RELIANT ENERGY TRANSITION BOND CO LLC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 JUNE 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-91093

RELIANT ENERGY TRANSITION BOND COMPANY LLC
(Exact name of registrant as specified in its charter)

DELAWARE 76-0624152
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

1111 LOUISIANA, SUITE 4667
HOUSTON, TEXAS 77002 (713) 207-8272
(Address and zip code of (Registrant's telephone number,
principal executive offices) including area code)

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.

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 [ ]

As of August 9, 2002, all outstanding membership interests in Reliant
Energy Transition Bond Company LLC were held by Reliant Energy, Incorporated.

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RELIANT ENERGY TRANSITION BOND COMPANY LLC

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.................................................................1
Statements of Income and Changes in Member's Equity
Three and Six Months Ended June 30, 2002 (unaudited)...................................1
Balance Sheets
December 31, 2001 and June 30, 2002 (unaudited)........................................2
Statements of Cash Flows
Six Months Ended June 30, 2001 and 2002 (unaudited)....................................3
Notes to Unaudited Financial Statements..................................................4
Item 2. Management's Narrative Analysis of Results of Operations of Reliant Energy
Transition Bond Company LLC..............................................................7

PART II. OTHER INFORMATION

Item 1. Legal Proceedings....................................................................9
Item 5. Other Information....................................................................9
Item 6. Exhibits and Reports on Form 8-K.....................................................9

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

From time to time we make statements concerning our expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These
statements are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied by these statements. In some cases, you can
identify our forward-looking statements by the words "anticipate," "believe,"
"continue," "could," "estimate," "expect," "intend," "may," "plan," "potential,"
"predict," "should," "will," "forecast," "goal," "objective," "projection," or
other similar words.

We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.

The following list identifies some of the factors that could cause actual
results to differ from those expressed or implied by our forward-looking
statements:

o state or federal legislative or regulatory developments;

o national or regional economic conditions;

o the accuracy of the servicer's estimates of market demand and prices for
energy;

o the accuracy of the servicer's estimates of industrial, commercial and
residential growth in Reliant Energy's service territory;

o weather variations and other natural phenomena affecting retail electric
customer energy usage;

o the speed, degree and effect of continued electric industry restructuring;

o the operating performance of Reliant Energy's facilities and third-party
suppliers of electric energy in Reliant Energy's service territory;

o the accuracy of the servicer's estimates of the payment patterns of retail
electric customers, including the rate of delinquencies and any collections
curves; and

o other factors we discuss in this Form 10-Q.

You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.

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PART I. FINANCIAL INFORMATION

RELIANT ENERGY TRANSITION BOND COMPANY LLC

STATEMENTS OF INCOME
AND CHANGES IN MEMBER'S EQUITY
(UNAUDITED)

See Notes to the Company's Financial Statements

1

RELIANT ENERGY TRANSITION BOND COMPANY LLC

BALANCE SHEETS
(UNAUDITED)

See Notes to the Company's Financial Statements

2

RELIANT ENERGY TRANSITION BOND COMPANY LLC

STATEMENTS OF CASH FLOWS
(UNAUDITED)

See Notes to the Company's Financial Statements

3

RELIANT ENERGY TRANSITION BOND COMPANY LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

(1) BACKGROUND AND BASIS OF PRESENTATION

Included in this Quarterly Report on Form 10-Q for Reliant Energy
Transition Bond Company LLC (the Company) are the Company's interim financial
statements and notes (Interim Financial Statements). The Interim Financial
Statements are unaudited, omit certain financial statement disclosures and
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.

The Company is a special purpose Delaware limited liability company whose
sole member is Reliant Energy, Incorporated (Reliant Energy).

The Company was organized on November 10, 1999 under the laws of the State
of Delaware for the sole purpose of acquiring and holding the Transition
Property to be acquired from Reliant Energy. The Company had no operations until
October 24, 2001.

The Company is restricted by its organizational documents from engaging in
any activity not directly related to the specific purposes for which the Company
was created. The Company is a separate and distinct legal entity from Reliant
Energy, and the Company's organizational documents require it to operate in a
manner to avoid consolidation with the bankruptcy estate of Reliant Energy in
the event Reliant Energy becomes subject to such a proceeding. Reliant Energy is
not the owner of the Transition Property described herein, and the assets of the
Company are not available to pay creditors of Reliant Energy or any of its
affiliates.

