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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, 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
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.
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
----
FORWARD-LOOKING STATEMENTS ii
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
Item 7A. Qualitative and Quantitative Disclosures About Market Risk.............................. 5
Item 8. Financial Statements and Supplementary Data............................................. 5
Independent Auditors' Report............................................................ 6
Notes to Financial Statements........................................................... 11
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.... 16
Item 9A. Controls and Procedures................................................................. 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. Principal Accounting Fees and Services.................................................. 16
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 17
Signatures.............................................................................. 19
Exhibit Index........................................................................... 20
i
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 Public Service Electric and Gas Company'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
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 are an asset-backed issuer, as defined
by the U.S. Securities and Exchange Commission, which was 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 $2.22
billion in seven classes remain outstanding as of December 31, 2003. 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 are being recovered on a subordinated
basis by us through the TBC. The initial TBC rate became effective on February
7, 2001, in accordance with the Final Order.
1
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.
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 our behalf. 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. In addition we pay
miscellaneous operating expenses to PSE&G up to $100 thousand per quarter,
administration fees up to $31 thousand per quarter and trustee fees up to $4
thousand per quarter. 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.
RESULTS OF OPERATIONS
Operating Revenues
Transition Bond Charge (TBC) revenues decreased approximately $7 million or
2% for the year ended December 31, 2003 as compared to the year ended December
31, 2002 primarily due to the 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.
As a result of the annual true-up approved by the BPU in January 2004, the
TBC rate for 2004 decreased to 0.6862 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 Public Service
Electric and Gas Company (PSE&G), as servicer of the bonds.
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 true-up, which was approved by the New Jersey Board of Public Utilities
(BPU) effective in January 2002.
3
Operating Expenses
Amortization of Bondable Transition Property (BTP)
Amortization of BTP decreased approximately $1 million or 1% for the year
ended December 31, 2003 as compared to the year ended December 31, 2002
primarily due 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. Accordingly, the lower TBC rates in
2003 resulted in a decrease of the amortization that was recorded.
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 TBC relating to the
BTP. Accordingly, the higher TBC rates in 2002 resulted in an increase in
recorded amortization.
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 increased
$38 thousand or 3% for the year ended December 31, 2003 as compared to the year
ended December 31, 2002 primarily due to increases in administrative expenses
billed to us by the Servicer, PSE&G.
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.
Interest Income
Interest Income decreased approximately $250 thousand or 38% for the year
ended December 31, 2003 as compared to the year ended December 31, 2002
primarily due to lower interest rates in 2003.
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 lower rates and lower average cash balances in 2002.
Interest Expense
Interest expense decreased approximately $7 million or 4% for the year
ended December 31, 2003 as compared to the year ended December 31, 2002 due to a
reduction in the total amount of debt outstanding.
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.
4
LIQUIDITY AND CAPITAL RESOURCES
The principal amount of the transition 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
debt/security trustee (Trustee) to make scheduled payments on the transition
bonds.
During 2003, all required payments of bond principal, interest and all
related expenses were made by the Trustee on March 17, 2003, June 16, 2003,
September 15, 2003 and December 15, 2003 totaling approximately $73 million, $68
million, $75 million and $73 million, respectively, including replenishments to
the Capital Subaccount and the Overcollateralization account to required levels.
During 2002, payments of bond principal, interest and all related expenses were
made by the Trustee on March 15, 2002, June 17, 2002, September 16, 2002 and
December 16, 2002 totaling approximately $297 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 charged to all of PSE&G's electrical transmission and
distribution system and is recorded based on electric usage. 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 temperature-humidity-index hours of the
unbilled period from expected norms. The resulting usage is priced at current
TBC rate levels and recorded as revenue. Each month the prior month's unbilled
amounts are reversed and the current month's amounts are accrued. The resulting
revenue reflects the billed data less the portion booked as unbilled revenue in
the prior month plus the unbilled portion of the current month. Unbilled revenue
is reflected as revenues and as a receivable.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
5
INDEPENDENT AUDITORS' REPORT
To the Board of Managers and Sole Member 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, 2003 and 2002, and the related statements
of income, member's equity and cash flows for each of the three years in the
period ended December 31, 2003. 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, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 19, 2004
6
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF INCOME
(THOUSANDS)
For the Years Ended
December 31,
---------------------------------
2003 2002 2001
---------------------------------
OPERATING REVENUES $ 291,182 $ 298,633 $ 246,496
OPERATING EXPENSES
Amortization of Bondable Transition Property 124,381 125,324 81,967
Servicing and Administrative Fees 1,506 1,468 1,290
---------------------------------
Total Operating Expenses 125,887 126,792 83,257
---------------------------------
OPERATING INCOME 165,295 171,841 163,239
Interest Income 416 666 1,280
Interest Expense (165,582) (172,292) (164,156)
---------------------------------
NET INCOME $ 129 $ 215 $ 363
=================================
See Notes to Financial Statements.
