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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
- ------------- ---------------------------------------- ------------------
333-83635 PSE&G Transition Funding LLC 22-3672053
(A Delaware limited liability company)
80 Park Plaza - T4D
P.O. Box 1171
Newark, New Jersey 07101-1171
973 297-2227
http://www.pseg.com
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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Registrant is a wholly owned subsidiary of Public Service Electric and Gas
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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PSE&G TRANSITION FUNDING LLC
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PAGE
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements............................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 7
Item 3. Qualitative and Quantitative Disclosures About Market Risk....... 9
Item 4. Controls and Procedures.......................................... 9
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings............................................... 9
Item 6. Exhibits and Reports on Form 8-K................................ 9
Signature............................................................... 10
i
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF INCOME
(Thousands)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------- ------------------------
2002 2001 2002 2001
-------- ---------- ---------- -----------
OPERATING REVENUES....................................... $ 89,258 $ 78,616 $227,902 $182,053
OPERATING EXPENSES
Amortization of Bondable Transition Property......... 45,857 33,870 97,549 62,048
Servicing and Administrative Fees.................... 400 315 1,077 841
-------- -------- --------- --------
Total Operating Expenses................... 46,257 34,185 98,626 62,889
-------- -------- --------- --------
OPERATING INCOME......................................... 43,001 44,431 129,276 119,164
Interest Expense......................................... 42,943 44,341 129,099 118,844
-------- -------- --------- --------
NET INCOME............................................... $ 58 $ 90 $ 177 $ 320
======== ======== ======== ========
See Notes to Financial Statements.
1
PSE&G TRANSITION FUNDING LLC
BALANCE SHEETS
(Thousands)
(Unaudited)
September 30, December 31,
2002 2001
--------------------- -------------------
ASSETS
Current Assets:
Cash.......................................................... $ 540 $ 363
Restricted Cash............................................... 13,466 11,935
Receivable from Member........................................ 68,370 53,301
--------------------- -------------------
Total Current Assets..................................... 82,376 65,599
--------------------- -------------------
Noncurrent Assets:
Bondable Transition Property.................................. 2,345,484 2,443,033
Regulatory Asset - Interest Rate Swap......................... 64,819 18,492
Deferred Issuance Costs....................................... 85,070 93,917
--------------------- -------------------
Total Noncurrent Assets.................................. 2,495,373 2,555,442
--------------------- -------------------
TOTAL ASSETS.......................................................... $ 2,577,749 $ 2,621,041
===================== ===================
LIABILITIES
Current Liabilities:
Current Portion of Long- Term Debt............................ $ 127,835 $ 120,455
Current Portion of Payable to Member.......................... 5,254 4,757
Overcollateralization......................................... 1,419 780
Accrued Interest.............................................. 7,665 12,505
--------------------- -------------------
Total Current Liabilities................................ 142,173 138,497
--------------------- -------------------
Long-Term Liabilities:
Long-Term Debt................................................ 2,258,541 2,351,156
Derivative Liability.......................................... 64,819 18,492
Payable to Member............................................. 99,051 99,908
--------------------- -------------------
Total Long-Term Liabilities.............................. 2,422,411 2,469,556
--------------------- -------------------
TOTAL LIABILITIES..................................................... 2,564,584 2,608,053
--------------------- -------------------
MEMBER'S EQUITY
Contributed Capital........................................... 12,625 12,625
Retained Earnings............................................. 540 363
--------------------- -------------------
Total Member's Equity.................................... 13,165 12,988
--------------------- -------------------
TOTAL LIABILITIES AND MEMBER'S EQUITY................................. $ 2,577,749 $ 2,621,041
===================== ===================
See Notes to Financial Statements.
2
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------------------
2002 2001
-------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 177 $ 320
Adjustments to reconcile net income to net cash flows from.........
operating activities:
Amortization of Bondable Transition Property..................... 97,549 62,048
Amortization of Deferred Issuance Costs.......................... 8,847 7,844
Net Changes in Certain Current Assets and Liabilities:
Restricted Cash................................................... (1,531) (6,115)
Accounts Receivable-Member........................................ (15,069) (61,242)
Accounts Payable-Member........................................... (360) 73,868
Overcollateralization............................................. 639 567
Accrued Interest.................................................. (4,840) 11,134
-------------- ------------------
Net Cash Provided By Operating Activities....................... 85,412 88,424
-------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Bondable Transition Property........................... -- (2,525,000)
-------------- ------------------
Net Cash Used in Investing Activities........................... -- (2,525,000)
-------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt......................................... -- 2,525,000
Repayment of Long-Term Debt........................................ (85,235) (26,028)
Deferred Issuance Costs............................................ -- (74,700)
Contributed Capital................................................ -- 12,624
-------------- ------------------
Net Cash (Used in) Provided By Financing Activities............. (85,235) 2,436,896
-------------- ------------------
Net Change in Cash and Cash Equivalents.................................. 177 320
Cash and Cash Equivalents at Beginning of Period......................... 363 1
-------------- ------------------
Cash and Cash Equivalents at End of Period............................... $ 540 $ 321
============== ==================
Interest Paid............................................................ $ 125,966 $ 96,918
See Notes to Financial Statements.
