10-Q 1 jcfunding_10q.txt JCP&L TRANSITION FUNDING 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 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. ----------- --------------------------------------- ------------------ 333-31250 JCP&L TRANSITION FUNDING LLC 75-2998870 (A Delaware Limited Liability Company) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800) 736-3402 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 Pages Part I. Financial Information Management's Narrative Analysis of Results of Operations ... 1 Quantitative and Qualitative Disclosures About Market Risk.. 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 Issuance of Transition Bonds ---------------------------- 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 with authorization to issue $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, was organized for the limited purpose of purchasing bondable transition property (BTP) and issuing transition bonds secured by the BTP. The Company is wholly-owned by JCP&L. 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. BTP represents the irrevocable right of JCP&L, or its successor or assignee, to charge, collect and receive a non-bypassable transition bond charge (TBC) from customers. The Financing Order authorizes the TBC collections to be sufficient to recover $320 million aggregate principal amount of transition 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 transition bonds. In June 2002, the Company acquired BTP from JCP&L and issued $320 million of Transition Bonds (Bonds), Series 2002-A, Class A-1 through Class A-4, with scheduled maturities ranging from 2007 through 2017 and final maturities ranging from 2009 through 2019. The Company entered into a servicing agreement with JCP&L. The servicing agreement 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 is due on March 5, 2003. Results of Operations --------------------- The Company did not have results of operations for the three- and nine-month periods ended September 30, 2001. Revenues The Company did not earn revenues prior to purchasing BTP and issuing the Bonds on June 11, 2002. Revenues of $11.4 million and $13.5 million, respectively, for the three- and nine-month periods ended September 30, 2002, relate to TBC revenues recognized during the respective periods, which are being collected from JCP&L customers. Expenses Expenses of $7.0 million and $8.2 million, respectively, for the three- and nine-month periods ended September 30, 2002, relate to amortization of BTP (which is based on TBC revenue collections). In addition, expenses of $5.2 million and $4.3 million for the respective periods represent accrued interest on the Bonds. 1 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omitted, as the Company meets the conditions set forth in General Instruction H(1) of Form 10-Q. 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)

JCP&L TRANSITION FUNDING LLC BALANCE SHEETS

JCP&L TRANSITION FUNDING LLC STATEMENTS OF CASH FLOWS (Unaudited)

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 established on February 24, 2000. Effective February 19, 2002, the Company became 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. Accordingly, the post-merger and pre-merger period financial results presented in this report are separated by a heavy black line. The Company was organized for the sole purpose of purchasing and owning BTP, issuing transition bonds to fund purchasing 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 of JCP&L, or its successor or assignee, to charge, collect and receive a non-bypassable TBC from customers pursuant to the Financing Order, which 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 $320 million aggregate principal amount of transition 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 transition bonds. On June 11, 2002, the Company issued $320 million of Bonds, in four different 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'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 corporation 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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements as of September 30, 2002 and for the three and nine months then ended 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, 2001 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 notes to the audited financial statements of the Company included in its Form S-3 registration statement No. 333-31250 declared effective on May 13, 2002, by the Securities and Exchange Commission. 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 Revenues Substantially all of the Company's revenues are derived from the TBC authorized pursuant to the Financing Order, which is being collected from JCP&L customers. The Company also accrues unbilled TBC revenues for electric service provided by JCP&L through the end of the accounting period. In addition, the Company records investment income on amounts on deposit with the Trustee; however, only earnings on the capital subaccount are recorded in income, as earnings on the other subaccounts must be credited to JCP&L customers pursuant to the Financing Order. The Company also earns interest on temporary cash investments. Cash and Cash Equivalents All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Balance Sheet at cost, which approximates their fair market value. Cash and cash equivalents do not include restricted funds deposited with the Trustee. Restricted Funds Amounts on deposit with the Trustee are classified as restricted funds on the Balance Sheet. See Note 3 for additional information. Amortization of Bondable Transition Property The BTP was recorded at the acquired cost and is being amortized over the life of the Bonds, based on TBC revenue collections, interest accruals and other fees. The BTP is solely the property of the Company. Financing Costs Prior to issuance of the Bonds, certain costs associated with the issuance were paid by JCP&L and included as deferred financing costs on the Company's Balance Sheet. Upon issuance of the Bonds, the Company reimbursed JCP&L for these costs, and the costs are being amortized as part of the BTP. Income Taxes The Company is a single member limited liability company which is treated as a disregarded entity for federal and state income tax purposes. Accordingly, the Company's results are included in the tax returns of JCP&L. However, the provision or liability for income taxes related to the Company's operations are included in the Company's financial statements. 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 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 September 30, 2002 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 Refundable Bond Collateral 61 Current Maturities (19,398) -------- Long-Term Debt $300,663 ======== The expected final payment date for each class of 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 Bonds will be reduced at the rates indicated in these amortization schedules. The legal final maturity date for each class of Bonds is 7 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. Daily, JCP&L deposits TBC collections 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 is required to make the first 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 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 Bonds will be refunded to JCP&L upon repayment of the Bonds. JCP&L began remitting TBC collections to the Trustee on July 15, 2002. At September 30, 2002, the following balances were reflected in the subaccounts maintained by the Trustee: Balance Subaccount (In Thousands) ---------- -------------- General.................. $8,020 Reserve.................. -- Overcollateralization.... -- Capital.................. 1,603 ------ Total................... $9,623 ====== 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 Bonds outstanding, or $400,000, of which the Company has accrued $117,000 during the three- and nine-month periods ended September 30, 2002. 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. is providing administrative services to the Company. During the three- and nine-month periods ended September 30, 2002, 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 (a Delaware limited liability company and wholly owned subsidiary of Jersey Central Power & Light Company) as of September 30, 2002, and the related statements of operations and changes in member's equity and of cash flows for each of the three-month and nine-month periods ended September 30, 2002. These 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 to financial data 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, 2001, and the related statements of changes in member's equity and of cash flows for the year then ended (not presented herein), and in our report dated April 25, 2002 we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of September 30, 2002, is fairly stated in all material respects in relation to the balance sheet from which it has been derived. PricewaterhouseCoopers LLP Cleveland, Ohio November 13, 2002 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 June 30, 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. November 13, 2002 /s/Harvey L. Wagner ----------------------------- Harvey L. Wagner Vice President, Controller and Chief 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: November 13, 2002 /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: November 13, 2002 /s/Richard H. Marsh ----------------------- Richard H. Marsh Chief Financial Officer 13

JCP&L TRANSITION FUNDING LLC 10-Q