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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, 2004
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
Newark, New Jersey 07102
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
--- ---
TABLE OF CONTENTS
PAGE
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FORWARD-LOOKING STATEMENTS ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Notes to Condensed Financial Statements
Note 1. Organization and Basis of Presentation 4
Note 2. The Bonds 4
Note 3. Significant Agreements and Related Party Transactions 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Liquidity and Capital Resources 7
Item 3. Qualitative and Quantitative Disclosures About Market Risk 7
Item 4. Controls and Procedures 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 6. Exhibits 8
Signature 9
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 (PSE&G) facilities and
third party suppliers; and the payment patterns of PSE&G's electric customers,
including the rate of delinquencies.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSE&G TRANSITION FUNDING LLC
CONDENSED STATEMENTS OF OPERATIONS
(Thousands)
(Unaudited)
For the Quarters Ended For the Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
2004 2003 2004 2003
--------- -------- --------- ---------
OPERATING REVENUES..................................... $ 82,264 $ 84,234 $ 223,268 $ 221,908
OPERATING EXPENSES
Amortization of Bondable Transition Property...... 43,011 42,879 103,916 96,477
Servicing and Administrative Fees................. 380 367 1,137 1,127
--------- --------- --------- ---------
Total Operating Expenses...................... 43,391 43,246 105,053 97,604
--------- --------- --------- ---------
OPERATING INCOME....................................... 38,873 40,988 118,215 124,304
Interest Income........................................ 160 86 370 312
Interest Expense....................................... (38,990) (41,047) (118,481) (124,518)
--------- --------- --------- ---------
NET INCOME............................................. $ 43 $ 27 $ 104 $ 98
========= ========= ========= =========
See Notes to Condensed Financial Statements.
1
PSE&G TRANSITION FUNDING LLC
CONDENSED BALANCE SHEETS
(Thousands)
(Unaudited)
September 30, December 31,
ASSETS 2004 2003
----------- ----------
Current Assets:
Cash.......................................................... $ 429 $ 707
Receivable from Member........................................ 65,220 57,921
Restricted Cash............................................... 6,764 2,857
---------- ----------
Total Current Assets..................................... 72,413 61,485
---------- ----------
Noncurrent Assets:
Restricted Cash............................................... 15,746 15,107
Bondable Transition Property.................................. 2,089,412 2,193,328
Deferred Issuance Costs....................................... 63,877 71,568
Regulatory Assets............................................. 41,343 51,015
---------- ----------
Total Noncurrent Assets.................................. 2,210,378 2,331,018
---------- ----------
TOTAL ASSETS....................................................... $2,282,791 $2,392,503
========== ==========
LIABILITIES
Current Liabilities:
Current Portion of Long- Term Debt............................ $ 143,885 $ 137,361
Current Portion of Derivative Liability....................... 18,066 22,110
Current Portion of Payable to Member.......................... 6,086 3,395
Accrued Interest.............................................. 6,067 5,939
---------- ----------
Total Current Liabilities................................ 174,104 168,805
---------- ----------
Long-Term Liabilities:
Long-Term Debt................................................ 1,979,637 2,084,860
Derivative Liability.......................................... 23,277 28,905
Payable to Member............................................. 89,598 94,119
Regulatory Liability - Overcollateralization.................. 3,121 2,482
---------- ----------
Total Long-Term Liabilities.............................. 2,095,633 2,210,366
---------- ----------
TOTAL LIABILITIES.................................................. 2,269,737 2,379,171
---------- ----------
MEMBER'S EQUITY
Contributed Capital........................................... 12,625 12,625
Retained Earnings............................................. 429 707
---------- ----------
Total Member's Equity................................... 13,054 13,332
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY.............................. $2,282,791 $2,392,503
========== ==========
See Notes to Condensed Financial Statements.
2
PSE&G TRANSITION FUNDING LLC
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
2004 2003
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income......................................................... $ 104 $ 98
Adjustments to reconcile Net Income to Net Cash Flows from
Operating Activities:
Amortization of Bondable Transition Property..................... 103,916 96,477
Amortization of Deferred Issuance Costs.......................... 7,691 8,101
Net Changes in Certain Current Assets and Liabilities:
Receivable from Member............................................ (7,299) (7,474)
Payable to Member................................................. (1,830) (4,347)
Overcollateralization............................................. 639 637
Accrued Interest.................................................. 128 (246)
-------- --------
Net Cash Provided By Operating Activities....................... 103,349 93,246
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted Cash................................................... (4,546) (534)
-------- --------
Net Cash Used In Investing Activities........................... (4,546) (534)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-Term Debt....................................... (98,699) (92,614)
Cash Dividends Paid............................................... (382) --
-------- --------
Net Cash Used In Financing Activities........................... (99,081) (92,614)
-------- --------
Net Change in Cash and Cash Equivalents.................................. (278) 98
Cash and Cash Equivalents at Beginning Of Period......................... 707 578
-------- --------
Cash and Cash Equivalents at End Of Period............................... $ 429 $ 676
======== ========
Interest Paid............................................................ $110,662 $116,663
See Notes to Condensed Financial Statements.