3
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Organization
Unless the context otherwise indicates, all references to "Transition Funding,"
"we," "us" or "our" herein mean PSE&G Transition Funding LLC, a Delaware limited
liability company located at 80 Park Plaza, Newark, New Jersey 07102.
We were formed under the laws of the State of Delaware on July 21, 1999 and
operate pursuant to a limited liability company agreement with Public Service
Electric and Gas Company (PSE&G) as our sole member. PSE&G is an operating
electric and gas utility and is a wholly owned subsidiary of Public Service
Enterprise Group Incorporated (PSEG). We were organized for the sole purpose of
purchasing and owning bondable transition property (BTP) of PSE&G, issuing
transition bonds (Bonds), pledging our interest in BTP and other collateral to a
debt/security trustee (Trustee) to collateralize the Bonds, and performing
activities that are necessary, suitable or convenient to accomplish these
purposes.
BTP represents the irrevocable right of PSE&G, or its successor or assignee, to
collect a non-bypassable transition bond charge (TBC) from electric customers
pursuant to a bondable stranded cost rate order (Finance Order), and rate
unbundling and restructuring proceedings (Final Order), which were issued on
September 17, 1999 by the State of New Jersey Board of Public Utilities (BPU) in
accordance with the New Jersey Electric Discount and Energy Competition Act
enacted in February 1999. These orders are a matter of public record and are
available at the BPU. The Finance Order authorizes the TBC to be sufficient to
recover $2.525 billion aggregate principal amount of Bonds, plus an amount
sufficient to provide for any credit enhancement, to fund any reserves and to
pay interest, redemption premiums, if any, servicing fees and other expenses
relating to the Bonds.
Our organizational documents require us to operate in a manner such that we
should not be consolidated in the bankruptcy estate of PSE&G in the event PSE&G
becomes subject to a bankruptcy proceeding.
Basis of Presentation
The financial statements included herein have been prepared pursuant to the
rules and regulation of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in the
opinion of management, the disclosures are adequate to make the information
presented not misleading. These Financial Statements and Notes to Financial
Statements (Notes) update and supplement matters discussed in our 2001 Annual
Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2002 and June 30, 2002 and should be read in conjunction with those
Notes.
The unaudited financial information furnished reflects all adjustments which
are, in the opinion of management, necessary to fairly state the results for the
interim periods presented. The year-end balance sheets were derived from the
audited financial statements included in our 2001 Annual Report on Form 10-K.
Certain reclassifications of amounts reported in prior periods have been made to
conform with the current presentation.
4
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) - Continued
Note 2. The Bonds
On January 31, 2001, we issued $2.525 billion of Bonds in eight classes with
maturities ranging from one year to fifteen years. The net proceeds of the
issuance were remitted to PSE&G as consideration for the property right in the
TBC.
Under applicable law, the Bonds are not an obligation of PSE&G or secured by the
assets of PSE&G, but rather the Bonds are only recourse to us and are
collateralized on a pro rata basis by the BTP and our equity and assets. TBC
collections are deposited at least monthly by PSE&G with the Trustee and are
used to pay our expenses, to pay our debt service on the Bonds and to fund any
credit enhancement for the Bonds. We have also pledged the capital contributed
by PSE&G to secure the debt service requirements of the Bonds. The debt service
requirements include an overcollateralization subaccount, a capital subaccount
and a reserve subaccount which are available to bond holders. Any amounts
collateralizing the Bonds will be returned to PSE&G upon payment of the Bonds.
