<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON February 28, 2000
REGISTRATION NO. 333-[ ]
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
JCP&L TRANSITION FUNDING LLC
(Issuer of Securities)
(Exact name as specified in registrant's Certificate of Formation)
Delaware
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
JCP&L TRANSITION FUNDING LLC
C/O GPU SERVICE, INC.
310 MADISON AVENUE
MORRISTOWN, NEW JERSEY 07962
(973) 455-8200
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
TERRANCE G. HOWSON
Vice President and Treasurer
GPU SERVICE, INC.
310 Madison Avenue
Morristown, New Jersey 07962
(973) 455-8200
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
------------------------------------
Copies to:
DOUGLAS E. DAVIDSON, ESQ. SCOTT L. GUIBORD, ESQ.
BERLACK, ISRAELS & LIBERMAN LLP Secretary
120 West 45th Street JERSEY CENTRAL POWER & LIGHT COMPANY
New York, New York 10036 2800 Pottsville Pike
(212) 704-0100 Reading, Pennsylvania 19605
(610) 929-3601
RICHARD L. HARDEN, ESQ.
WINTHROP, STIMSON, PUTNAM & ROBERTS
One Battery Park Plaza
New York, New York 10004
(212) 858-1000
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or dividend reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
===========================================================================================
PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM
SECURITIES AMOUNT AGGREGATE AGGREGATE
TO BE TO BE PRICE OFFERING AMOUNT OF
REGISTERED REGISTERED PER UNIT (1) PRICE (1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transition Bonds
Issuable in Series.... $1,000,000 _______% $________ $264
- -------------------------------------------------------------------------------------------
Total.................. $1,000,000 _______% $________ $264
===========================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
Subject to Completion. Dated , 2000.
Prospectus Supplement to Prospectus dated , 2000.
$
JCP&L TRANSITION FUNDING LLC
ISSUER
JERSEY CENTRAL POWER & LIGHT COMPANY
SERVICER
TRANSITION BONDS, SERIES 2000-A
---------------------------
JCP&L Transition Funding LLC will pay interest on the transition bonds on
, , , and of each year. The first such payment
will be made on . The transition bonds will be issued only in
denominations of $1,000 and integral multiples of $1,000.
See "Risk Factors" beginning on page in the accompanying prospectus to
read about factors you should consider before buying the transition bonds.
The transition bonds represent obligations only of JCP&L Transition Funding
LLC, which is the issuer, and are backed only by the assets of the issuer. None
of Jersey Central Power & Light Company (referred to as "JCP&L"), its parent,
GPU, Inc., or any of their respective affiliates, other than the issuer, is
liable for payments on the transition bonds.
---------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------------
<TABLE>
<CAPTION>
Initial Proceeds Scheduled Legal Final
Interest Principal Underwriting To Issuer Final Payment Maturity
Rate Amount Price (%) Discount (%) (%)(1)(2) Date Date
---- ------ --------- ------------ --------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Class [ ] % $ % %
Class [ ] % $ % %
Class [ ] % $ % %
</TABLE>
(1) Before payment of fees and expenses.
(2) The total price to the public is $ and the amount of the underwriting
discount and other fees is $ . The total amount of proceeds before
deduction of expenses (estimated to be $ ) is $ .
---------------------------
The underwriters expect to deliver the transition bonds in book-entry form
only through the facilities of The Depository Trust Company against payment in
New York, New York on , 2000.
GOLDMAN, SACHS & CO.
[other underwriters]
--------------
Prospectus Supplement dated , 2000.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
WHERE TO FIND INFORMATION IN THESE DOCUMENTS...............................S-1
INTRODUCTION...............................................................S-2
The Collateral.........................................................S-2
Payment Sources........................................................S-4
RISK FACTORS...............................................................S-4
THE SERIES 2000-A TRANSITION BONDS.........................................S-4
Interest Payments......................................................S-5
Principal Payments.....................................................S-5
Optional Redemption....................................................S-7
CREDIT ENHANCEMENT.........................................................S-7
Periodic Adjustment of the Transition Bond Charge......................S-8
Collection Account and Subaccounts.....................................S-8
DESCRIPTION OF BONDABLE TRANSITION PROPERTY................................S-11
THE TRANSITION BOND CHARGE.................................................S-11
UNDERWRITING THE SERIES 2000-A TRANSITION BONDS............................S-13
RATINGS FOR THE SERIES 2000-A TRANSITION BONDS.............................S-14
INCOME TAX MATTERS.........................................................S-14
<PAGE>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the attached prospectus provide information
about the issuer and JCP&L, including terms and conditions that apply to the
transition bonds. The specific terms of this series of transition bonds, the
series 2000-A transition bonds, are contained in this prospectus supplement. The
terms that apply to all series of transition bonds appear in the prospectus
which follows this prospectus supplement. You should read both of these
documents in full before buying the transition bonds.
We have included cross-references to captions in these materials where you
can find further related discussions. Cross references may be contained in the
introductory sections which will direct you elsewhere in this prospectus
supplement or the attached prospectus for more detailed description of a
particular topic. You can also find references to key topics in the Table of
Contents on the next page.
You should rely only on information on the transition bonds provided in
this prospectus supplement and the prospectus. We have not authorized anyone to
provide you with different information.
S-1
<PAGE>
INTRODUCTION
THE ISSUER: JCP&L Transition Funding LLC, a Delaware limited
liability company and a wholly-owned indirect
subsidiary of JCP&L. JCP&L is a public utility
providing retail electric service in northern,
western and east central New Jersey having a
population of approximately 2.6 million. JCP&L is
a subsidiary of GPU, Inc., a holding company
registered under the Public Utility Holding
Company Act of 1935.
ISSUER'S ADDRESS: c/o GPU Service, Inc.
310 Madison Avenue
Morristown, New Jersey 07962
ISSUER'S TELEPHONE NUMBER: (973) 455-8200
SELLER OF THE PROPERTY
TO THE ISSUER: JCP&L Transition, Inc., a wholly-owned indirect
subsidiary of JCP&L, which is referred to as the
seller. The seller is a Delaware corporation
formed solely for the purpose of acquiring the
bondable transition property and selling it to the
issuer, and holding all of the equity interest in
the issuer.
SELLER'S ADDRESS: c/o GPU Service, Inc.
310 Madison Avenue
Morristown, New Jersey 07962
SELLER'S TELEPHONE NUMBER: (973) 455-8200
SERVICER OF THE PROPERTY: JCP&L
TRUSTEE: [ ]
MINIMUM DENOMINATION: $1,000
THE COLLATERAL
The transition bonds will be secured primarily by bondable transition
property, a presently existing property right created by the New Jersey Electric
Discount and Energy Competition Act of 1999 (referred to as the "Competition
Act") and a financing order (referred to as the "BPU financing order") issued by
the New Jersey Board of Public Utilities (referred to as the "BPU"). In general
terms, the bondable transition property represents the irrevocable right
S-2
<PAGE>
to charge, collect and receive, and be paid from collections of, a
non-bypassable transition bond charge payable by JCP&L's customers in an amount
sufficient to pay:
o the fees, expenses, costs, charges, credit enhancement and premiums,
if any, associated with the transition bonds and their issuance, and
o the principal amount of and interest on the transition bonds.
The proceeds of the transition bonds will be used to reduce a portion of
JCP&L's stranded costs through the retirement of its debt or equity, or both.
Stranded costs are (1) the amount by which the net cost of the electric public
utility's electric generating assets or electric power purchase contracts, which
traditionally would be recoverable in a regulated environment, exceeds the
market value of those assets or contracts in a competitive supply marketplace,
as determined by the BPU, and (2) the costs of buydowns or buyouts of power
purchase contracts. The bondable transition property is described in more detail
under "THE CONTRIBUTION AGREEMENT -- ASSIGNMENT OF BONDABLE TRANSITION PROPERTY
AND RELATED RIGHTS TO THE SELLER" in the prospectus.
For convenience of usage in this prospectus supplement and the prospectus,
there are numerous references to the holding and transfer of bondable transition
property by JCP&L and others. However, pursuant to New Jersey state law and the
BPU financing order, bondable transition property arises, and constitutes a
vested, presently existing property right, upon (i) the transfer to an assignee
and (ii) receipt of consideration therefor.
As used throughout this prospectus supplement, a customer is an end user of
electricity that is connected to any part of JCP&L's transmission and
distribution system and is located within JCP&L's service territory, other than
(1) the single end user presently taking service under an experimental JCP&L
rate class that accounted for approximately 1.7% of JCP&L's kilowatt hour sales
in 1999 and (2) certain end users that are connected to JCP&L's transmission and
distribution system but who self-generate from on-site facilities. End users who
self-generate will not pay the transition bond charge with respect to such
generation, unless new on-site generation facilities in the aggregate reduce the
kilowatt hours distributed by JCP&L to 92.5% or less of the kilowatt hours
distributed by it in 1999.
In connection with the issuance of the transition bonds, JCP&L will make a
capital contribution of the bondable transition property to JCP&L Transition
Holdings, Inc., a Delaware corporation wholly owned by JCP&L (referred to as
"JCP&L Sub"). JCP&L Sub, in turn, will contribute the bondable transition
property to the seller, its wholly-owned subsidiary, which will then sell the
bondable transition property to the issuer. JCP&L, as servicer of the bondable
transition property, will collect the transition bond charge from customers on
behalf of the issuer. However, under certain circumstances, third party
suppliers of electricity to JCP&L's customers may be allowed to bill and collect
the transition bond charge from customers and will then be required to pay the
billed amounts to JCP&L, as servicer. Since the amount of transition bond charge
collections will depend on the amount of electricity consumed by customers
within JCP&L's service territory, these collections may vary substantially from
year to year. See "SERVICING OF THE BONDABLE TRANSITION PROPERTY" in the
prospectus.
S-3
<PAGE>
PAYMENT SOURCES
On each payment date, the trustee will pay amounts scheduled to be paid on
transition bonds from amounts available for withdrawal from trust accounts held
by the trustee or paid pursuant to contracts pledged to secure one or more
series of transition bonds, including collections received from the servicer
with respect to the transition bond charge during the prior three months. All
series of transition bonds, including the series 2000-A transition bonds, will
be payable from bondable transition property. If another series of transition
bonds is issued, the principal source of repayment for that series will also be
the transition bond charge collected by the servicer. See "THE INDENTURE --
TRANSITION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES" in the prospectus.
RISK FACTORS
Consider carefully the risk factors beginning on page 12 of the attached
prospectus.
THE SERIES 2000-A TRANSITION BONDS
The transition bonds will be issued under and secured pursuant to the
indenture between the issuer and the trustee, as supplemented for each series of
transition bonds. The following summary does not purport to be complete and is
qualified by reference to the terms and provisions of the indenture and the
transition bonds.
The transition bonds will be issued in minimum denominations of $1,000 and
in integral multiples of that amount. The transition bonds will consist of ___
classes, in the initial principal amounts, bearing the interest rates and having
the expected final payment dates and legal final maturity dates set forth below:
TABLE 1
Class Principal Balance Interest Rate Expected Final Legal Final
----- ----------------- ------------- Payment Date Maturity Date
------------ -------------
_______ $______________ _____%
_______ $______________ _____%
_______ $______________ _____%
The expected final payment date for each class of the series 2000-A transition
bonds is the date on which there is expected to be no further outstanding
principal balance of that class in accordance with the expected amortization
schedule for that class. The legal final maturity date for each class of the
series 2000-A transition bonds is the date on which the issuer is required to
pay any outstanding principal balance of that class.
S-4
<PAGE>
INTEREST PAYMENTS
Interest on each class of series 2000-A transition bonds will accrue from
the date of issuance until the first payment date, and thereafter from payment
date to payment date until the transition bonds have been paid in full, at the
interest rates indicated in Table 1. The issuer is required to pay interest
quarterly on ______________, ______________, ______________ and ______________
of each year, beginning ______________, 2000, or, if such day is not a business
day, the following business day. Each such day is referred to as a payment date.
On each payment date, the issuer will pay interest on each class of the
series 2000-A transition bonds as follows:
o if there has been a payment default, any unpaid interest payable on any
prior payment dates, together with interest on any such unpaid interest;
and
o accrued interest on the principal balance of each class of series 2000-A
transition bonds since the close of business on the preceding payment date,
or the date of the original issuance of the class of series 2000-A
transition bonds, as applicable, after giving effect to all payments of
principal made on the preceding payment date.
The record date to determine the holders entitled to receive interest payments
will be the business day prior to each payment date. The issuer will pay
interest on the series 2000-A transition bonds prior to paying principal of the
transition bonds. See "THE TRANSITION BONDS -- PAYMENTS OF INTEREST AND
PRINCIPAL ON THE TRANSITION BONDS" in the prospectus. If there is a shortfall in
the amounts necessary to make interest payments, the trustee will distribute
interest pro rata to each series and class of transition bonds based on the
interest then due on that series or class. The issuer will calculate interest on
the basis of a 360-day year of twelve 30-day months.
[Interest on the series 2000-A floating rate transition bonds, class ___,
will be calculated as follows:]
[To be provided at issuance for any class with a floating interest rate.]
PRINCIPAL PAYMENTS
On each payment date, the issuer will distribute principal of the series
2000-A transition bonds to the series 2000-A transition bondholders, in
accordance with the expected amortization schedule and to the extent funds are
available, in the following order:
(1) to the holders of the class __ transition bonds, until the principal
balance of that class has been reduced to zero;
(2) [Add other classes]
S-5
<PAGE>
The issuer will not, however, distribute principal of any class of series
2000-A transition bonds on a payment date if making such payment would reduce
the principal balance of a class to an amount lower than that specified in the
expected amortization schedule for that class on that payment date. The entire
unpaid principal amount of each class of the series 2000-A transition bonds will
be due and payable on the legal final maturity date for that class. If an event
of default under the indenture has occurred and is continuing, the trustee, or
the holders of not less than a majority of the outstanding principal amount of
the transition bonds of all series, voting together as a single class, may
declare the unpaid principal amount of all outstanding transition bonds together
with accrued interest due and payable. If there is a shortfall in the amount
necessary to make principal payments that are due and payable, including upon an
acceleration following an event of default, the trustee will distribute
principal pro rata among the series and classes of transition bonds in
proportion to the amount of principal due and payable for each series or class.
If there is a shortfall in the amount necessary to make scheduled principal
payments, the trustee will distribute principal pro rata among the series and
classes in proportion to the amount scheduled to be paid for each series or
class.
The following table sets forth the principal balance from the issuance date
to the expected final payment date that is scheduled to remain outstanding for
each class of the series 2000-A transition bonds. The table reflects the
principal balance for each class at each payment date following scheduled
payments of principal on that date. In establishing the expected amortization
schedule for the series 2000-A transition bonds, it has been assumed, among
other things, that:
(1) the series 2000-A transition bonds are issued on ________;
(2) payments on the series 2000-A transition bonds are made on each payment
date, commencing on___________;
(3) the initial annual servicing fee for the series 2000-A transition bonds
equals _____% of the initial outstanding principal balance of the
series 2000-A transition bonds;
(4) there are no net earnings on amounts on deposit in the collection
account;
(5) operating expenses, including all fees, costs and charges of the issuer
and the trustee, are paid in the amount of $_____ in the aggregate for
all series on each payment date and that these amounts are payable in
arrears; and
(6) all transition bond charge collections are received in accordance with
JCP&L's forecasts and deposited in the collection account.
S-6
<PAGE>
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
Scheduled Outstanding
Payment Dates Class Principal Balance
------------- ----- -----------------
There can be no assurance that the principal balance of any class of the
series 2000-A transition bonds will be reduced at the rate indicated in the
foregoing table. The actual rates of reduction in class principal balances may
be slower but, except in the case of optional redemption (as discussed below) or
upon acceleration of the transition bonds due to an event of default, not faster
than those indicated in Table 2. The series 2000-A transition bonds will not be
in default if principal is not paid as specified above in Table 2; however, a
default will occur if the entire outstanding principal balance of any class is
not paid on or before the legal final maturity date of that class.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding series 2000-A transition
bonds, at its option, on any payment date if the outstanding principal balance
of the series 2000-A transition bonds (after giving effect to payments scheduled
to be made on that payment date) is less than 5% of the initial principal
balance of the series 2000-A transition bonds. Upon redemption, the issuer will
pay the outstanding principal amount of the series 2000-A transition bonds and
interest accrued and unpaid up to the redemption date. The trustee will give
notice of the redemption to series 2000-A transition bondholders not less than
five days nor more than 45 days prior to the redemption date. The series 2000-A
transition bonds will not be redeemed before the expected final payment date in
any other circumstances other than in the case of acceleration due to an event
of default.
CREDIT ENHANCEMENT
Credit enhancement for the series 2000-A transition bonds is intended to
protect you against losses or delays in scheduled payments on your transition
bonds.
S-7
<PAGE>
PERIODIC ADJUSTMENT OF THE TRANSITION BOND CHARGE
Credit enhancement for the transition bonds includes mandatory periodic
adjustments by the BPU to the transition bond charge to be billed to customers,
upon the petition by JCP&L, as servicer. JCP&L, as servicer, will petition for
an adjustment at least annually. The periodic adjustments will be designed to
ensure, among other things, that sufficient funds for timely payments of
principal and interest on the transition bonds will be available in accordance
with the expected amortization schedule set forth in Table 2 above. See "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE BPU'S TRANSITION BOND
CHARGE ADJUSTMENT PROCESS" in the prospectus. The adjustments will be made if
there are excess collections or if the transition bond charge does not produce
sufficient revenues:
(1) to pay ongoing transaction expenses and fees;
(2) to make timely principal and interest payments on the transition bonds
in accordance with the expected amortization schedule; and
(3) to fund and/or replenish the subaccounts, including the capital
subaccount and overcollateralization subaccount, to their required
levels.
COLLECTION ACCOUNT AND SUBACCOUNTS
The trustee will establish a collection account to hold the capital
contribution made to the issuer and amounts remitted by the servicer from time
to time. The collection account will contain the funds securing the transition
bonds. The collection account will consist of subaccounts including the
following:
o the general subaccount;
o the capital subaccount;
o the overcollateralization subaccount; and
o the reserve subaccount.
Withdrawals from and deposits to these subaccounts will be made as
described under "THE INDENTURE -- THE COLLECTION ACCOUNT FOR THE TRANSITION
BONDS" and "-- HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" in the
prospectus.
The General Subaccount. Transition bond charge collections remitted by the
servicer to the trustee will be deposited into the general subaccount.
Allocations from the general subaccount will be made as described under
"THE INDENTURE -- HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED"
S-8
<PAGE>
in the prospectus. On each payment date, the trustee will withdraw funds, to the
extent available following payment of expenses of the trustee and servicer and
certain other fees and expenses, from the general subaccount to make payments on
all series of transition bonds as follows:
(1) current and past due interest payable on that payment date, including
interest on past due interest;
(2) the principal of any series payable as a result of an acceleration
following the occurrence of an event of default, the principal of any
series payable on the legal final maturity date of that series, or the
principal of any series payable on a redemption date; and
(3) principalscheduled to be paid on any series on that payment date,
excluding amounts provided for in item (2) above.
The Capital Subaccount. Upon the issuance of the series 2000-A transition
bonds, JCP&L will, through JCP&L Sub and the seller, make a capital contribution
to the issuer in the amount of $_____, which represents [0.50%] of the initial
principal balance of that series. This amount is the required capitalization
amount for that series and shall be held in the capital subaccount. If amounts
available in the general subaccount, the reserve subaccount and the
overcollateralization subaccount are not sufficient on any payment date to pay
the expenses, fees and charges specified in the indenture and to make scheduled
payments to the transition bondholders, the trustee will withdraw amounts from
the capital subaccount to make those payments. The required capitalization
amount has been set at a level sufficient to obtain the ratings on the series
2000-A transition bonds that are described below under "RATINGS FOR THE SERIES
2000-A TRANSITION BONDS." The required capitalization amount for each future
series of transition bonds will be set at an amount sufficient to preclude any
downgrading or withdrawal of the ratings on the series 2000-A transition bonds
upon the issuance of those future series of transition bonds and will be set
forth in the applicable prospectus supplement for that future series. Upon any
future issuance, the required capitalization level at any time will equal the
aggregate of the required capitalization levels for all outstanding series. See
also "THE TRANSITION BONDS -- CREDIT ENHANCEMENT FOR THE TRANSITION BONDS" in
the prospectus.
The Overcollateralization Subaccount. The required overcollateralization
amount for the series 2000-A transition bonds is $_____ million, which
represents [0.50]% of the initial outstanding balance of that series. The
overcollateralization amount will be collected and deposited in the
overcollateralization subaccount over the life of the transition bonds. The
trustee will deposit in the overcollateralization subaccount transition bond
charge collections to maintain that subaccount at an amount which is referred to
as the required overcollateralization level, which is equal to the amounts shown
in Table 3 below for each payment date. The required overcollateralization
amount has been set at a level sufficient to obtain the ratings on the series
2000-A transition bonds that are described below under "RATINGS FOR THE SERIES
2000-A
S-9
<PAGE>
TRANSITION BONDS." The required overcollateralization amount for each future
series of transition bonds will be set at an amount sufficient to preclude any
downgrading or withdrawal of the ratings on the series 2000-A transition bonds
upon the issuance of those future series of transition bonds and will be set
forth in the applicable prospectus supplement for that future series. Upon any
future issuance, the required overcollateralization level at any time will equal
the aggregate of the required overcollateralization levels for all outstanding
series. See also "THE TRANSITION BONDS -- CREDIT ENHANCEMENT FOR THE TRANSITION
BONDS" in the prospectus.
TABLE 3
REQUIRED OVERCOLLATERALIZATION LEVEL SCHEDULE
FOR SERIES 2000-A TRANSITION BONDS
Required Over- Required Over-
Payment Date Collateralization Level Payment Date Collateralization Level
------------ ----------------------- ------------ -----------------------
If amounts available in the general subaccount and the reserve subaccount
are not sufficient on any payment date to pay the expenses, fees and charges
specified in the indenture and to make scheduled payments to the transition
bondholders, the trustee will withdraw amounts from the overcollateralization
subaccount to make those payments.
The Reserve Subaccount. The reserve subaccount will be funded with any
transition bond charge collections and earnings on amounts in the collection
account, other than the capital subaccount, in excess of the amount necessary to
pay the following amounts on any payment date:
(1) expenses of the trustee and the servicer and other fees and expenses;
(2) principal and interest payments on the transition bonds payable or
scheduled to be paid on that payment date, including past due amounts;
(3) any amount required to replenish the capital subaccount to the required
capital level; and
(4) the amounts required to fund the overcollateralization subaccount to
the required overcollateralization level.
Disregarding interest earnings on funds held in the collection account, the
transition bond charge is calculated so that, if projected consumption is
realized exactly, there should not be any amounts in the reserve subaccount. In
the event that there are such amounts in the reserve
S-10
<PAGE>
subaccount, the transition bond charge will be adjusted periodically in a manner
designed to eliminate these amounts.
On any payment date, if amounts available in the general subaccount are not
sufficient to pay the expenses, fees and charges specified in the indenture, and
to make scheduled payments to the transition bondholders, the trustee will first
withdraw amounts from the reserve subaccount to make those payments before
withdrawing amounts from the overcollateralization subaccount and, then, from
the capital subaccount.
DESCRIPTION OF BONDABLE TRANSITION PROPERTY
Bondable transition property is a presently existing property right created
by the Competition Act and the BPU financing order. Bondable transition property
represents the irrevocable right of an electric public utility to charge,
collect and receive, and be paid from collections of, a non-bypassable
transition bond charge, in amounts sufficient to pay debt service on the
transition bonds and ongoing costs related to the transaction, which includes
recovery of the following, referred to as bondable stranded costs:
(1) the stranded costs of an electric public utility approved by the BPU
for recovery through the issuance of transition bonds;
(2) the cost of retiring existing debt or equity capital of the electric
public utility, including accrued interest, premiums, and other related
fees, costs and charges, as approved by the BPU, with the proceeds of
the financing of bondable transition property; and
(3) the costs incurred to issue, service or refinance the transition bonds,
including interest, acquisition or redemption premium, and other
financing costs and related fees, costs and charges, whether paid upon
issuance or over the life of the transition bonds, including but not
limited to credit enhancements, service charges, overcollateralization,
interest rate caps, swaps or collars, yield maintenance, maturity
guarantees and other hedging agreements, equity investments, operating
costs and other related fees, costs and charges, or to assign, sell or
otherwise transfer bondable transition property, as approved by the
BPU.
