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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Documents incorporated by reference: Not Applicable
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 if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Registrant is a wholly-owned subsidiary of Public Service Electric and Gas
Company. Registrant meets the conditions set forth in General Instruction I (1)
(a) and (b) of Form 10-K and is filing this Annual Report on Form 10-K with the
reduced disclosure format authorized by General Instruction I.
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 2
Item 3. Legal Proceedings.............................................. 2
Item 4. Submission of Matters to a Vote of Security Holders............ 2
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................. 3
Item 6. Selected Financial Data........................................ 3
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 3
Forward Looking Statements..................................... 5
Item 7A. Qualitative and Quantitative Disclosures About
Market Risk.................................................. 5
Item 8. Financial Statements and Supplementary Data.................... 6
Notes to Financial Statements.................................. 10
Independent Auditors' Report................................... 15
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.......................... 16
PART III
Item 10. Directors and Executive Officers of the Registrants............ 16
Item 11. Executive Compensation......................................... 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 16
Item 13. Certain Relationships and Related Transactions................. 16
Item 14. Disclosure Controls and Procedures............................. 16
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 18
Signatures..................................................... 19
i
PART I
ITEM 1. BUSINESS
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.
Following the enactment of the New Jersey Electric Discount and Energy
Competition Act (Energy Competition Act), the New Jersey Board of Public
Utilities (BPU) rendered a Final Order (Final Order) in August 1999 relating to
PSE&G's rate unbundling, stranded costs and restructuring proceedings providing,
among other things, for PSE&G to recover up to $2.94 billion (net of tax) of its
generation-related stranded costs including the securitization of $2.4 billion
(plus an estimated $125 million of associated transaction costs). The stranded
costs represent various generation-related investments and other obligations
that were anticipated to be unrecoverable through market-based rates in a
competitive electricity generation retail market.
Following the issuance of the Final Order, the BPU issued the Finance
Order approving PSE&G's petition relating to the securitization transaction
which authorized, among other things, the imposition of a non-bypassable
transition bond charge (TBC) on PSE&G's customers; the sale of PSE&G's property
right in such charge to a bankruptcy-remote financing entity; the issuance and
sale of $2.525 billion of transition bonds (Bonds) by such entity as
consideration for such property right, including an estimated $125 million of
transaction costs; and the application by PSE&G of the transition bond proceeds
to retire outstanding debt and/or equity.
On January 31, 2001, we issued $2.525 billion of transition bonds in eight
classes with stated maturities ranging from 1 year to 15 years, of which $2.351
billion in seven classes remain outstanding. The net proceeds of the issuance
were utilized to acquire PSE&G's property right in the TBC. The transition bonds
are collateralized by the BTP created under the Energy Competition Act and the
related Finance Order. The BTP represents the irrevocable right to recover,
through a TBC billed by PSE&G to its retail electric customers within PSE&G's
service territory, an amount sufficient to pay:
o the interest, fees, expenses, costs, charges, credit enhancement and
premiums, if any, associated with the transition bonds, and
o the principal amount of the transition bonds.
Approximately $230 million of issuance costs were incurred in connection
with the securitization transaction, including costs of a hedging arrangement as
permitted by the Finance Order. The $105 million in costs in excess of the $125
million of estimated transaction costs included in the BTP, as provided for in
the Finance Order, were capitalized and will be recovered on a subordinated
basis by PSE&G through the TBC. The initial TBC rate became effective on
February 7, 2001, in accordance with the Final Order.
As the TBC is a usage-based charge based on access to PSE&G's transmission
and distribution system, the customers will be assessed regardless of whether
the customers purchase electricity from PSE&G or a third party supplier. Also,
if on-site generation facilities that are connected to PSE&G's transmission and
distribution system produce power that is delivered to off-site retail electric
customers in PSE&G's service territory, the transition bond charge applies to
the sale or delivery of that power.
1
Payments are made to the bondholders on a quarterly basis. Principal and
interest on the transition bonds and the excess issuance costs will be paid from
the following sources:
o TBC collections remitted by the servicer (PSE&G) to the issuer (us);
o amounts from any third party credit enhancement;
o investment earnings on amounts held in accounts established under
the indenture agreement;
o amounts payable to the issuer under any interest rate swap
agreements;
o other amounts available in the trust accounts held by the trustee.
To the extent that TBC collections are deficient or in excess of the
principal and interest on the transition bonds, the TBC rate will be adjusted in
the following year.
