UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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 WITH THE REDUCED DISCLOSURE FORMAT
(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, 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.
- ---------- -------------------------------------- ------------------
333-31250 JCP&L TRANSITION FUNDING LLC 75-2998870
(A Delaware Limited Liability Company)
103 Foulk Road, Suite 202
Wilmington, DE 19803-3742
Telephone (302) 691-6118
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
------- --------
This Form 10-Q includes forward-looking statements based on information
currently available to management. Such statements are subject to certain risks
and uncertainties. These statements typically contain, but are not limited to,
the terms "anticipate", "potential", "expect", "believe", "estimate" and similar
words. Actual results may differ materially due to national or regional economic
conditions; changes in market demand and prices for energy; legislative and
regulatory developments; new technologies (including distributed generation);
weather variations affecting customer energy usage; the effect of continued
electric industry restructuring; operating performance of third party suppliers;
the payment patterns of customers, including the rate of delinquencies; and the
outcomes of legal proceedings.
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Management's Narrative Analysis of Results of Operations..... 1-2
Controls and Procedures...................................... 2
Financial Statements
Statements of Operations and Changes in Member's Equity.... 3
Balance Sheets............................................. 4
Statements of Cash Flows................................... 5
Notes to Financial Statements.............................. 6-8
Report of Independent Accountants.......................... 9
Part II. Other Information.............................................. 10
Signature and Certifications................................. 11-13
PART I. FINANCIAL INFORMATION
- ------------------------------
JCP&L TRANSITION FUNDING LLC
MANAGEMENT'S NARRATIVE ANALYSIS OF
RESULTS OF OPERATIONS
Background
- ----------
In accordance with the Electric Discount and Energy Competition Act enacted
by the State of New Jersey in February 1999, the New Jersey Board of Public
Utilities (NJBPU) is authorized to issue "bondable stranded cost rate orders,"
approving, among other things, the issuance of transition bonds to recover
bondable stranded costs and related expenses of an electric public utility. On
February 6, 2002, Jersey Central Power & Light Company (JCP&L) received a
bondable stranded costs rate order (Financing Order) from the NJBPU authorizing
the issuance of $320 million of transition bonds to securitize the recovery of
bondable stranded costs associated with the previously divested Oyster Creek
Nuclear Generating Station.
In February 2000, JCP&L Transition Funding LLC (Company), a Delaware
limited liability company and wholly owned subsidiary of JCP&L, was organized
for the sole purpose of purchasing and owning bondable transition property (BTP)
and issuing transition bonds secured by the BTP. BTP represents the irrevocable
right to charge, collect and receive, and be paid from collections of, a
non-bypassable transition bond charge (TBC) from JCP&L's electric customers
pursuant to a bondable stranded costs rate order. The Company's organizational
documents require it to operate in a manner so that it should not be
consolidated in the bankruptcy estate of JCP&L in the event JCP&L becomes
subject to a bankruptcy proceeding.
Issuance of Transition Bonds
- ----------------------------
In June 2002, the Company acquired BTP from JCP&L and issued $320 million
of Series 2002-A Transition Bonds (Bonds), Class A-1 through Class A-4, with
scheduled maturities ranging from 2007 through 2017, and final maturities
ranging from 2009 through 2019. The Financing Order authorizes the TBC
collections to be sufficient to recover the $320 million aggregate principal
amount of the Bonds, plus an amount sufficient to provide for any credit
enhancement, to fund any reserves and to pay interest (including financing
costs), redemption premiums, if any, servicing fees and other expenses relating
to the Bonds.
The Company has no paid employees, and has entered into a servicing
agreement with JCP&L (Servicing Agreement) which requires JCP&L, as Servicer, to
manage and administer the BTP of the Company and to collect the TBC on behalf of
the Company. JCP&L began remitting TBC collections to The Bank of New York, as
trustee for the Bonds (Trustee), on July 15, 2002. The first quarterly payment
of Bond principal, interest and related expenses was made on March 5, 2003.
Results of Operations
- ---------------------
The Company did not have results of operations for the three-month period
ended March 31, 2002.
Revenues
The Company did not earn revenues prior to purchasing BTP and issuing the
Bonds on June 11, 2002. Revenues of $9.4 million for the three-month period
ended March 31, 2003 relate to TBC revenues recognized during the period, which
are being collected from JCP&L customers.
Expenses
Expenses of $4.8 million for the three-month period ended March 31, 2003
relate to amortization of BTP (which is based on TBC revenue collections). In
addition, expenses of $4.5 million for the period represent accrued interest on
the Bonds.