THE TRANSITION BOND CHARGE
The bondable stranded costs authorized in the BPU financing order are to be
recovered from customers of JCP&L through the assessment of the non-bypassable
transition bond charge.
JCP&L Will Assess the Transition Bond Charge on Customers. JCP&L, in its
capacity as servicer of the bondable transition property under the servicing
agreement, will assess the transition bond charge on the bills of its customers.
See "INTRODUCTION -- THE COLLATERAL" in the prospectus for a description of
JCP&L's customers. The transition bond
S-11
<PAGE>
charge will be a uniform non-bypassable per kilowatt hour charge assessed
against customers on their bills, regardless of customer rate class, as part of
JCP&L's regular billing. The amount of the charge will depend generally on the
amount of electricity delivered to the customer through JCP&L's transmission and
distribution system. Any third party electric power supplier of electricity to
JCP&L's customers must pay JCP&L the transition bond charge billed by such third
party electric power supplier to JCP&L's customers.
JCP&L Will Calculate the Transition Bond Charge. JCP&L, as servicer, will
calculate the transition bond charge based on the total amount required to be
billed to customers to generate transition bond charge collections sufficient to
ensure timely payment of principal of and interest on the transition bonds and
the other amounts required to be paid by the issuer. The charge will be
reflected in each customer's bill. Actual transition bond charge collections may
vary from projected collections due to changes in electricity consumption
patterns, total usage, the number of customers, rates of delinquencies and
write-offs and other factors. See Tables 1 through 7 under "SERVICING OF THE
BONDABLE TRANSITION PROPERTY" in the prospectus. JCP&L, as servicer, is required
to seek adjustments to the transition bond charge as described under "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE" in the prospectus, in order to
adjust for such variations.
The BPU's Transition Bond Charge Adjustment Process. Transition bond charge
collections are intended to be neither more nor less than the amount necessary
to pay the principal of the transition bonds of each series in accordance with
the expected amortization schedule, to pay interest on each series, to pay
related expenses and to fund or replenish the subaccounts. There is no limit on
the number of transition bond charge adjustments that may be sought and
implemented. Furthermore, New Jersey law requires that the BPU continue to
approve transition bond charge adjustments calculated in accordance with the
formula until there are no transition bonds outstanding and all fees and
expenses of the issuer have been paid. In order to enhance the likelihood that
the proper transition bond charge amount is collected, the servicing agreement
requires that the servicer petition the BPU to approve adjustments to the
transition bond charge at least annually. The adjustments will increase or
decrease the transition bond charge so that transition bond charge collections
will be in an amount sufficient to amortize principal on the transition bonds in
accordance with the expected amortization schedule for each series of the
transition bonds, and to pay interest, fees and expenses, and will be in an
amount required to ensure receipt of revenues sufficient to provide for the full
recovery of bondable stranded costs. Each periodic adjustment will become
effective on an interim basis 30 days after filing, absent a determination of
manifest error by the BPU, and will become final 60 days thereafter in the
absence of a BPU order to the contrary. Under the BPU financing order, "manifest
error" means an arithmetic error evident on the face of the filing.
Initially, JCP&L estimates that the transition bond charge will be
approximately $ per kilowatt hour for customers of all rate classes,
beginning on the issuance date for the series 2000-A transition bonds. See "THE
COMPETITION ACT" and "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE" in
the prospectus.
S-12
<PAGE>
UNDERWRITING THE SERIES 2000-A TRANSITION BONDS
The issuer, the seller, JCP&L Sub, JCP&L and the underwriters for the
offering named below, for whom Goldman, Sachs & Co. is acting as the
representative, have entered into an underwriting agreement with respect to the
series 2000-A transition bonds. Subject to certain conditions, each underwriter
has severally agreed to purchase the principal amount of series 2000-A
transition bonds indicated in the following table.
Underwriters Principal Amount of Class
------------ -------------------------
A-1 A-2 A-3
Goldman, Sachs & Co.
Total......................
Under the underwriting agreement, the underwriters will purchase all of the
series 2000-A transition bonds if any are purchased. Series 2000-A transition
bonds sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus
supplement. Any series 2000-A transition bonds sold by the underwriters to
securities dealers may be sold at a discount from the initial public offering
price of up to % of the principal amount of series 2000-A transition bonds.
Any such securities dealers may resell any series 2000-A transition bonds
purchased from the underwriters to certain other brokers or dealers at a
discount from the initial public offering price of up to % of the principal
amount of series 2000-A transition bonds. If all the series 2000-A transition
bonds are not sold at the initial public offering price, the underwriters may
change the offering price and the other selling terms.
The series 2000-A transition bonds are a new issue of securities with no
established trading market. The issuer and JCP&L have been advised by the
underwriters that the underwriters intend to make a market in the series 2000-A
transition bonds but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for the series 2000-A transition bonds.
In connection with this offering, the underwriters may purchase and sell
series 2000-A transition bonds in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of series 2000-A transition bonds than they are required to
purchase in this offering. Stabilizing transactions consist of certain bids or
purchases made for the purpose of preventing or retarding a decline in the
market price of the series 2000-A transition bonds while this offering is in
progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representative has repurchased the series
2000-A transition bonds sold by or for the account of such underwriter in
stabilizing or short covering transactions.
S-13
<PAGE>
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the series 2000-A transition bonds. As a result, the
price of the series 2000-A transition bonds may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued by the underwriters at any time. These transactions may
be effected in the over-the-counter market or otherwise.
The issuer estimates that its total expenses for this offering, excluding
underwriting discounts and commissions, will be approximately $ .
The issuer, the seller, JCP&L Sub and JCP&L have agreed to reimburse the
several underwriters for certain expenses and to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking and related
services to JCP&L and its affiliates for which they have in the past received,
and in the future may receive, customary fees.
RATINGS FOR THE SERIES 2000-A TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the series
2000-A transition bonds that the series 2000-A transition bonds be rated ___ by
Standard & Poor's Rating Services, ___ by Moody's Investors Service Inc., ___ by
Fitch IBCA Inc. and __ by Duff & Phelps Credit Rating Company.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the rating agency.
No person is obligated to maintain the rating on the transition bonds, and,
accordingly, there can be no assurance that the ratings assigned to any class of
the transition bonds upon initial issuance will not be revised or withdrawn by a
rating agency at any time thereafter. If a rating of any class of the transition
bonds is revised or withdrawn, the liquidity of that class may be adversely
affected. In general, ratings address credit risk and do not represent any
assessment of any particular rate of principal payments on the transition bonds
other than payment in full of each class of the transition bonds by the
applicable legal final maturity date.
INCOME TAX MATTERS
See "MATERIAL INCOME TAX MATTERS FOR THE HOLDERS OF THE TRANSITION BONDS"
in the prospectus.
S-14
<PAGE>
Subject to Completion. Dated [ ], 2000
PROSPECTUS
JCP&L TRANSITION FUNDING LLC
Issuer of the Transition Bonds
TRANSITION BONDS
JERSEY CENTRAL POWER & LIGHT COMPANY
Servicer
Consider carefully the risk factors beginning on page 12 of this prospectus
before buying the transition bonds.
The transition bonds represent obligations only of JCP&L Transition Funding
LLC, which is the issuer, and are backed only by the assets of the issuer. None
of Jersey Central Power & Light Company, its parent, GPU, Inc., or any of their
respective affiliates, other than the issuer, is liable for payments on the
transition bonds.
There currently is no secondary market for the transition bonds.
This prospectus, together with the applicable prospectus supplement,
constitutes a summary of material terms of the offering of a series of
transition bonds. Prospective investors are urged to read both this prospectus
and the prospectus supplement in full. Sales of the transition bonds may not be
consummated unless the purchaser has received both this prospectus and the
prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, NOR HAVE THEY
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
___________ _____, 2000
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
Page
<S> <C>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS...............................................1
SUMMARY OF TERMS..............................................................................................1
RISK FACTORS.................................................................................................12
Judicial, Legislative or Regulatory Action That May Adversely Affect Your Investment....................12
Servicing Risks.........................................................................................17
The Risks Associated With Potential Bankruptcy Proceedings..............................................22
Other Risks Associated With An Investment In The Transition Bonds.......................................25
FORWARD-LOOKING STATEMENTS...................................................................................27
JERSEY CENTRAL POWER & LIGHT COMPANY.........................................................................28
WHERE YOU CAN FIND MORE INFORMATION..........................................................................29
THE COMPETITION ACT..........................................................................................30
Recovery of Stranded Costs is Allowed for JCP&L and Other New Jersey Utilities..........................30
JCP&L and Other Utilities May Securitize Stranded Costs.................................................31
JCP&L'S RESTRUCTURING........................................................................................34
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE.......................................................35
The BPU Financing Order.................................................................................35
The BPU's Transition Bond Charge Adjustment Process.....................................................37
SERVICING OF THE BONDABLE TRANSITION PROPERTY................................................................38
JCP&L'S Customer Classes................................................................................38
Billed Electric Revenue, Number of Customers and Consumption............................................38
How JCP&L Forecasts the Number of Customers and the Amount of Electricity Usage........................39
Credit Policy; Billing; Collections; Termination of Service.............................................41
Loss and Delinquency Experience.........................................................................43
How JCP&L Will Apply Partial Payments by its Customers..................................................44
JCP&L TRANSITION FUNDING LLC, THE ISSUER.....................................................................44
HOW THE ISSUER WILL USE THE PROCEEDS OF THE TRANSITION BONDS.................................................47
THE TRANSITION BONDS.........................................................................................47
General Terms of the Transition Bonds...................................................................47
Payments of Interest and Principal on the Transition Bonds..............................................48
Optional Redemption of the Transition Bonds.............................................................49
Credit Enhancement for the Transition Bonds.............................................................50
Transition Bonds Will Be Issued in Book-Entry Form......................................................51
Certificated Transition Bonds...........................................................................54
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR
THE TRANSITION BONDS....................................................................................55
THE CONTRIBUTION AGREEMENT...................................................................................56
Assignment of the Bondable Transition Property and Related Rights to the Seller.........................56
JCP&L's Representations and Warranties..................................................................57
JCP&L's Covenants.......................................................................................62
JCP&L's Obligation to Indemnify the Issuer and the Trustee and to Take Legal Action.....................66
Successors to JCP&L.....................................................................................67
THE SALE AGREEMENT......................................................................................68
Sale and Assignment of Bondable Transition Property and Rights Under
the Contribution Agreement.........................................................................68
THE SERVICING AGREEMENT......................................................................................69
JCP&L'S Servicing Procedures............................................................................70
<PAGE>
The BPU's Transition Bond Charge Adjustment Process.....................................................72
JCP&L'S Transition Bond Charge Collections..............................................................73
JCP&L'S Compensation for Its Role as Servicer and Its Release of Other Parties..........................73
JCP&L'S Duties as Servicer..............................................................................73
JCP&L'S Representations and Warranties as Servicer......................................................74
JCP&L, as Servicer, Will Indemnify the Issuer and Other Related Entities................................75
JCP&L, as Servicer, Will Provide Statements to the Issuer and to the Trustee............................76
JCP&L Will Provide Compliance Reports Concerning the Servicing Agreement................................76
Matters Regarding JCP&L as Servicer.....................................................................77
Events Constituting a Default by JCP&L in Its Role as Servicer..........................................78
The Trustee's Rights if JCP&L Defaults as Servicer......................................................79
The Obligations of a Servicer that Succeeds JCP&L.......................................................79
THE INDENTURE................................................................................................80
The Security for the Transition Bonds...................................................................80
Transition Bonds May Be Issued in Various Series or Classes.............................................81
The Collection Account for the Transition Bonds.........................................................82
How Funds in the Collection Account Will Be Allocated...................................................86
Reports to Holders of the Transition Bonds..............................................................88
The Issuer and the Trustee May Modify the Indenture.....................................................89
What Constitutes an Event of Default on the Transition Bonds............................................92
Covenants of the Issuer.................................................................................94
Access to the List of Holders of the Transition Bonds...................................................96
The Issuer Must File an Annual Compliance Statement.....................................................97
The Trustee Must Provide a Report to All Transition Bondholders.........................................97
What Will Trigger Satisfaction and Discharge of the Indenture...........................................97
The Issuer's Legal Defeasance and Covenant Defeasance Options...........................................97
The Trustee.............................................................................................99
HOW A BANKRUPTCY OF THE ISSUER, THE SELLER, JCP&L SUB
OR THE SERVICER MAY AFFECT YOUR INVESTMENT.............................................................100
MATERIAL INCOME TAX MATTERS FOR THE HOLDERS OF THE TRANSITION BONDS.........................................104
General................................................................................................104
Taxation of U.S. Holders...............................................................................106
Taxation of Non-U.S. Holders...........................................................................107
Information Reporting and Backup Withholding...........................................................109
Material State of New Jersey Tax Matters...............................................................109
ERISA CONSIDERATIONS........................................................................................109
Prohibited Transaction Issues..........................................................................110
Plan Asset Issues......................................................................................112
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS...............................................................113
RATINGS FOR THE TRANSITION BONDS............................................................................113
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS......................................................114
</TABLE>
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS
You should rely only on information on the transition bonds provided in
this prospectus and in the related prospectus supplement. No dealer, salesperson
or other person has been authorized to give any information or to make any
representations other than those contained in this prospectus and the prospectus
supplement and, if given or made, the information or representations must not be
relied upon as having been authorized by the issuer or by Jersey Central Power &
Light Company (referred to as "JCP&L"), the underwriters or any dealer,
salesperson or other person. Neither the delivery of this prospectus and the
prospectus supplement nor any sale made hereunder shall, under any
circumstances, create an implication that information herein is correct as of
any time since the date of this prospectus or the prospectus supplement. This
prospectus and the prospectus supplement do not constitute an offer to sell, or
a solicitation of an offer to buy, any security in any jurisdiction in which it
is unlawful to make any similar offer or solicitation.
SUMMARY OF TERMS
This summary contains a brief description of the transition bonds that
applies to all series of transition bonds issued under this prospectus.
Information that relates to a specific series of transition bonds can be found
in the prospectus supplement related to that series. You will find a detailed
description of the terms of the offering of the transition bonds in "THE
TRANSITION BONDS" in this prospectus.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 12 OF THIS PROSPECTUS.
THE ISSUER: JCP&L Transition Funding LLC, a Delaware
limited liability company (referred to as the
"issuer"). The issuer was formed solely to
purchase bondable transition property from
the seller and to issue one or more series of
transition bonds secured by the bondable
transition property.
ISSUER'S ADDRESS: c/o GPU Service, Inc., 310 Madison Avenue,
Morristown, New Jersey 07962
ISSUER'S TELEPHONE NUMBER: (973) 455-8200
SELLER OF THE BONDABLE JCP&L Transition, Inc., a Delaware
TRANSITION PROPERTY TO corporation (referred to as the "seller") and
THE ISSUER: a wholly-owned indirect subsidiary of JCP&L.
The seller was formed solely for the purpose
of acquiring the bondable transition property
and selling it to the issuer, and holding all
of the equity interest in the
<PAGE>
issuer. JCP&L will make a capital
contribution of the bondable transition
property to JCP&L Transition Holdings, Inc.,
a Delaware corporation and a wholly-owned
subsidiary of JCP&L (referred to as "JCP&L
Sub"). JCP&L Sub, in turn, will make a
capital contribution of the bondable
transition property to the seller which is a
wholly-owned subsidiary of JCP&L Sub. The
seller will then sell such bondable
transition property to the issuer. JCP&L, a
public utility furnishing electric service
wholly within the State of New Jersey, is a
subsidiary of GPU, Inc., a holding company
registered under the Public Utility Holding
Company Act of 1935. JCP&L provides retail
electric service within a territory located
in northern, western and east central New
Jersey having a population of approximately
2.6 million.
SELLER'S ADDRESS: c/o GPU Service, Inc., 310 Madison Avenue,
Morristown, New Jersey 07962
SELLER'S TELEPHONE NUMBER: (973) 455-8200
SERVICER OF THE BONDABLE
TRANSITION PROPERTY: JCP&L, acting as servicer, and any successor
servicer, will service the bondable
transition property, including the billing,
collection and remittance of the transition
bond charge pursuant to a servicing agreement
with the issuer.
JCP&L will be entitled to an annual servicing
fee that will be payable from the transition
bond charge collections. If JCP&L is replaced
by a successor servicer that does not
concurrently bill the transition bond charge
with other charges for electric services, the
successor servicer will be paid an annual fee
that may be higher than that paid to JCP&L.
TRUSTEE: [ ]
THE ASSETS OF THE ISSUER: The issuer will own:
o the bondable transition property sold to
the issuer (See "THE CONTRIBUTION
AGREEMENT -- ASSIGNMENT OF THE BONDABLE
TRANSITION PROPERTY AND
2
<PAGE>
RELATED RIGHTS TO THE SELLER" in this
prospectus);
o trust accounts held by the trustee; and
o other credit enhancement acquired or held
to ensure payment of the transition bonds,
if any.
TRANSACTION OVERVIEW: New Jersey law permits electric public
utilities, such as JCP&L, to recover the
costs of generation-related investments and
other obligations that cannot be recouped
through market-based rates in a competitive
electricity generation market. These costs
are commonly known as stranded costs. The New
Jersey Board of Public Utilities (referred to
as the "BPU") may authorize an electric
public utility or a transferee to issue debt
securities, referred to as transition bonds,
secured by the right to charge, collect and
receive, and be paid from collections of, a
non-bypassable transition bond charge payable
by the utility's customers, by means of which
the utility pays debt service and other costs
relating to the transition bonds. This right
to charge, collect and receive transition
bond charges will be a presently existing
property right of the issuer referred to as
bondable transition property. See "THE
TRANSITION BONDS" in this prospectus.
The following sets forth the primary steps of
the transaction underlying the offering of
the transition bonds:
o JCP&L will, through JCP&L Sub, make a
capital contribution of the bondable
transition property to the seller, which
will then sell the bondable transition
property to the issuer in exchange for the
net proceeds from the sale of the
transition bonds. The seller will
distribute the net proceeds it receives to
JCP&L Sub, which will, in turn, distribute
the net proceeds to JCP&L.
o JCP&L will, through JCP&L Sub and the
seller, also make a capital contribution
to the issuer equal to [0.50%] of the
initial principal amount of the transition
bonds.
3
<PAGE>
o The issuer, whose primary asset will be
the bondable transition property, will
sell the transition bonds to the
underwriters named in the prospectus
supplement.
o JCP&L will act as the servicer of the
bondable transition property.
o GPU Service, Inc., an affiliate of JCP&L,
will act as administrator of the issuer.
The transition bonds and the bondable
transition property securing the transition
bonds are not obligations of JCP&L, GPU, Inc.
or any of their respective affiliates, other
than the issuer. The transition bonds and the
bondable transition property are also not
obligations of the State of New Jersey or any
governmental agency, authority or
instrumentality of the State.
PARTIES TO THE TRANSACTION
[Disagram omitted]
THE COLLATERAL
The transition bonds will be secured primarily by bondable transition
property, a presently existing property right created by the New Jersey Electric
Discount and Energy Competition Act of 1999 (referred to as the "Competition
Act") and a financing order (referred to as the "BPU financing order") issued by
the BPU to JCP&L. In general terms, the bondable transition property represents
the irrevocable right to charge, collect and receive, and be paid from
collections of, a non-bypassable transition bond charge payable by JCP&L's
customers in an amount sufficient to pay:
o the fees, expenses, costs, charges, credit enhancement and premiums, if
any, associated with the transition bonds and their issuance; and
o the principal amount of and interest on the transition bonds.
As used throughout this prospectus, a customer is an end user of
electricity that is connected to any part of JCP&L's transmission and
distribution system and is located within JCP&L's service territory, other than
(1) the single end user presently taking service under an experimental JCP&L
rate class that accounted for approximately 1.7% of JCP&L's kilowatt hour sales
in 1999 and (2) certain end users that are connected to JCP&L's transmission and
distribution system but who self-generate from on-site facilities. End users who
self-generate
4
<PAGE>
will not pay the transition bond charge with respect to such generation, unless
new on-site generation facilities in the aggregate reduce the kilowatt hours
distributed by JCP&L to 92.5% or less of the kilowatt hours distributed by it in
1999.
JCP&L will, through JCP&L Sub, make a capital contribution of the bondable
transition property to the seller, which, in turn, will sell such bondable
transition property to the issuer. The bondable transition property is described
in more detail under "THE CONTRIBUTION AGREEMENT -- ASSIGNMENT OF BONDABLE
TRANSITION PROPERTY AND RELATED RIGHTS TO THE SELLER" in this prospectus. JCP&L,
as servicer of the bondable transition property, will bill and collect the
transition bond charge from customers on behalf of the issuer. However, under
certain circumstances, third party electric power suppliers to JCP&L's customers
may be allowed to bill and collect the transition bond charge from JCP&L's
customers. Any such third party electric power supplier will be required to pay
the transition bond charges to the servicer, whether or not the customers pay
the third party electric power supplier. See "SERVICING OF THE BONDABLE
TRANSITION PROPERTY" in this prospectus.
The net proceeds from the transition bonds will be used to reduce a portion
of JCP&L's stranded costs through the retirement of its debt or equity, or both.
Stranded costs are the amount by which an electric utility's net electric
generation-related costs, which traditionally would be recoverable in a
regulated environment, exceed those costs recoverable in a competitive electric
supply market, as determined by the BPU.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts due on the transition
bonds from
o transition bond charges remitted by the servicer to the trustee on
behalf of the issuer during the associated collection period;
o any third party credit enhancement; and
o amounts available from trust subaccounts held by the trustee.
These subaccounts are described in greater detail under "THE INDENTURE -- THE
COLLECTION ACCOUNT FOR THE TRANSITION BONDS" in this prospectus.
PRIORITY OF DISTRIBUTIONS
On each payment date, the trustee will pay or allocate transition bond
charges received from the servicer and all investment earnings on the amounts
held in the collection account, except for amounts held in the capital
subaccount, to the extent funds are available in the collection account, in the
following priority:
(1) payment of all amounts owed to the trustee and all amounts owed to the
independent managers of the issuer;
5
<PAGE>
(2) payment of the servicing fees and all unpaid servicing fees from prior
periods;
(3) payment of the administration fee in an amount specified in the
administration agreement between the issuer and GPU Service, Inc.;
(4) so long as no event of default has occurred and is continuing or would
be be caused by this payment, the payment of current operating
expenses of the issuer (up to an annual aggregate of $_______for all
series);
(5) payment of interest as follows:
o first, unpaid interest on any series from prior periods, including
payment of any amount payable to any swap or hedge counterparty on
any interest rate swap or hedge agreement, including interest on
past due interest;
o then, payment of the current interest then due on the transition
bonds of each series, including payment of any amount payable to
the swap counterparty on any interest rate swap;
(6) payment of the principal then legally required to be paid on the
transition bonds of any series as follows:
o the unpaid principal amount of any series if such payment date is
on or after the legal final maturity date of that series; plus
o the unpaid principal amount of any transition bonds called for
redemption; plus
o the unpaid principal amount of any series due upon an acceleration
following an event of default;
(7) payment of the principal then scheduled to be paid on the transition
bonds of any series;
(8) payment of any remaining unpaid operating expenses and indemnity
amounts then owed by the issuer;
(9) replenishment of any withdrawals from the capital subaccount, up to
the aggregate required capitalization amount;
(10) allocation of any required amount necessary to cause the amount in the
overcollateralization subaccount to equal the aggregate required
overcollateralization level;
6
<PAGE>
(11) payment of any termination or breakage amounts payable under any swap
or hedge agreement relating to any floating rate transition bonds;
(12) so long as no event of default has occurred and is continuing, release
to the issuer of an amount equal to investment earnings since the
preceding payment date on amounts in the capital subaccount; and
(13) allocation of the remainder, if any, to the reserve subaccount.