We have no employees. 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 collect the TBC on behalf of us. We pay an annual
servicing fee to PSE&G equal to 0.05% of the initial balance of Bonds
outstanding. The servicing fee is recovered through the TBC. Interest earned on
funds in the Capital Subaccount results in Net Income for us and will be
periodically dividended to PSE&G.
ITEM 2. PROPERTIES
We do not own any real property. Our primary asset is the BTP described in
Item 1. Business.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Omitted pursuant to conditions set forth in General Instruction I of Form
10-K.
2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
All of our outstanding equity interests are owned by PSE&G.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to conditions set forth in General Instruction I of Form
10-K.
ITEM 7. 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.
The following analysis of our financial condition and results of
operations is in an abbreviated format pursuant to General Instruction I of Form
10-K. Such analysis should be read in conjunction with the financial statements
attached hereto.
On January 31, 2001, we issued $2.525 billion of transition bonds in eight
classes with stated maturities ranging from 1 year to 15 years, of which $2.351
billion in seven classes remain outstanding. The net proceeds of the issuance
were utilized to acquire PSE&G's property right in the TBC (see Item 1.
Business). We use collections of the TBC to make scheduled principal and
interest payments on the transition bonds and to cover any additional
administrative costs.
RESULTS OF OPERATIONS
Operating Revenues
Transition Bond Charge (TBC) revenues increased approximately $52 million
or 21% for the year ended December 31, 2002 as compared to the year ended
December 31, 2001 primarily due to revenues being recorded for a full year in
2002 as compared to eleven months in 2001. This was supplemented by an increase
in the TBC rate, as well as an increase in PSE&G's electric transmission and
distribution 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.
As a result of the annual true-up approved by the BPU in January 2003, the
TBC rate decreased to 0.7018 cents per kwh. Any increases or decreases in the
TBC rate are designed to maintain the Capital Subaccount and the
Overcollateralization account at appropriate levels and have adequate funds to
meet our scheduled repayments of the deferred issuance costs to PSE&G, as
servicer of the bonds.
Operating Expenses
Amortization of Bondable Transition Property (BTP)
3
Amortization of BTP increased approximately $43 million or 53% for the
year ended December 31, 2002 as compared to the year ended December 31, 2001
primarily due to expenses being recorded for a full year in 2002 as compared to
eleven months in 2001. This was supplemented by an increase in the TBC rate and
an increase in sales as discussed above. 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.
Servicing and Administrative Fees
Servicing and Administrative Fees increased $178 thousand or 14% for the
year ended December 31, 2002 as compared to the year ended December 31, 2001
primarily due to the transition bonds being outstanding for a full year in 2002
as compared to eleven months in 2001. Administrative expenses are billed to us
by the Servicer, PSE&G, when interest and principal payments are made on the
transition bonds.
Interest Income
Interest Income decreased approximately $614 thousand or 48% for the year
ended December 31, 2002 as compared to the year ended December 31, 2001
primarily due to higher rates and higher average cash balances in 2001 prior to
the initial bond and other related payments in September 2001.
Interest Expense
Interest expense increased approximately $8 million or 5% for the year
ended December 31, 2002 as compared to the year ended December 31, 2001
primarily due to the transition bonds being outstanding for a full year in 2002
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.
During 2002, payments of bond principal, interest and all related expenses
were made by the Trustee on March 17, 2002, June 17, 2002, September 17, 2002
and December 17, 2002 totaling approximately $68 million, $69 million, $78
million and $82 million, respectively, including replenishments to the Capital
Subaccount and the Overcollateralization account to required levels. During
2001, payments of bond principal, interest and all related expenses were made by
the Trustee on September 17, 2001 and December 17, 2001 totaling approximately
$201 million. These payments were primarily funded from our TBC collections and
interest earned on those funds.
ACCOUNTING ISSUES
Critical Accounting Policies
Unbilled Revenues
The TBC is usage-based charge based on access to PSE&G's electrical
transmission and distribution system and is recorded based on electric usage.
These are recorded based on services rendered to its retail electric customers
during each accounting period. PSE&G records unbilled revenues for the estimated
amount customers will be billed for services rendered from the time meters were
last read to the end of the respective accounting period. Unbilled usage is
calculated in two steps. The initial step is to apply a base usage per day to
the number of unbilled days in the period. The second step estimates seasonal
loads based upon the time of year and the variance of actual degree-days and
4
temperature-humidity-index hours of the unbilled period from expected norms. The
resulting usage is priced at current rate levels and recorded as revenue. A
calculation of the associated energy cost for the unbilled usage is recorded as
well. Each month the prior month's unbilled amounts are reversed and the current
month's amounts are accrued. The resulting revenue and expense reflect the
billed data less the portion booked in the prior month plus the unbilled portion
of the current month.
