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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, 2003
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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No X
--- ---
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TABLE OF CONTENTS
PAGE
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FORWARD-LOOKING STATEMENTS ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Notes to Financial Statements
Note 1. Organization and Basis of Presentation 4
Note 2. The Bonds 4
Note 3. Significant Agreements and Related Party Transactions 5
Note 4. New Accounting Standards 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Results of Operations 6
Liquidity and Capital Resources 7
Accounting Matters 7
Item 3. Qualitative and Quantitative Disclosures About Market Risk 7
Item 4. Controls and Procedures 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K 8
Signature 9
i
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PSE&G TRANSITION FUNDING LLC
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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.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF OPERATIONS
(Thousands)
(Unaudited)
For the Quarters For the Nine Months
Ended Ended
September 30, September 30,
-------------------- ----------------------
2003 2002 2003 2002
-------- -------- --------- ---------
OPERATING REVENUES..................................... $ 84,234 $ 89,258 $ 221,908 $ 227,902
OPERATING EXPENSES
Amortization of Bondable Transition Property...... 42,879 45,857 96,477 97,549
Servicing and Administrative Fees................. 367 400 1,127 1,077
-------- -------- --------- ---------
Total Operating Expenses...................... 43,246 46,257 97,604 98,626
-------- -------- --------- ---------
OPERATING INCOME....................................... 40,988 43,001 124,304 129,276
Interest Income........................................ 86 222 312 514
Interest Expense....................................... (41,047) (43,165) (124,518) (129,613)
-------- -------- --------- ---------
NET INCOME............................................. $ 27 $ 58 $ 98 $ 177
======== ======== ========= =========
See Notes to Financial Statements.
1
PSE&G TRANSITION FUNDING LLC
BALANCE SHEETS
(Thousands)
(Unaudited)
September 30, December 31,
ASSETS 2003 2002
------------- ------------
Current Assets:
Cash.......................................................... $ 676 $ 578
Restricted Cash............................................... 14,161 13,627
Receivable from Member........................................ 65,281 57,807
---------- ----------
Total Current Assets..................................... 80,118 72,012
---------- ----------
Noncurrent Assets:
Bondable Transition Property.................................. 2,221,232 2,317,709
Deferred Issuance Costs....................................... 74,202 82,303
Regulatory Assets............................................. 60,773 65,806
---------- ----------
Total Noncurrent Assets.................................. 2,356,207 2,465,818
---------- ----------
TOTAL ASSETS.......................................................... $2,436,325 $2,537,830
========== ==========
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt............................. $ 135,020 $ 128,935
Current Portion of Payable to Member.......................... 6,736 6,200
Regulatory Liability - Overcollateralization.................. 2,269 1,632
Accrued Interest.............................................. 6,330 6,576
---------- ----------
Total Current Liabilities................................ 150,355 143,343
---------- ----------
Long-Term Liabilities:
Long-Term Debt................................................ 2,123,522 2,222,221
Derivative Liability.......................................... 60,773 65,806
Payable to Member............................................. 88,374 93,257
---------- ----------
Total Long-Term Liabilities.............................. 2,272,669 2,381,284
---------- ----------
TOTAL LIABILITIES..................................................... 2,423,024 2,524,627
---------- ----------
MEMBER'S EQUITY
Contributed Capital........................................... 12,625 12,625
Retained Earnings............................................. 676 578
---------- ----------
Total Member's Equity................................... 13,301 13,203
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY................................. $2,436,325 $2,537,830
========== ==========
See Notes to Financial Statements.
2
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
For the Nine Months Ended
September 30,
---------------------------
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 98 $ 177
Adjustments to reconcile net income to net cash flows from
operating activities:
Amortization of Bondable Transition Property..................... 96,477 97,549
Amortization of Deferred Issuance Costs.......................... 8,101 8,847
Net Changes in Certain Current Assets and Liabilities:
Restricted Cash................................................... (534) (1,531)
Receivable from Member............................................ (7,474) (15,069)
Payable to Member................................................. (4,347) (360)
Overcollateralization............................................. 637 639
Accrued Interest.................................................. (246) (4,840)
-------- --------
Net Cash Provided By Operating Activities....................... 92,712 85,412
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -- --
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-Term Debt........................................ (92,614) (85,235)
-------- --------
Net Cash Used In Financing Activities.............................. (92,614) (85,235)
-------- --------
Net Change in Cash and Cash Equivalents.................................. 98 177
Cash and Cash Equivalents at Beginning Of Period......................... 578 363
-------- --------
Cash and Cash Equivalents at End Of Period............................... $ 676 $ 540
======== ========
Interest Paid............................................................ $116,663 $125,966
See Notes to Financial Statements.
3
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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. The Finance Order authorizes the TBC to recover
$2.525 billion aggregate principal amount of Bonds, plus an amount 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 (SEC) for the
Quarterly Reports on Form 10-Q. 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) should be read in
conjunction with and update and supplement matters discussed in our 2002 Annual
Report on Form 10-K and the Quarterly Report on Form 10-Q for the quarters ended
March 31, 2003 and June 30, 2003.
