10-Q 1 jc_10-q.txt JCP&L TRANSITION FUNDING LLC 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)

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)

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:

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

JCP&L TRANSITION FUNDING LLC 10-Q