See also "THE INDENTURE -- HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" in this prospectus. A diagram depicting how the transition bond
charge collections will be allocated may be found on page __ of this prospectus.
CREDIT ENHANCEMENT AND ACCOUNTS
Unless otherwise specified in any prospectus supplement, the primary form
of credit enhancement for the transition bonds will be mandatory periodic
adjustments (which will be made at least annually) to the transition bond
charge. The BPU is required to make periodic adjustments to the transition bond
charge upon petition by JCP&L, as servicer, on behalf of the issuer, to ensure
receipt of revenues sufficient to recover all amounts required to be
distributed, including
o for each series of transition bonds, principal of each class of such
series in accordance with the expected amortization schedule;
o interest on the transition bonds;
o other ongoing transaction costs and expenses as specified in items (1)
through (11) above;
o the funding of the overcollateralization subaccount in amounts
sufficient to bring the balance in that subaccount to the aggregate
required overcollateralization level; and
o the funding of the capital subaccount in amounts sufficient to bring
the balance in that subaccount to the aggregate required level.
The servicer will petition the BPU to approve such adjustments to make up
for any shortfall or excess in transition bond charge collections. In this way,
the transition bond charge collections will be designed to meet the expected
amortization schedule of payments of principal of the transition bonds, interest
on the transition bonds and other fees, costs and expenses. The adjustments must
be made at least annually. Expressed generally, the most likely primary causes
of a shortfall or excess in transition bond charge collections include the
following situations:
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o the actual electric consumption by JCP&L's customers varying from
JCP&L's forecasts; and
o the actual rate of collection of billed transition bond charges varying
from JCP&L's expected rate of collection due to delinquencies and
write-offs, including shortfalls created by third party electric power
suppliers that default in payments of transition bond charges to the
servicer.
See "RISK FACTORS -- SERVICING RISKS" in this prospectus. The transition bond
charge collections will fund the collection account and various subaccounts as
set forth below. These accounts are additional credit enhancement for the
transition bonds.
Collection Account - Under the indenture, the trustee will maintain a
single collection account, divided into various subaccounts, some of which may
be series specific and some of which may be held for all series of transition
bonds. The primary subaccounts for credit enhancement purposes are:
(1) Capital Subaccount - An amount specified in the prospectus supplement
for each series of transition bonds will be deposited into the capital
subaccount on the date of issuance of that series. Any shortfall in the
capital subaccount that is not otherwise replenished will be replenished by
periodic adjustments to the transition bond charge. The issuer will receive
all interest earned on amounts held in the capital subaccount not used to
meet current obligations. The required capitalization level at any time
will equal the aggregate of the required capitalization levels for all
outstanding series.
(2) Overcollateralization Subaccount - The prospectus supplement for each
series of transition bonds will specify a funding amount for that series
for the overcollateralization subaccount. That amount will be funded over
the term of such series, as specified in the prospectus supplement, through
transition bond charge collections. The required overcollateralization
level at any time will equal the aggregate of the required
overcollateralization levels for all outstanding series.
(3) Reserve Subaccount - Any excess amount of transition bond charge
collections and investment earnings on amounts held in the collection
account, other than earnings on amounts held in the capital subaccount,
after payments have been made on a payment date, will be held in the
reserve subaccount and be used to meet payment obligations on subsequent
payment dates or, to the extent not so used, be applied to reduce the
transition bond charge in connection with the next periodic adjustment.
Each of the capital subaccount and the overcollateralization subaccount
will be available to make payments for all series on each payment date and all
other amounts as described in items (1) through (7) in "PRIORITY OF
DISTRIBUTIONS" above. The reserve subaccount will be available to make payments
for all series on each payment date and all other amounts as described in items
(1) through (7), (9) and (10) above. To the extent that amounts on deposit in
the capital, overcollateralization and reserve subaccounts are needed for more
than one series, but are insufficient, the amounts on deposit will be allocated
to each series, in proportion to the
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amounts payable or scheduled to be paid from such subaccount with respect to
each series on that payment date.
Although it is not anticipated, additional credit enhancement for any
series may include surety bonds or letters of credit. Additional forms of credit
enhancement, if any, for each series will be specified in the related prospectus
supplement. Credit enhancement for the transition bonds is intended to protect
you against losses or delays in scheduled payments on your transition bonds.
STATE PLEDGE
Under the Competition Act, the State of New Jersey pledges and agrees with
the holders of the transition bonds and with the issuer not to limit, alter or
impair the bondable transition property or the other rights vested in an
electric public utility or an assignee or pledgee of the utility or any
financing entity, such as the issuer, or vested in the holders of any transition
bonds pursuant to a financing order, until the transition bonds are fully paid
and discharged. In addition, the State will not in any way limit, alter, impair
or reduce the value or amount of the bondable transition property approved by a
financing order except as contemplated by the periodic adjustments to the
transition bond charge.
Under certain circumstances, the State of New Jersey may not be required to
adhere to its pledge. Any action by New Jersey which would constitute a
violation of its pledge would have to be a reasonable exercise of the state's
sovereign power and of a character appropriate to the state's public purpose in
order to justify such an action. However, there is no existing case law
addressing the exercise of the State of New Jersey's sovereign powers with
respect to transition bonds. Alternatively, the State of New Jersey may not be
required to adhere to its pledge if it pays just compensation to transition
bondholders. There is also no existing case law addressing the issue of just
compensation in the context of transition bonds.
ALLOCATIONS AND DISTRIBUTIONS
[Diagram omitted]
PAYMENTS OF INTEREST AND PRINCIPAL
Interest on each class of transition bonds will accrue at the interest rate
specified in the related prospectus supplement. On each payment date, the
trustee will distribute interest accrued on each class of transition bonds and
the scheduled principal payment for that class, if any, to the extent funds are
available, until the outstanding principal balance of that class has been
reduced to the level designated for each payment date in accordance with the
expected amortization schedule.
Failure to pay the entire outstanding balance of the transition bonds of
any class or series by that series' expected final payment date will not result
in a default with respect to that class or series; however, a default will occur
if the entire outstanding balance of any class or series is not
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paid on or before the legal final maturity date of that class or series. The
expected final payment date and the legal final maturity date of each series and
class of transition bonds will be specified in the related prospectus
supplement.
To the extent that available funds are insufficient to pay principal,
interest or any other of items (1) through (11) in "PRIORITY OF DISTRIBUTIONS"
above, and amounts payable or scheduled to be paid are different for different
series, those funds available for payment of that item will be allocated in
proportion to the amount payable or scheduled to be paid with respect to that
item for each series on that payment date.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding transition bonds of any
series, at its option, only if, on any payment date, the outstanding principal
balance of the transition bonds of that particular series (after giving effect
to payments scheduled to be made on that payment date) is less than 5% of the
initial principal balance of the transition bonds of that series. Unless
otherwise specified in a prospectus supplement, there will be no other optional
redemption for a series.
PAYMENT DATES AND RECORD DATES
The payment dates and record dates for each series of transition bonds will
be specified in the related prospectus supplement.
MATERIAL INCOME TAX CONSIDERATIONS
In the opinion of Carter, Ledyard & Milburn, for federal income tax
purposes, and in the opinion of [___________], for New Jersey state income tax
purposes, the transition bonds will constitute debt obligations of the seller.
JCP&L has received a private letter ruling from the Internal Revenue
Service regarding certain of the federal income tax aspects of the transactions
described above. Tax counsel have relied, in part, on that ruling in rendering
their opinion that transition bonds will be treated as debt of the seller. If
you purchase a transition bond, you agree to treat it as debt of the seller for
federal, state and local tax purposes.
ERISA CONSIDERATIONS
Pension plans and other investors subject to the Employee Retirement Income
Security Act of 1974, as amended (referred to as "ERISA"), may acquire the
transition bonds subject to specified conditions. The acquisition and holding of
the transition bonds could be treated as an indirect prohibited transaction
under ERISA. Accordingly, by purchasing the transition bonds, each investor
purchasing on behalf of a pension plan will be deemed to certify that the
investor's purchase and subsequent holding of the transition bonds would be
exempt from the prohibited transaction rules of ERISA. For further information
regarding the application of ERISA, see "ERISA CONSIDERATIONS" in this
prospectus.
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REPORTS TO HOLDERS OF THE TRANSITION BONDS
With respect to each series of transition bonds, on or prior to each
payment date, the trustee will deliver a statement prepared by the trustee to
each transition bondholder of that series. This statement will include, to the
extent applicable, the following information, as well as any other information
so specified in the related supplemental indenture, as to the transition bonds
of that series with respect to that payment date or the period since the
previous payment date:
(1) the amount to be paid to transition bondholders of that series and
class as principal;
(2) the amount to be paid to transition bondholders of that series and
class as interest;
(3) the projected transition bond principal balance and the actual
transition bond principal balance for that series and class as of that
payment date;
(4) the amount on deposit in the overcollateralization subaccount and the
required overcollateralization level, as of that payment date;
(5) the amount on deposit in the capital subaccount and the required level
of the capital subaccount, as of that payment date; and
(6) the amount, if any, on deposit in the reserve subaccount as of that
payment date.
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RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase transition bonds.
TRANSITION BONDHOLDERS MAY EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT OF
THE LIMITED SOURCES OF PAYMENT FOR THE TRANSITION BONDS AND LIMITED CREDIT
ENHANCEMENT
You may suffer payment delays or losses on your transition bonds if the
assets of the issuer are insufficient to pay the principal amount of the
transition bonds in full. The only source of funds for payments on the
transition bonds will be the assets of the issuer. These assets are limited to:
o the bondable transition property, including the right to charge,
collect and receive the transition bond charge and to adjust the
transition bond charge at least annually;
o the funds on deposit in the trust accounts held by the trustee;
o contractual rights under various contracts, including the sale
agreement and the contribution agreement; and
o any other credit enhancements described in a prospectus supplement.
Any floating rate transition bonds will also have the proceeds of any swap
agreement available as a payment source.
The transition bonds will not be insured or guaranteed by JCP&L, including
in its capacity as servicer, or by its parent, GPU, Inc., or by any of their
affiliates, the trustee or any other person or entity. Furthermore, it is not
anticipated that the transition bonds will have the benefit of any liquidity
facility or of any third-party credit enhancement, such as letters of credit or
insurance. Thus, you must rely for payment of the transition bonds solely upon
collections of the transition bond charge, funds on deposit in the trust
accounts held by the trustee and any other credit enhancement described in the
related prospectus supplement. See "JCP&L TRANSITION FUNDING LLC, THE ISSUER" in
this prospectus.
JUDICIAL, LEGISLATIVE OR REGULATORY ACTION
THAT MAY ADVERSELY AFFECT YOUR INVESTMENT
-----------------------------------------
THE LAW WHICH UNDERPINS THE TRANSITION BONDS MAY BE INVALIDATED
The bondable transition property is the creation of the Competition Act and
the BPU financing order issued pursuant to the Competition Act. The Competition
Act was adopted in February 1999. A court decision or a federal or state law
might overturn either the Competition
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Act or the BPU financing order. Because the transition bonds are a creation of
statute, any proceeding affecting the validity of the relevant underlying
legislative provisions could directly impact the transition bonds. For example,
if the provisions which establish that bondable transition property is presently
existing property were invalidated, the validity of the assets securing the
transition bonds would be compromised. As another example, if the provisions
which require the periodic transition bond charge adjustment process were
invalidated, the servicer would not be able to ensure that the issuer has
sufficient funds to make the scheduled payments on the transition bonds. Similar
legislation in other states has been challenged but not overturned as discussed
below.
There is uncertainty associated with investing in bonds payable from an
asset which depends on recently enacted legislation for its existence because of
the absence of any judicial or regulatory precedent implementing and
interpreting the legislation. Since the enactment of the Competition Act in
February 1999, there has been no lawsuit which has challenged its validity;
also, no lawsuit has challenged the validity of the BPU financing order, but a
financing order issued to another New Jersey utility is under appeal in New
Jersey state court. A future lawsuit may yet be filed and may be successful. See
"JCP&L'S RESTRUCTURING."
If a court were to determine that the relevant provisions of the
Competition Act or the BPU financing order are unlawful, invalid or
unenforceable in whole or in part, it could adversely affect the validity of the
transition bonds, the State of New Jersey's pledge against limitation,
alteration or impairment of the bondable transition property or the issuer's
ability to make distributions on the transition bonds, and may not trigger any
requirement for JCP&L to indemnify you. In that case, you could suffer a loss on
your investment in the transition bonds.
Electricity generation deregulation laws similar to the Competition Act
have been enacted in other states, including Pennsylvania, California, Illinois,
Massachusetts, Montana and Texas. The validity of similar legislation in other
states has been upheld in those states where judicial challenges were made.
While the issuer is not aware of any significant challenges to similar
legislation currently pending in other states, a court might yet nullify a
similar statute in another state in response to a future or pending claim. Such
a decision would not automatically invalidate the Competition Act or the related
BPU financing order, but it might give rise to a challenge to the Competition
Act. Therefore, legal activity in other states may indirectly affect the value
of your investment.
In Pennsylvania, three lawsuits have challenged the validity of state
legislation similar to the Competition Act. Two of these suits alleged that the
legislation was not validly enacted by the Pennsylvania legislature. A
Pennsylvania court has rejected these claims. The court's decisions in those
cases have not been appealed and the period for filing appeals has lapsed. The
third law suit asserted that the legislative provisions that allowed for the
recovery of a charge similar to New Jersey's transition bond charge violated the
Commerce Clause of the U.S. Constitution. The Pennsylvania courts rejected that
claim, and the U.S. Supreme Court denied a petition to review the case.
In California, a consumer advocacy group and others filed a petition to the
California Supreme Court asking that the court suspend the implementation of the
California Public Utility
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Commission's decision, which, among other items, permitted the recovery of a
utility's stranded costs. The California Supreme Court denied this petition.
Various consumer groups then filed a voter initiative which, among other things,
would have prohibited the collection of customer charges to pay for interest and
principal for debt instruments similar to transition bonds. In November of 1998,
only approximately 27% of the total votes cast were voted in favor of the
proposition. Although consumer groups have recently issued press releases
threatening legal action, no other legal action has taken place which threatens
the recovery of stranded costs in California.
In Massachusetts, a consumer advocacy group filed a voter initiative which
would have repealed the Commonwealth of Massachusetts' electricity deregulation
law. This law includes a provision allowing utilities to recover stranded costs
from consumers. In November of 1998, only approximately 35% of the total votes
cast were voted in favor of repealing the deregulation law. No other legal
action has taken place which threatens the recovery of stranded costs in
Massachusetts.
In Montana, there was an attempt to generate a voter initiative by
referendum to repeal the state's deregulation legislation. The petitioners,
however, failed to obtain the required number of signatures to place the
initiative on the November 1998 ballot.
In Illinois, there has been no legal activity which challenged the recovery
of stranded costs.
Neither the issuer, the seller, JCP&L Sub, JCP&L, nor any successor will
indemnify you for any changes in the law that may affect the value of your
transition bonds.
THE COMPETITION ACT MAY BE OVERTURNED BY THE FEDERAL GOVERNMENT WITHOUT FULL
COMPENSATION
At least one bill was introduced in the 105th Congress prohibiting the
recovery of stranded costs, and this prohibition could negate the existence of
bondable transition property. The 105th Congress adjourned without taking any
further action on that bill. As of the date hereof, no member of Congress had
introduced a bill in the 106th Congress that would affect the existence or value
of JCP&L's bondable transition property or the imposition of the transition bond
charge. No prediction can be made as to whether any future bills, that prohibit
the recovery of stranded costs, or securitized financing for the recovery of
these costs, will become law or, if they become law, what their final form or
effect will be. There is no assurance that the courts would consider this
preemption a "taking" from the transition bondholders. Moreover, even if this
preemption of the Competition Act and/or the BPU financing order by the federal
government were considered a "taking" under the U.S. Constitution for which the
government had to pay the estimated market value of the transferred bondable
transition property at the time of the taking, there is no assurance that this
compensation would be sufficient to pay the full amount of principal of and
interest on the transition bonds or to pay such amounts on a timely basis.
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FUTURE STATE LEGISLATIVE ACTION MAY INVALIDATE THE TRANSITION BONDS OR THEIR
UNDERLYING ASSETS
Unlike California, Massachusetts and some other states, the citizens of the
State of New Jersey do not have the constitutional right to adopt or revise laws
by initiative or referendum. Thus, absent an amendment of the Constitution of
the State of New Jersey, the Competition Act cannot be amended or repealed by
the electorate.
Under the Competition Act, the State of New Jersey has pledged not to
diminish the value of the bondable transition property. For a description of
this pledge, see "THE COMPETITION ACT -- JCP&L AND OTHER UTILITIES MAY
SECURITIZE STRANDED COSTS" in this prospectus. Despite this pledge, the
legislature of the State of New Jersey may attempt in the future to repeal or
amend the Competition Act in a manner which might limit or alter the bondable
transition property so as to reduce its value.
In the opinion of Berlack, Israels & Liberman LLP, counsel to JCP&L and the
issuer, with respect to applicable federal and state constitutional principles
relating to the impairment of contracts, the State of New Jersey could not,
absent a demonstration that such action was necessary to serve a significant and
legitimate public purpose, repeal or amend the Competition Act by means of the
legislative process, or take or refuse to take (through the BPU or otherwise)
any action required under its pledge described above, or take or refuse to take
any other action, if any such repeal or amendment or the action or inaction
would substantially impair the rights of the owners of the bondable transition
property or the transition bondholders or otherwise limit, alter, impair or
reduce the value or amount of the bondable transition property.
In addition, it may be possible for the New Jersey legislature to repeal or
amend the Competition Act without violating the State's pledge if the
legislature acts in order to serve a significant and legitimate public purpose,
such as protecting the public health and safety. Even if the legislature
provides you with an amount deemed to be just compensation, it may not be
sufficient for you to fully recover your investment. Any action of the New
Jersey legislature adversely affecting the bondable transition property or the
ability to collect transition bond charges may be considered a "taking" under
the United States or New Jersey Constitutions. In such event, the New Jersey
legislature would then be obligated to pay the estimated value of the bondable
transition property at the time of the taking. The issuer cannot assure you of
the likelihood or legal validity of any action of this type by the New Jersey
legislature, or whether the action would be considered a taking. As of the date
of this prospectus, the issuer is not aware of any pending legislation in the
New Jersey legislature that would affect any provisions of the Competition Act.
There can be no assurance that a repeal of or amendment to the Competition
Act will not be sought or adopted or that any action by the State of New Jersey
may not occur, any of which might constitute a violation of the State of New
Jersey's pledge and agreement with the transition bondholders. In any event,
costly and time-consuming litigation might ensue. Any litigation might adversely
affect the price and liquidity of the transition bonds and the dates of payments
of interest on and principal thereof and, accordingly, the weighted average
lives thereof. Moreover, given the lack of judicial precedent directly on point,
and the novelty of the security for the
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transition bondholders, the outcome of any litigation cannot be predicted with
certainty, and accordingly, no assurances can be made that transition
bondholders would not incur a loss of their investment.
JCP&L has agreed to take legal or administrative actions, including
instituting and provoking legal actions, as may be reasonably necessary to block
or overturn any attempts to cause a repeal, modification or supplement to the
Competition Act, the BPU financing order or the bondable transition property.
JCP&L has also agreed to resist proceedings of third parties, which, if
successful, would result in a breach of its representations concerning the
bondable transition property, the BPU financing order or the Competition Act.
See "THE CONTRIBUTION AGREEMENT" in this prospectus. However, there is no
assurance that JCP&L would be able to take any action or that any action JCP&L
is able to take would be successful.
None of the issuer, the seller, JCP&L Sub, JCP&L, or any successor will
indemnify you for any changes in the law that may affect the value of your
transition bonds.
THE BPU MAY TAKE ACTION WHICH REDUCES THE VALUE OF THE TRANSITION BONDS
Pursuant to the Competition Act, the BPU financing order issued to JCP&L
became irrevocable upon issuance and the BPU may not, directly or indirectly, by
any subsequent action, rescind or amend the BPU financing order or reduce or
impair the amount of bondable stranded costs authorized to be recovered through
the issuance of transition bonds under the BPU financing order. The BPU
nevertheless might attempt to revise or rescind any of its regulations or orders
in ways that ultimately have an adverse impact upon the bondable transition
property or the transition bond charge. Apart from the terms of the BPU
financing order, the BPU retains the power to adopt, revise or rescind rules or
regulations affecting JCP&L or a successor electric public utility. Any new or
amended regulations or orders by the BPU, for example, could affect the ability
of the servicer to collect the transition bond charge on a full and timely
basis. JCP&L has agreed to take legal or administrative actions, including
instituting and provoking legal actions, as may be reasonably necessary to block
or overturn any attempts to cause a repeal, modification or supplement to the
Competition Act, the BPU financing order or the bondable transition property.
JCP&L has also agreed to resist proceedings of third parties, which, if
successful, would result in a breach of its representations concerning the
bondable transition property, the BPU financing order or the Competition Act.
See "THE CONTRIBUTION AGREEMENT" in this prospectus. However, there is no
assurance that JCP&L would be able to take this action or that any action JCP&L
is able to take would be successful. Future BPU regulations or orders may affect
the credit rating of the transition bonds, their price or the rate of transition
bond charge collections and, accordingly, the amortization of transition bonds
and their weighted average lives. As a result, transition bondholders could
suffer a loss of their investment.
JCP&L, as servicer, is required to file at least annually with the BPU, on
behalf of the issuer, requests for adjustments of the transition bond charge.
These adjustments are intended to provide, among other things, for timely
payment of the transition bonds. The BPU may challenge JCP&L's calculation of
its proposed adjustments, which may cause delay, or may refuse to
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permit an adjustment to take effect on the grounds that the adjustment contains
a "manifest error." Under the BPU financing order, "manifest error" means an
arithmetic error evident on the face of the filing. Any such delay in the
implementation of the adjustment could cause a delay in the payments on the
transition bonds.
SERVICING RISKS
INACCURATE FORECASTING OR UNANTICIPATED DELINQUENCIES COULD RESULT IN
INSUFFICIENT FUNDS TO MAKE PAYMENTS ON THE TRANSITION BONDS.
Because the transition bond charge is assessed based on kilowatt hours of
electricity consumed by customers, a shortfall of payments arising from the
transition bond charge could result if the servicer inaccurately forecasts
electricity consumption or underestimates customer delinquencies or write-offs
when setting or adjusting the transition bond charge. A shortfall in transition
bond charge collections could result in shortfalls in payments of interest and
principal of the transition bonds, the lengthening of the weighted average life
of the transition bonds, or payments of principal and interest not being made at
all.
Inaccurate forecasting of electricity consumption by the servicer could
result from, among other things:
o warmer winters or cooler summers, resulting in less electricity
consumption than forecasted;
o general economic conditions being worse than expected, causing
customers to migrate from JCP&L's service territory or reduce their
electricity consumption;
o the occurrence of a natural disaster, such as a hurricane or blizzard,
unexpectedly disrupting electrical service and reducing consumption;
o problems with energy generation, transmission or distribution resulting
from a change in the market structure of the electric industry;
o large customers ceasing business or departing JCP&L's service
territory;
o customers consuming less electricity because of increased conservation
efforts; or
o large customers switching to self-generation of electric power without
being required to pay the transition bond charge under the Competition
Act. See "THE COMPETITION ACT" in this prospectus.
Inaccurate forecasting of delinquencies or write-offs by the servicer could
result from, among other things:
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o unexpected deterioration of the economy or the occurrence of a natural
disaster, causing greater write-offs than expected or forcing JCP&L or
a successor electric public utility to grant additional payment relief
to more customers than originally forecast;
o a change in law that makes it more difficult for JCP&L or a successor
electric public utility to disconnect nonpaying customers, or that
requires JCP&L or a successor electric public utility to apply more
lenient credit standards in accepting customers; or
o the introduction into the energy markets of less creditworthy third
party electric power suppliers who bill and collect payments arising
from the transition bond charge but who fail to remit customer charges
to the servicer in a timely manner. See "-- IT MAY BE MORE DIFFICULT TO
COLLECT THE TRANSITION BOND CHARGE FROM THIRD PARTY ELECTRIC POWER
SUPPLIERS THAN FROM JCP&L'S CUSTOMERS" in this prospectus.