(2) SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Interim Financial Statements reflect all normal
recurring adjustments that are, in the opinion of management, necessary to
present fairly the financial position for the respective periods.

REGULATION AND REGULATORY ASSETS AND LIABILITIES. The Company's business
meets the criteria of Statement of Financial Accounting Standards ("SFAS") No.
71 (SFAS No. 71), "Accounting for the Effects of Certain Types of Regulation."
This accounting standard recognizes the cost based rate making process which may
result in differences in the application of generally accepted accounting
principles between regulated and non-regulated businesses. The Company's purpose
is to purchase the Transition Property, issue one or more series of Transition
Bonds secured by the Transition Property and to perform any activity incidental
thereto. The Transition Charges are designed to provide the necessary revenues
to make such payments. Continued applicability of SFAS No. 71 requires that
rates be designed to recover specific costs of providing regulated services and
products, and that it be reasonable to assume that the Transition Charges are
set at levels that will recover an entity's costs and can be charged to and
collected from customers. The Company believes it satisfies such requirements,
and applies the provisions of SFAS No. 71 to its business.

CASH AND CASH EQUIVALENTS/RESTRICTED FUNDS. For purposes of the Balance
Sheet and Statement of Cash Flows, the Company considers investments purchased
with a maturity of three months or less to be the equivalent of cash. The
Trustee has established the following subaccounts for the Transition Bonds:

The General Subaccount is comprised of collections of Transition
Charges and interest earned from short- term investments. These amounts
accumulate in the General Subaccount until they are transferred from the
General Subaccount on each Transition Bond payment date.

The Reserve Subaccount is maintained for the purpose of holding any
Transition Charges and investment

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earnings (other than investment earnings on amounts in the Capital
Subaccount) not otherwise used on the payment dates of the Transition Bonds
for payment of principal, interest, fees or expenses, or for funding the
Capital Subaccount or the Overcollateralization Subaccount. As of June 30,
2002, the Reserve Subaccount had a zero balance.

The Indenture also provides for an Overcollateralization Subaccount.
The target funding level of this subaccount is 0.5% of the initial
principal amount of the Transition Bonds, and funding occurs ratably over
the life of the Transition Bonds. The Trustee may draw from this subaccount
if the General Subaccount and Reserve Subaccount are not sufficient on any
payment date to make scheduled payments on the Transition Bonds and
payments of certain fees and expenses. As of June 30, 2002, the
Overcollateralization Subaccount had a zero balance.

An amount equal to 0.5% of the initial principal amount of the
Transition Bonds was deposited into the Capital Subaccount under the
Indenture on the date of issuance of the Transition Bonds. This amount was
contributed by Reliant Energy to the Company. If amounts available in the
General, Reserve and Overcollateralization Subaccounts are not sufficient
on any payment date to make scheduled payments on the Transition Bonds and
payments of certain fees and expenses, the Trustee will draw on amounts in
the Capital Subaccount. Any remaining amounts collateralizing the
Transition Bonds will be released to the Company upon final payment of the
Transition Bonds. Approximately $2.9 million was drawn from the Capital
Subaccount in connection with the March 15, 2002 interest payment on the
Transition Bonds. As of June 30, 2002, the Capital Subaccount had a balance
of $799,886.

DEBT ISSUANCE COSTS. The costs associated with the issuance of the
Transition Bonds are capitalized and are being amortized over the life of the
Transition Bonds utilizing the effective interest method.

REVENUE. Beginning on October 25, 2001 and pursuant to the Financing Order,
Reliant Energy, as Servicer, implemented the nonbypassable Transition Charge on
behalf of the Company. The Company records revenue for Transition Charges under
the accrual method. These revenues are generally recognized upon delivery of
services by Reliant Energy to consumers.