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 2002 Annual Report on Form
10-K. 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. 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
4
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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, 2003 are as follows:
===================================================================================================
Payments
Initial Made On Current Noncurrent Final/ Final
Principal Interest Bonds Portion Portion Expected Maturity
Balance Rate Through Outstanding Outstanding Payment Date Date
September 30,
2003
===============================================================================================================
Class A-1 $105,249,914 5.46% $105,249,914 -- -- 6/17/02 --
Class A-2 $368,980,380 5.74% 161,208,779 $135,019,765 $ 72,751,836 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 + 0.30% -- -- 496,606,425 6/15/09 6/15/11
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 $266,458,693 $135,019,765 $2,123,521,542
===============================================================================================================
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 interest rate swap
is indexed to the three-month LIBOR rate. The fair value of the interest rate
swap was approximately $(61) million and $(66) million as of September 30, 2003
and December 31, 2002, respectively, and was recorded as a derivative liability,
with an offsetting amount recorded as a regulatory asset on the Balance Sheets.
The fair value of this swap will vary over time as a result of changes in market
conditions. This amount is deferred and is expected to be recovered from
PSE&G's customers through the TBC.
We incurred approximately $230 million in issuance costs in connection with
the securitization transaction, including $201 million of costs of a hedging
arrangement as permitted by the Finance Order. Of this amount, $125 million was
included with the BTP, with the balance in deferred issuance costs. 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.
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 quarters ended September 30, 2003 and
2002 were $367 thousand and $400 thousand, respectively. Servicing and
administrative fees paid to PSE&G for the nine months ended September 30, 2003
and 2002 were $1,127 thousand and $1,077 thousand, respectively.
As of September 30, 2003 and December 31, 2002, we had a receivable from
our member, PSE&G, of approximately $65 million and $58 million, respectively,
relating to TBC billings. As of September 30, 2003 and December 31, 2002 our
payable to our member was approximately $95 million and $100 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.
Note 4. New Accounting Standards
We adopted Statement of Financial Accounting Standards (SFAS) No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(SFAS 149) on July 1, 2003. SFAS 149 amends and clarifies the accounting
guidance for derivative instruments (including certain derivative instruments
embedded in other contracts) and hedging activities that fall within the scope
of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
We have concluded that there is no impact from adopting this standard.
5
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 2002 Annual Report on Form 10-K and our Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003 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.
On January 31, 2001, we issued $2.525 billion of transition bonds in eight
classes with maturities ranging from 1 year to 15 years. The net proceeds of the
issuance were utilized to acquire Public Service Electric and Gas Company's
(PSE&G) property right in the Transition Bond Charge (TBC). 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
TBC revenues decreased approximately $5 million or 6% and $6 million or 3%
for the quarter and nine months ended September 30, 2003 as compared to the same
periods in 2002, respectively, due to a decline in the TBC rate from 2002. In
January 2003, as a result of the annual true-up approved by the State of New
Jersey Board of Public Utilities (BPU), the TBC rate decreased to 0.7018 cents
per Kilowatt-hour (kWh) from 0.7250 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 insure 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)
Amortization of BTP decreased approximately $3 million or 6% and $1 million
or 1% for the quarter and nine months ended September 30, 2003 as compared to
the same periods in 2002. These changes primarily relate to the changes in
Operating Revenues 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.
Servicing and Administrative Fees
PSE&G withholds from the TBC collections an annual servicing fee equal to
0.05% of the initial balance of the Bonds issued and charges an additional fee
for various administrative costs. Servicing and Administrative Fees decreased
approximately $33 thousand or 8% for the quarter ended September 30, 2003 and
increased $50 thousand or 5% for the nine months ended September 30, 2003 as
compared to the same periods in 2002, due to changes in administrative expenses
billed to us by the Servicer, PSE&G.
Interest Income
Interest Income decreased approximately $136 thousand or 61% and
$202 thousand or 39% for the quarter and nine months ended September 30, 2003,
respectively, as compared to the quarter and nine months ended September 30,
2002 primarily due to lower interest rates in 2003.
6
Interest Expense
Interest expense decreased approximately $2 million or 5% and $5 million or
4% for the quarter and nine months ended September 30, 2003, respectively, as
compared to the quarter and nine months ended September 30, 2002, due to 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 2003, payments of bond principal, interest and all related expenses
were made by the Trustee on March 17, 2003, June 16, 2003 and September 15, 2003
totaling approximately $73 million, $68 million and $75 million, respectively,
including funding of the Capital Subaccount and the Overcollateralization
account to required levels.
Accounting Matters
We adopted Statement of Financial Accounting Standards (SFAS) No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(SFAS 149) on July 1, 2003. SFAS 149 amends and clarifies the accounting
guidance for derivative instruments (including certain derivative instruments
embedded in other contracts) and hedging activities that fall within the scope
of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
We have concluded that there is no impact from adopting this standard.
ITEM 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
There were no material changes from the disclosures in the Annual Report on
Form 10-K for the year ended December 31, 2002 or Quarterly Report on Form 10-Q
for the quarters ended March 31, 2003 and June 30, 2003.
7
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 the organization,
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 the end of the reporting period and, 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 during the quarter that could
significantly affect internal controls. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no updates to information reported under Item 3 of Part I of our
2002 Annual Report on Form 10-K and March 31, 2003 and June 30, 2003 Quarterly
Reports on Form 10-Q.
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
-------------- --------
31 Certification by Robert E. Busch, Chief
Executive Officer of PSE&G Transition
Funding LLC Pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange
Act of 1934
31.1 Certification by Robert E. Busch, Chief
Financial Officer of PSE&G Transition
Funding LLC Pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange
Act of 1934
32 Certification by Robert E. Busch, Chief
Executive Officer of PSE&G Transition
Funding LLC Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United
States Code
32.1 Certification by Robert E. Busch, 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.
8
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 10, 2003
9