UNCERTAINTIES ASSOCIATED WITH COLLECTING THE TRANSITION BOND CHARGE AND THE
UNPREDICTABILITY OF A DEREGULATED ELECTRICITY MARKET MAY REDUCE THE AMOUNT OF
FUNDS AVAILABLE FOR PAYMENTS ON THE TRANSITION BONDS
JCP&L had not previously calculated a transition bond charge for customers,
nor had it made all of the associated calculations and predictions which are
inherent in such calculation, before it made the calculations required in
connection with the BPU financing order and the issuance of transition bonds.
The predictions are based on primarily historical performance of customer energy
usage and collection of payments for which JCP&L has records available. These
usage and collection records, however, do not reflect customers' payment
patterns or energy usage in a competitive market, which is significant because
competition is being introduced now in New Jersey for the first time. These
records also do not reflect the introduction of consolidated billing by third
party electric power suppliers. Because this kind of billing has not yet been
introduced in New Jersey, there are potentially unforeseen factors in that
billing which may impact on the collection of payments. Therefore, the records
which JCP&L has to date may have limited value in calculating the initial
transition bond charge and the proposed transition bond charge adjustments.
Furthermore, the servicer does not have any experience administering the
transition bond charge on behalf of an independent issuer. Risks are associated
with the servicer's inexperience in calculating, billing and collecting the
transition bond charge and in managing customer payments on behalf of the
issuer.
YOUR INVESTMENT RELIES ON JCP&L OR A SUCCESSOR ACTING AS SERVICER OF THE
BONDABLE TRANSITION PROPERTY
JCP&L, as servicer, will be responsible for billing and collecting
transition bond charges from customers and from third party electric power
suppliers that bill and collect from customers and for filing requests with the
BPU to adjust this charge. If JCP&L ceased servicing the bondable transition
property, it might be difficult to find a successor servicer. Upon a servicer
default based upon the commencement of a case by or against the servicer under
federal
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bankruptcy law, the trustee and the issuer may be prevented from effecting a
transfer of servicing. A successor servicer may experience difficulties in
collecting transition bond charges, determining appropriate adjustments to
transition bond charges, terminating service to customers or otherwise taking
actions against customers for non-payment of their transition bond charges. If
JCP&L were to be replaced as servicer, any of these factors and others could
delay the timing of payments and may reduce the value of your investment. Also,
a change in servicer or the reclaiming of billing functions by the servicer from
any third party electric power supplier that has defaulted may cause billing
and/or payment arrangements to change, which may lead to a period of disruption
in which customers continue to remit payments according to the former
arrangement, resulting in delays in collection that could result in delays in
payments on your transition bonds. See "The Servicing Agreement" in this
prospectus.
Upon a servicer default because of a failure to make required remittances,
the issuer or the trustee would have the right to apply to the BPU for an order
of sequestration and payment of revenues arising from the bondable transition
property. However, federal bankruptcy law may prevent the trustee and the issuer
from applying to the BPU for such an order and the BPU from issuing or enforcing
this order. In either case of a servicer default, payments on the transition
bonds may be suspended. See "THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" in this prospectus.
BILLING AND COLLECTION PRACTICES MAY REDUCE THE AMOUNT OF FUNDS AVAILABLE FOR
PAYMENTS ON THE TRANSITION BONDS
The methodology of determining the amount of the transition bond charge the
issuer may impose on each customer is specified in the BPU financing order.
Thus, the issuer cannot change this methodology. However, JCP&L, as servicer,
may set its own billing and collection arrangements with each customer. For
example, to recover part of an outstanding electricity bill, JCP&L may agree to
extend a customer's payment schedule or to write off the remaining portion of
the bill. Also, JCP&L, or a successor to JCP&L as servicer, may change billing
and collection practices. Any change to billing and collection practices may
have an adverse or unforeseen impact on the timing and amount of customer
payments and may reduce the amount of transition bond charge collections and
thereby limit the issuer's ability to make scheduled payments on the transition
bonds. See "SERVICING OF THE BONDABLE TRANSITION PROPERTY -- HOW JCP&L FORECASTS
THE NUMBER OF CUSTOMERS AND THE AMOUNT OF ELECTRICITY USAGE" in this prospectus.
Similarly, the BPU may require changes to these practices. Any changes in
billing and collection regulation might adversely affect the billing terms and
the terms of remittances by third party electric power suppliers to the servicer
or make it more difficult for the servicer to collect the transition bond
charge. These changes may adversely affect the value of the transition bonds and
their amortization and, accordingly, their weighted average lives. See "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE" in this prospectus.
IT MAY BE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE FROM THIRD PARTY
ELECTRIC POWER SUPPLIERS WHO PROVIDE ELECTRICITY TO JCP&L'S CUSTOMERS
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In the future, customers may be billed by, and pay transition bond charges
to, third parties who supply them with electric power. These third party
electric power suppliers will be obligated to forward the amount billed in
respect of the transition bond charge to JCP&L, as servicer, regardless of
whether and to what extent these amounts are collected from customers. JCP&L
will have limited rights to collect transition bond charges directly from those
customers who receive their electricity bills from third party electric power
suppliers. If many customers elect to be billed by and receive aggregated
electricity bills from third party electric power suppliers, the issuer may have
to rely on a relatively small number of third party electric power suppliers to
remit the bulk of the transition bond charges from those customers. A remittance
default by a third party electric power supplier which collects from a large
number of customers would have a greater impact than a default by a single
customer and, therefore, would have a greater impact on transition bond charge
collections and, in turn, on the issuer's ability to make timely payments on the
transition bonds. Although third party electric power suppliers will be required
to post a deposit with JCP&L, as servicer, if they do not have a credit rating
of at least `Baa2' by Moody's Investors Service (referred to as Moody's) or
`BBB' by Standard & Poor's Ratings Services (referred to as S&P), there can be
no assurance that such deposit will be sufficient to compensate fully for a
remittance default by a third party electric power supplier.
JCP&L will not pay any shortfalls resulting from the failure of any third
party electric power supplier to forward billed transition bond charges to
JCP&L, as servicer. Additionally, there can be no assurance that third party
electric power suppliers will use the same customer credit standards as the
servicer. Therefore, it is possible that customers served by third party
electric power suppliers may have a higher rate of delinquencies and write-offs
than those served by JCP&L. Also, there can be no assurance that the servicer
will be able to mitigate credit risks relating to these third party electric
power suppliers in the same manner or to the same extent to which it mitigates
the risks relating to its customers.
The adjustment mechanism, the deposits required from certain customers and
third party electric power suppliers as a prerequisite to service or the ability
to do business, as applicable, and any other credit enhancement will be
available to compensate for a failure by a third party electric power supplier
to remit the billed transition bond charges to the servicer. However, the amount
of credit enhancement funds may not be sufficient to prevent a delay in payments
on the transition bonds. For example, in the event of the bankruptcy of a third
party electric power supplier, there is no assurance that a bankruptcy court
would permit the servicer to assume billing and collection responsibility for
sales by the third party electric power supplier; thus, shortfalls in the
payment of transition bond charges could result. See "THE BPU FINANCING ORDER
AND THE TRANSITION BOND CHARGE" in this prospectus.
JCP&L'S CUSTOMER PAYMENTS MAY DECLINE DUE TO CONFUSION
The transition bond charge is being introduced to customers for the first
time. Commercial and industrial customers receive bills with separate line items
showing charges for distribution, transmission and generation services, as well
as market transition, societal benefits and, when imposed, transition bond
charges. Residential customers receive bills showing some of these charges
bundled into a single line item. All customer bills will have a footnote stating
that a transition bond charge is being collected on behalf of the issuer. Any
change in customer
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billing and payment arrangements may result in customer confusion and the
misdirection or delay of payments, which could have the effect of causing delays
in transition bond charge collections. Any problems arising from new and
untested systems or any lack of experience on the part of the third party
electric power suppliers or other third parties with customer billing and
collections responsibilities could also cause delays in billing and collecting
the transition bond charge. These delays could result in shortfalls in
transition bond charge collections and, therefore, reduce the ability of the
issuer to make timely payments on the transition bonds.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT
CUSTOMERS IN WINTER
A winter moratorium prevents JCP&L from terminating service to certain
delinquent residential customers from November 15 of each year until at least
March 15 of the following year unless JCP&L has received special approval from
the BPU. As a result, JCP&L must provide service to such customers during this
period without recouping the transition bond charge from such customers. This
reduces the amount of transition bond charge collections available for payments
on the transition bonds, although the expected associated reduction in payments
would be factored into the transition bond charge adjustment. See "SERVICING OF
THE BONDABLE TRANSITION PROPERTY -- JCP&L MAINTAINS LIMITED INFORMATION ON ITS
CUSTOMERS' CREDITWORTHINESS" in this prospectus.
TECHNOLOGICAL CHANGE MAY MAKE ALTERNATIVE ENERGY
SOURCES MORE ATTRACTIVE AND REDUCE THE NUMBER OF
CUSTOMERS PAYING TRANSITION BOND CHARGES
----------------------------------------
The continuous process of technological development may result in the
introduction for an increasing number of customers of economically attractive
alternatives to purchasing electricity through JCP&L's transmission and
distribution facilities. Previously, only the largest industrial and
institutional users with large process steam requirements could use cogeneration
or self-generation installations cost-effectively. However, manufacturers of
self-generation facilities continue to develop smaller-scale, more
fuel-efficient generating units which can be cost-effective options for
customers with smaller electric energy requirements. Those customers may not
have to pay transition bond charges under provisions of the Competition Act.
Technological developments may allow greater numbers of customers to avoid
transition bond charges under such provisions, which may reduce the total number
of customers from which transition bond charges will be collected. A reduction
in the number of payers of transition bond charges could result in delays in or
a failure to make payments of interest on and principal of the transition bonds.
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THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
----------------------------------------------------------
JCP&L WILL COMMINGLE THE TRANSITION BOND CHARGE COLLECTIONS WITH OTHER REVENUES,
WHICH MAY OBSTRUCT ACCESS TO THE ISSUER'S FUNDS IN CASE OF BANKRUPTCY OF JCP&L
JCP&L will not segregate the transition bond charge collections from the
other funds it collects from its customers. The transition bond charge
collections will be segregated only after JCP&L makes payment to the trustee.
Except in limited circumstances, JCP&L will be required to remit
collections daily. Despite these requirements, JCP&L might fail to pay the full
amount of the transition bond charge collections to the trustee or might fail to
do so on a timely basis. This failure could materially reduce the value of your
investment.
The Competition Act provides that the rights of the issuer to the bondable
transition property are not affected by the commingling of these funds with
JCP&L's other funds. In a bankruptcy of JCP&L, however, a bankruptcy court might
rule that federal bankruptcy law takes precedence over the Competition Act and
does not recognize the right of the issuer to collections of the transition bond
charge that are commingled with other funds of JCP&L as of the date of
bankruptcy. If so, the collections of the transition bond charge held by JCP&L
as of the date of bankruptcy would not be available to pay amounts owing on the
transition bonds. In this case, the issuer would have a general unsecured claim
against JCP&L for those amounts. This scenario could cause material delays in
payment or losses on your transition bonds and could materially reduce the value
of your investment.
BANKRUPTCY OF JCP&L COULD RESULT IN LOSSES OR DELAYS IN
PAYMENTS ON THE TRANSITION BONDS
The Competition Act and the BPU financing order provide that as a matter of
New Jersey state law:
o bondable transition property, including the right to charge, collect
and receive the transition bond charge, constitutes presently existing
property for all purposes;
o JCP&L may sell, assign and otherwise transfer that property and JCP&L
or the issuer may pledge or grant a security interest in the property
as collateral for transition bonds; and
o a transfer of the bondable transition property from JCP&L to the
issuer, either directly or through one or more subsidiaries, is a true
sale or other absolute transfer of the bondable transition property,
not a pledge of the bondable transition property to secure a financing
by JCP&L.
See "THE COMPETITION ACT" in this prospectus. These three provisions are
important to maintaining payments on the transition bonds in accordance with
their terms during
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any bankruptcy of JCP&L. In addition, the transaction has been structured with
the objective of keeping the issuer separate from JCP&L in the event of a
bankruptcy of JCP&L.
A bankruptcy court generally follows state property law on issues such as
those addressed by the three provisions described above. However, a bankruptcy
court has authority not to follow state law if it determines that the state law
is contrary to a paramount federal bankruptcy policy or interest. If a
bankruptcy court in a JCP&L bankruptcy refused to enforce one or more of the
state property law provisions described above for this reason, the effect of
this decision on you as a transition bondholder would be similar to the
treatment you would receive in a JCP&L bankruptcy if the transition bonds had
been issued directly by JCP&L. A decision by the bankruptcy court that, despite
the separateness of JCP&L and the issuer, the two companies should be
consolidated for the purposes of the bankruptcy proceeding, would have a similar
effect on you as a transition bondholder. That treatment could cause material
delays in payment of, or losses on, your transition bonds and could materially
reduce the value of your investment. For example:
o the bankruptcy court could order the trustee to exchange the bondable
transition property for other property, which might be of lower value;
o tax or other government liens on JCP&L's property that arose after the
transfer of the bondable transition property to the issuer might
nevertheless have priority over the trustee's lien and might be paid
from transition bond charge collections before you receive payments on
the transition bonds;
o the trustee's lien might not be properly perfected in bondable
transition property collections that were commingled with other funds
JCP&L collects from its customers as of the date of JCP&L's bankruptcy,
or might not be properly perfected in all of the bondable transition
property, and the lien could therefore be set aside in the bankruptcy,
with the result that the transition bonds would represent only general
unsecured claims against JCP&L;
o the bankruptcy court might rule that the transition bond charge
collected by the servicer should be used to pay a portion of the cost
of providing electric service;
o the bankruptcy court might rule that the remedy provisions of the sale
agreement or the contribution agreement are unenforceable, leaving the
issuer with a claim of actual damages against JCP&L, which may be
difficult to prove;
o the trustee could not, without permission from the bankruptcy court
(which could be denied):
- exercise any remedies against JCP&L on your behalf;
- recover funds to repay the transition bonds;
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- use funds in the subaccounts under the indenture to make payments
on the transition bonds; or
- replace JCP&L as the servicer;
o the bankruptcy court might rule that neither the issuer's property
interest nor the trustee's lien extends to transition bond charge
collections in respect of electricity consumed after the commencement
of JCP&L's bankruptcy case, with the result that the transition bonds
would represent only general unsecured claims against JCP&L;
o neither JCP&L nor the issuer may be obligated to make any payments on
the transition bonds during the pendency of the bankruptcy case; or
o JCP&L may be able to alter the terms of the transition bonds as part of
its plan of reorganization.
Furthermore, if JCP&L enters into bankruptcy, it may be permitted to stop acting
as servicer. See "HOW A BANKRUPTCY OF THE ISSUER, THE SELLER, JCP&L SUB OR THE
SERVICER MAY AFFECT YOUR INVESTMENT" in this prospectus.
BANKRUPTCY OF THIRD PARTY ELECTRIC POWER SUPPLIER COULD RESULT IN LOSSES OR
DELAYS IN PAYMENTS ON THE TRANSITION BONDS
In the event of the bankruptcy of a third party electric power supplier,
there could be shortfalls in the payments of the transition bond charges to the
servicer, which could reduce the ability of the issuer to make timely payments
on the transition bonds.
A SEQUESTRATION ORDER FOR BONDABLE TRANSITION PROPERTY IN CASE OF DEFAULT MIGHT
NOT BE ENFORCEABLE IN BANKRUPTCY
If JCP&L defaults on its obligations as servicer, the Competition Act
allows the BPU or any court of competent jurisdiction to order the sequestration
and payment of all transition bond charge collections to the transition
bondholders. The Competition Act states that this BPU or court order would be
effective even if made while JCP&L or its successor is in bankruptcy. However,
federal bankruptcy law may prevent the BPU from issuing or enforcing such an
order. The indenture requires that the trustee request an order from the
bankruptcy court to permit the BPU to issue and enforce this order. However, the
bankruptcy court may deny the request. In this scenario, the issuer would lose
access to the transition bond charge collections and thereby lose its source of
funds for scheduled payments on the transition bonds.
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OTHER RISKS ASSOCIATED WITH
AN INVESTMENT IN THE TRANSITION BONDS
-------------------------------------
ABSENCE OF SECONDARY MARKET FOR TRANSITION BONDS COULD LIMIT YOUR ABILITY TO
RESELL TRANSITION BONDS
The underwriters for the transition bonds may assist in resales of the
transition bonds, but they are not required to do so. A secondary market for the
transition bonds may not develop. If it does develop, it may not continue or it
may not be sufficiently liquid to allow you to resell any of your transition
bonds.
THE ISSUER MAY ISSUE ADDITIONAL SERIES OF TRANSITION BONDS THAT WILL SHARE
AVAILABLE CREDIT ENHANCEMENT AND WHOSE HOLDERS MAY HAVE INTERESTS THAT CONFLICT
WITH YOURS
The issuer may issue other series of transition bonds without your prior
review or approval. These series may include terms and provisions which would be
unique to that particular series. See "THE TRANSITION BONDS" and "THE INDENTURE"
in this prospectus. In addition, some matters may require the vote of the
holders of all series and classes of transition bonds, voting as a single class.
Your interests in these votes may conflict with the interests of the transition
bondholders of another series or of another class. Thus, these votes could
result in an outcome that is materially unfavorable to you.
In the event that other series of transition bonds are issued, amounts
deposited with respect to your series of transition bonds, including amounts in
the capital subaccount and the overcollateralization subaccount, may be used to
pay amounts relating to those other series. Payment dates may not be the same
for all series, and available credit enhancement may be exhausted on a payment
date preceding that applicable to your transition bonds.
THE RATINGS HAVE A LIMITED FUNCTION AND THEY ARE NO INDICATION OF THE EXPECTED
RATE OF PAYMENT OF PRINCIPAL OF THE TRANSITION BONDS
The transition bonds will be rated by at least two nationally recognized
statistical rating organizations (referred to as the "rating agencies"). The
ratings are limited to analyzing the probability that the issuer will repay the
total principal amount of the transition bonds at final maturity and will make
timely interest payments. The ratings do not assess the speed at which the
issuer will repay the principal of the transition bonds. Thus, the issuer may
repay the principal of your transition bonds earlier or later than you expect,
which may materially reduce the value of your investment. See "RATINGS FOR THE
TRANSITION BONDS" in this prospectus.
THE OBLIGATIONS UNDER THE CONTRIBUTION AGREEMENT TO INDEMNIFY THE ISSUER OR
TRUSTEE FOR A BREACH OF A REPRESENTATION OR WARRANTY MAY NOT BE SUFFICIENT TO
PROTECT YOUR INVESTMENT
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Under the contribution agreement, JCP&L undertook obligations to JCP&L Sub,
which assigned these obligations to the seller. The seller, in turn, has
assigned these obligations, as well as its own obligations under the
contribution agreement, to the issuer. As a result, if JCP&L breaches a
representation, warranty or covenant in the contribution agreement, JCP&L is
ultimately obligated to indemnify the issuer and the trustee for any
liabilities, obligation, claims, actions, suit or payments resulting from that
breach, as well as any reasonable costs and expenses incurred. In addition,
JCP&L is obligated to indemnify the issuer and the trustee for principal and
interest on the transition bonds not paid when scheduled to be paid in
accordance with their terms and the amount of any deposits to the collection
account required to have been made which are not made when so required as a
result of a breach of a representation, warranty or covenant of JCP&L. JCP&L
will not be obligated to repurchase the bondable transition property in the
event of a breach of any of its representations, warranties or covenants
regarding the bondable transition property. Neither the trustee nor the
transition bondholders will have the right to accelerate payments on the
transition bonds as a result of a breach. The amount of any indemnification paid
by JCP&L may not be sufficient for you to recover your transition bond
investment. If JCP&L becomes obligated to indemnify transition bondholders, the
ratings on the transition bonds will likely be downgraded since transition
bondholders will be unsecured creditors of JCP&L with respect to those
indemnification amounts. See "The Contribution Agreement -- JCP&L'S OBLIGATION
TO INDEMNIFY THE ISSUER AND THE TRUSTEE AND TO TAKE LEGAL ACTION" in this
prospectus.
YOU MAY HAVE TO REINVEST PRINCIPAL OF YOUR TRANSITION BONDS AT A LOWER RATE OF
RETURN BECAUSE OF AN OPTIONAL REDEMPTION OF BONDS.
As described more fully under "Description of the Transition Bonds -
Optional Redemption," the issuer may redeem any series of transition bonds on
any payment date if, after giving effect to payments that would otherwise be
made on that payment date, the outstanding principal balance of that series of
transition bonds has been reduced to less than 5% of that series' initial
principal amount. In addition, the issuer may redeem a series of transition
bonds if and to the extent provided in the related prospectus supplement.
Redemption of a series of transition bonds will result in a shorter than
expected weighted average life for that series. Redemption may also adversely
affect the yield to maturity of the transition bonds redeemed. The issuer cannot
predict whether any series of transition bonds will be redeemed. Future market
conditions may require you to reinvest the proceeds of a redemption at a lower
rate than the rate you receive on the transition bonds.
ADDITIONAL RISKS OF FLOATING RATE BONDS.
If the issuer issues floating rate transition bonds, it will enter into a
swap agreement pursuant to which interest will be paid on a floating rate basis.
Any swap agreement will bear the risks of the creditworthiness of the swap
counterparty. The issuer will terminate the swap agreement if the swap
counterparty defaults or if its credit rating falls below specified levels and
the swap agreement is not assigned to a replacement swap counterparty satisfying
specified ratings criteria. Upon any swap termination event or event of default,
the interest rate payable with respect to the floating rate transition bonds
will convert permanently to the fixed swap rate payable to the swap
counterparty, which may be substantially less than the rate otherwise
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payable on the floating rate transition bonds. A conversion to a fixed interest
rate may adversely affect both the liquidity and the market value of the
floating rate transition bonds.
RISKS ASSOCIATED WITH THE USE OF CREDIT ENHANCEMENTS, HEDGES OR SWAP
TRANSACTIONS.
The issuer may enter into certain forms of credit enhancement, interest
rate swaps or hedge arrangements with respect to a series or class of floating
rate transition bonds that entail certain kinds of risks. The applicable
prospectus supplement will contain the risk factors, if any, associated with any
applicable credit enhancement, interest rate swap or hedge arrangement.
YOU MIGHT RECEIVE PRINCIPAL PAYMENTS LATER, OR IN LIMITED CIRCUMSTANCES,
EARLIER, THAN YOU EXPECTED.
The amount and the rate of collection of transition bond charges that the
servicer will collect from each customer class will partially depend on actual
electricity usage and the amount of delinquencies and write-offs for that
customer class. The amount and the rate of collection of transition bond
charges, together with the transition bond charge adjustments described above,
will generally determine whether there is a delay in the scheduled repayments of
principal of the transition bonds. If the servicer collects transition bond
charges at a slower rate than expected from any customer class, it may have to
request adjustments of the transition bond charges. If those adjustments are not
timely and accurate, you may experience a delay in payments of principal and
interest or a material decrease in the value of your investment. If there is an
acceleration of any series of transition bonds before maturity, all classes
within that series will be paid pro rata. Therefore, some classes may be paid
earlier and some classes may be paid later than expected. Unless there is a
redemption or acceleration of the transition bonds before maturity, the
transition bonds will not be retired earlier than scheduled. If there is a
shortfall in the amount necessary to make principal payments that are due and
payable, including upon an acceleration following an event of default, the
trustee will distribute principal pro rata among the series and classes of
transition bonds in proportion to the amount of principal due and payable for
each series or class. If there is a shortfall in the amount necessary to make
scheduled principal payments, the trustee will distribute principal pro rata
among the series and classes in proportion to the amount scheduled to be paid
for each series or class.
FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus and the related prospectus
supplement concerning expectations, beliefs, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts, are
forward-looking statements within the meaning of the federal securities laws.