AMORTIZATION. The Transition Property was recorded at acquired cost and is
being amortized over 12 years, the life of the Transition Bonds, based on
estimated revenue from Transition Charges, interest accruals and other expenses.
The Financing Order limits the terms of the Transition Bonds to no greater than
15 years. In accordance with SFAS No. 71, amortization is adjusted for
over/under collection of Transition Charges. At June 30, 2002, Transition
Property included regulatory adjustments of $17,803,674 to defer amortization
costs until periods in which Transition Charge revenue is recorded.

INCOME TAXES. The Company is organized as a single member limited liability
company, and will not be subject to United States federal income tax as an
entity separate from Reliant Energy. In addition, the Company has received a
ruling from the Comptroller of Public Accounts of the State of Texas to the
effect that (i) the Company's receipt of the Transition Property, (ii) the
Company's receipt of the Transition Charges, and (iii) the Company's short-term
earnings from investment of the Transition Charges will be excluded from taxable
capital and taxable earned surplus for purposes of the Texas franchise tax.
Accordingly, there is no provision for income taxes.

(3) LONG-TERM DEBT

Interest payments on the Transition Bonds are due semi-annually, began
March 15, 2002 and are paid from funds deposited daily with the Trustee for the
Transition Bonds by Reliant Energy as Servicer of the Transition Property.

The source of repayment for the Transition Bonds is the Transition Charges.
The Servicer collects this non-bypassable charge from retail electric providers
who, in turn, collect it from retail consumers of electricity in Reliant
Energy's service territory. The Servicer deposits Transition Charge collections
into a General Subaccount

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maintained by the Trustee under the Indenture. The Transition Charges collected
and remitted to the Trustee from January 1, 2002 through June 30, 2002 were
$27,506,279.

(4) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS

Under a sale agreement between the Company and Reliant Energy dated October
24, 2001, Reliant Energy sold the Transition Property to the Company. Pursuant
to a servicing agreement entered into between the Company and Reliant Energy
concurrently with the issuance of the Transition Bonds, Reliant Energy will
serve as initial servicer of the Transition Property. As the Servicer, Reliant
Energy will manage and administer the Transition Property of the Company and
collect the Transition Charges on behalf of the Company. The Company will pay a
fixed annual servicing fee to Reliant Energy for these services. Pursuant to an
administration agreement entered into between the Company and Reliant Energy,
Reliant Energy will also provide administrative services to the Company. The
Company will pay Reliant Energy a fixed fee for performing these services, plus
all reimbursable expenses. The Company recorded administrative expenses of
$25,000 and $50,000 for the three and six months ended June 30, 2002,
respectively, related to these agreements. The Company recorded servicing fees
of $65,936 and $159,548 for the three and six months ended June 30, 2002,
respectively, related to these agreements.

Subsidiaries of Reliant Resources, Inc. (Reliant Resources), an
approximately 83% owned subsidiary of Reliant Energy, collect the majority of
the Transition Charges. Effective July 31, 2002, Moody's Investors Service,
Inc. lowered its rating on the senior unsecured debt of Reliant Resources from
Baa3 to Ba3 and left the securities on review for potential downgrade. Reliant
Resources continues to be in compliance with the creditworthiness criteria for
retail electric providers as set forth in the Financing Order.

Effective March 8, 2002, the Company de-registered all securities that
remained unissued under its Registration Statement No. 333-91093, which
registered $750,000,000 aggregate principal amount of Transition Bonds.

6

MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS OF RELIANT ENERGY
TRANSITION BOND COMPANY LLC

The following is an analysis of the Company's consolidated results of
operations in an abbreviated format pursuant to Instruction H(1)(a) and (b) of
Form 10-Q. This analysis should be read in combination with the Interim
Financial Statements included in Item 1 of this Form 10-Q. The Company meets the
conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and is
therefore permitted to use the reduced disclosure format for wholly owned
subsidiaries of reporting companies. Accordingly, the Company has omitted from
this report the information called for by Item 3 (Quantitative and Qualitative
Disclosures About Market Risk) of Part I and the following Part II items of Form
10-Q: Item 2 (Changes in Securities and Use of Proceeds), Item 3 (Defaults Upon
Senior Securities) and Item 4 (Submission of Matters to a Vote of Security
Holders).