Accounting for the Effects of Regulation
The application of generally accepted accounting principles by us as a
regulated entity differs in certain respects from applications by non-regulated
businesses. We prepare our financial statements in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In
general, SFAS 71 recognizes that accounting for rate-regulated enterprises
should reflect the economic effects of regulation. As a result, a rate regulated
entity is required to defer the recognition of costs (a regulatory asset) or the
recognition of obligations (a regulatory liability) if it is probable that,
through the rate-making process, there will be a corresponding increase or
decrease in future rates. Accordingly, we have deferred certain costs, which
will be amortized over various future periods.
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.
ITEM 7A. 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.
5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF INCOME
(THOUSANDS)
For the Years Ended
December 31,
-----------------------
2002 2001
--------- ---------
OPERATING REVENUES $ 298,633 $ 246,496
OPERATING EXPENSES
Amortization of Bondable Transition Property 125,324 81,967
Servicing and Administrative Fees 1,468 1,290
--------- ---------
Total Operating Expenses 126,792 83,257
--------- ---------
OPERATING INCOME 171,841 163,239
Interest Income 666 1,280
Interest Expense (172,292) (164,156)
--------- ---------
NET INCOME $ 215 $ 363
========= =========
See Notes to Financial Statements.
6
PSE&G TRANSITION FUNDING LLC
BALANCE SHEETS
(THOUSANDS)
December 31, December 31,
2002 2001
ASSETS ---------- ----------
Current Assets:
Cash $ 578 $ 363
Restricted Cash 13,627 11,935
Receivable from Member 57,807 53,301
---------- ----------
Total Current Assets 72,012 65,599
---------- ----------
Noncurrent Assets:
Bondable Transition Property 2,317,709 2,443,033
Deferred Issuance Costs 82,303 93,917
Regulatory Assets - Interest Rate Swap 65,806 18,492
---------- ----------
Total Noncurrent Assets 2,465,818 2,555,442
---------- ----------
TOTAL ASSETS $2,537,830 $2,621,041
========== ==========
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt $ 128,935 $ 120,455
Current Portion of Payable to Member 6,200 4,757
Regulatory Liability - Overcollateralization 1,632 780
Accrued Interest 6,576 12,505
---------- ----------
Total Current Liabilities 143,343 138,497
---------- ----------
Long-Term Liabilities:
Long-Term Debt 2,222,221 2,351,156
Derivative Liability 65,806 18,492
Payable to Member 93,257 99,908
---------- ----------
Total Long-Term Liabilities 2,381,284 2,469,556
---------- ----------
TOTAL LIABILITIES 2,524,627 2,608,053
---------- ----------
MEMBER'S EQUITY
Contributed Capital 12,625 12,625
Retained Earnings 578 363
---------- ----------
Total Member's Equity 13,203 12,988
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY $2,537,830 $2,621,041
========== ==========
See Notes to Financial Statements.
7
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF CASH FLOWS
(THOUSANDS)
For the Years Ended December 31,
----------------------------------
2002 2001 2000
--------- ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 215 $ 363 $ --
Adjustments to reconcile net income
to net cash flows from operating
activities:
Amortization of Bondable Transition
Property 125,324 81,967 --
Amortization of Deferred Issuance Costs 11,614 10,642 --
Net Changes in Certain Current Assets
and Liabilities:
Restricted Cash (1,692) (11,935) --
Receivable from Member (4,506) (52,286) --
Payable to Member (5,208) 68,046 36,619
Overcollateralization 852 780 --
Accrued Interest (5,929) 12,856 --
Other -- (1,366) --
--------- ----------- --------
Net Cash Provided By Operating
Activities 120,670 109,067 36,619
--------- ----------- --------
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 (120,455) (53,389) --
Deferred Issuance Costs -- (67,940) (36,619)
Contributed Capital -- 12,624 1
--------- ----------- --------
Net Cash Provided By (Used In)
Financing Activities (120,455) 2,416,295 (36,618)
--------- ----------- --------
Net Change in Cash and Cash
Equivalents 215 362 1
Cash and Cash Equivalents at
Beginning of Period 363 1 --
--------- ----------- --------
Cash and Cash Equivalents at
End of Period $ 578 $ 363 $ 1
========= =========== ========
Interest Paid $ 166,968 $ 141,008 $ --
See Notes to Financial Statements.