Although JCP&L and the issuer believe that the expectations and the underlying
assumptions reflected in these statements are reasonable, there can be no
assurance that these expectations will prove to have been correct. The
forward-looking statements involve a number of risks and uncertainties and
actual results may differ materially from the results discussed in the
forward-looking
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statements. The following are among the important factors that could cause
actual results to differ materially from the forward-looking statements:
o state and federal legal or regulatory developments;
o national or regional economic conditions;
o market demand and prices for energy;
o weather variations affecting customer energy usage;
o the effect of continued electric industry restructuring and general
industry trends;
o operating performance of JCP&L's facilities;
o the payment patterns of customers including the rate of delinquencies
and the accuracy of the collections curve; and
o system conditions.
Any forward-looking statements should be considered in light of these
important factors and in conjunction with JCP&L's other documents on file with
the Securities and Exchange Commission (referred to as the "SEC").
New factors that could cause actual results to differ materially from those
described in forward-looking statements emerge from time to time. It is not
possible for JCP&L or the issuer to predict all of these factors, or the extent
to which any factor or combination of factors may cause actual results to differ
from those contained in any forward-looking statement. Any forward-looking
statement speaks only as of the date on which the statement is made and neither
JCP&L nor the issuer undertakes any obligation to update the information
contained in the statement to reflect subsequent developments or information.
JERSEY CENTRAL POWER & LIGHT COMPANY
JCP&L, a public utility furnishing electric service wholly within the State
of New Jersey, is a subsidiary of GPU, Inc., a holding company registered under
the Public Utility Holding Company Act of 1935. JCP&L provides retail electric
service within a territory located in northern, western and east central New
Jersey having a population of approximately 2.6 million. JCP&L's principal
executive offices are located at 2800 Pottsville Pike, Reading, Pennsylvania
19605, and its telephone number is (610) 929-3601.
During 1999, residential sales accounted for about 46% of JCP&L's operating
revenues from customers and 42% of kilowatt hour sales to customers; commercial
sales accounted for about 40% of JCP&L's operating revenues from customers and
40% of kilowatt hour sales to customers; industrial sales accounted for about
13% of JCP&L's operating revenues from customers and 17% of kilowatt hour sales
to customers; and sales to rural electric cooperatives,
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municipalities (primarily for street and highway lighting) and others accounted
for about 1% of JCP&L's operating revenues from customers and less than 1% of
kilowatt hour sales to customers. The revenues derived from the 25 largest
customers in the aggregate accounted for approximately 9% of operating revenues
from customers for the year 1999. JCP&L also makes interchange and spot market
sales of electricity to other utilities.
The electric generating and transmission facilities of JCP&L and its
affiliates, Pennsylvania Electric Company and Metropolitan Edison Company
(collectively doing business as "GPU Energy"), are physically interconnected and
are operated as a single integrated and coordinated system. The transmission
facilities of the integrated system are physically interconnected with
neighboring nonaffiliated utilities in Pennsylvania, New Jersey, Maryland, New
York and Ohio. JCP&L is a member of the Pennsylvania-New Jersey-Maryland
Interconnection ("PJM") and the Mid-Atlantic Council, an organization providing
coordinated review of the planning by utilities in the PJM area. The
interconnection facilities are used for substantial capacity and energy
interchange and purchased power transactions as well as emergency assistance.
WHERE YOU CAN FIND MORE INFORMATION
JCP&L files annual, quarterly and current reports and other information
with the SEC under File No. 1-3141. The issuer has filed with the SEC a
registration statement under the Securities Act of 1933 ("Securities Act") with
respect to the transition bonds. This prospectus, which forms a part of the
registration statement, and any prospectus supplement describe the material
terms of some documents filed as exhibits to the registration statement.
However, this prospectus and any prospectus supplement do not contain all of the
information contained in the registration statement and its exhibits. Any
statements contained in this prospectus or any prospectus supplement concerning
the provisions of any document filed as an exhibit to the registration statement
or otherwise filed with the SEC are not necessarily complete, and in each
instance reference is made to the copy of the document so filed.
The registration statement and other SEC filings are available to the
public over the Internet at the SEC's web site at http://www.sec.gov. You may
also read and copy any of these SEC filings at the SEC's public reference room
in Washington, D.C. located at 450 Fifth Street, N.W. Please call the SEC at
1-800-SEC-0330 for further information about the operation of the public
reference room. Some of JCP&L's securities are listed on the New York Stock
Exchange, and such reports and other information can also be inspected and
copied at the offices of such exchange on the 7th Floor, 20 Broad Street, New
York, New York. JCP&L also provides information through its website at .
The SEC allows the issuer to "incorporate by reference" into this
prospectus the information JCP&L or the issuer files with it, which means that
the issuer can disclose important information to you by referring you to those
documents. The information incorporated by reference is an important part of
this prospectus and should be read with the same care. Information that JCP&L or
the issuer files later with the SEC under the Securities Exchange Act of 1934
("Exchange Act") will automatically update and supersede this information. JCP&L
or the issuer incorporates by reference the documents listed below and any
future filings (including those made after the initial filing of the
registration statement and prior to effectiveness) JCP&L
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or the issuer makes with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act until all of the transition bonds described in this prospectus are
sold.
o JCP&L's Annual Report on Form 10-K for the year ended December 31,
1998;
o JCP&L's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1999, June 30, 1999 and September 30, 1999; and
o JCP&L's Current Reports on Form 8-K dated April 16, 1999, May 26, 1999,
August 5, 1999, September 15, 1999, October 19, 1999, November 5, 1999,
November 18, 1999, December 2, 1999 and December 27, 1999.
You may request a free copy of these filings by writing or telephoning
JCP&L at the following address: Jersey Central Power & Light Company, 2800
Pottsville Pike, Reading, Pennsylvania 19605, attention: Secretary. The
telephone number is (610) 929-3601.
THE COMPETITION ACT
The Competition Act, signed into law in February 1999, provides, among
other things, for the restructuring of the electric utility industry in New
Jersey. The Competition Act requires the unbundling of electric services into
separate generation, transmission and distribution services with open retail
competition for generation services. While electric utilities will continue to
provide transmission and distribution services, the Competition Act authorizes
third party electric power suppliers licensed by the BPU to provide electric
generation services to retail customers. Under the Competition Act, third party
electric power suppliers are subject to some limited financial and other
requirements and some customer protection requirements, but are generally not
regulated by the BPU. Electric distribution and transmission services will
remain regulated.
Even with the enactment of the Competition Act, the BPU will continue to
regulate aspects of the electric industry in New Jersey with respect to electric
distribution companies. The BPU will also establish guidelines governing
customer billing and collection, metering and disclosure requirements applicable
to third party electric power suppliers participating in the new market in New
Jersey.
RECOVERY OF STRANDED COSTS IS ALLOWED FOR JCP&L AND OTHER NEW JERSEY UTILITIES
The Competition Act allows utilities an opportunity to recover their
stranded costs. Stranded costs are (1) the amount by which the net cost of the
electric public utility's electric generating assets or electric power purchase
contracts, which traditionally would be recoverable in a regulated environment,
exceeds the market value of those assets or contracts in a competitive supply
marketplace, as determined by the BPU, and (2) the costs of buydowns or buyouts
of power purchase contracts. The Competition Act also permits the recovery of
restructuring-related costs which the BPU approves as appropriate for recovery.
As a mechanism to recover these stranded costs, the Competition Act provides for
the imposition and collection of a transition
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bond charge on customers' bills. Because the transition bond charge is a
usage-based charge based on access to the utility's transmission and
distribution system, the customers will be assessed regardless of whether the
customers purchase electricity from the utility or a third party electric power
supplier, except as described under "JCP&L AND OTHER UTILITIES MAY SECURITIZE
STRANDED COSTS -- Customers Cannot Avoid Paying the Transition Bond Charge."
The Competition Act requires the BPU to review periodically any market
transition charge used to recover stranded costs. This review will ensure that
the utility imposing the charge will not collect charges which exceed its actual
stranded costs. Any periodic review of the market transition charge will not
affect the transition bond charge assessed to pay the transition bonds. See
"JCP&L'S RESTRUCTURING" in this prospectus.
JCP&L AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS
The Recovery of Stranded Costs May be Facilitated by the Issuance of
Transition Bonds. The Competition Act authorizes the BPU to issue "bondable
stranded costs rate orders" approving, among other things, the issuance of
transition bonds to recover bondable stranded costs and related expenses of an
electric public utility. A utility, a direct or indirect finance subsidiary of a
utility or a third-party assignee of a utility may issue transition bonds. Under
the Competition Act, proceeds of transition bonds are required to be used to
reduce the utility's stranded costs through the retirement of its debt or
equity, or both. Transition bonds are secured by and payable from bondable
transition property and may have an expected amortization schedule of up to 15
years. The BPU financing order allows the legal final maturity of the transition
bonds issued by the issuer to extend to 17 years from the date of issuance of
the transition bonds.
The Competition Act contains a number of provisions designed to facilitate
the securitization of stranded costs and related expenses.
A Bondable Stranded Costs Rate Order is Irrevocable. Under the Competition
Act, bondable transition property is created by the issuance by the BPU of a
bondable stranded costs rate order, such as the BPU financing order. The
Competition Act provides that each bondable stranded costs rate order, including
the BPU financing order, will become irrevocable upon issuance and effectiveness
of the order. Upon the transfer of the bondable transition property to an
assignee, such as the issuer, and the receipt by the utility of consideration
for the sale of the transition bonds, the bondable stranded costs rate order,
the transition bond charge and the bondable transition property become a vested,
presently existing property right, vested ab initio in the assignee.
Under the Competition Act, neither the BPU nor any other governmental
entity has the authority, directly or indirectly, legally or equitably, to
rescind, alter, repeal, modify or amend a bondable stranded costs rate order, to
revalue, re-evaluate or revise the amount of bondable stranded costs, to
determine that the transition bond charge or the revenues required to recover
bondable stranded costs are unjust or unreasonable, or in any way to reduce or
impair the value of bondable transition property, nor will the amount of
revenues from the transition bond charge
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be subject to reduction, impairment, postponement or termination. In addition,
under the Competition Act, the State of New Jersey pledges and agrees with the
holders of the transition bonds, and with any owner or assignee of bondable
transition property, or with any financing entity, such as the issuer, not to
limit, alter or impair the bondable transition property or the other rights
vested in an electric public utility or any assignee or pledgee of the utility
or any financing entity or vested in the holders of any transition bonds
pursuant to the bondable stranded costs rate order until the transition bonds
and any interest thereon, plus the cost of any credit enhancement, reserves,
servicing fees and other expenses and any acquisition or redemption premium, if
any, are fully paid and discharged. In addition, the State pledges and agrees in
the Competition Act that it will not in any way limit, alter, impair or reduce
the value or amount of the bondable transition property approved under the
bondable stranded costs rate order except as contemplated by the periodic
adjustments to the transition bond charge authorized by the Competition Act. See
"-- The Transition Bond Charge is Adjusted Periodically" below. See also "RISK
FACTORS -- JUDICIAL, LEGISLATIVE OR REGULATORY ACTION THAT MAY ADVERSELY AFFECT
YOUR INVESTMENT" in this prospectus. A bondable stranded costs rate order does
not constitute a debt or liability of the State, nor does it constitute a pledge
of the full faith and credit of the State. The issuance of transition bonds does
not, directly, indirectly or contingently, obligate the State to levy or pledge
any form of taxation or make any appropriation for their payment.
The Transition Bond Charge is Adjusted Periodically. The Competition Act
requires each bondable stranded costs rate order to provide for mandatory
adjustment of the transition bond charge, at least once a year, upon petition of
the electric public utility or its assignee or financing party. Such adjustments
are formula-based to ensure receipt of revenues sufficient to provide for the
full recovery of bondable stranded costs, including, without limitation, the
timely payment of the principal of, and interest and acquisition or redemption
premium on, the transition bonds in accordance with the expected amortization
schedule. JCP&L will agree in the servicing agreement with the issuer to file
with the BPU each proposed adjustment calculated in accordance with the formula.
Customers Cannot Avoid Paying the Transition Bond Charge. The Competition
Act provides that the transition bond charge is "non-bypassable", which means
that the charge will be payable by all of JCP&L's customers, even if those
customers elect to purchase electricity from a third party electric power
supplier. See "SUMMARY OF TERMS -- THE COLLATERAL" in this prospectus for a
description of JCP&L's customers.
The Competition Act Provides a Procedure for Perfecting a Transfer of
Bondable Transition Property and for Perfecting the Transition Bonds' Lien on
Bondable Transition Property. The Competition Act provides that a transfer of
bondable transition property will be perfected against any third party when:
o the BPU has issued its bondable stranded costs rate order with respect
to such bondable transition property and such order is effective;
o the agreement to transfer the property has been executed and delivered
by the electric public utility or its assignee; and
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o a financing statement with respect to the transfer has been filed in
accordance with the New Jersey Uniform Commercial Code.
The Competition Act provides that security interests in the bondable
transition property are perfected only by means of a separate filing under the
New Jersey Uniform Commercial Code. Upon perfection, a security interest under
the Uniform Commercial Code attaches to bondable transition property, whether or
not the revenues or proceeds thereof have accrued. The Competition Act provides
that priority of security interests in bondable transition property will not be
defeated or adversely affected by:
o commingling of revenues received from transition bond charge
collections with other funds of the utility or its assignee; or
o the periodic adjustment of the transition bond charge under the
Competition Act.
The Competition Act Characterizes the Transfer of Bondable Transition
Property as a Sale or Other Absolute Transfer. The Competition Act provides that
a transfer by the utility or an assignee of bondable transition property will be
treated as a sale or other absolute transfer of the transferor's right, title
and interest and not as a borrowing secured by the bondable transition property
if the parties expressly state in governing documents that a transfer is to be a
sale or other absolute transfer. The characterization of the transfer as a sale
is not affected or impaired by the fact that:
(1) the assignor retains or acquires a pari passu equity interest in the
bondable transition property or the fact that only a portion of the
bondable transition property is transferred;
(2) the assignor retains or acquires a subordinated equity interest or
other credit enhancement provisions or terms commensurate with market
practices;
(3) the electric public utility acts as collector or servicer of the
related transition bond charge;
(4) the assignor retains bare legal title to the bondable transition
property for servicing or supervising services and collections relating
to the bondable transition property; or
(5) the transfer is treated as a financing for federal, state or local tax
purposes or financial accounting purposes.
See "RISK FACTORS -- THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" in this prospectus.
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JCP&L'S RESTRUCTURING
The Stipulation and Restructuring Order. On April 14, 1999, JCP&L and a
number of other parties filed a stipulation with the BPU, detailing a proposal
for JCP&L's implementation of full customer choice under the Competition Act.
The parties to the stipulation agreed, among other things, not to oppose a
financing order to be issued by the BPU or the sale of transition bonds to
implement securitization in any judicial or regulatory forum. An alternative
joint proposal was submitted by the Division of the Ratepayer Advocate and
others in opposition to the stipulation. The BPU found the stipulation submitted
by JCP&L, subject to certain modifications, to be a reasonable framework for
resolution of the proceedings and issued its summary order, dated May 24, 1999.
Its more detailed decision and order was issued on _____, 2000 and is referred
to as the restructuring order.
In the restructuring order, the BPU authorized JCP&L to issue up to $____
million of transition bonds to recover up to $____ million in stranded costs
plus up to $___ million in transaction costs and related expenses of the
financing. In addition, the BPU authorized the imposition of a charge to
recover, through a market transition charge, federal and state taxes associated
with the collection of the transition bond charge.
JCP&L Unbundled its Electric Rates. JCP&L unbundled its retail electric
rates on August 1, 1999 into charges for distribution, transmission and
generation services, as well as market transition and societal benefits charges.
Upon issuance of transition bonds, there will also be a transition bond charge.
Residential customers receive bills showing some of these charges combined into
a single line item. Commercial and industrial customers receive bills with
separate line items for each of these charges. All customer bills will have a
footnote stating that a transition bond charge is being collected on behalf of
the issuer. If a customer chooses a third party electric power supplier for
generation services, the customer may receive separate billings for those
generation services directly from the third party electric power supplier or it
may receive combined billings for all charges, either from JCP&L or, subject to
further BPU action, from the third party electric power supplier pursuant to an
agreement between JCP&L and the third party electric power supplier. If the
third party electric power supplier bills the combined charges, it must remit to
JCP&L the amount it bills to customers on behalf of JCP&L. See "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE BPU FINANCING ORDER -
JCP&L Must Allow Other Entities to Provide Metering and Billing Services." JCP&L
has not as yet entered into any arrangements with third party electric power
suppliers for billings and collections.
JCP&L May Collect a Societal Benefits Charge. Under the Competition Act, an
electric public utility is permitted, with BPU approval, to collect a
non-bypassable societal benefits charge from its customers to recover
o nuclear plant decommissioning costs;
o demand side management program costs;
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o customer education program costs;
o certain environmental remediation costs; and
o previously approved social programs costs such as the costs of programs
that assist customers unable to pay their utility bills in full and on
time.
The BPU restructuring order provided that JCP&L may impose a societal benefits
charge commencing August 1, 1999.
Reduction in JCP&L's Electric Rates. Pursuant to the BPU restructuring
order, JCP&L's rates for generating, transmitting and distributing electric
power to its customers were reduced on August 1, 1999 by 5% from rates in effect
on April 30, 1997, a portion of which reduction reflects the anticipated savings
from securitization. There will be additional rate reductions of 1% on August 1,
2000, 2% on August 1, 2001 and 3% on August 1, 2002, providing an overall rate
reduction from rates in effect on April 30, 1997 of 11%, regardless of the
amount of reduction achieved from securitization. JCP&L's rates will not be
subject to any statutory cap after July 31, 2003.
Third Party Electric Power Suppliers. Pursuant to the Competition Act and
the BPU restructuring order, customers may choose to purchase power from
alternative third party electric power suppliers and later return to JCP&L as
their supplier of basic generation service at least until July 31, 2002, after
which date JCP&L is authorized to bid out this responsibility to third parties.
Any third party electric power supplier will be required to provide the servicer
with total monthly kilowatt hour usage information for each customer in a timely
manner for the servicer to fulfill its obligations.
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
THE BPU FINANCING ORDER
JCP&L's Petition and the BPU Financing Order. On August 25, 1999, JCP&L
filed a petition with the BPU, which petition was amended on December 14, 1999,
requesting the issuance by the BPU of a bondable stranded costs rate order under
the Competition Act to allow JCP&L to recover bondable stranded costs relating
to its Oyster Creek nuclear generating station, plus associated transaction
costs and the cost of retiring equity and debt securities of JCP&L. These costs
are recoverable through the issuance of transition bonds and the imposition of a
transition bond charge. In response to the petition the BPU issued its financing
order on _____, 2000.
The BPU Authorized JCP&L to Transfer Bondable Transition Property and to
Issue Transition Bonds. The BPU financing order authorizes the transfer of the
bondable transition property described herein and the issuance of transition
bonds in an aggregate principal amount not to exceed $____ million, secured by
bondable transition property. The transition bonds may have a legal final
maturity date not later than 17 years from the date of issuance.
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The final structure, pricing and other terms of the transition bonds will
be subject to approval of the BPU or its designee. This approval will be
obtained prior to the sale of the transition bonds.
The BPU Authorized JCP&L to Impose the Transition Bond Charge. Under the
BPU financing order, the BPU irrevocably authorizes JCP&L to impose, meter,
charge, bill, collect and receive from customers, the non-bypassable transition
bond charge in an amount sufficient to recover the principal amount of
transition bonds in accordance with an expected amortization schedule and
interest thereon, plus an amount sufficient to provide for any credit
enhancement, to fund any reserves, and to pay acquisition or redemption
premiums, if any, servicing fees and other expenses relating to the transition
bonds.
The BPU financing order also grants JCP&L, as servicer, the authority to
make "non-routine" filings for adjustments of the transition bond charge. This
would permit filings to be made to accommodate changes in the formula specified
in the BPU financing order for the mandatory periodic adjustments which JCP&L
deems appropriate to remedy a significant and recurring variance between actual
and expected transition bond charge collections. Any such filing is required to
be made at least 90 days prior to the proposed effective date and would be
subject to BPU approval.
The transition bond charge will be a uniform non-bypassable per kilowatt
hour charge assessed against customers on their bills, regardless of customer
rate class, as part of JCP&L's regular billing. JCP&L will set the initial per
kilowatt hour transition bond charge, based upon the formula approved in the BPU
financing order. Upon each adjustment of the transition bond charge or the
issuance of an additional series of transition bonds, the adjusted transition
bond charge will be assessed in the same manner.
The transition bond charge will be pro-rated in the case of the first bill
after issuance of a series of transition bonds to account for any partial month
since the date of issuance. For instance, if a particular series' issuance date
is August 15, bills that include current charges for services provided before
August 15 will not be assessed the transition bond charge for the period prior
to August 15, with respect to that series.
The initial transition bond charge will be calculated on the basis of:
o the issuance of $ million of transition bonds;
o the projected total payments required in relation to the transition
bonds during the period commencing on the date of issuance of the
transition bonds and ending ; and
o the estimated amount of kilowatt hours of electricity to be delivered,
billed and collected during that period.
The periodic adjustments to the transition bond charge are designed to
ensure that transition bond charge collections are not more or less than the
amount necessary to meet all of the required payments in relation to the
transition bonds and related costs and expenses and to
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<PAGE>
maintain the required balances in the overcollateralization subaccount and the
capital subaccount. In requesting periodic adjustments, the servicer is required
to take into account updated projections of consumption levels and timing of
collections and any amounts held in the reserve subaccount.
JCP&L May Be Required to Allow Other Entities to Provide Metering and
Billing Services. Under the Competition Act, the BPU may establish specific
standards for metering, billing and other activities by third party electric
power suppliers participating in the new market in New Jersey. In order to
qualify to serve as a third party electric power supplier, an electric supplier
must maintain at least a `BBB' or the equivalent long term unsecured credit
rating from Moody's or S&P, or maintain with the servicer a cash deposit or
comparable security equal to two months' maximum estimated collections of all
charges payable to JCP&L. The BPU financing order allows qualified third party
electric power suppliers, approved by the BPU, to bill and collect the
transition bond charge on behalf of the issuer. In doing so, third party
electric power suppliers must comply with all applicable BPU billing and
collection requirements. Each third party electric power supplier must also
agree to remit the full amount of all charges it bills to customers for the
electric transmission and distribution services JCP&L or its successor provides,
together with transition bond charge payments, regardless of whether those
payments are received from the customers, within 15 days of JCP&L's or its
successor's bill for such charges. If a third party electric power supplier
fails to remit charges within a further seven days, JCP&L, as servicer, or its
successor may assume responsibility for billing or transfer responsibility to
another qualified third party electric power supplier. While a third party
electric power supplier collecting the transition bond charge may request
termination of service to delinquent customers, only JCP&L or a successor
electric public utility may disconnect or reconnect a customer's distribution
service.
The BPU May Designate a Replacement Servicer. The Competition Act provides
that in the event of a default by the electric public utility in respect of
charging, collecting and receiving revenues derived from the transition bond
charge and upon the application of the secured party, such as the trustee, or an
assignee, such as the issuer, the BPU or any court of competent jurisdiction
will by order designate a trustee or other entity to act in place of the
electric public utility to impose, meter, charge, bill, collect and receive the
transition bond charge. The BPU may, in its discretion, establish criteria for
the selection of any entity that may become a servicer of bondable transition
property upon the default or other material adverse change in the financial
condition of the electric public utility. The appointment of a successor
servicer must not result in the downgrade or withdrawal of a rating on any
outstanding transition bonds.
THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS
The servicing agreement requires the servicer to seek adjustments to the
transition bond charge in order to enhance the likelihood that actual transition
bond charge collections, net of any amounts on deposit in the reserve
subaccount, are neither more nor less than the amount necessary to amortize the
transition bonds of each series in accordance with the related expected
amortization schedule, to pay interest, to fund the overcollateralization
subaccount to the amount required to be on deposit in the overcollateralization
subaccount, to replenish any shortfalls in the capital subaccount, and to pay
the trustee's fee, the servicing fee and the other expenses and
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costs included in bondable stranded costs. These adjustments are formula based,
incorporating actual transition bond charge collections, as well as updated
assumptions by the servicer as to projected future usage of electricity by
customers, expected delinquencies and write-offs and future expenses relating to
bondable transition property and the transition bonds, and the issuance of any
additional series of transition bonds. They are designed to achieve each of the
above goals by the payment date immediately preceding the next date on which the
transition bond charge is adjusted or the expected final payment date, as
applicable, taking into account any amounts on deposit in the reserve
subaccount. If at the time of issuance of a series, the servicer determines any
additional adjustments are required, the dates for these adjustments will be
specified in the prospectus supplement for the series.