The significant terms of the Bonds issued by Transition Funding as of September
30, 2002 are as follows:
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Payments
Initial Made On Current Noncurrent Final/ Final
Principal Interest Bonds Portion Portion Expected Maturity
Balance Rate Through Outstanding Outstanding Payment Date Date
June 30,
2002
========= ============== ======== ============ ============ ============== ============ ==========
Class A-1 $105,249,914 5.46% $105,249,914 -- -- 6/17/02 6/15/04
Class A-2 $368,980,380 5.74% 33,373,829 $127,834,950 $207,771,601 3/15/05 3/15/07
Class A-3 $182,621,909 5.98% -- -- $182,621,909 6/15/06 6/15/08
Class A-4 $496,606,425 LIBOR + -- -- $496,606,425 6/15/09 6/15/11
0.30%
Class A-5 $328,032,965 6.45% -- -- $328,032,965 3/15/11 3/15/13
Class A-6 $453,559,632 6.61% -- -- $453,559,632 6/15/13 6/15/15
Class A-7 $219,688,870 6.75% -- -- $219,688,870 6/15/14 6/15/16
Class A-8 $370,259,905 6.89% -- -- $370,259,905 12/15/15 12/15/17
-------------- ------------ ------------ --------------
Total $2,525,000,000 $138,623,743 $127,834,950 $2,258,541,307
==============================================================================================================
We have entered into an interest rate swap on our sole class of floating rate
Bonds (Class A-4). The interest rate swap effectively converts the existing
floating rate debt into fixed rate borrowings at 6.2875%. The notional amount of
the interest rate swap is $497 million and is indexed to the three-month LIBOR
rate. The fair value of the interest rate swap was approximately $(65) million
as of September 30, 2002 and $(18) million as of December 31, 2001 and was
recorded as a derivative liability, with an offsetting amount recorded as a
regulatory asset on the Balance Sheet. The fair value of this swap will vary
over time as a result of changes in market conditions and is expected to be
recovered through the TBC.
We incurred approximately $230 million in issuance costs, $125 million of which
were included in BTP with the balance in deferred issuance costs, in connection
with the securitization transaction, including $201 million of costs of a
hedging arrangement as permitted by the Finance Order. Costs in excess of the
$125 million of transaction costs provided for in the Finance Order were paid by
PSE&G and are being recovered on a subordinated basis by us through the TBC and
remitted to PSE&G with interest at a rate of 6.48%. The TBC rate became
effective on February 7, 2001, in accordance with the Final Order.
5
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) - Concluded
Note 3. Significant Agreements and Related Party Transactions
Under the servicing agreement entered into by PSE&G and us, concurrently with
the issuance of the first Series of Bonds, PSE&G, as servicer, is required to
manage and administer our BTP and to collect the TBC on our behalf. Under the
Finance Order, PSE&G withholds from the TBC collections an annual servicing fee
equal to 0.05% of the initial balance of Bonds issued. Interest earned on funds
in the Capital Subaccount results in Net Income for us and will be periodically
dividended to PSE&G. Servicing and administrative fees paid to PSE&G for the
three months ended September 30, 2002 and 2001 were $400 thousand and $315
thousand, respectively. Servicing and administrative fees paid to PSE&G for the
nine months ended September 30, 2002 and 2001 were $1 million and $841 thousand,
respectively.
As of September 30, 2002 and December 31, 2001, we had a receivable from our
member, PSE&G, of approximately $68 million and $53 million, respectively,
relating to TBC billings. As of September 30, 2002 and December 31, 2001 our
payable to our member was approximately $104 million and $105 million,
respectively, which primarily relates to the costs in excess of the $125 million
of transaction costs provided for in the Finance Order that were paid by PSE&G
and billed to us.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise indicates, all references to "Transition Funding,"
"we," "us" or "our" herein mean PSE&G Transition Funding LLC, a Delaware limited
liability company located at 80 Park Plaza, Newark, New Jersey 07102.
Following are the significant changes in or additions to information reported in
our 2001 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2002 and June 30, 2002 affecting the financial
condition and the results of our operations. This discussion refers to our
Financial Statements (Statements) and related Notes to Financial Statements
(Notes) and should be read in conjunction with such Statements and Notes. The
following analysis of the financial condition and our results of operations is
in an abbreviated format pursuant to General Instruction H of Form 10-Q. Such
analysis should be read in conjunction with the Financial Statements and Notes
to Financial Statements included in Item 1 above.
RESULTS OF OPERATIONS
Operating Revenues
Transition Bond Charge (TBC) revenues increased approximately $11 million or 14%
for the three months ended September 30, 2002 as compared to the three months
ended September 30, 2001 due to an increase in the TBC rate, as well as an
increase in sales. The TBC rate increased from 0.6739 cents per kwh to 0.7250
cents per kwh as part of our annual rate true-up, which was approved by the New
Jersey Board of Public Utilities (BPU) effective in January 2002. The increased
TBC rate is designed to replenish the Capital Subaccount and the
Overcollateralization account and enable us to meet our scheduled repayments of
the deferred issuance costs to PSE&G, as servicer of the bonds.
TBC revenues increased approximately $46 million or 25% for the nine months
ended September 30, 2002 as compared to the nine months ended September 30, 2001
primarily due to revenues being recorded for a full period in the current year
compared to revenues in 2001 being recorded, starting February 7, 2001, when the
TBC commenced. This was supplemented by an increase in the TBC rate as discussed
above.
