10-Q 1 pseg-tf_090210q.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30,2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission 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. ================================================================================ ================================================================================ PSE&G TRANSITION FUNDING LLC ================================================================================ PAGE ---- PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements............................................. 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 7 Item 3. Qualitative and Quantitative Disclosures About Market Risk....... 9 Item 4. Controls and Procedures.......................................... 9 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings............................................... 9 Item 6. Exhibits and Reports on Form 8-K................................ 9 Signature............................................................... 10 i PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS

3 NOTES TO FINANCIAL STATEMENTS Note 1. Organization and Basis of Presentation Organization Unless the context otherwise indicates, all references to "Transition Funding," "we," "us" or "our" herein mean PSE&G Transition Funding LLC, a Delaware limited liability company located at 80 Park Plaza, Newark, New Jersey 07102. We were formed under the laws of the State of Delaware on July 21, 1999 and operate pursuant to a limited liability company agreement with Public Service Electric and Gas Company (PSE&G) as our sole member. PSE&G is an operating electric and gas utility and is a wholly owned subsidiary of Public Service Enterprise Group Incorporated (PSEG). We were organized for the sole purpose of purchasing and owning bondable transition property (BTP) of PSE&G, issuing transition bonds (Bonds), pledging our interest in BTP and other collateral to a debt/security trustee (Trustee) to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. BTP represents the irrevocable right of PSE&G, or its successor or assignee, to collect a non-bypassable transition bond charge (TBC) from electric customers pursuant to a bondable stranded cost rate order (Finance Order), and rate unbundling and restructuring proceedings (Final Order), which were issued on September 17, 1999 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 at 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 such 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 financial statements included herein have been prepared pursuant to the rules and regulation of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the disclosures are adequate to make the information presented not misleading. These Financial Statements and Notes to Financial Statements (Notes) update and supplement matters discussed in our 2001 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002 and should be read in conjunction with those Notes. 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 balance sheets were derived from the audited financial statements included in our 2001 Annual Report on Form 10-K. Certain reclassifications of amounts reported in prior periods have been made to conform with the current presentation. 4 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Continued 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. 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 September 30, 2002 are as follows:

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 notional amount of the interest rate swap is $497 million and is indexed to the three-month LIBOR rate. The fair value of the interest rate swap was approximately $(65) million as of September 30, 2002 and $(18) million as of December 31, 2001 and was recorded as a derivative liability, with an offsetting amount recorded as a regulatory asset on the Balance Sheet. The fair value of this swap will vary over time as a result of changes in market conditions and is expected to be recovered through the TBC. We incurred approximately $230 million in issuance costs, $125 million of which were included in BTP with the balance in deferred issuance costs, in connection with the securitization transaction, including $201 million of costs of a hedging arrangement as permitted by the Finance Order. Costs in excess of the $125 million of transaction costs provided for in the Finance Order were paid by PSE&G and are being recovered on a subordinated basis by us through the TBC and remitted to PSE&G with interest at a rate of 6.48%. The TBC rate became effective on February 7, 2001, in accordance with the Final Order. 5 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Concluded 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. Interest earned on funds in the Capital Subaccount results in Net Income for us and will be periodically dividended to PSE&G. Servicing and administrative fees paid to PSE&G for the three months ended September 30, 2002 and 2001 were $400 thousand and $315 thousand, respectively. Servicing and administrative fees paid to PSE&G for the nine months ended September 30, 2002 and 2001 were $1 million and $841 thousand, respectively. As of September 30, 2002 and December 31, 2001, we had a receivable from our member, PSE&G, of approximately $68 million and $53 million, respectively, relating to TBC billings. As of September 30, 2002 and December 31, 2001 our payable to our member was approximately $104 million and $105 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. 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 2001 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002 affecting the financial condition and the results of our operations. This discussion refers to our Financial Statements (Statements) and related Notes to 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. Such analysis should be read in conjunction with the Financial Statements and Notes to Financial Statements included in Item 1 above. RESULTS OF OPERATIONS Operating Revenues Transition Bond Charge (TBC) revenues increased approximately $11 million or 14% for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001 due to an increase in the TBC rate, as well as an increase in sales. The TBC rate increased from 0.6739 cents per kwh to 0.7250 cents per kwh as part of our annual rate true-up, which was approved by the New Jersey Board of Public Utilities (BPU) effective in January 2002. The increased TBC rate is designed to replenish the Capital Subaccount and the Overcollateralization account and enable us to meet our scheduled repayments of the deferred issuance costs to PSE&G, as servicer of the bonds. TBC revenues increased approximately $46 million or 25% for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 primarily due to revenues being recorded for a full period in the current year compared to revenues in 2001 being recorded, starting February 7, 2001, when the TBC commenced. This was supplemented by an increase in the TBC rate as discussed above. Operating Expenses Amortization of Bondable Transition Property (BTP) Amortization of BTP increased approximately $12 million or 35% for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001 primarily due to an increase in the TBC rate and an increase in sales as discussed above. A portion of the TBC rate is designed to recover the amortization of the BTP. As a regulated entity, we amortize an amount equal to what we record as revenue for the portion of the TBC relating to the BTP. Accordingly, the higher TBC rates in 2002 resulted in an increase of the amortization that was recorded. Amortization of BTP increased approximately $36 million or 57% for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 primarily due to expenses being recorded for a full period in the current year as compared to eight months in 2001. This was supplemented by an increase in the TBC rate as discussed above. 7 Servicing and Administrative Fees Servicing and Administrative Fees increased approximately $85 thousand or 35% for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001. Administrative expenses are billed to us by the Servicer, PSE&G, when interest and principle payments are made on the transition bonds. Servicing and Administrative Fees increased $236 thousand or 28% for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 primarily due to the transition bonds being outstanding for a full period in the current year as compared to eight months in 2001. Interest Expense Interest expense decreased approximately $1 million or 3% for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001 primarily due to a reduction in the total amount of debt outstanding. Interest expense increased approximately $10 million or 9% primarily due to the transition bonds being outstanding for a full period in the current year partially offset by 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. On March 17, 2002, June 17, 2002 and September 17, 2002 payments of bond principal, interest and all related expenses were made by the Trustee totaling approximately $68 million, $69 million and $78 million, respectively, including replenishments to the Capital Subaccount and the Overcollateralization account to required levels. These payments were primarily funded from our TBC collections and interest earned on those funds. 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 PSE&G's facilities and third party suppliers; and the payment patterns of customers including the rate of delinquencies and the accuracy of the collections curve. 8 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in our transition bonds is the potential loss arising from adverse changes in interest rates. We have entered into an interest rate swap on our sole class (Class A-4) of floating rate transition bonds (see Note 2. The Bonds). The interest rate swap effectively converts the existing floating rate debt into fixed rate borrowings at 6.2875%. Any gain or loss on this financial instrument will be recovered from or refunded to PSE&G's customers. ITEM 4. CONTROLS AND PROCEDURES We have established and maintained disclosure controls and procedures which are designed to provide reasonable assurance that material information relating to the Company is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared. We have established a Disclosure Committee which is made up of several key management employees and reports directly to the Chief Executive Officer and Chief Financial Officer, to monitor and evaluate these disclosure controls and procedures. The Chief Executive Officer, who also serves as the Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on this evaluation, he has concluded that our disclosure controls and procedures were effective during the period covered in this quarterly report. There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no updates to information reported under Item 3 of Part I of our 2001 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) A listing of exhibits being filed with this document is as follows: --------------- --------------------------------------------------------- Exhibit Number Document 99 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 --------------- --------------------------------------------------------- (B) Reports on Form 8-K: None. 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: November 12, 2002 10 Certification Pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act I certify that: 1. I have reviewed this quarterly report on Form 10-Q of PSE&G Transition Funding LLC (the registrant); 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. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to me by others, 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 my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of PSEG's board of directors: 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 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. 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: November 12, 2002 /s/ Robert E. Busch ----------------------------------- Robert E. Busch Chief Executive Officer and Chief Financial Officer 11

PSE&G TRANSITION FUNDING LLC 10-Q