The Schedule for Making Adjustments to the Transition Bond Charge. The
servicer will file a request for an adjustment to the transition bond charge
with the BPU at least annually. Each proposed adjustment will become effective
on an interim basis 30 days after filing, absent a determination of manifest
error by the BPU, and will become final 60 days thereafter in the absence of a
BPU order to the contrary. Under the BPU financing order, "manifest error" means
an arithmetic error evident on the face of the filing. Under certain
circumstances, adjustment filings may be made quarterly or, during the last year
before scheduled maturity and continuing until legal final maturity, monthly.
SERVICING OF THE BONDABLE TRANSITION PROPERTY
JCP&L'S CUSTOMER CLASSES
JCP&L's customer base is divided into three principal revenue classes:
residential, commercial and industrial. The revenue class labeled "other"
consists primarily of services rendered for street and highway lighting. Several
rate classes are included within each category, differentiated by type and level
of service.
BILLED ELECTRIC REVENUE, NUMBER OF CUSTOMERS AND CONSUMPTION
The following table shows the amount of billed electric revenue per
customer class for the past five and a quarter years and the percentage each
customer class represents of the total billed revenue. The figures for 2000 are
based on the three-month period from January through March.
TABLE 1
BILLED REVENUE (IN THOUSANDS)
<TABLE>
<CAPTION>
2000 % 1999 % 1998 % 1997 % 1996 % 1995 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $924,519 45.89 $892,922 45.06 $905,063 44.44 $900,929 44.79 $875,564 44.86
Commercial 797,922 39.60 779,878 39.35 796,755 39.13 777,363 38.65 740,209 37.92
Industrial 272,055 13.50 288,241 14.55 313,000 15.37 311,775 15.50 315,189 16.15
Other 20,331 1.01 20,671 1.04 21,544 1.06 21,239 1.06 20,974 1.07
------- ---- ------- ---- - ------- ---- - ------- ---- ------- ----
Total 2,014,827 100.00 $1,981,712 100.00 $2,036,362 100.00 $2,011,306 100.00 $1,951,936 100.00
</TABLE>
The following table shows the average number of customers in each customer
class for the past five and a quarter years and the percentage each customer
class represents of the total
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number of customers. The figures for 2000 are based on the three-month period
from January through March.
TABLE 2
AVERAGE NUMBER OF CUSTOMERS (CUSTOMER BILLS)
<TABLE>
<CAPTION>
2000 % 1999 % 1998 % 1997 % 1996 % 1995 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 879,009 88.77 866,787 88.75 854,243 88.80 841,204 88.87 830,931 88.94
Commercial 106,547 10.76 105,158 10.77 103,074 10.71 100,667 10.63 98,608 10.55
Industrial 2,989 0.30 3,036 0.31 3,083 0.32 3,126 0.33 3,189 0.34
Other 1,643 0.17 1,623 0.17 1,605 0.17 1,571 0.17 1,543 0.17
----- ---- - ------ ---- ------ ---- ------ ---- ------ ----
Total 990,188 100.00 976,604 100.00 962,005 100.00 946,568 100.00 934,271 100.00
</TABLE>
The following table shows the total billed electric consumption in megawatt
hours for the past five and a quarter years for each customer class and the
percentage each customer class represents of the total consumption. The figures
for 2000 are based on the three-month period from January through March.
TABLE 3
BILLED ELECTRIC CONSUMPTION (MWH)
<TABLE>
<CAPTION>
2000 % 1999 % 1998 % 1997 % 1996 % 1995 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 7,977,703 42.05 7,551,505 41.12 7,255,505 40.66 7,265,817 41.12 7,111,558 40.96
Commercial 7,624,531 40.19 7,258,769 39.52 6,974,503 39.08 6,829,103 38.65 6,610,802 38.08
Industrial 3,288,707 17.33 3,474,384 18.92 3,535,806 19.81 3,497,209 19.79 3,561,951 20.52
Other 81,258 0.43 80,874 0.44 79,370 0.45 77,843 0.44 77,064 0.44
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total 18,972,199 100.00 18,365,532 100.00 17,845,184 100.00 17,669,972 100.00 17,361,375 100.00
</TABLE>
PERCENTAGE CONCENTRATION WITHIN JCP&L'S LARGE COMMERCIAL AND
INDUSTRIAL CUSTOMERS
For the year ended December 31, 1999, JCP&L's ten largest electric
customers, all of whom are currently multi-site customers, represented
approximately 8.4% of JCP&L's kilowatt hour sales. These customers are in the
commercial and industrial customer classes. There are no material concentrations
in the residential class.
HOW JCP&L FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF ELECTRICITY USAGE
The energy forecast process incorporates analyses for each major customer
class. In each class, projections are developed using a variety of methods,
including econometric and time series analysis (regression, exponential
smoothing and Box-Jenkins). A final forecast is then developed based on
evaluation of all the results. A software package called "Forecast-Pro",
developed by Business Forecast Systems, Inc., is used extensively in the
development of forecasts for all classes.
The first step in the forecast process is to develop a set of basic
economic assumptions for the U.S. and the State of New Jersey, including
assumptions on Gross Domestic Product (GDP),
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industrial production, manufacturing and non-manufacturing employment, housing
starts, and personal income. Data from a variety of sources, including Regional
Financial Associates (RFA), NPA Data Services, the Blue Chip Economic Indicators
Report and the Rutgers Economic Advisory Service, is analyzed in the process.
Then, forecasts are developed for each customer class, as described below. All
forecasts assume normal weather conditions.
The residential forecast is developed in two parts. First, a forecast of
number of customers is developed, based primarily on projections of housing
starts in the State. Then, a forecast of use per customer is developed. Methods
used include Box-Jenkins and exponential smoothing, which project use per
customer based on past trends, and regression analysis, which projects use per
customer based on explanatory variables such as personal income, electricity
price and weather.
In the commercial sector, economic and demographic variables considered in
regression models include personal income, non-manufacturing employment, the
number of residential customers and weather. Box-Jenkins and exponential
smoothing models are also reviewed.
The primary variable in the industrial sales forecast is a survey of large
industrial customers - who account for more than half of all industrial sales -
conducted each year. The survey provides information on the customers' expected
usage over the next few years. Projections of industrial production and
manufacturing employment are also considered in development of the forecast.
Forecast Variances
The table below compares usage in gigawatt hours for a particular year to
the related forecast prepared during the previous year. For example, the annual
1995 variance is based on a forecast of 1995 consumption prepared in 1994. A
positive variance indicates that actual consumption exceeded forecast
consumption. There can be no assurance that the future variance between actual
and expected consumption will be similar to the historical experience set forth
below.
TABLE 4
VARIANCE FOR THE AMOUNT OF ELECTRICITY CONSUMED (GWH)
1999 1998 1997 1996 1995
Forecast 18,846 18,170 17,946 17,584 17,528
Actual 18,972 18,366 17,845 17,670 17,361
Variance % 0.67% 1.08% -0.56% 0.49% -0.95%
If actual consumption of electricity is higher than the forecast, there may
be an excess of transition bond charge collections. Similarly, if actual
consumption is lower than the forecast, there may be a shortfall in transition
bond charge collections.
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CREDIT POLICY; BILLING; COLLECTIONS; TERMINATION OF SERVICE
JCP&L is obligated to provide service to all customers within its service
area under New Jersey law. JCP&L relies on the information provided by the
customer, its customer information system and, for residential customers,
validation of the social security number provided by the customer to determine
whether JCP&L has previously served a customer. Certain accounts are secured
with deposits or guarantees as a precautionary measure. The amount of the
deposit reflects the estimated electricity use over a two-month period, which is
the average time period required to take collection action on past-due billings.
Since the vast majority of customers pay their bills within the allotted time,
JCP&L does not require deposits from new residential customers who provide a
valid social security number and whose credit score exceeds the threshold set by
JCP&L.
JCP&L has developed certain criteria for establishing credit. Industrial
and commercial customers may establish credit by depositing cash equal to twice
the estimated average monthly bill, by obtaining a guarantee from a satisfactory
guarantor, or by otherwise establishing credit to the satisfaction of JCP&L. In
general, residential customers may establish credit by depositing cash equal to
twice the estimated average monthly bill. Deposits may not be required if the
applicant is currently or has previously been a customer of JCP&L and has paid
all bills for service, or if the customer provides a letter confirming the
customer's creditworthiness from its previous utility.
BILLING PROCESS
JCP&L bills its customers monthly. The normal billing period for an
individual customer ranges from 26 to 35 days for a given month. Bills are
generally issued the next business day after the meter readings are obtained.
Accounts with potential meter reading or billing errors are reviewed and,
if necessary, corrected before mailing. Accounts with unusually high or low
usage compared to past customer history are not billed until reviewed and/or
corrected. Residential bills of $5,000 or more and general service bills of
$50,000 or more are also reviewed and, if necessary, corrected before mailing.
For residential customers, a pre-disconnection warning notice is sent when
the customer's previous month's bill is not paid at the invoicing time of the
next monthly bill. This notice is sent as a separate notification to the
customer. If payment is not received by the time of the third month's bill, a
shut-off notice is sent to the customer. A telephone contact to the premises
scheduled for shut-off is attempted anywhere from three to five days prior to
the disconnection date. The customer will face termination of service on or
after the scheduled date of the termination if payment is not received. Once the
service is terminated, the customer may be required to pay the full outstanding
balance or, if eligible, enter into an installment plan.
For commercial and industrial customers, a disconnection notice is sent if
the payment of the previous month's invoice is not received when JCP&L invoices
the account again. This
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notice is sent as a separate notification to the customer. A telephone contact
to the premises that is scheduled for shut-off is attempted anywhere from three
to five days prior to the disconnection date. The customer will face termination
of service on or after the scheduled date of the termination if payment is not
received. Once the service is terminated, the customer may be required to pay
the full outstanding balance or, if eligible, enter into an installment plan.
JCP&L may change its credit, billing and collections and
termination/restoration of service policies and procedures from time to time. It
is expected that any such changes would be designed to enhance JCP&L's ability
to bill and collect customer charges on a timely basis.
Termination of Service for Residential Customers in the Winter. The winter
termination program is part of the New Jersey Administrative Code and prevents
discontinuance of electric service to qualified residential customers from
November 15 through March 15. The BPU has reserved the option of extending the
program to the end of March, if abnormally bad weather is forecasted. The
program provides for the requirement of good-faith payments equal to budget
amounts and placement on a 12-month system budget plan. However, averages will
be taken into consideration when calculating the 12-month budget plan amount.
The regulation also provides for restoration of service for customers
eligible to participate in the program who had service shut off for non-payment
prior to November 15, if up to 25% of the outstanding balance is paid. During
the program period, service can be discontinued when the customer has made no
contact with JCP&L; however, all efforts are made to contact the customer prior
to discontinuance. The program requires that a BPU-approved fact sheet accompany
each discontinuance notice to residential customers during the program period.
The fact sheet is distributed as a bill insert since discontinuance notices are
issued on the customer's bill.
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth information relating to the total billed
revenues and write-off experience for the past several years. Such historical
information is presented herein because JCP&L's actual experience with respect
to write-offs and delinquencies may affect the timing of transition bond charge
collections. JCP&L does not expect, but cannot assure, that the delinquency or
write-off experience with respect to transition bond charge collections will
differ substantially from the rates indicated below. However, changes in the
retail electric market, including but not limited to the introduction of third
party electric power suppliers who may be permitted to provide consolidated
billing to JCP&L's customers, could mean that historical delinquency and
write-off ratios will not be indicative of future rates.
For the total electric billed revenue for the past five and a quarter years
for each customer class, see the table "BILLED REVENUE (IN THOUSANDS)" on page
__ of this prospectus.
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TABLE 5
GROSS WRITE-OFF, NET WRITE-OFF AND NET WRITE-OFF
AS A PERCENTAGE OF BILLED REVENUE
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Gross Write-Off $7,084,000 $5,549,000 7,011,000 7,475,000 6,970,000 7,335,000
Net Write-Off 5,276,000 $4,141,000 5,232,000 5,520,000 4,500,000 5,375,000
Net Write-Off as 0.26% 0.21% 0.26% 0.27% 0.23% 0.28%
a % of Billed
Revenue
</TABLE>
Net write-offs include amounts recovered by JCP&L from bankruptcy
proceedings and payments received after an account has been written off, either
to JCP&L or one of its external collection agencies.
The following table sets forth information relating to JCP&L's rate of
delinquencies, as a percentage of accounts receivable of all JCP&L customers for
the past five and a quarter years.
TABLE 6
BILLED ELECTRIC RECEIVABLES AGING ANALYSIS
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
0-30 DAYS 85.4% 90.6% 90.6% 90.5% 92.6%
31-60 DAYS 7.0% 5.4% 5.1% 5.1% 2.2%
61-90 DAYS 3.4% 2.0% 1.8% 1.7% 2.1%
91-120 DAYS 2.6% 1.4% 1.5% 0.9% 1.1%
OVER 120 DAYS 1.7% 0.6% 1.0% 1.7% 2.0%
</TABLE>
Any account that has an unpaid balance at the time of the next billing is
considered to be delinquent. The delinquency data above represents only active
customer accounts as opposed to the write-off data which reflects only customer
accounts where service is no longer being provided. JCP&L has not traced the
rate of delinquencies by customer class.
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The following table sets forth the average days of revenue outstanding for
the past five and a quarter years. The figures for 2000 are based on the
three-month period from January through March.
TABLE 7
DAYS OF REVENUE OUTSTANDING
2000 1999 1998 1997 1996 1995
AVERAGE DAYS 30.1 30.2 28.2 27.5 26.5
HOW JCP&L WILL APPLY PARTIAL PAYMENTS BY ITS CUSTOMERS
The BPU financing order requires that JCP&L allocate partial payments of
electricity delivery and basic generation service charges for any period in the
following order:
o to sales taxes associated with the partial payment (which JCP&L
collects as trustee for the State of New Jersey and not for its own
account or for that of the issuer);
o pro rata to the transition bond charge and JCP&L's other charges and
taxes, where any of such charges are in arrears, based on their
proportion to JCP&L's total arrearages assessed for that period; and
o pro rata to the transition bond charge and JCP&L's other charges and
taxes, where any of such charges are current charges, based on their
proportion to JCP&L's total charges assessed for that period.
Partial payments will also be allocated among different series of
transition bonds, pro rata, based on their respective outstanding principal
balances.
JCP&L TRANSITION FUNDING LLC, THE ISSUER
JCP&L Transition Funding LLC, the issuer of the transition bonds, was
formed as a Delaware limited liability company in February 2000 pursuant to a
limited liability company agreement with the seller as sole member of the
issuer. The assets of the issuer are limited to the bondable transition property
which was purchased by the issuer, the trust funds held by the trustee, the
rights of the issuer under the transaction documents, any third party credit
enhancement and any money distributed to the issuer from the collection account
in accordance with the indenture and not distributed to the seller. The BPU
financing order and the indenture provide that the bondable transition property,
as well as the other collateral described in the BPU financing order and the
indenture, will be pledged by the issuer to the trustee. Pursuant to the
indenture, the transition bond charge collections remitted to the trustee by the
servicer must be used to pay the principal of and interest on the transition
bonds and other obligations of the issuer specified in the indenture. As of the
date of this prospectus, the issuer has not conducted
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any business activities and has no operating history. Audited financial
statements of the issuer are included as an exhibit to this prospectus.
The Issuer's Purpose. The issuer has been created for the sole purpose of:
o purchasing and owning the bondable transition property;
o issuing one or more series of transition bonds, each of which may be
comprised of one or more classes, from time to time;
o pledging its interest in the bondable transition property and other
collateral to the trustee under the indenture in order to secure the
transition bonds; and
o performing activities that are necessary, suitable or convenient to
accomplish these purposes.
The Interaction Among JCP&L, JCP&L Sub, the Seller and the Issuer. Pursuant
to a contribution agreement among JCP&L, JCP&L Sub and the seller, JCP&L will
assign and transfer the bondable transition property to JCP&L Sub and JCP&L Sub,
in turn, will assign and transfer it to the seller. Upon issuance of any series
of transition bonds, the seller will, pursuant to the sale agreement with the
issuer, sell and transfer the bondable transition property, and assign its
rights under the contribution agreement, to the issuer. JCP&L will service the
bondable transition property pursuant to a servicing agreement with the issuer.
JCP&L and any successor in the capacity of servicer are referred to as the
servicer.
The Issuer's Management. The issuer's business will be managed by five
managers, referred to as the managers, appointed from time to time by the seller
or, in the event that the seller transfers its interest in the issuer, by the
new owner or owners. The issuer will have at all times following the initial
issuance of the transition bonds at least two independent managers who, among
other things, are not and have not been for at least three years from the date
of their appointment:
o a direct or indirect legal or beneficial owner of the issuer, JCP&L,
JCP&L Sub, the seller or any of their respective affiliates;
o a relative, supplier, employee, officer, director, manager, contractor
or material creditor of the issuer, JCP&L, JCP&L Sub, the seller or any
of their respective affiliates; or
o a person who controls JCP&L, JCP&L Sub, the seller or any of their
respective affiliates.
The remaining managers will be employees or officers of JCP&L or any of its
affiliates.
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The managers will devote the time necessary to conduct the affairs of the
issuer. The following are the managers as of the date of this prospectus:
NAME POSITION WITH JCP&L
- ---- -------------------
T.G. Howson Vice President and Treasurer
S. H. Somich Assistant Treasurer
M.E. Gramlich Assistant Secretary
None of the managers has been involved in any legal proceedings which are
specified in Item 401(f) of the SEC's Regulation S-K.
The Managers' Compensation and Limitation on Liabilities. The issuer has
not paid any compensation to any manager since the issuer was formed. The
managers other than the independent managers will not be compensated by the
issuer for their services on behalf of the issuer. The independent managers will
be paid quarterly fees from the revenues of the issuer and will be reimbursed
for their reasonable expenses. These expenses include, without limitation, the
reasonable compensation, expenses and disbursements of such agents,
representatives, experts and counsel as the independent managers may employ in
connection with the exercise and performance of their rights and duties under
the issuer's limited liability company agreement, the indenture, the
contribution agreement, the sale agreement and the servicing agreement. The
limited liability company agreement provides that the managers will not be
personally liable under any circumstances except for:
o liabilities arising from their own willful misconduct or gross
negligence;
o liabilities arising from the failure by any of the managers to perform
obligations expressly undertaken in the issuer's limited liability
company agreement; or
o taxes, fees or other charges, based on or measured by any fees,
commissions or compensation received by the managers in connection with
the transactions described in this prospectus.
The limited liability company agreement further provides that, to the
fullest extent permitted by law, the issuer shall indemnify the managers against
any liability incurred in connection with their services as managers for the
issuer except in the cases described above.
The Issuer is a Separate and Distinct Legal Entity. Under the issuer's
limited liability company agreement, the issuer may not file a voluntary
petition for relief under federal bankruptcy law, nor consent to the
commencement of a Chapter 11 case pursuant to an involuntary petition, without a
unanimous vote of its managers, including the independent managers. Each of the
seller, JCP&L Sub and JCP&L has agreed that it will not cause the issuer
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to file a voluntary petition for relief under federal bankruptcy law. The
limited liability company agreement requires the issuer:
o to take all reasonable steps to continue its identity as a separate
legal entity;
o to make it apparent to third parties that it is an entity with assets
and liabilities distinct from those of JCP&L, other affiliates of
JCP&L, the managers or any other person; and
o to make it apparent to third persons that, except for federal and state
income tax purposes, it is not a division of JCP&L or any of its
affiliated entities or any other person.
The principal place of business of the issuer is c/o GPU Service, Inc., 310
Madison Avenue, Morristown, New Jersey 07962 and its telephone number is (973)
455-8200.
Administration Agreement. GPU Service, Inc. will provide administrative
services for the issuer pursuant to an administration agreement between the
issuer and GPU Service, Inc. The issuer will pay GPU Service, Inc. a cost-based
fee for performing these services.
HOW THE ISSUER WILL USE THE PROCEEDS OF THE TRANSITION BONDS
As required by the Competition Act, the issuer will use the net proceeds of
the issuance of the transition bonds to purchase the bondable transition
property from the seller and to pay the expenses of issuance of the transition
bonds. The seller will distribute the proceeds it receives from the sale of the
bondable transition property to JCP&L Sub. JCP&L Sub, in turn, will distribute
these proceeds to JCP&L. JCP&L will use the proceeds it receives from such
distribution principally to reduce stranded costs through the retirement of debt
or equity or both, including transactions completed before the date of the sale
of the transition bonds, and also to pay related expenses.
THE TRANSITION BONDS
The transition bonds will be issued under and secured by the indenture
between the issuer and the trustee substantially in the form filed as an exhibit
to the registration statement of which this prospectus forms a part. The terms
of each series of transition bonds will be provided in the indenture and the
related supplemental indenture. The following summary describes some general
terms and provisions of the transition bonds. The particular terms of the
transition bonds of any series offered by any prospectus supplement will be
described in the prospectus supplement.
GENERAL TERMS OF THE TRANSITION BONDS
The transition bonds may be issued in one or more series, each made up of
one or more classes. The terms of a series may differ from the terms of another
series, and the terms of a class
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<PAGE>
may differ from the terms of another class of the same series. The terms of each
series will be specified in the related prospectus supplement.
The indenture requires, as a condition to the issuance of each series of
transition bonds, that such issuance will not result in any rating agency
reducing or withdrawing its then current rating of any outstanding series or
class of transition bonds.
The Issuer's Transition Bonds Will be Maintained in Book-Entry Format. The
related prospectus supplement will set forth the procedure for the manner of the
issuance of the transition bonds of each series. Generally, each series of
transition bonds will initially be represented by one or more transition bonds
registered in the name of Cede & Co., as the nominee of The Depository Trust
Company ("DTC"). The transition bonds will be available for purchase in initial
denominations specified in the related prospectus supplement which will be not
less than $1,000. Unless and until definitive transition bonds are issued under
the limited circumstances described in this prospectus, no transition bondholder
will be entitled to receive a physical bond representing a transition bond. All
references in this prospectus to actions by transition bondholders will refer to
actions taken by DTC upon instructions from DTC participants. In addition, all
references in this prospectus to payments, notices, reports and statements to
transition bondholders will refer to payments, notices, reports and statements
to DTC or Cede & Co. as the registered holder of each series of transition
bonds. DTC or Cede & Co. will receive these payments, notices, reports and
statements for distribution to the beneficial owners of the transition bonds in
accordance with DTC's procedures with respect thereto. See "-- TRANSITION BONDS
WILL BE ISSUED IN BOOK-ENTRY FORM" and "-- CERTIFICATED TRANSITION BONDS" below.
PAYMENTS OF INTEREST AND PRINCIPAL ON THE TRANSITION BONDS
Interest will accrue on the principal balance of transition bonds of a
series or class at the interest rate specified in or determined in the manner
specified in the related prospectus supplement. Interest will be payable to the
transition bondholders of the series or class on each payment date, commencing
on the first payment date specified in the related prospectus supplement. On any
payment date with respect to any series, the issuer will make principal payments
on that series only until the outstanding principal balance thereof has been
reduced to the principal balance specified for that payment date in the expected
amortization schedule for that series on that payment date, but only to the
extent funds are available for that series as described in this prospectus.
Accordingly, principal of the series or class of transition bonds may be paid
later, than reflected in the expected amortization schedule therefor, but
generally not earlier, except in a case of any applicable optional redemption or
acceleration. See "RISK FACTORS -- OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN
THE TRANSITION BONDS" and "-- SERVICING RISKS" in this prospectus.