1
Liquidity
- ---------
Substantially all of the Company's revenues are derived from the TBC, the
collection of which was authorized by the NJBPU in the Financing Order, and
which is currently being collected from JCP&L customers. The Company has risk
exposure related to consumption forecasting by JCP&L and unanticipated
delinquencies or write-offs of JCP&L customer receivables, all of which could
result in insufficient TBC collections and thus insufficient funds available to
make scheduled payments on the Bonds and provide other credit support. A
potential shortfall or excess of TBC collections could occur because the TBC
rate assessed to JCP&L's customers is based on these estimates of electricity
consumption, customer delinquencies and write-offs. The NJBPU is required to
make annual adjustments to the TBC upon petition by JCP&L, in its capacity as
Servicer on behalf of the Company, to provide sufficient revenues to make
scheduled payments on the Bonds and provide other credit support. The Servicing
Agreement requires that JCP&L make those petitions.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer have
reviewed and evaluated the Company's disclosure controls and procedures, as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c), as
of a date within 90 days prior to the filing date of this report (Evaluation
Date). Based on that evaluation those officers have concluded that the Company's
disclosure controls and procedures are effective and were designed to bring to
their attention, during the period in which this quarterly report was being
prepared, material information relating to the Company by others within the
Company and/or the Company's parent, JCP&L.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other
factors that could significantly affect those controls subsequent to the
Evaluation Date.
2
JCP&L TRANSITION FUNDING LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY
(Unaudited)
Three Months
Ended March 31,
------------------
2003 2002
---- ----
(In Thousands)
REVENUES:
Transition bond charge revenues.................... $9,403 $ --
Interest income.................................... 54 --
------ -----
Total Revenues................................. 9,457 --
------ -----
EXPENSES:
Amortization of bondable transition property....... 4,837 --
Interest expense................................... 4,515 --
Servicing and administrative expenses.............. 100 --
------ -----
Total Expenses................................. 9,452 --
------ -----
OPERATING INCOME........................................ 5 --
------ -----
Income tax expense...................................... 2 --
------ -----
NET INCOME.............................................. $ 3 $ --
====== =====
Member's equity, beginning of period.................... $1,608 $ 1
Net income.............................................. 3 --
Capital contributed by member........................... -- --
------ -----
Member's equity, end of period.......................... $1,611 $ 1
====== =====
The accompanying Notes to Financial Statements
are an integral part of these statements.
3
JCP&L TRANSITION FUNDING LLC
BALANCE SHEETS
March 31, December 31,
2003 2002
---------- -----------
(Unaudited)
(In Thousands)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents........................... $ 1 $ 1
Restricted funds held by Trustee.................... 5,583 19,750
Transition bond charge receivable from Servicer..... 6,153 5,538
-------- ---------
11,737 25,289
-------- ---------
OTHER ASSETS:
Bondable transition property........................ 301,292 306,130
-------- ---------
$313,029 $331,419
======== ========
LIABILITIES AND MEMBER'S EQUITY
-------------------------------
CURRENT LIABILITIES:
Currently payable long-term debt.................... $ 16,984 $ 23,799
Accrued taxes....................................... 5 4
Accrued interest.................................... 1,402 9,532
Payable to JCP&L.................................... 17 217
-------- --------
18,408 33,552
-------- --------
CAPITALIZATION:
Member's equity..................................... 1,611 1,608
Long-term debt...................................... 293,010 296,259
-------- --------
294,621 297,867
-------- --------
$313,029 $331,419
======== ========
The accompanying Notes to Financial Statements
are an integral part of these balance sheets.
4
JCP&L TRANSITION FUNDING LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
----------------
2003 2002
---- ----
(In Thousands)
Cash Flows from Operating Activities:
Net income.............................................. $ 3 $ --
Adjustments to reconcile net income to net cash
from operating activities -
Amortization of bondable transition property....... 4,837 --
Restricted funds held by Trustee................... 14,168 --
Transition bond charge receivable from Servicer.... (615) --
Accrued interest................................... (8,131) --
Other.............................................. (172) --
-------- -----
Net cash provided from operating activities ............ 10,090 --
-------- -----
Cash Flows from Financing Activities:
Long-term debt repayments ......................... (10,090) --
-------- -----
Net cash used for financing activities ................. (10,090) --
-------- -----
Net change in cash and cash equivalents................. -- --
Cash and cash equivalents at beginning of period........ 1 1
-------- -----
Cash and cash equivalents at end of period.............. $ 1 $ 1
======== =====
Supplemental Cash Flows Information:
Cash Paid During the Period -
Interest............................................ $ 12,646 $ --
======== =====
The accompanying Notes to Financial Statements
are an integral part of these statements.