7
PSE&G TRANSITION FUNDING LLC
BALANCE SHEETS
(THOUSANDS)
December 31, December 31,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash $ 707 $ 578
Receivable from Member 57,921 57,807
Restricted Cash 5,339 1,002
---------- ----------
Total Current Assets 63,967 59,387
---------- ----------
Noncurrent Assets:
Restricted Cash 12,625 12,625
Bondable Transition Property 2,193,328 2,317,709
Deferred Issuance Costs 71,568 82,303
Regulatory Assets - Interest Rate Swap 51,015 65,806
---------- ----------
Total Noncurrent Assets 2,328,536 2,478,443
---------- ----------
TOTAL ASSETS $2,392,503 $2,537,830
========== ==========
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt $ 137,361 $ 128,935
Current Portion of Payable to Member 3,395 6,200
Accrued Interest 5,939 6,576
---------- ----------
Total Current Liabilities 146,695 141,711
---------- ----------
Long-Term Liabilities:
Long-Term Debt 2,084,860 2,222,221
Derivative Liability 51,015 65,806
Payable to Member 94,119 93,257
Regulatory Liability - Overcollateralization 2,482 1,632
---------- ----------
Total Long-Term Liabilities 2,232,476 2,382,916
---------- ----------
TOTAL LIABILITIES 2,379,171 2,524,627
---------- ----------
MEMBER'S EQUITY
Contributed Capital 12,625 12,625
Retained Earnings 707 578
---------- ----------
Total Member's Equity 13,332 13,203
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY $2,392,503 $2,537,830
========== ==========
See Notes to Financial Statements.
8
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF CASH FLOWS
(THOUSANDS)
For the Years Ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 129 $ 215 $ 363
Adjustments to Reconcile Net Income to Net Cash
flows from Operating Activities:
Amortization of Bondable Transition Property 124,381 125,324 81,967
Amortization of Deferred Issuance Costs 10,735 11,614 10,642
Net Changes in Certain Current Assets and
Liabilities:
Receivable from Member (114) (4,506) (52,286)
Payable to Member (1,943) (5,208) 68,046
Restricted Cash (4,337) (1,002) --
Accrued Interest (637) (5,929) 12,856
Other -- -- (1,366)
Net Increase in Overcollateralization 850 852 780
--------- --------- -----------
Net Cash Provided By Operating Activities 129,064 121,360 121,002
--------- --------- -----------
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
Restricted Cash -- (690) (11,935)
Repayment of Long-Term Debt (128,935) (120,455) (53,389)
Deferred Issuance Costs -- -- (67,940)
Contributed Capital -- -- 12,624
--------- --------- -----------
Net Cash (Used In) Provided By Financing
Activities (128,935) (121,145) 2,404,360
--------- --------- -----------
Net Change in Cash and Cash Equivalents 129 215 362
Cash and Cash Equivalents at Beginning of Period 578 363 1
--------- --------- -----------
Cash and Cash Equivalents at End of Period $ 707 $ 578 $ 363
========= ========= ===========
Interest Paid $ 155,484 $ 166,608 $ 141,008
See Notes to Financial Statements.
9
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF MEMBER'S EQUITY
(THOUSANDS)
Contributed Retained
Capital Earnings Total
----------- -------- -------
Balance as of January 1, 2001 $ 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
------- ---- -------
Net Income -- 129 129
------- ---- -------
Balance as of December 31, 2003 $12,625 $707 $13,332
======= ==== =======
See Notes to Financial Statements.
10
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
Generally Accepted Accounting Principles in the United States of America (GAAP)
and 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.
11
NOTES TO FINANCIAL STATEMENTS
Cash
Cash consists primarily of highly liquid marketable securities and money
market funds.
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 and are classified as
Restricted Cash in Current Assets on the Balance Sheet. In addition, as required
by the Finance Order, we deposited an amount equal to 0.5% of the initial
principal amount of the bonds, which was contributed by PSE&G, into the Capital
Subaccount with the Trustee to be drawn in the event collections and other
reserve funds are insufficient to make scheduled payments. The funds deposited
into the Capital Subaccount are classified as Restricted Cash in Noncurrent
Assets 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.