The indenture provides that failure to pay the entire outstanding principal
amount of the transition bonds of any series or class by the expected final
payment date will not result in an event of default under the indenture;
however, a default will occur if the entire outstanding principal amount is not
paid on or before the legal final maturity date of that series or class, as
applicable.
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On each payment date, the amount required to be paid as principal on the
transition bonds, from transition bond charge collections allocable to all
series, the capital subaccount, the overcollateralization subaccount and the
reserve subaccount will equal:
o the unpaid principal amount of any class or series if such payment date
is on or after the final payment date of that class or series; plus
o the unpaid principal amount of any transition bonds of any class or
series called for redemption; plus
o the unpaid principal amount of any class or series upon an acceleration
following an event of default; plus
o the principal amount scheduled to be paid on the transition bonds of
each class or series on that payment date.
The entire unpaid principal amount of a series of transition bonds will be
due and payable if:
o an event of default under the indenture occurs and is continuing; and
o the trustee or the holders of a majority in principal amount of the
transition bonds of all series then outstanding, voting as a group,
have declared the transition bonds to be immediately due and payable.
See "THE INDENTURE -- WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE
TRANSITION BONDS" and "WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE
TRANSITION BONDS" in this prospectus.
OPTIONAL REDEMPTION OF THE TRANSITION BONDS
The issuer may redeem all of the outstanding transition bonds, at its
option, only if, on any payment date, the outstanding principal balance of the
transition bonds of that particular series (after giving effect to payments
scheduled to be made on that payment date) is less than 5% of the initial
principal balance of the transition bonds of that series. Unless otherwise
specified in a prospectus supplement, there will be no other optional redemption
for a series.
Redemption provisions, if any, for any series will be specified in the
related prospectus supplement, including the premiums, if any, payable upon
redemption. Unless the context requires otherwise, all references in this
prospectus to principal of the transition bonds of a series insofar as it
relates to redemption includes any premium that might be payable thereon if
transition bonds of the series are redeemed, as described in the related
prospectus supplement. Notice of redemption of any series of transition bonds
will be given by the trustee to each registered holder of a transition bond by
first-class mail, postage prepaid, mailed not less than five days nor more than
45 days prior to the date of redemption or in another manner or at
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another time as may be specified in the related prospectus supplement. The
redemption price will, in each case, include accrued interest to the date of
redemption. Notice of redemption may be conditioned upon the deposit of moneys
with the trustee before the redemption date and this notice will be of no effect
unless these moneys are so deposited. All transition bonds called for redemption
will cease to bear interest on the specified redemption date, provided the
redemption price is on deposit with the trustee at that time, and will no longer
be considered "outstanding" under the indenture. The transition bondholders will
have no further rights with respect thereto, except to receive payment of the
redemption price thereof and unpaid interest accrued to the date fixed for
redemption from the trustee.
CREDIT ENHANCEMENT FOR THE TRANSITION BONDS
Credit enhancement with respect to the transition bonds of any series will
be provided principally by adjustments to the transition bond charge and amounts
on deposit in the reserve subaccount, the overcollateralization subaccount and
the capital subaccount. In addition, for any series of transition bonds or one
or more classes thereof, additional credit enhancement may be provided. The
amounts and types of additional credit enhancement, if any, and the provider of
any additional credit enhancement with respect to any series of transition bonds
or one or more classes thereof, will be described in the related prospectus
supplement.
Additional credit enhancement may be in the form of:
o an additional reserve subaccount;
o subordination by one series for the benefit of another;
o additional overcollateralization;
o a financial guaranty insurance policy;
o a letter of credit;
o a credit or liquidity facility;
o a repurchase obligation;
o a third party payment or other support;
o a cash deposit or other credit enhancement; or
o any combination of the foregoing, as may be set forth in the related
prospectus supplement.
If specified in the related prospectus supplement, credit enhancement for a
series of transition bonds may cover one or more other series of transition
bonds.
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TRANSITION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM
Unless otherwise specified in the related prospectus supplement, all
classes of transition bonds will initially be represented by one or more bonds
registered in the name of DTC, or another securities depository. The transition
bonds will be available to investors only in the form of book-entry transition
bonds. Transition bondholders may also hold transition bonds through Clearstream
Banking, societe anonyme (formerly known as CEDEL, societe anonyme), or
Euroclear in Europe, if they are participants in one of those systems or
indirectly through participants.
The Role of Cede & Co., Clearstream Banking and Euroclear. DTC will hold
the global bond or bonds representing the transition bonds. Clearstream Banking
and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Clearstream Banking's and Euroclear's
names on the books of their respective depositories. Citibank, N.A. is
depository for Clearstream Banking and Morgan Guaranty Trust Company of New York
is depository for Euroclear. These depositories will, in turn, hold these
positions in customers' securities accounts in the depositories' names on the
books of DTC. Citibank, N.A. will act as depository for Clearstream Banking and
Morgan Guaranty Trust Company of New York will act as depository for Euroclear.
The Function of DTC. DTC is a limited purpose trust company organized under
the laws of the State of New York, and is a member of the Federal Reserve
System. DTC is a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and to facilitate the clearance and settlement of securities transactions
between participants through electronic book-entries, thereby eliminating the
need for physical movement of bonds. Direct participants of DTC include
securities brokers and dealers, banks, trust companies, clearing corporations
and some other organizations. DTC is owned by a number of its direct
participants and by the New York Stock Exchange, Inc., the Nasdaq-Amex Market
Group and the National Association of Securities Dealers, Inc. Access to DTC's
system is also available to indirect participants.
The Function of Clearstream Banking. Clearstream Banking is incorporated
under the laws of Luxembourg. Clearstream Banking holds securities for its
customers and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream Banking provides various services, including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream Banking also deals with
domestic securities markets in over 30 countries through established depository
and custodial relationships. Clearstream Banking has established an electronic
bridge with Morgan Guaranty Trust Company of New York as the Operator of the
Euroclear system in Brussels to facilitate settlement of trades between
Clearstream Banking and MGT/EOC. Clearstream Banking currently accepts over
110,000 securities issues on its books.
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Clearstream Banking customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations and may include any underwriters, agents or dealers
with respect to a series of transition bonds offered hereby. Clearstream
Banking's U.S. customers are limited to securities brokers and dealers and
banks.
The Function of Euroclear. Euroclear was created in 1968 to hold securities
for Euroclear participants and to clear and settle transactions between
Euroclear participants through simultaneous electronic book-entry delivery
against payment. By performing these functions, Euroclear eliminated the need
for physical movement of securities and also eliminated any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 30 currencies, including Euros and U.S. dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
arrangements with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described below. The Euroclear
System is operated by Euroclear Operator under contract with the Euroclear
Clearance System S.C., a Belgian cooperative corporation, referred to as the
Cooperative. All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear participants. Euroclear participants
include central banks, commercial banks, securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As a Federal
Reserve System member, it is regulated and examined by the Board of Governors of
the Federal Reserve System and the New York State Banking Department, as well as
the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law which are
referred to in this prospectus as the Terms and Conditions. The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific securities to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear participants and has no record of or relationship
with persons holding through Euroclear participants.
The Rules for Transfers Among DTC, Clearstream Banking or Euroclear
Participants. Transfers between participants will occur in accordance with DTC
rules. Transfers between Clearstream Banking customers and Euroclear
participants will occur in accordance with their respective rules and operating
procedures. Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Clearstream Banking customers or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system
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by its depository. Cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in this system in accordance with its rules and procedures and
within its established deadlines, in European time. The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its depository to take action to effect
final settlement on its behalf by delivering or receiving transition bonds in
DTC, and making or receiving payments in accordance with normal procedures for
same-day funds settlement applicable to DTC. Clearstream Banking customers and
Euroclear participants may not deliver instructions directly to the
depositories.
DTC Will be the Holder of the Issuer's Transition Bonds. Unless and until
definitive transition bonds are issued, it is anticipated that the only "holder"
of transition bonds of any series will be DTC. Transition bondholders will only
be permitted to exercise their rights as transition bondholders indirectly
through participants and DTC. All references herein to actions by transition
bondholders thus refer to actions taken by DTC upon instructions from its
participants. In addition, all references herein to payments, notices, reports
and statements to transition bondholders refer to payments, notices, reports and
statements to DTC, as the registered holder of the transition bonds, for
payments or delivery to the beneficial owners of the transition bonds in
accordance with DTC procedures.
Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while any book-entry transition bonds of a series
are outstanding, under DTC's rules, DTC is required to make book-entry transfers
among participants on whose behalf it acts with respect to the book-entry
transition bonds. In addition, DTC is required to receive and transmit payments
of principal of, and interest on, the book-entry transition bonds. Participants
with whom transition bondholders have accounts with respect to book-entry
transition bonds are similarly required to make book-entry transfers and receive
and transmit these payments on behalf of their respective transition
bondholders. Accordingly, although transition bondholders will not possess
physical bonds, DTC's rules provide a mechanism by which transition bondholders
will receive payments and will be able to transfer their interests.
DTC can only act on behalf of participants, who, in turn, act on behalf of
indirect participants and some banks. Thus, the ability of holders of beneficial
interests in the transition bonds to pledge transition bonds to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of these transition bonds, may be limited due to the lack of definitive
transition bonds.
DTC has advised the trustee that it will take any action permitted to be
taken by a transition bondholder under the indenture only at the direction of
one or more participants to whose account with DTC the transition bonds are
credited.
How Transition Bond Payments Will Be Credited by Clearstream Banking and
Euroclear. Payments with respect to transition bonds held through Clearstream
Banking or Euroclear will be credited to the cash accounts of Clearstream
Banking customers or Euroclear participants in accordance with the relevant
systems' rules and procedures, to the extent received by its depository. These
payments will be subject to tax reporting in accordance with relevant United
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States tax laws and regulations. See "MATERIAL INCOME TAX MATTERS FOR THE
HOLDERS OF TRANSITION BONDS" in this prospectus. Clearstream Banking or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a transition bondholder under the indenture on behalf of a
Clearstream Banking customer or Euroclear participant only in accordance with
its relevant rules and procedures and subject to its depository's ability to
effect these actions on its behalf through DTC.
DTC, Clearstream Banking and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of transition bonds among
participants of DTC, Clearstream Banking and Euroclear. However, they are under
no obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
CERTIFICATED TRANSITION BONDS
The Circumstances That Will Result in the Issuance of Certificated
Transition Bonds. Unless otherwise specified in the related prospectus
supplement, each class of transition bonds will be issued in fully registered,
certificated form to transition bondholders or their nominees, rather than to
DTC, only if:
o the issuer advises the trustee in writing that DTC is no longer willing
or able to discharge properly its responsibilities as depository with
respect to that class of transition bonds and the issuer is unable to
locate a qualified successor;
o the issuer, at its option, elects to terminate the book-entry system
through DTC; or
o after the occurrence of an event of default under the indenture,
transition bondholders representing at least a majority of the
outstanding principal amount of the transition bonds of all series
advise the trustee through DTC in writing that the continuation of a
book-entry system through DTC, or a successor thereto, is no longer in
the transition bondholders' best interest.
The Delivery of Certificated Transition Bonds. Upon the occurrence of any
event described in the immediately preceding paragraph, DTC will be required to
notify all affected beneficial owners of transition bonds through participants
of the availability of certificated transition bonds. Upon surrender by DTC of
the certificated bonds representing the applicable transition bonds and receipt
of instructions for re-registration, the trustee will authenticate and deliver
certificated transition bonds. Thereafter, the trustee will recognize the
holders of these certificated transition bonds as transition bondholders under
the indenture.
The Payment Mechanism for Certificated Transition Bonds. Payments of
principal of, and interest on, certificated transition bonds will be made by the
trustee, as paying agent, in accordance with the procedures set forth in the
indenture. These payments will be made directly to holders of certificated
transition bonds in whose names the certificated transition bonds were
registered at the close of business 15 days prior to the payment date, unless
otherwise specified in a prospectus supplement. These payments will be made by
check mailed to the address of the holder as it appears on the register
maintained by the trustee. The final payment on any transition
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bond, however, will be made only upon presentation and surrender of the
transition bond at the office or agency specified in the notice of final payment
to transition bondholders.
The Transfer or Exchange of Certificated Transition Bonds. Certificated
transition bonds will be transferable and exchangeable at the offices of the
transfer agent and registrar, which will initially be the trustee. No service
charge will be imposed for any registration of transfer or exchange, but the
transfer agent and registrar may require payment of a sum sufficient to cover
any tax or other governmental charge imposed in connection therewith.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS
The rate of principal payments, the amount of each interest payment and the
actual final payment date for each series or class of transition bonds will be
dependent on the rate and timing of receipt of transition bond charge
collections and the availability of credit enhancement. Accelerated receipts of
transition bond charge collections will not, however, result in payment of
principal on the transition bonds earlier than the related expected final
payment dates. This is because receipts in excess of the amounts necessary to
amortize the transition bonds in accordance with the applicable expected
amortization schedule, to pay interest on the transition bonds, to pay related
expenses and to fund or replenish the capital subaccount and the
overcollateralization subaccount, will be allocated to the reserve subaccount.
However, delayed receipts of transition bond charge collections may result in
principal payments on the transition bonds occurring more slowly than as
reflected in the expected amortization schedule or later than the related
expected final payment dates. Redemption of any class or series of transition
bonds and acceleration of the legal final maturity date after an event of
default will result in payment of principal earlier than the related expected
final payment dates.
The Effect of Transition Bond Charge Collections on the Timing of
Transition Bond Payments. The actual payments on each payment date for each
series or class of transition bonds and the weighted average life thereof will
be affected primarily by the rate and the timing of receipt of transition bond
charge collections. Amounts available in the reserve subaccount, the
overcollateralization subaccount and the capital subaccount will also affect the
weighted average life of the transition bonds. The aggregate amount of
transition bond charge collections and the rate of principal amortization on the
transition bonds will depend, in part, on actual electricity usage by customers
and the rate of delinquencies and write-offs. This is because the transition
bond charge will be calculated based on estimates of usage and collections. The
transition bond charge will be adjusted from time to time based in part on the
actual rate of transition bond charge collections. However, there can be no
assurance that the servicer will be able to forecast accurately actual
electricity usage and the rate of collections or implement adjustments to the
transition bond charge that will cause transition bond charge collections to be
received at any particular rate. See "RISK FACTORS -- SERVICING RISKS" and "THE
BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE BPU'S TRANSITION BOND
CHARGE ADJUSTMENT PROCESS" in this prospectus.
A payment on a date that is later than the expected final payment date will
result in a longer weighted average life. In addition, if scheduled payments on
the transition bonds are
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received later than the applicable expected payment date, this might result in a
longer weighted average life of the transition bonds.
THE CONTRIBUTION AGREEMENT
The following summary describes material terms and provisions of the
contribution agreement pursuant to which JCP&L assigned the bondable transition
property to its wholly-owned subsidiary, JCP&L Sub, which, in turn, assigned the
bondable transition property to the seller, a wholly-owned subsidiary of JCP&L
Sub. The contribution agreement may be amended by the parties who signed the
document, if the trustee consents, and if notice of the substance of any
amendment is provided to each rating agency. The form of the contribution
agreement has been filed as an exhibit to the registration statement of which
this prospectus forms a part.
ASSIGNMENT OF THE BONDABLE TRANSITION PROPERTY AND RELATED RIGHTS TO THE SELLER.
For convenience of usage in this prospectus, there are numerous references
to the holding and transfer of bondable transition property by JCP&L and others.
However, pursuant to New Jersey State law and the BPU financing order, bondable
transition property arises, and constitutes a vested, presently existing
property right, upon (i) the transfer to an assignee and (ii) receipt of
consideration therefor.
Pursuant to the contribution agreement, JCP&L has:
1. assigned and transferred to JCP&L Sub, and JCP&L Sub has assigned and
transferred to the seller, without recourse, all right, title and interest of
JCP&L in and to the bondable transition property which represents the
irrevocable right to charge, collect and receive, and be paid from collections
of, the transition bond charges in the amount necessary to provide for the full
recovery of JCP&L's bondable stranded costs with respect to the related series
of transition bonds; and
2. agreed that JCP&L's representations, warranties, covenants and
obligations under the contribution agreement, including JCP&L's indemnification
obligations, inure to the benefit of JCP&L Sub, the seller, as the assignee of
JCP&L Sub, the issuer and the trustee for the benefit of the transition
bondholders.
In the contribution agreement, where applicable, JCP&L Sub makes the
corresponding assignments, transfers and agreements specified in items 1 and 2
above for the benefit of the seller, the issuer and the trustee for the benefit
of the transition bondholders.
The assignments and transfers of the bondable transition property by JCP&L
to JCP&L Sub and by JCP&L Sub to the seller are expressly stated to be absolute
transfers. Pursuant to the Competition Act, these assignments and transfers are
treated as absolute transfers of all of JCP&L's and JCP&L Sub's right, title and
interest, as in a true sale of the bondable transition property. Each of JCP&L
and JCP&L Sub agrees that, after giving effect to its respective assignment, it
has no rights in the bondable transition property.
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JCP&L'S REPRESENTATIONS AND WARRANTIES
In the contribution agreement, JCP&L makes the following representations
and warranties:
1. all information provided by JCP&L to JCP&L Sub, the seller or the issuer
with respect to the bondable transition property is correct in all material
respects;
2. the assignments and transfers contemplated by the contribution agreement
constitute absolute transfers of the initial bondable transition property or the
subsequent bondable transition property, as the case may be, from JCP&L to JCP&L
Sub and from JCP&L Sub to the seller, and the beneficial interest in and title
to the assigned and transferred bondable transition property would not be part
of the debtor's estate in the event of the filing of a bankruptcy petition by or
against JCP&L or JCP&L Sub under any bankruptcy law;
3. (a) JCP&L is the sole owner of the bondable transition property being
transferred and assigned to JCP&L Sub and, then, to the seller pursuant to the
contribution agreement on the initial contribution date or the subsequent
contribution date, as applicable;
(b) upon the execution and delivery of the contribution agreement and
the related assignment, the bondable transition property will be validly
assigned and transferred to JCP&L Sub and, then, to the seller, free and clear
of all liens other than liens created by the issuer pursuant to the indenture;
and
(c) all filings (including filings with the New Jersey Secretary of
State under the New Jersey Uniform Commercial Code) necessary in any
jurisdiction have been made (i) to give the issuer and its permitted assignees a
valid, first priority ownership interest in the bondable transition property,
perfected against third parties and free and clear of all liens of JCP&L or its
affiliates or anyone claiming through JCP&L or its affiliates, other than the
issuer or the trustee; and (ii) to give the trustee a first priority perfected
security interest in the bondable transition property;
4. the BPU financing order has been issued by the BPU in accordance with
the Competition Act; the BPU financing order and the process by which it was
issued comply with all applicable laws, rules and regulations; and the BPU
financing order is in full force and effect, is final, and is not subject to
appeal;
5. as of the date of issuance of any series of transition bonds, the
transition bonds will be entitled to the protections provided by the Competition
Act and, in accordance with the Competition Act, the provisions of the BPU
financing order relating to the bondable transition property and the transition
bond charge will not be revocable by the BPU and each issuance advice letter
delivered by the issuer or JCP&L to the BPU pursuant to the BPU financing order
will be irrevocable, final and uncontestable;
6. (a) under the Competition Act, the State of New Jersey may not limit,
alter or impair the bondable transition property or other rights vested in
JCP&L, JCP&L Sub, the
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seller, the issuer or the trustee for the benefit of the transition bondholders
pursuant to the BPU financing order until the transition bonds are fully paid
and discharged, or in any way limit, alter, impair or reduce the value or amount
of the bondable transition property, as approved pursuant to the BPU financing
order; and
(b) under the laws of the State of New Jersey and of the United States,
the State of New Jersey may not take any action that substantially impairs the
rights of the transition bondholders unless such action is a reasonable exercise
of the State of New Jersey's sovereign powers and appropriate to further a
significant and legitimate public purpose, and, under the Takings Clauses of the
New Jersey and United States Constitutions, in the event such action constitutes
a permanent appropriation of the property interest of transition bondholders in
the bondable transition property and deprives the transition bondholders of
their reasonable expectations arising from their investments in transition
bonds, this action cannot be taken unless just compensation, as determined by a
court of competent jurisdiction, is provided to the transition bondholders;
7. there is no order by any court providing for the revocation, alteration,
limitation or other impairment of the Competition Act, the BPU financing order,
the bondable transition property or the transition bond charge or any rights
arising under any of them or which seeks to enjoin the performance of any
obligations under the BPU financing order;
8. no other approval, authorization, consent, order or other action of, or
filing with, any court, federal or state regulatory body, administrative agency
or other governmental instrumentality is required in connection with the
creation, assignment or transfer of the bondable transition property, except
those that have been obtained or made;
9. except as disclosed by JCP&L, there are no proceedings or investigations
pending, or to JCP&L's best knowledge, threatened, before any court, federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over JCP&L, JCP&L Sub, the seller or the
issuer or their respective properties challenging the Competition Act, the BPU
financing order or the restructuring order (insofar as the restructuring order
relates to the sale, assignment or transfer of the bondable transition property
and the sale of the transition bonds);
10. the assumptions used in calculating the transition bond charge in the
issuance advice letter delivered by the issuer or JCP&L to the BPU pursuant to
the BPU financing order are reasonable and made in good faith;
11. (a) the bondable transition property constitutes a presently existing
property right;
(b) the bondable transition property includes, without limitation:
(1) the irrevocable right to charge, collect and receive, and be
paid from collections of, the transition bond charge in the
amounts
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necessary to provide for the full recovery of the bondable
stranded costs determined to be recoverable in the BPU
financing order;
(2) all rights of JCP&L, JCP&L Sub and the seller under the BPU
financing order;
(3) the rights to obtain periodic adjustments of the transition
bond charge; and
(4) all revenues, collections, payments, money and proceeds
arising under, or with respect to, all of the foregoing; and
(c) the BPU financing order, including the right to collect the
transition bond charge, is irrevocable by the BPU;
12. JCP&L is a corporation duly organized and in good standing under the
laws of the State of New Jersey, with corporate power and authority to own its
properties and conduct its business as currently owned and conducted;
13. JCP&L has the corporate power and authority to execute and deliver each
of the contribution agreement and the assignment of the bondable transition
property pursuant to the contribution agreement and to carry out its terms;
JCP&L has full corporate power and authority to own the bondable transition
property and to assign and transfer the initial and subsequent bondable
transition property; and JCP&L has duly authorized by all necessary corporate
action such assignment and transfer to JCP&L Sub and, then, to the seller
pursuant to the contribution agreement;
14. each of the contribution agreement, the assignment of the bondable
transition property pursuant to the contribution agreement, the sale agreement,
the bill of sale for the bondable transition property pursuant to the sale
agreement, the servicing agreement, the administration agreement between the
issuer and GPU Service, Inc., the issuer's limited liability company agreement
and the certificate of formation that was filed with the Secretary of State of
the State of Delaware to establish the issuer (which are collectively referred
to as the basic documents) constitutes a legal, valid and binding obligation of
each of the parties to each such agreement, enforceable against each of them in
accordance with its terms, subject to bankruptcy, receivership, insolvency,
fraudulent transfer, reorganization, moratorium or other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity;
15. the execution and delivery of each basic document by each of the
parties thereto, the performance by each of them of the transactions
contemplated by each such basic document or the fulfillment by each of them of
the terms of each such basic document have been duly authorized by all necessary
action and do not conflict with, result in any breach of any of the terms and
provisions of, or constitute (with or without notice or lapse of time) a default
under, the organizational documents of any of them, or any indenture, agreement
or other
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instrument to which any of these entities is a party or by which it is bound; or
result in the creation or imposition of any lien upon any of its properties
pursuant to the terms of any such indenture, agreement or other instrument; or
violate any law or any order, rule or regulation applicable to any of these
entities of any court or of any federal or state regulatory body, administrative
agency or other governmental instrumentality having jurisdiction over any of
these entities or its properties;
16. JCP&L Sub is a corporation duly organized and in good standing under
the laws of the State of Delaware, with corporate power and authority to own its
properties and conduct its business as currently owned or conducted;
17. JCP&L Sub has the corporate power and authority to execute and deliver
the each of the basic documents to which it is a party and to carry out its
terms; JCP&L Sub has full corporate power and authority to own the bondable
transition property and to assign and transfer the initial and subsequent
bondable transition property; and JCP&L Sub has duly authorized by all necessary
corporate action such assignment and transfer to the seller pursuant to the
contribution agreement;
18. the seller is a corporation duly organized and in good standing under
the laws of the State of Delaware, with corporate power and authority to own its
properties and conduct its business as currently owned or conducted;
19. the seller has the corporate power and authority to execute and deliver
each of the basic documents to which it is a party and to carry out its
respective terms; the seller has full corporate power and authority to own the
bondable transition property and to sell and transfer the initial and subsequent
bondable transition property to the issuer; and the seller has duly authorized
by all necessary corporate action such sale and transfer to the issuer pursuant
to the sale agreement;
20. the issuer is a limited liability company duly formed and in good
standing under the laws of the State of Delaware, with power and authority to
own its properties and conduct its business as currently owned or conducted;
21. the issuer has the power and authority to execute and deliver each of
the basic documents to which it is a party and the indenture and to carry out
their respective terms; the issuer has full power and authority to own the
bondable transition property and to grant a first priority perfected security
interest in the initial and subsequent bondable transition property to the
trustee under the indenture; and the issuer has duly authorized by all necessary
action such grant of a first priority perfected security interest to the trustee
pursuant to the indenture;
22. except for the filing of financing statements and continuation
statements under the New Jersey Uniform Commercial Code, no approval,
authorization, consent, order or other action of, or filing with, any court,
federal or state regulatory body, administrative agency or other governmental
instrumentality is required in connection with the execution and delivery of the
contribution agreement or the sale agreement by each of the parties to each such
agreement, the performance by such parties of the transactions contemplated by
each such agreement or the
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fulfillment by such parties of the terms of each such agreement, except those
that have been obtained or made;
23. there are no proceedings or investigations pending or, to JCP&L's best
knowledge, threatened, before any court, federal or state regulatory body,
administrative agency or other governmental instrumentality:
(a) asserting the invalidity of any of the basic documents or the
transition bonds;
(b) seeking to prevent the issuance of transition bonds or the
consummation of the transactions contemplated by the basic documents;
(c) seeking any determination or ruling that could reasonably be
expected to materially and adversely affect the performance by JCP&L, JCP&L Sub,
the seller or the issuer of their respective obligations under, or the validity
or enforceability of, the basic documents or the transition bonds; or
(d) challenging the seller's treatment of the transition bonds as debt
of the seller for federal and state income tax purposes;
24. after giving effect to the assignment and transfer of the bondable
transition property to JCP&L Sub and, then, to the seller pursuant to the
contribution agreement, JCP&L:
(a) will be solvent and expects to remain solvent;
(b) will be adequately capitalized to conduct its business and affairs
considering its size and the nature of its business and intended purposes;
(c) will not be engaged, nor does it expect to engage in, a business
for which its remaining property represents an unreasonably small portion of its
capital;
(d) believes that it will be able to pay its debts as they become due
and that this belief is reasonable; and
(e) will be able to pay its debts as they mature and does not intend to
incur, and does not believe that it will incur, indebtedness that it will not be
able to repay at its maturity;
25. each of the parties to the contribution agreement and the sale
agreement is duly qualified to do business as a foreign corporation or limited
liability company, as applicable, in good standing, and has obtained all
necessary licenses and approvals, in all jurisdictions in which the ownership or
lease of its property or the conduct of its business requires such
qualifications, licenses or approvals (except where the failure to so qualify or
to obtain such licenses or approvals would not be reasonably likely to have a
material adverse effect on it);
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26. the sale and transfer contemplated by the sale agreement constitute an
absolute transfer of the initial bondable transition property or subsequent
bondable transition property, as the case may be, from the seller to the issuer
and the beneficial interest in and title to the transferred bondable transition
property would not be part of the debtor's estate in the event of the filing of
a bankruptcy petition by or against JCP&L, JCP&L Sub or the seller under any
bankruptcy law; and
27. the seller will be the sole owner of the bondable transition property
being sold and transferred by the seller to the issuer pursuant to the sale
agreement and the related bill of sale on the initial sale date or the
subsequent sale date, as applicable; upon the execution and delivery of such
bill of sale and the related filing with the New Jersey Secretary of State under
the New Jersey Uniform Commercial Code, the bondable transition property will
have been validly sold and transferred to the issuer, free and clear of all
liens other than liens created by the issuer pursuant to the indenture.
