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 June 30, 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 outcome 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.............................. 6-7
Report of Independent Auditors............................. 8
Part II. Other Information.............................................. 9
Signature and Certifications................................. 10-13
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.
In February 2000, JCP&L Transition Funding LLC (Company), a Delaware
limited liability company and wholly owned subsidiary of Jersey Central Power &
Light Company (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.
On February 6, 2002, 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.
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 five-month period ended
May 31, 2002.
Revenues
The Company did not earn revenues prior to purchasing BTP and issuing
the Bonds on June 11, 2002. Revenues increased to $18.4 million for the
six-month period ended June 30, 2003, compared to $2.1 million for the same
period in 2002, which relate to TBC revenues recognized during the period that
are being collected from JCP&L customers.
Expenses
Amortization expense increased to $9.6 million for the six-month
period ended June 30, 2003, compared to $1.2 million for the same period in
2002, which relate to amortization of BTP (which is based on TBC revenue
collections). In addition, interest expense increased to $8.7 million for the
period in 2003 compared to $0.9 million in 2002, which 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 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. 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
Effective June 1, 2003, the registrant implemented a new Enterprise
Resource Planning (ERP) system. While the associated business process changes
transform the internal control structure, management believes adequate controls
have been properly integrated into the reengineered ERP-enabled processes and
that internal controls will be enhanced.
2
JCP&L TRANSITION FUNDING LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands)
REVENUES:
Transition bond charge revenues................... $8,999 $2,067 $18,402 $2,067
Interest income................................... 19 -- 73 --
------ ------ ------- ------
Total Revenues................................ 9,018 2,067 18,475 2,067
------ ------ ------- ------
EXPENSES:
Amortization of bondable transition property...... 4,721 1,157 9,558 1,157
Interest expense.................................. 4,189 910 8,704 910
Administrative and general expenses............... 105 -- 205 --
------- ------ ------- ------
Total Expenses................................ 9,015 2,067 18,467 2,067
------ ------ ------- ------
OPERATING INCOME....................................... 3 -- 8 --
------ ------ ------- ------
Income tax expense..................................... 1 -- 3 --
------- ------ ------- ------
NET INCOME............................................. $ 2 $ -- $ 5 $ --
====== ====== ======= ======
Member's equity, beginning of period................... $1,611 $ 1 $ 1,608 $ 1
Net Income............................................. 2 -- 5 --
Capital contributed by member.......................... -- 1,600 -- 1,600
------ ------ ------- ------
Member's equity, end of period......................... $1,613 $1,601 $1,613 $1,601
====== ====== ====== ======
The accompanying Notes to Financial Statements are an integral part of these statements.
3
JCP&L TRANSITION FUNDING LLC
BALANCE SHEETS
June 30, December 31,
2003 2002
----------- ------------
(Unaudited)
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 1 $ 1
Restricted funds held by Trustee.................. 5,460 19,750
Transition bond charge receivable from Servicer... 41,799 23,127
---------- ---------
47,260 42,878
---------- ---------
OTHER ASSETS:
Bondable transition property...................... 296,573 306,130
---------- ---------
$ 343,833 $ 349,008
========== =========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Currently payable long-term debt.................. $ 15,526 $ 23,799
Accrued taxes..................................... 6 4
Accrued interest.................................. 1,385 9,532
Payable to parent company......................... 35,743 17,806
---------- ---------
52,660 51,141
---------- ---------
CAPITALIZATION:
Member's equity................................... 1,613 1,608
Long-term debt.................................... 289,560 296,259
---------- ---------
291,173 297,867
---------- ---------
$ 343,833 $ 349,008
========== =========
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 Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
(In Thousands)
Cash Flows from Operating Activities:
Net income.............................................. $ 2 $ -- $ 5 $ --
Adjustments to reconcile net income to net cash
from operating activities-
Amortization of bondable transition property .... 4,721 1,157 9,558 1,157
Restricted funds held by Trustee ................ 123 (1,600) 14,290 (1,600)
Transition bond charge receivable from Servicer . (9,026) (2,083) (18,672) (2,083)
Accounts payable to parent company............... 9,106 -- 17,937 --
Accrued interest................................. (17) 910 (8,147) 910
Other............................................ (86) 16 (57) 16
-------- --------- -------- ---------
Net cash provided from (used for) operating activities.. 4,823 (1,600) 14,914 (1,600)
-------- --------- -------- ---------
Cash Flows from Financing Activities:
New Financing-
Proceeds from issuance of transition bonds......... -- 318,106 -- 318,106
Capital contributed by member...................... -- 1,600 -- 1,600
Redemptions and Repayments-
Long-term debt repayments......................... (4,823) -- (14,914) --
-------- --------- -------- ---------
Net cash provided from (used for) financing activities.. (4,823) 319,706 (14,914) 319,706
-------- --------- -------- ---------
Cash Flows from Investing Activities:
Purchase of bondable transition property............. -- (318,106) -- (318,106)
-------- --------- -------- ---------
Net cash used for investing activities.................. -- (318,106) -- (318,106)
-------- --------- -------- ---------
Net change in cash and cash equivalents................. -- -- -- --
Cash and cash equivalents at beginning of period........ 1 1 1 1
-------- --------- -------- ---------
Cash and cash equivalents at end of period.............. $ 1 $ 1 $ 1 $ 1
======== ========= ======== =========
Supplemental Cash Flows Information:
Cash Paid During the Period from Restricted Funds
Held by Trustee-
Interest............................................ $ 4,206 $ -- $ 16,852 $ --
======== ========= ======== =========
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 is a wholly owned electric utility operating subsidiary of
FirstEnergy Corp.
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 June 30, 2003 and
for the three months and six months ended June 30, 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 accounting principles generally accepted in the United
States. 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. Certain prior year amounts have been reclassified to
conform with the current year presentation.
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.
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.
6
Scheduled maturity and interest rates for the Bonds at June 30, 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 (15,026)
Current maturities:
-- Class A-1 bonds (15,526)
Refundable bond collateral 112
--------
Long-term debt $289,560
========
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 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.
As of June 30, 2003, the following balances were reflected in the
subaccounts maintained by the Trustee:
Balance
Subaccount (In Thousands)
---------- --------------
General................. $2,677
Reserve................. 1,604
Overcollateralization... 80
Capital................. 1,099
------
Total................. $5,460
======
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 $200,000 during the six-month period
ended June 30, 2003. This servicing fee is being recovered by the Company
through the TBC. The Company has also entered into an administration agreement
with FirstEnergy Service Company, an affiliated company, pursuant to which
FirstEnergy Service Company provides administrative services to the Company.
During the six-month period ended June 30, 2003, no expenses for administrative
services were paid or accrued by the Company.
7
REPORT OF INDEPENDENT AUDITORS
To the Member of
JCP&L Transition Funding LLC:
We have reviewed the accompanying balance sheet of JCP&L Transition
Funding LLC as of June 30, 2003, and the related statements of operations and
changes in member's equity and of cash flows for each of the three-month and
six-month periods ended June 30, 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 information from which
it has been derived.
PricewaterhouseCoopers LLP
Cleveland, Ohio
August 15, 2003
8
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number
------
31.1 Certification letter from chief executive officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification letter from chief financial officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification letter from chief executive officer and 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.
9
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.
August 18, 2003
/s/ Harvey L. Wagner
-----------------------------------------------
Harvey L. Wagner
Vice President and Controller
(Principal Accounting Officer)
10