5
JCP&L TRANSITION FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1 - NATURE OF OPERATIONS
JCP&L Transition Funding LLC, a Delaware limited liability company, was
formed on February 24, 2000. The Company is a wholly owned subsidiary of JCP&L.
JCP&L, a wholly owned electric utility operating subsidiary of FirstEnergy
Corp., was formerly a wholly owned subsidiary of GPU, Inc., which merged with
and into FirstEnergy Corp. on November 7, 2001.
On June 11, 2002, the Company issued $320 million of Bonds, in four
classes, to securitize the recovery of bondable stranded costs associated with
the previously divested Oyster Creek Nuclear Generating Station. See Note 3 for
additional information.
The Company was organized for the sole purpose of purchasing and owning
BTP, issuing transition bonds to fund the purchase of BTP, pledging its interest
in BTP and other collateral to the Trustee under an indenture between the
Company and the Trustee (Indenture) to collateralize the transition bonds, and
performing activities that are necessary, suitable or convenient to accomplish
these purposes. BTP represents the irrevocable right to charge, collect and
receive, and be paid from collections of, a non-bypassable TBC from JCP&L's
electric customers pursuant to the Financing Order. The Financing Order was
issued on February 6, 2002 by the NJBPU in accordance with the Electric Discount
and Energy Competition Act enacted by the State of New Jersey in February 1999.
The Financing Order authorizes the TBC collections to be sufficient to recover
the $320 million aggregate principal amount of the Bonds, plus an amount
sufficient to provide for any credit enhancement, to fund any reserves and to
pay interest (including financing costs), redemption premiums, if any, servicing
fees and other expenses relating to the Bonds.
The Company's organizational documents require it to operate in a manner so
that it should not be consolidated in the bankruptcy estate of JCP&L in the
event JCP&L becomes subject to a bankruptcy proceeding. Both JCP&L and the
Company have treated the transfer of BTP to the Company as a sale under
applicable law, and the Bonds are being treated as debt obligations of the
Company. For financial reporting, federal income tax and State of New Jersey
income and corporate business tax purposes, the transfer of BTP to the Company
is being treated as a financing arrangement and not as a sale. Under applicable
law, the Bonds are recourse only to the Company and are not secured by the
assets of JCP&L.
2 - FINANCIAL STATEMENTS
The accompanying interim financial statements as of March 31, 2003 and for
the three months ended March 31, 2003 and 2002 are unaudited, but include all
adjustments that the Company considers necessary for a fair presentation of its
financial statements. All adjustments are of a normal, recurring nature, except
as otherwise disclosed. The December 31, 2002 balance sheet data were derived
from audited financial statements but do not include all disclosures required by
generally accepted accounting principles. Certain information in these unaudited
footnote disclosures, normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States,
has been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. These unaudited financial
statements and notes should be read in conjunction with the audited financial
statements and notes of the Company included in its Annual Report on Form 10-K
for the year ended December 31, 2002.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements, and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
3 - BONDS
In June 2002, the Company issued $320 million of Bonds, consisting of four
classes. The Company used the net proceeds from the sale of the Bonds to fund
the purchase of BTP from JCP&L. The Bonds are collateralized on a pro-rata basis
by the BTP and the equity and assets of the Company.
Scheduled maturity and interest rates for the Bonds at March 31, 2003 are
as follows:
Expected Final Legal Final
Class Interest Rate Principal Amount Payment Date Maturity Date
----- ------------- ---------------- -------------- -------------
(In Thousands)
A-1..... 4.19% $ 91,111 December 5, 2007 December 5, 2009
A-2..... 5.39% 52,297 September 5, 2010 September 5, 2012
A-3..... 5.81% 77,075 December 5, 2013 December 5, 2015
A-4..... 6.16% 99,517 June 5, 2017 June 5, 2019
----------
320,000
Principal payments to date:
-- Class A-1 bonds (10,090)
Current maturities:
-- Class A-1 bonds (16,984)
Refundable bond collateral 84
----------
Long-term debt $ 293,010
==========
The expected final payment date for each class of the Bonds is the date on
which there is expected to be no further outstanding principal balance for that
class, based upon an expected amortization schedule for that class. The Company
has made certain assumptions in establishing these amortization schedules,
including, among other things, that all TBC collections are received in
accordance with JCP&L's forecasts. There can be no assurance that the principal
balance of any class of the Bonds will be reduced at the rates indicated in
these amortization schedules. The legal final maturity date for each class of
the Bonds is the date on which the Company is required to pay any outstanding
principal balance for that class. The Bonds will not be in default if principal
is not paid in accordance with the expected amortization schedules; however, a
default will occur if the entire outstanding balance of any class is not paid on
or before the final maturity date of that class.