8
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF MEMBER'S EQUITY
(THOUSANDS)
Contributed Capital Retained Earnings Total
------------------- ----------------- -----
Balance as of January 1, 2000 $ -- $ -- $ --
Contributed Capital 1 -- 1
------- ---- -------
Balance as of December 31, 2000 1 -- 1
------- ---- -------
Net Income -- 363 363
Contributed Capital 12,624 -- 12,624
------- ---- -------
Balance as of December 31, 2001 12,625 363 12,988
------- ---- -------
Net Income -- 215 215
------- ---- -------
Balance as of December 31, 2002 $12,625 $578 $13,203
======= ==== =======
See Notes to Financial Statements.
9
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization, Basis of Presentation and Significant Accounting Policies
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 retail
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 from 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 so 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 regulations of the Securities and Exchange Commission.
Significant Accounting Policies
Accounting for the Effects of Regulation
The application of generally accepted accounting principles by us as a
regulated entity differs in certain respects from applications by non-regulated
businesses. We prepare our financial statements in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In
general, SFAS 71 recognizes that accounting for rate-regulated enterprises
should reflect the economic effects of regulation. As a result, a rate regulated
entity is required to defer the recognition of costs (a regulatory asset) or the
recognition of obligations (a regulatory liability) if it is probable that,
through the rate-making process, there will be a corresponding increase or
decrease in future rates. Accordingly, we have deferred certain costs, which
will be amortized over various future periods.
10
NOTES TO FINANCIAL STATEMENTS
Restricted Cash
Revenues collected through the TBC by PSE&G from its retail electric
customers are remitted to the Trustee and must be used to pay the principal,
interest and other expenses associated with the Bonds. Also, as required by the
Finance Order, we deposited an amount equal to 0.5% of the initial principal
amount of the bonds into the Capital Subaccount with the Trustee. This amount
was contributed by PSE&G to us. This account is the last account drawn in the
event funds are insufficient to make scheduled allocations. If the Capital
Subaccount is used, it will be replenished from TBC remittances to its original
level through the periodic reconciliation process. Accordingly, the TBC
collections remitted to the Trustee, including interest earned related to these
funds, and the funds deposited into the Capital Subaccount are classified as
"Restricted Cash" on the Balance Sheet.
Bondable Transition Property
The BTP was recorded at the acquired cost and is being amortized over the
life of the Bonds, based on TBC revenues, interest expenses and other fees. The
BTP is solely our property.
Deferred Issuance Costs
The securitization transaction issuance costs in excess of the $125
million provided for in the Finance Order were funded by PSE&G and are recovered
on a subordinated basis through the TBC. These costs were capitalized and are
being amortized to interest expense over the life of the bonds utilizing the
effective interest method.
Regulatory Assets - Interest Rate Swap
For a description of the regulatory asset and the corresponding derivative
liability related to the interest rate swap on our sole class of floating rate
debt, see Note 2. The Bonds.
Regulatory Liabilities - Overcollateralization
The overcollateralization account is funded ratably from collections of
TBC over the term of each series of transition bonds. The account is held by the
trustee as a credit enhancement to fund payments in the event of a collection
shortfall.
Revenues
Revenues are recorded on a calendar month basis, based on services
rendered by PSE&G to its customers during each accounting period at the current
rate (including the TBC) and also include estimates for usage not yet billed.
PSE&G records unbilled revenues for the estimated amount customers will be
billed for services rendered from the time meters were last read to the end of
the respective accounting period. The unbilled revenue is estimated each month
based on weather factors, line losses, estimated customer usage by class, and
applicable customer rates based on regression analyses reflecting significant
historical trends and experience.
Amortization Expense
Amortization expense is recorded on the BTP using the effective interest
method. Amortization expense is also adjusted based on the TBC revenue recorded
and the deferred issuance costs.
Interest Income
Interest Income consists of interest earned on TBC collections deposited
with the Trustee and interest earned on funds in the Capital Subaccount.
Interest earned on deposited TBC funds reduce the BTP and will affect the
calculation of future TBC rates. Interest earned on funds in the Capital
Subaccount results in Net Income for us and will be periodically dividended to
PSE&G.
11
NOTES TO FINANCIAL STATEMENTS
Interest Expense
Interest Expense consists primarily of interest on the Bonds. Also
included in Interest Expense is the amortization of the deferred issuance costs
and related interest on the obligation to PSE&G.
Income Taxes
We are a single-member limited liability company. Accordingly, all Federal
and State income tax effects of our activities accrue to PSE&G.
