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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 March 31, 2005
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. Condensed 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 7
Results of Operations 7
Liquidity and Capital Resources 8
Item 3. Qualitative and Quantitative Disclosures About Market Risk 8
Item 4. Controls and Procedures 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits 9
Signature 10
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.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSE&G TRANSITION FUNDING LLC
CONDENSED STATEMENTS OF OPERATIONS
(Thousands)
(Unaudited)
For the Quarters Ended
March 31,
----------------------
2005 2004
-------- ---------
OPERATING REVENUES $ 69,470 $ 70,194
OPERATING EXPENSES
Amortization of Bondable Transition Property 31,509 29,885
Servicing and Administrative Fees 375 389
-------- --------
Total Operating Expenses 31,884 30,274
-------- --------
OPERATING INCOME 37,586 39,920
Interest Income 276 115
Interest Expense (37,787) (40,000)
-------- --------
NET INCOME $ 75 $ 35
======== ========
See Notes to Condensed Financial Statements.
1
PSE&G TRANSITION FUNDING LLC
CONDENSED BALANCE SHEETS
(Thousands)
(Unaudited)
March 31, December 31,
2005 2004
---------- ------------
ASSETS
Current Assets:
Cash $ 438 $ 435
Receivable from Member 57,513 58,974
Restricted Cash 5,462 5,697
---------- ----------
Total Current Assets 63,413 65,106
---------- ----------
Noncurrent Assets:
Restricted Cash 16,171 15,959
Bondable Transition Property 2,027,491 2,059,000
Deferred Issuance Costs 58,931 61,384
Regulatory Asset - Interest Rate Swap 22,235 34,000
---------- ----------
Total Noncurrent Assets 2,124,828 2,170,343
---------- ----------
TOTAL ASSETS $2,188,241 $2,235,449
========== ==========
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt $ 148,313 $ 146,113
Current Portion of Derivative Liability 9,165 14,943
Current Portion of Payable to Member 6,282 6,183
Accrued Interest 5,885 5,971
---------- ----------
Total Current Liabilities 169,645 173,210
---------- ----------
Long-Term Liabilities:
Long-Term Debt 1,902,457 1,938,747
Derivative Liability 13,070 19,057
Payable to Member 86,460 88,041
Regulatory Liability - Overcollateralization 3,546 3,334
---------- ----------
Total Long-Term Liabilities 2,005,533 2,049,179
---------- ----------
TOTAL LIABILITIES 2,175,178 2,222,389
---------- ----------
MEMBER'S EQUITY
Contributed Capital 12,625 12,625
Retained Earnings 438 435
---------- ----------
Total Member's Equity 13,063 13,060
---------- ----------
TOTAL LIABILITIES AND MEMBER'S EQUITY $2,188,241 $2,235,449
========== ==========
See Notes to Condensed Financial Statements.
2
PSE&G TRANSITION FUNDING LLC
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
For the Quarters Ended
March 31,
----------------------
2005 2004
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 75 $ 35
Adjustments to reconcile net income to net cash flows from
operating activities:
Amortization of Bondable Transition Property 31,509 29,885
Amortization of Deferred Issuance Costs 2,453 2,596
Net Changes in Certain Current Assets and Liabilities:
Receivable from Member 1,461 1,011
Accrued Interest (86) 296
Net Increase in Overcollateralization 212 213
-------- --------
Net Cash Provided By Operating Activities 35,624 34,036
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted Cash 23 (3,158)
-------- --------
Net Cash Provided By (Used In) Investing Activities 23 (3,158)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-Term Debt (34,090) (31,862)
Repayment of Payable to Member (1,482) 1,019
Dividends Paid (72) (309)
-------- --------
Net Cash Used In Financing Activities (35,644) (31,152)
-------- --------
Net Change in Cash and Cash Equivalents 3 (274)
Cash and Cash Equivalents at Beginning Of Period 435 707
-------- --------
Cash and Cash Equivalents at End Of Period $ 438 $ 433
======== ========
Interest Paid $ 35,420 $ 37,018
See Notes to Condensed Financial Statements.
3
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 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.
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 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 on 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. 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 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 in the United States of America
(GAAP) 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 2004 Annual Report on
Form 10-K.