The Company is a Delaware limited liability company established in November
1999 for limited purposes. On October 24, 2001 the Company issued Transition
Bonds and used the net proceeds to purchase the Transition Property from Reliant
Energy, Incorporated. As the Company is restricted by its organizational
documents from engaging in activities not directly related to the specific
purposes for which the Company was created, income statement effects were
limited primarily to income generated from the Transition Charges, interest
expense on the Transition Bonds, amortization of the Transition Property, debt
issuance expenses and the discount on the Transition Bonds, Transition Property
servicing and administration fees and incidental investment interest income.

For the three months ended June 30, 2002, revenue from Transition Charges
was $17,105,719 and investment income was $37,140. Interest expense of
$9,630,071 relates to interest on the Transition Bonds and amortization expense
of $431,570 relates to amortization of debt issuance expenses and the discount
on the Transition Bonds. Amortization of the Transition Property includes
regulatory adjustments of $8,452,716 for the three months ended June 30, 2002 to
defer amortization costs until periods in which Transition Charge revenue is
recorded. The Company recorded administrative expenses of $154,830, including
bad debt expense of $63,893, and servicing fees of $65,936 for the three months
ended June 30, 2002.

For the six months ended June 30, 2002, revenue from Transition Charges was
$33,304,274 and investment income was $67,833. Interest expense of $19,246,771
relates to interest on the Transition Bonds and amortization expense of $863,140
relates to amortization of debt issuance expenses and the discount on the
Transition Bonds. Amortization of the Transition Property includes regulatory
adjustments of $17,803,674 for the six months ended June 30, 2002 to defer
amortization costs until periods in which Transition Charge revenue is recorded.
The Company recorded administrative expenses of $307,662, including bad debt
expense of $94,513, and servicing fees of $159,548 for the six months ended June
30, 2002.

The Company expects to use collections of Transition Charges to make
scheduled principal and interest payments on the Transition Bonds. Transition
Charges are expected to offset (1) interest expense on the Transition Bonds, (2)
amortization of the Transition Property, debt issuance expenses and the discount
on the Transition Bonds and (3) the fees charged by Reliant Energy for servicing
the Transition Property and providing administrative services to the Company.
Approximately $2.9 million was drawn from the Capital Subaccount in connection
with the March 15, 2002 interest payment on the Transition Bonds. The Capital
Subaccount is expected to be drawn from again in connection with the September
15, 2002 principal and interest payments on the Transition Bonds.

Transition Bondholders may suffer payment delays or losses if the Company's
assets are not sufficient to pay interest or the scheduled principal of the
Transition Bonds. Funds for payments are dependent upon the Transition Property
and the right to collect the Transition Charges over a period limited by Texas
law to 15 years.

In addition, collections are dependent on the amount of electricity
consumed by customers within Reliant Energy's service territory.

The Transition Charges are expected to be reviewed and adjusted at least
annually by the Public Utility Commission of Texas to correct any
overcollections or undercollections during the preceding 12 months and to
provide for the expected recovery of amounts sufficient to timely provide all
payment of debt service and other required amounts and charges in connection
with the Transition Bonds.

7

Reliant Energy, Incorporated filed on August 2, 2002 with the Public
Utility Commission of Texas, in Docket No. 26402, the Transition Charges to be
effective November 1, 2002. Reliant Energy, Incorporated is required to true-up
Transition Charges annually on November 1st in compliance with the Financing
Order adopted in Application of Reliant Energy, Incorporated for Financing Order
to Securitize Regulatory Assets and Other Qualified Costs, Docket No. 21665. The
adjusted Transition Charges will permit the collection of $60,048,285 during the
year ended October 31, 2003. This amount includes an expected shortfall of
$1,284,92l in the collection of Transition Charges during the year ended October
31, 2002. The $1,284,921 shortfall is 2.7% of the expected $48,345,803
collections for the year ended October 31, 2002.

8

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There is nothing to report with respect to this item.

ITEM 5. OTHER INFORMATION

There is nothing to report with respect to this item.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

None.

(b) Reports on Form 8-K.

None.

9

SIGNATURES

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.

RELIANT ENERGY TRANSITION BOND COMPANY LLC
(Registrant)

By: /s/ Marc Kilbride
--------------------------
Marc Kilbride
Treasurer and Principal
Accounting Officer

Date: August 14, 2002

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