Accounting Matters
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) established accounting
and reporting standards for derivative instruments. It requires an entity to
recognize the fair value of derivative instruments held as assets or liabilities
on the balance sheet. In accordance with SFAS 133, the effective portion of the
change in the fair value of a derivative instrument designated as a cash flow
hedge is reported as a Regulatory Asset or Liability and are ultimately
recognized in earnings when the related hedged forecasted transaction occurs.
The change in the fair value of the ineffective portion of the derivative
instrument designated as a cash flow hedge is recorded in earnings. The fair
value of the derivative instruments is determined by reference to quoted market
prices, listed contracts, published quotations or quotations from
counterparties. For information relating to our interest rate swap agreement,
see Note 2. The Bonds.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets and liabilities, as well as the disclosure of
contingencies. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications of amounts reported in prior periods have been
made to conform with the current presentation.
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, of which $2.351 billion
remain outstanding as of December 31, 2002. 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.
12
NOTES TO FINANCIAL STATEMENTS
The significant terms of the Bonds issued by Transition Funding as of December
31, 2002 are as follows:
===================================================================================================
Payments
Made On
Bonds
Initial Through Current Noncurrent Final/ Final
Principal Interest December Portion Portion Expected Maturity
Balance Rate 31, 2002 Outstanding Outstanding Payment Date Date
===============================================================================================================
Class A-1 $ 105,249,914 5.46% $105,249,914 -- -- 6/17/02 --
Class A-2 $ 368,980,380 5.74% $ 68,593,784 $128,935,356 $ 171,451,240 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 $173,843,698 $128,935,356 $2,222,220,946
===============================================================================================================
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 $(66) million
as of December 31, 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 initial TBC rate
became effective on February 7, 2001, in accordance with the Final Order.
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. Servicing and
administrative fees paid to PSE&G for the year ended December 31, 2002 and 2001
were $1.5 million and $1.3 million, respectively.
As of December 31, 2002 and December 31, 2001, we had a receivable from
our member, PSE&G, of approximately $58 million and $53 million, respectively,
relating to TBC billings. As of December 31, 2002 and December 31, 2001 our
payable to our member was approximately $99 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.
13
NOTES TO FINANCIAL STATEMENTS
Note 4. Selected Quarterly Data (Unaudited)
The information shown below, in the opinion of Transition Funding includes
all adjustments, consisting only of normal recurring accruals, necessary to a
fair presentation of such amounts.
Calendar Quarter Ended
-------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------- ------------------- ------------------- -------------------
2002 2001 2002 2001 2002 2001 2002 2001
------- ------- ------- ------- ------- ------- ------- -------
(Thousands)
Operating Revenues ................. $67,545 $36,690 $71,099 $66,747 $89,258 $78,616 $70,731 $64,443
Operating Income ................... 42,875 30,055 43,400 44,678 43,001 44,431 42,565 44,075
Net Income ......................... 61 -- 58 230 58 90 38 43
14
INDEPENDENT AUDITORS' REPORT
To the Managers of PSE&G Transition Funding LLC:
We have audited the accompanying balance sheets of PSE&G Transition
Funding LLC (the "Company") as of December 31, 2002 and December 31, 2001, the
related statements of income for each of the two years in the period ended
December 31, 2002 and the related statements of member's equity and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2002 and
2001, the results of its operations for each of the two years in the period
ended December 31, 2002 and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 4, 2003
15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Omitted pursuant to conditions set forth in General Instruction I of Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to conditions set forth in General Instruction I of Form
10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Omitted pursuant to conditions set forth in General Instruction I of Form
10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to conditions set forth in General Instruction I of Form
10-K.
ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES
PSE&G Transition Funding LLC (the "Company") has established and maintains
disclosure controls and procedures which are designed to provide reasonable
assurance that material information relating to the Company is made known to the
Chief Executive Officer, who also serves as the Chief Financial Officer,
particularly during the period in which this annual report is being prepared.
The Company has 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, has evaluated the effectiveness of the
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"). Based on this
evaluation, he has concluded that the disclosure controls and procedures were
effective during the period covered in this annual 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.
16
Certification Pursuant to Rules 13a-14 and 15d-14
of the 1934 Securities Exchange Act
I certify that:
1. I have reviewed this annual report on Form 10-K of PSE&G Transition
Funding LLC (the registrant);
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: March 17, 2003 /s/ Robert E. Busch
---------------------------------
Robert E. Busch
Chief Executive Officer and Chief
Financial Officer
17
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
PSE&G Transition Funding LLC Statements of Income for the years ended
December 31, 2002 and 2001 on page 6.