The source for repayment of the Bonds is the TBC authorized pursuant to the
Financing Order, which is being collected from JCP&L customers by JCP&L, as
Servicer. JCP&L deposits TBC collections daily into a collection account
maintained by the Trustee. In accordance with the Indenture, the Trustee
allocates amounts in the collection account to general, reserve,
overcollateralization and capital subaccounts. The general subaccount is used to
make principal and interest payments on the Bonds and to pay expenses, fees and
charges as specified in the Indenture. The Trustee made the first quarterly
payment on the Bonds on March 5, 2003. The reserve subaccount is maintained for
the purpose of retaining any excess amount of TBC collections and investment
earnings not released to the Company. The overcollateralization subaccount is
held by the Trustee as a credit enhancement to fund payments in the event of a
collection shortfall, and the funding level of the overcollateralization
subaccount is 0.5% of the initial principal balance of the Bonds, funded ratably
over the life of the Bonds. If amounts available in the general, reserve or
overcollateralization subaccounts are not sufficient on any payment date to make
scheduled payments specified in the Indenture, the Trustee will draw on amounts
in the capital subaccount. Upon issuance of the Bonds, an amount equal to 0.5%
of the initial principal balance of the Bonds was deposited into the capital
subaccount. Any amounts collateralizing the Bonds that remain upon repayment of
all the Bonds will be refunded to JCP&L's customers.
JCP&L began remitting TBC collections to the Trustee on July 15, 2002. As
of March 31, 2003, the following balances were reflected in the subaccounts
maintained by the Trustee:
Balance
Subaccount (In Thousands)
---------- --------------
General................. $ 2,805
Reserve................. 1,098
Overcollateralization... 80
Capital................. 1,600
-------
Total................. $ 5,583
=======
7
4 - SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under the Servicing Agreement between JCP&L and the Company, JCP&L, as
Servicer, manages and administers the BTP of the Company and collects the TBC on
behalf of the Company. The Company is required to pay an annual servicing fee to
JCP&L equal to 0.125% of the initial principal balance of the Bonds outstanding,
or $400,000, of which the Company accrued $100,000 during the three-month period
ended March 31, 2003. This servicing fee is being recovered by the Company
through the TBC. The Company has also entered into an administration agreement
with GPU Service, Inc., an affiliated company, pursuant to which GPU Service,
Inc. provides administrative services to the Company. During the three-month
period ended March 31, 2003, no expenses for administrative services were paid
or accrued by the Company.
8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Member of
JCP&L Transition Funding LLC:
We have reviewed the accompanying balance sheet of JCP&L Transition Funding LLC
as of March 31, 2003, and the related statements of operations and changes in
member's equity and of cash flows for the three-month periods ended March 31,
2003 and 2002. These interim financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the balance sheet as of December 31, 2002, and
the related statements of operations and changes in member's equity and of cash
flows for the year then ended (not presented herein), and in our report dated
February 28, 2003 we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
balance sheet information as of December 31, 2002, is fairly stated in all
material respects in relation to the balance sheet from which it has been
derived.
PricewaterhouseCoopers LLP
Cleveland, Ohio
May 9, 2003
9
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number
------
99.1 Certification letter from chief executive officer, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification letter from chief financial officer, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed since December 31, 2002.
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
JCP&L Transition Funding LLC has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
May 12, 2003
/s/ Harvey L. Wagner
------------------------------
Harvey L. Wagner
Vice President and Controller
(Principal Accounting Officer)
11
CERTIFICATION
I, Earl T. Carey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of JCP&L Transition
Funding LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to
us by others within the registrant and/or the registrant's
parent, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/Earl T. Carey
------------------------
Earl T. Carey
Chief Executive Officer
12
CERTIFICATION
I, Richard H. Marsh, certify that:
1. I have reviewed this quarterly report on Form 10-Q of JCP&L Transition
Funding LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to
us by others within the registrant and/or the registrant's
parent, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/Richard H. Marsh
--------------------------
Richard H. Marsh
Chief Financial Officer
13