12
NOTES TO FINANCIAL STATEMENTS
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.
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 payable 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 GAAP 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 $2.222 billion
remain outstanding as of December 31, 2003. The net proceeds of the issuance
were remitted to PSE&G as consideration for the property right in the TBC.
13
NOTES TO FINANCIAL STATEMENTS
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 December
31, 2003 are as follows:
=======================================================================================================
Payments
Made On
Initial Bonds Through Current Noncurrent Final/ Final
Principal Interest December Portion Portion Expected Maturity
Balance Rate 31, 2003 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% $197,529,140 $137,360,627 $ 34,090,613 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 $302,779,054 $137,360,627 $2,084,860,319
===================================================================================================================
During the years ended December 31, 2003 and 2002, Transition Funding made
principal payments on the bonds of $129 million and $120 million, respectively.
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 $(51) million
as of December 31, 2003 and $(66) million as of December 31, 2002 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. This amount is deferred
and is expected to be recovered from PSE&G customers.
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%.
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. In addition we pay
miscellaneous operating expenses to PSE&G up to $100 thousand per quarter,
administration fees up to $31 thousand per quarter and trustee fees up to $4
thousand per quarter. Servicing and administrative fees paid to PSE&G for the
years ended December 31, 2003, 2002 and 2001 were approximately $1.5 million,
$1.5 million and $1.3 million, respectively.
14
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2003 and December 31, 2002, we had a receivable from our
member, PSE&G, of approximately $58 million, relating to TBC billings. As of
December 31, 2003 and December 31, 2002 our payable to our member was
approximately $98 million and $99 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. Interest Expense
relating to this payable to PSE&G for the years ended December 31, 2003, 2002
and 2001 were approximately $6.9 million, $6.7 million and $5.9 million,
respectively.
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,
----------------- ----------------- ----------------- -----------------
2003 2002 2003 2002 2003 2002 2003 2002
------- ------- ------- ------- ------- ------- ------- -------
(Thousands)
Operating Revenues....... $70,311 $67,545 $67,363 $71,099 $84,234 $89,258 $69,274 $70,731
Operating Income......... 42,257 42,875 41,059 43,400 40,988 43,001 40,991 42,565
Net Income............... 37 61 34 58 27 58 31 38
15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
ITEM 9A. CONTROLS AND PROCEDURES
Not Applicable.
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. PRINCIPAL ACCOUNTING FEES AND SERVICES
Not Applicable.
16
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, 2003, 2002 and 2001 on page 7.
PSE&G Transition Funding LLC Balance Sheets as of December 31, 2003 and
2002 on page 8.
PSE&G Transition Funding LLC Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 on page 9.
PSE&G Transition Funding LLC Statements of Member's Equity for the years
ended December 31, 2003, 2002 and 2001 on page 10.
PSE&G Transition Funding LLC Notes to Financial Statements on pages 11
through 15.
(B) There were no reports on Form 8-K filed during the last quarter of 2003 and
the 2002 period covered by this report.
17
(C) A listing of exhibits being filed with this document is as follows. 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.
- -----------------------
Exhibit Number
- -----------------------
This Previous
Filing 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
31 Certification by Robert E. Busch, Chief Executive
Officer and 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 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
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
(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.
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 22, 2004
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
--------- ----- ----
/s/ ROBERT E. BUSCH President, Chief Executive Officer, March 22, 2004
- ------------------------ Chief Financial Officer and Manager
Robert E. Busch (Principal Executive Officer and
Principal Financial Officer)
/s/ MORTON A. PLAWNER Vice President, Treasurer and Manager March 22, 2004
- ------------------------
Morton A. Plawner
/s/ PATRICIA A. RADO Controller March 22, 2004
- ------------------------ (Principal Accounting Officer)
Patricia A. Rado
/s/ R. EDWIN SELOVER Manager March 22, 2004
- ------------------------
R. Edwin Selover
/s/ BENJAMIN B. ABEDINE Manager March 22, 2004
- ------------------------
Benjamin B. Abedine
/s/ DEAN A. CHRISTIANSEN Manager March 22, 2004
- ------------------------
Dean A. Christiansen
19
EXHIBIT INDEX
A listing of exhibits being filed with this document is as follows:
Exhibit Number Document
- -------------- --------
31 Certification by Robert E. Busch, Chief Executive Officer and
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 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
20