PSE&G Transition Funding LLC Balance Sheets as of December 31, 2002 and
2001 on page 7.
PSE&G Transition Funding LLC Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 on page 8.
PSE&G Transition Funding LLC Statements of Member's Equity for the years
ended December 31, 2002, 2001 and 2000 on page 9.
PSE&G Transition Funding LLC Notes to Financial Statements on pages 10
through 14.
(B) There were no reports on Form 8-K filed during the last quarter of 2002
and the 2003 period covered by this report.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ ROBERT E. BUSCH
--------------------------------------
Robert E. Busch
President, Chief Executive Officer
and Chief Financial Officer
Date: March 17, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
ROBERT E. BUSCH President, Chief Executive March 17, 2003
- ------------------------------- Officer, Chief Financial
Robert E. Busch Officer and Manager (Principal
Executive Officer and Principal
Financial Officer)
MORTON A. PLAWNER Vice President, Treasurer and March 17, 2003
- ------------------------------- Manager
Morton A. Plawner
PATRICIA A. RADO Controller March 17, 2003
- ------------------------------- (Principal Accounting Officer)
Patricia A. Rado
R. EDWIN SELOVER Manager March 17, 2003
- -------------------------------
R. Edwin Selover
BENJAMIN B. ABEDINE Manager March 17, 2003
- -------------------------------
Benjamin B. Abedine
DEAN A. CHRISTIANSEN Manager March 17, 2003
- -------------------------------
Dean A. Christiansen
19
EXHIBIT INDEX
Certain Exhibits previously filed with the Commission and the appropriate
securities exchanges are indicated as set forth below. Such Exhibits are not
being refiled, but are included because inclusion is desirable for convenient
reference.
(a) Filed by Transition Funding with Registration Statement No. 333-83635
under the Securities Act of 1933, effective January 23, 2001, relating to
the issuance of $2,525,000,000 Transition Bonds.
(b) Filed by Transition Funding with Form 8-K under the Securities Exchange
Act of 1934, on February 7, 2001.
- -----------------------------
Exhibit Number
- -----------------------------
This Filing Previous Filing
- -----------------------------
1.1 (b) 1.1 Underwriting Agreement dated as of January 25,
2001 among Public Service Electric and Gas
Company, PSE&G Transition Funding LLC and Lehman
Brothers, Inc., on behalf of itself and as the
representative of the several underwriters named
therein
3.1 (a) 4.1 Limited Liability Company Agreement of PSE&G
Transition Funding LLC
3.1.1 (b) 4.1.1 Form of Amended and Restated Limited Liability
Company Agreement of PSE&G Transition Funding LLC
dated as of January 31, 2001
3.2 (a) 4.2 Certificate of Formation of PSE&G Transition
Funding LLC
3.2.1 (b) 4.2.1 Form of Amended and Restated Certificate of
Formation of PSE&G Transition Funding LLC dated as
of January 25, 2001, which was filed with the
Delaware Secretary of State's Office on January
26, 2001
4.1 (a) 4.3 Form of Indenture
4.1.1 (b) 4.3.1 Indenture dated as of January 31, 2001 between
PSE&G Transition Funding LLC and The Bank of New
York
4.1.2 (b) 4.3.2 Series Supplement dated as of January 31, 2001
between PSE&G Transition Funding LLC and The Bank
of New York
4.2 (a) 4.4 Form of Transition Bonds
10.1 (b) 10.1 Bondable Transition Property Sale Agreement dated
as of January 31, 2001 between Public Service
Electric and Gas Company and PSE&G Transition
Funding LLC
10.2 (b) 10.2 Servicing Agreement dated as of January 31, 2001
between PSE&G Transition Funding LLC and Public
Service Electric and Gas Company
10.3 (a) 10.3 Petition of PSE&G to the State of New Jersey Board
of Public Utilities, dated June 8, 1999
10.4 (a) 10.4 Financing Order of the BPU issued September 17,
1999
25.1 (a) 25.1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of The Bank of New York,
as Trustee under the Indenture
99.1 (a) 99.1 Final BPU restructuring order issued August 24,
1999
99.2 (a) 99.2 Internal Revenue Service Private Letter Ruling
pertaining to Transition Bonds
99.3 Certification by Robert E. Busch, Chief Executive
Officer and Chief Financial Officer, pursuant to
Section 1350 of Chapter 63 of Title 18 of the
United States Code.
20