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 2004 Annual Report
on Form 10-K.
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.
4
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 March 31,
2005 are as follows:
Payments
Initial Made On Current Noncurrent Final/ Final
Principal Interest Bonds Through Portion Portion Expected Maturity
Balance Rate March 31, 2005 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% 368,980,380 -- -- 3/15/05 3/15/07
Class A-3 182,621,909 5.98% -- $148,313,388 $34,308,521 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 $474,230,294 $148,313,388 $1,902,456,318
============== ============ ============ ==============
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 $(22) million as of March 31, 2005 and $(34) million as
of December 31, 2004 and was recorded as a derivative liability, with an
offsetting amount recorded as a regulatory asset on the Condensed 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 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%.
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 each
of the three months ended March 31, 2005 and 2004 were approximately $375
thousand and $389 thousand, respectively.
5
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
As of March 31, 2005 and December 31, 2004, we had a receivable from our
sole member, PSE&G, of approximately $58 million and $59 million, respectively,
relating to TBC billings. As of March 31, 2005 and December 31, 2004 our payable
to PSE&G was approximately $93 million and $94 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 each of the three
months ended March 31, 2005 and 2004 were approximately $2 million.
In additions to the payments above, interest earned on funds in the
Capital Subaccount is periodically dividended to PSE&G. During the three months
ended March 31, 2005 and 2004, we paid dividends to PSE&G of approximately $72
thousand and $309 thousand, respectively.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise indicates, all references to "Transition
Funding," "we," "us" or "our" herein mean PSE&G Transition Funding LLC, a
Delaware limited liability company located at 80 Park Plaza, Newark, New Jersey
07102.
Following are the significant changes in or additions to information
reported in our 2004 Annual Report on Form 10-K affecting the financial
condition and the results of our 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 of transition 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
transition bonds and to cover any additional administrative costs.
RESULTS OF OPERATIONS
Operating Revenues
TBC revenues decreased approximately $724 thousand or 1% for the quarter
ended March 31, 2005 as compared to the same quarter in 2004, respectively,
primarily due to a decline in the TBC rate from 2004. In January 2005, 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 0.6723 cents per Kilowatt-hour (kWh)
from 0.6862 cents per kWh in 2004. Any increases or decreases in the TBC rate
are designed to maintain the Capital Subaccount and the Overcollateralization
account at appropriate levels and have adequate funds to meet our scheduled
repayments of the deferred issuance costs to PSE&G, as servicer of the Bonds.
Operating Expenses
Amortization of Bondable Transition Property (BTP)
As a regulated entity, our amortization expense fluctuates with changes in
revenue and interest expense. Amortization of BTP increased approximately $1.6
million or 5% for the quarter ended March 31, 2005 as compared to the same
quarter in 2004 due to the decrease in Interest Expense offset by the decrease
in Operating Revenues. 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 decreased
approximately $14 thousand or 4% for the quarter ended March 31, 2005 as
compared to the same quarter in 2004, due to decreases in administrative
expenses billed to us by the Servicer, PSE&G.
Interest Income
Interest Income increased approximately $161 thousand for the quarter ended
March 31, 2005 as compared to the quarter ended March 31, 2004 primarily due to
higher interest rates in 2005. The average return on investments increased to
approximately 2.5% for the quarter ended March 31, 2005 compared to
approximately 1.1% for the quarter ended March 31, 2004.
7
Interest Expense
Interest expense decreased approximately $2.2 million or 6% for the quarter
ended March 31, 2005 as compared to the quarter ended March 31, 2004 due
primarily 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 2005, payments of bond principal, interest, intercompany payables
and all related expenses were made by the Trustee on March 15, 2005 totaling
approximately $72 million, including funding of the Capital Subaccount and the
Overcollateralization account to required levels.
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, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Not Applicable.
8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no updates to information reported under Item 3 of Part I of our
2004 Annual Report on Form 10-K.
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
9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSE&G TRANSITION FUNDING LLC
(Registrant)
By: /s/ Patricia A. Rado
------------------------------------
Patricia A. Rado
Controller
(Principal Accounting Officer)
Date: May 11, 2005
10