3
NOTES TO CONDENSED 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 Final Order in PSE&G's rate unbundling and restructuring
proceedings (Final Order) and a bondable stranded cost rate order (Finance
Order), which were issued August 24, 1999 and September 17, 1999, respectively,
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 condensed 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 Condensed Financial Statements and Notes to Condensed Financial Statements
(Notes) should be read in conjunction with and update and supplement matters
discussed in our 2003 Annual Report on Form 10-K and our Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.
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 Condensed Balance Sheets were
derived from the audited financial statements included in our 2003 Annual Report
on Form 10-K.
Note 2. The Bonds
On January 31, 2001, we issued $2.525 billion aggregate principal amount 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 CONDENSED 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, 2004 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, 2004
================================================================================================================
Class A-1 $105,249,914 5.46% $105,249,914 $ -- $ -- 6/17/02 --
Class A-2 368,980,380 5.74% 296,228,544 72,751,836 -- 3/15/05 3/15/07
Class A-3 182,621,909 5.98% -- 71,133,384 111,488,525 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 $401,478,458 $143,885,220 $1,979,636,322
================================================================================================================
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 $(41) million and $(51) million as of September 30, 2004
and December 31, 2003, respectively, and was recorded as a derivative liability,
with an offsetting amount recorded as a regulatory asset on the Condensed
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 or refunded to PSE&G's customers.
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 Finance 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. 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
quarters ended September 30, 2004 and 2003 were $380 thousand and $367 thousand,
respectively. Servicing and administrative fees paid to PSE&G for each of the
nine months ended September 30, 2004 and 2003 were approximately $1.1 million.
As of September 30, 2004 and December 31, 2003, 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, 2004 and December 31, 2003 our
payable to our member was approximately $96 million and $98 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. Also in 2004, we paid a cash dividend of $382 thousand to
PSE&G.
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 2003 Annual Report on Form 10-K and our Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004 affecting the
financial condition and the results of operations. This discussion refers to our
Condensed Financial Statements (Statements) and related Notes to Condensed
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 aggregate principal amount of
transition bonds (Bonds) in eight classes with maturities ranging from one year
to fifteen 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 Bonds and to cover any additional
administrative costs.
RESULTS OF OPERATIONS
Operating Revenues
TBC revenues decreased approximately $2 million or 2% for the quarter ended
September 30, 2004, as compared to the same period in 2003 due to a decline in
the TBC rate from 2003. In January 2004, 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 0.6862 cents per Kilowatt-hour (kWh) from 0.7018 cents per kWh
in 2003. 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. TBC revenues increased
approximately $1 million or 1% for the nine months ended September 30, 2004, as
compared to the same period in 2003 due to an increase in sales volume at PSE&G.
The increase was partially offset by the decline in the TBC rate from 2003, as
previously discussed.
Operating Expenses
Amortization of Bondable Transition Property (BTP)
Amortization of BTP increased approximately $132 thousand or less than 1%
and $7 million or 8% for the quarter and nine months ended September 30, 2004,
respectively, as compared to the same periods in 2003. As a regulated entity,
our amortization expense fluctuates with changes in revenue and interest
expense. We defer any over or under collection of expense to match against
future revenues.
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
approximately $13 thousand or 4% and $10 thousand or 1% for the quarter and
nine months ended September 30, 2004, respectively, as compared to the same
periods in 2003, due to increases in administrative expenses billed to us by the
Servicer, PSE&G.
Interest Income
Interest Income increased approximately $74 thousand or 86% and $58
thousand or 19% for the quarter and nine months ended September 30, 2004,
respectively, as compared to the same periods in 2003 primarily due to an
increase in interest rates and higher cash balances in the third quarter of
2004.
6
Interest Expense
Interest expense decreased approximately $2 million or 5% and $6 million or
5% for the quarter and nine months ended September 30, 2004, respectively, as
compared to the same periods in 2003 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 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 2004, payments of bond principal, interest and all related expenses
were made by the Trustee on March 15, 2004, June 15, 2004 and September 15, 2004
totaling approximately $69 million, $69 million and $75 million, respectively,
including funding of the Capital Subaccount and the Overcollateralization
account to required levels. Also in 2004, we paid a cash dividend of $382
thousand to PSE&G.
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, 2003 or Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2004 and June 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Not Applicable.
7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no updates to information reported under Item 3 of Part I of our
2003 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004 and June 30, 2004.
ITEM 6. EXHIBITS
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
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 9, 2004
9