Operating Expenses
Amortization of Bondable Transition Property (BTP)
Amortization of BTP increased approximately $12 million or 35% for the three
months ended September 30, 2002 as compared to the three months ended September
30, 2001 primarily due to an increase in the TBC rate and an increase in sales
as discussed above. A portion of the TBC rate is designed to recover the
amortization of the BTP. As a regulated entity, we amortize an amount equal to
what we record as revenue for the portion of the TBC relating to the BTP.
Accordingly, the higher TBC rates in 2002 resulted in an increase of the
amortization that was recorded.
Amortization of BTP increased approximately $36 million or 57% for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001 primarily due to expenses being recorded for a full period in the
current year as compared to eight months in 2001. This was supplemented by an
increase in the TBC rate as discussed above.
7
Servicing and Administrative Fees
Servicing and Administrative Fees increased approximately $85 thousand or 35%
for the three months ended September 30, 2002 as compared to the three months
ended September 30, 2001. Administrative expenses are billed to us by the
Servicer, PSE&G, when interest and principle payments are made on the transition
bonds.
Servicing and Administrative Fees increased $236 thousand or 28% for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001 primarily due to the transition bonds being outstanding for a full
period in the current year as compared to eight months in 2001.
Interest Expense
Interest expense decreased approximately $1 million or 3% for the three months
ended September 30, 2002 as compared to the three months ended September 30,
2001 primarily due to a reduction in the total amount of debt outstanding.
Interest expense increased approximately $10 million or 9% primarily due to the
transition bonds being outstanding for a full period in the current year
partially offset by a reduction in the total amount of debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The principal amount of the Bonds, interest, fees and funding of the
overcollateralization subaccount are being recovered through the TBC payable by
retail customers of electricity within PSE&G's service territory who receive
electric delivery service from PSE&G. As part of PSE&G's responsibility as
servicer under the Servicing Agreement, PSE&G remits the TBC collections to the
Trustee to make scheduled payments on the Bonds. On March 17, 2002, June 17,
2002 and September 17, 2002 payments of bond principal, interest and all related
expenses were made by the Trustee totaling approximately $68 million, $69
million and $78 million, respectively, including replenishments to the Capital
Subaccount and the Overcollateralization account to required levels. These
payments were primarily funded from our TBC collections and interest earned on
those funds.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain of the matters
discussed in this report constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used herein, the words
"will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"potential", variations of such words and similar expressions are intended to
identify forward-looking statements. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following review of factors should
not be construed as exhaustive.
In addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, factors that could cause actual
results to differ materially from those contemplated in any forward-looking
statements include, among others, the following: state and federal legal or
regulatory developments; national or regional economic conditions; market demand
and prices for energy; customer conservation; distributed generation technology;
weather variations affecting customer energy usage; the effect of continued
electric industry restructuring; operating performance of PSE&G's facilities and
third party suppliers; and the payment patterns of customers including the rate
of delinquencies and the accuracy of the collections curve.
8
ITEM 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our transition bonds is the potential loss arising
from adverse changes in interest rates. We have entered into an interest rate
swap on our sole class (Class A-4) of floating rate transition bonds (see Note
2. The Bonds). The interest rate swap effectively converts the existing floating
rate debt into fixed rate borrowings at 6.2875%. Any gain or loss on this
financial instrument will be recovered from or refunded to PSE&G's customers.
ITEM 4. CONTROLS AND PROCEDURES
We have established and maintained disclosure controls and procedures which are
designed to provide reasonable assurance that material information relating to
the Company is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared. We have
established a Disclosure Committee which is made up of several key management
employees and reports directly to the Chief Executive Officer and Chief
Financial Officer, to monitor and evaluate these disclosure controls and
procedures. The Chief Executive Officer, who also serves as the Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"). Based on this evaluation, he has
concluded that our disclosure controls and procedures were effective during the
period covered in this quarterly report. There were no significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no updates to information reported under Item 3 of Part I of our 2001
Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2002 and June 30, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) A listing of exhibits being filed with this document is as follows:
--------------- ---------------------------------------------------------
Exhibit Number Document
99 Certification by Robert E. Busch, Chief Executive
Officer and Chief Financial Officer of PSE&G Transition
Funding LLC Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code
--------------- ---------------------------------------------------------
(B) Reports on Form 8-K:
None.
9
SIGNATURE
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.
PSE&G TRANSITION FUNDING LLC
(Registrant)
By: /s/ Patricia A. Rado
-----------------------------------------------------
Patricia A. Rado
Controller
(Principal Accounting Officer)
Date: November 12, 2002
10
Certification Pursuant to Rules 13a-14 and 15d-14
of the 1934 Securities Exchange Act
I certify that:
1. I have reviewed this quarterly report on Form 10-Q of PSE&G Transition
Funding LLC (the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of PSEG's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Robert E. Busch
-----------------------------------
Robert E. Busch
Chief Executive Officer and Chief Financial Officer
11