JCP&L further agrees that these representations and warranties will inure
to the benefit of JCP&L Sub and the seller and that JCP&L Sub and the seller
will have the right to enforce such representations and warranties directly
against JCP&L. Also, JCP&L agrees that each of JCP&L Sub and the seller will
have the right to assign or otherwise convey its rights with respect to such
representations and warranties, including such right of enforcement, to the
issuer and that such representations and warranties will then inure to the
benefit of the issuer. In addition, JCP&L agrees that the issuer will have the
right to further assign such rights to the trustee for the benefit of the
transition bondholders. These representations and warranties will survive the
assignment of the bondable transition property to JCP&L Sub, the subsequent
assignment to the seller, the sale of the bondable transition property to the
issuer and the pledge thereof by the issuer to the trustee pursuant to the
indenture. JCP&L represents, warrants and agrees that these representations and
warranties will be true and correct on and as of each date on which bondable
transition property is sold by the seller to the issuer as if made by it on that
date.
In the contribution agreement, JCP&L Sub (1) assigns its rights against
JCP&L to the seller and (2) makes the corresponding representations and
warranties described above for the benefit of the seller, the issuer and the
trustee for the benefit of the transition bondholders.
JCP&L'S COVENANTS
In the contribution agreement, JCP&L makes the following covenants and
agrees that these covenants inure to the benefit of JCP&L Sub, the seller, the
issuer and the trustee for the benefit of the transition bondholders:
1. so long as any of the transition bonds are outstanding, JCP&L shall keep
in full force and effect its corporate existence and remain in good standing
under the laws of the State of New Jersey, and shall obtain and preserve its
qualification to do business in each jurisdiction in which such qualification is
necessary to protect the validity and enforceability of
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the contribution agreement and each other instrument or agreement to which JCP&L
is a party necessary to the proper administration of the contribution agreement
and the transactions contemplated hereby;
2. except for the transfers and assignments pursuant to the contribution
agreement, JCP&L shall not sell, pledge, assign or transfer to any other person,
or grant, create, incur, assume or suffer to exist any lien on, any of the
bondable transition property, whether now existing or hereafter created, or any
interest therein;
3. JCP&L shall not at any time assert any lien against or with respect to
any bondable transition property, and shall defend the right, title and interest
of JCP&L Sub, and upon assignment and transfer by JCP&L Sub to the seller, the
seller, and upon sale and transfer by the seller to the issuer, the issuer, and
upon pledge by the issuer to the trustee, the trustee for the benefit of the
transition bondholders, in, to and under the bondable transition property,
whether now existing or hereafter created, against all claims of third parties
claiming through or under JCP&L, JCP&L Sub or the seller;
4. in the event that JCP&L is no longer acting as the servicer, if JCP&L
receives collections in respect of the transition bond charge or the proceeds
thereof, JCP&L agrees to pay the servicer, on behalf of the issuer, all payments
received by JCP&L in respect thereof as soon as practicable after receipt
thereof by JCP&L, but in no event later than two business days after such
receipt;
5. JCP&L shall notify JCP&L Sub, the seller, the issuer and the trustee
promptly after becoming aware of any lien on any bondable transition property
other than any lien arising under the contribution agreement, the sale agreement
or the indenture;
6. JCP&L agrees to comply with its organizational or governing documents
and all laws, treaties, rules, regulations and determinations of any
governmental instrumentality applicable to JCP&L, except to the extent that
failure to so comply would not adversely affect the interests of JCP&L Sub, the
seller, the issuer or the trustee in the bondable transition property or under
any of the basic documents or JCP&L's performance of its obligations under the
contribution agreement or under any of the other basic documents to which it is
a party;
7. (a) so long as any of the transition bonds are outstanding, JCP&L shall
treat the transition bonds as debt of the seller for federal and state income
tax purposes;
(b) so long as any of the transition bonds are outstanding, JCP&L shall:
(1) clearly disclose in its financial statements that it is not the
owner of the bondable transition property and that the assets of JCP&L Sub, the
seller or the issuer are not available to pay creditors of JCP&L or any of its
other affiliates;
(2) clearly disclose the effects of all transactions among JCP&L,
JCP&L Sub, the seller and the issuer in accordance with generally accepted
accounting principles; and
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(3) not own or purchase any transition bonds;
8. JCP&L agrees that upon the assignment and transfer by JCP&L of the
bondable transition property to JCP&L Sub and, then, by JCP&L Sub to the seller
pursuant to the contribution agreement and the sale and transfer of the bondable
transition property by the seller to the issuer pursuant to the sale agreement:
(a) to the fullest extent permitted by law, including applicable BPU
orders and regulations, JCP&L Sub and, then, the seller and, then, the issuer
shall have all of the rights originally held by JCP&L with respect to the
bondable transition property (other than the rights of an electric public
utility set forth in the Competition Act), including the right to collect any
amounts payable by any customer or third party electric power supplier in
respect of such bondable transition property, notwithstanding any objection or
direction to the contrary by JCP&L; and
(b) any such payment to the issuer by any customer or third party
electric power supplier in respect of the transition bond charge shall discharge
such customer's or such third party electric power supplier's obligations in
respect of such bondable transition property to the extent of such payment,
notwithstanding any objection or direction to the contrary by JCP&L;
9. so long as any of the transition bonds are outstanding:
(a) JCP&L shall not make any statement or reference in respect of
bondable transition property that is inconsistent with the ownership thereof by
the issuer, other than for financial accounting, state or federal regulatory or
tax purposes, none of which shall affect the treatment of the transfer of the
bondable transition property as a true sale for the purposes of any bankruptcy
proceeding; and
(b) JCP&L shall not take any action in respect of the bondable
transition property except solely in its capacity as the servicer thereof
pursuant to the servicing agreement or as otherwise contemplated by the basic
documents, provided, however, that JCP&L, not in its capacity as servicer, shall
take such actions as are required to satisfy the requirements of paragraph 13
below;
10. JCP&L shall deliver to JCP&L Sub, the seller, the issuer and the
trustee, promptly after having obtained knowledge thereof, written notice in a
certificate, signed by authorized officers of JCP&L, of the occurrence of any
event which requires or which, with the giving of notice or the passage of time
or both, would require JCP&L to make any indemnification payment pursuant to the
contribution agreement;
11. JCP&L shall execute and file or cause to be executed and filed any
filings, including filings with the New Jersey Secretary of State under the New
Jersey Uniform Commercial Code, in the manner and in the places as may be
required by law fully to preserve, maintain and protect the interests of JCP&L
Sub, the seller, the issuer and their permitted assigns in the bondable
transition property, including all filings contemplated by the Competition Act
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relating to the transfer of the ownership of the bondable transition property
from JCP&L to JCP&L Sub, from JCP&L Sub to the seller, and from the seller to
the issuer;
12. JCP&L shall deliver to the seller and the issuer file-stamped copies
of, or filing receipts for, any document filed as provided above, as soon as
available following such filing;
13. JCP&L agrees to take legal or administrative actions, including
defending against or instituting and pursuing legal actions and appearing or
testifying at hearings or similar proceedings (the costs of any such actions to
be reimbursed from transition bond charge collections as described under "THE
INDENTURE -- HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" in this
prospectus), as may be reasonably necessary:
(a) to protect JCP&L Sub, the seller, the issuer and the trustee for
the benefit of the transition bondholders from claims, state actions or other
actions or proceedings of third parties which, if successfully pursued, would
result in a breach of any representation, warranty or covenant set forth in any
of the basic documents; or
(b) to block or overturn any attempts to cause a repeal of,
modification of or supplement to the Competition Act or the BPU financing order
or the rights of holders of bondable transition property by legislative
enactment or constitutional amendment that would be adverse to the holders of
bondable transition property; and
14. so long as any of the transition bonds are outstanding, JCP&L shall,
and shall cause each of its subsidiaries to, pay all material taxes, assessments
and governmental charges imposed upon it or any of its properties or assets or
with respect to any of its franchises, business, income or property before any
penalty accrues thereon if the failure to pay any such taxes, assessments and
governmental charges would, after any applicable grace periods, notices or other
similar requirements, result in a lien on the bondable transition property;
provided that no such tax need be paid if JCP&L or any of its subsidiaries is
contesting the same in good faith by appropriate proceedings promptly instituted
and diligently conducted and if JCP&L or that subsidiary has established
appropriate reserves as shall be required in conformity with generally accepted
accounting principles.
In the contribution agreement, where applicable, JCP&L Sub makes the
corresponding covenants described above for the benefit of the seller, the
issuer and the trustee for the benefit of the transition bondholders.
JCP&L further agrees that each of JCP&L Sub and the seller will have the
right to enforce the covenants listed above directly against JCP&L, and that
each of JCP&L Sub and the seller will have the right to assign or otherwise
convey its rights with respect to these covenants, including that right of
enforcement, to the issuer. In addition, JCP&L agrees that the issuer will have
the right to further assign these rights to the trustee for the benefit of the
transition bondholders.
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JCP&L'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE AND TO TAKE LEGAL
ACTION
Under the contribution agreement, JCP&L is obligated to indemnify JCP&L
Sub, the seller, the issuer, any swap counterparty and the trustee for the
benefit of the transition bondholders and related parties specified in the
contribution agreement, against:
1. any and all taxes, other than any taxes imposed on transition
bondholders solely as a result of their ownership of transition bonds, that may
at any time be imposed on or asserted against any of those persons under
existing law as of the date of issuance of the transition bonds as a result of
the assignment and transfer of the bondable transition property by JCP&L to
JCP&L Sub and by JCP&L Sub to the seller, or the sale and transfer of bondable
transition property by the seller to the issuer, or the acquisition or holding
of bondable transition property by JCP&L Sub, the seller or the issuer, or the
issuance and sale by the issuer of the transition bonds, including any sales,
general corporation, personal property, privilege, franchise or license taxes
not recovered by the issuer through the transition bond charge, or through the
market transition charge, but excluding any taxes imposed as a result of a
failure of that person to properly withhold or remit taxes imposed with respect
to payments on any transition bond; and
2. (a) any and all amounts of principal of and interest on the transition
bonds not paid when due or when scheduled to be paid in accordance with their
terms and the amount of any deposits to the issuer required to have been made in
accordance with the terms of the basic documents or the BPU financing order
which are not made when so required, in either case as a result of JCP&L's
breach of any of its representations, warranties or covenants contained in the
contribution agreement; and
(b) any and all liabilities, obligations, claims, actions, suits or
payments of any kind whatsoever that may be imposed on or asserted against any
of those persons (other than any liabilities, obligations or claims for, or
payments of, principal or interest on the transition bonds) together with any
reasonable costs and expenses incurred by that person, as a result of JCP&L's
breach of any of its representations, warranties or covenants contained in the
contribution agreement.
These indemnification obligations will rank pari passu with other
general unsecured obligations of JCP&L. The indemnities described above will
survive the termination of the contribution agreement and include reasonable
fees and expenses of investigation and litigation, including reasonable
attorneys' fees and expenses.
JCP&L's Obligation to Undertake Legal Action. The contribution agreement
requires JCP&L, in its own capacity and not in its capacity as the servicer, to
take legal or administrative actions as may be reasonably necessary to protect
the rights of the holders of the bondable transition property and the trustee
for the benefit of the transition bondholders. See "-- JCP&L's Covenants" above.
JCP&L will not be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its obligations under the contribution
agreement, and that in its opinion may involve it in any expense or liability.
However, this
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provision is subject to JCP&L's covenant to fully preserve, maintain and protect
the interests of the issuer, the trustee and the transition bondholders in the
bondable transition property.
SUCCESSORS TO JCP&L
The contribution agreement provides that any person:
o into which JCP&L may be merged or consolidated and which succeeds to all
or substantially all of the electric distribution business of JCP&L;
o which results from the division of JCP&L into two or more entities and
which succeeds to all or substantially all of the electric distribution business
of JCP&L;
o which may result from any merger or consolidation to which JCP&L shall be
a party and which succeeds to all or substantially all of the electric
distribution business of JCP&L;
o which may succeed to the properties and assets of JCP&L substantially as
a whole and which succeeds to all or substantially all of the electric
distribution business of JCP&L; or
o which may otherwise succeed to all or substantially all of the electric
distribution business of JCP&L
will be the successor to JCP&L.
The contribution agreement further requires that:
o immediately after giving effect to any transaction referred to above, no
representation, warranty or covenant made in the contribution agreement or the
sale agreement will have been breached and no servicer default, and no event
that, after notice or lapse of time, or both, would become a servicer default
will have occurred and be continuing;
o the successor to JCP&L must execute an agreement of assumption to perform
every obligation of JCP&L under the contribution agreement;
o the rating agencies will have received prior written notice of the
transaction; and
o officers' certificates and opinions of counsel specified in the
contribution agreement will have been delivered to the issuer and the trustee.
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THE SALE AGREEMENT
The following summary describes material terms and provisions of the sale
agreement pursuant to which the seller is selling and the issuer is purchasing
bondable transition property. The sale agreement may be amended by the parties
thereto, with the consent of the trustee, provided notice of the substance of
the amendment is provided by the issuer to each rating agency. The form of the
sale agreement has been filed as an exhibit to the registration statement of
which this prospectus forms a part.
SALE AND ASSIGNMENT OF BONDABLE TRANSITION PROPERTY AND RIGHTS UNDER THE SALE
AGREEMENT
On the initial transfer date, pursuant to the sale agreement, the seller
will sell and transfer to the issuer, without recourse, except as provided
therein, the initial bondable transition property. The bondable transition
property represents the irrevocable right to charge, collect and receive, and be
paid from collections of, transition bond charges in the amounts necessary to
provide for the full recovery of the bondable stranded costs with respect to the
related series of transition bonds. On the initial transfer date, the seller
will also assign to the issuer all of the seller's related rights under the
contribution agreement, including the right to enforce JCP&L's representations,
warranties, covenants and indemnities under the contribution agreement. The net
proceeds received from the sale of the transition bonds issued on the initial
transfer date will be applied by the issuer to the purchase of the bondable
transition property transferred to it on that date and the seller's related
rights under the contribution agreement.
In addition, the seller may from time to time on a subsequent transfer date
sell additional bondable transition property to the issuer, subject to the
satisfaction of the conditions specified in the sale agreement and the
indenture. Each subsequent sale will be financed through the issuance of an
additional series of transition bonds.
In accordance with the Competition Act, after the issuance of the BPU
financing order and upon the execution and delivery of the sale agreement and
the related bill of sale and the proper filing of a financing statement with
respect to the sale and transfer of the bondable transition property and any
subsequent bondable transition property, the sale and transfer will be perfected
as against all third persons, including judicial lien creditors.
Initial bondable transition property means bondable transition property, as
identified in the related bill of sale, sold and transferred to the issuer on
the initial transfer date pursuant to the sale agreement in connection with the
issuance of the initial series of transition bonds. Subsequent bondable
transition property means bondable transition property, as identified in the
related bill of sale, sold and transferred to the issuer on any subsequent
transfer date pursuant to the sale agreement in connection with the subsequent
issuance of a series of transition bonds.
Each sale and transfer of bondable transition property under the sale
agreement is subject to the satisfaction or waiver of each of the following
conditions:
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1. on or prior to the initial transfer date or subsequent transfer
date, as applicable, the seller shall have delivered to the issuer a duly
executed bill of sale identifying the bondable transition property to be sold
and transferred on that date, in the form required by the sale agreement;
2. as of the initial transfer date or subsequent transfer date, as
applicable, the seller shall not be insolvent and shall not have been made
insolvent by the sale and transfer, and the seller shall not be aware of any
pending insolvency with respect to itself;
3. as of the initial transfer date or subsequent transfer date, as
applicable, no breach by JCP&L, JCP&L Sub or the seller of its representations,
warranties or covenants in the contribution agreement shall exist, and no
servicer default shall have occurred and be continuing;
4. as of the initial transfer date or subsequent transfer date, as
applicable, the issuer shall have sufficient funds available to pay the purchase
price for the transferred bondable transition property to be sold and
transferred on that date, and all conditions to the issuance of one or more
series of transition bonds intended to provide sufficient funds set forth in the
indenture shall have been satisfied or waived;
5. on or prior to the initial transfer date or subsequent transfer
date, as applicable, the seller shall have taken all action required to transfer
to the issuer ownership of the transferred bondable transition property to be
sold and transferred on that date, free and clear of all liens other than liens
created by the issuer pursuant to the indenture, and the issuer shall have
taken, or JCP&L shall have taken on behalf of the issuer, any action required
for the issuer to grant the trustee a first priority perfected security interest
in the collateral and to maintain this security interest;
6. in the case of a sale and transfer of subsequent bondable transition
property only, the seller shall have provided the issuer and the rating agencies
with a timely additional notice specifying the subsequent transfer date for the
subsequent bondable transition property not later than 10 days prior to the
subsequent transfer date, and the subsequent offerings of transition bonds will
not result in a reduction or withdrawal of the then current rating of any
outstanding transition bonds;
7. the seller shall have delivered to the rating agencies, the issuer
and the trustee the opinions of counsel specified in the sale agreement; and
8. the seller shall have delivered to the issuer and the trustee an
officer's certificate confirming the satisfaction of each condition precedent
specified above.
THE SERVICING AGREEMENT
The following summary describes material terms and provisions of the
servicing agreement pursuant to which the servicer is undertaking to service
bondable transition property. The form of the servicing agreement has been filed
as an exhibit to the registration statement of which this prospectus forms a
part.
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JCP&L'S SERVICING PROCEDURES
General. The servicer, as agent for the issuer, will manage, service,
administer and make collections in respect of the transition bond charge. The
servicer's duties will include:
1. calculating and billing the transition bond charge and collecting the
transition bond charges from customers and third party electric power
suppliers, as applicable;
2. responding to inquiries by customers and third party electric power
suppliers, the BPU, or any federal, local or other state governmental
authority with respect to the transition bond charge;
3. accounting for transition bond charge collections, investigating and
resolving delinquencies, processing and depositing collections, making
periodic remittances and furnishing periodic reports to the issuer, the
trustee and the rating agencies;
4. selling, as agent for the issuer, defaulted or written-off accounts in
accordance with the servicer's usual and customary practices for
accounts of its own electric service customers; and
5. taking action in connection with adjustments to the transition bond
charge as described below.
The servicer is required to notify the issuer, the trustee and the rating
agencies in writing of any laws or BPU regulations promulgated after the
execution of the servicing agreement that have a material adverse effect on the
servicer's ability to perform its duties under the servicing agreement.
The servicer will remit to the trustee transition bond charge collections
based on its estimated system-wide write-off percentage and the average number
of days outstanding of bills. Each year, the servicer will reconcile remittances
of estimated payments arising from billed transition bond charges with the
trustee to more accurately reflect the amount of billed transition bond charges
that should have been remitted, based on the actual system-wide write-off
percentage. To the extent the remittances of estimated payments arising from the
transition bond charge exceed the amounts that should have been remitted based
on actual system-wide write-offs, the servicer will be entitled to withhold the
excess amount from any subsequent remittance to the trustee. To the extent the
remittances of estimated payments arising from the transition bond charges are
less than the actual payments arising from the transition bond charges, the
servicer will remit the amount of the shortfall to the trustee within two
business days, or, if monthly remittances are permitted, as described below, on
the next remittance date. Although the servicer will remit estimated payments
arising from the transition bond charge to the trustee, the servicer is not
obligated to make any payments on the transition bonds.
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In the event that the servicer makes changes to its current computerized
customer information system which would allow the servicer to track actual
transition bond charge collections and/or otherwise monitor payment and
collection activity more efficiently or accurately than is being done today, the
servicing agreement will allow the servicer to substitute actual remittance
procedures for the estimated remittance procedures described above and otherwise
modify the remittance procedures described above as may be appropriate in the
interests of efficiency, accuracy, cost and/or system capabilities. However, the
servicer will not be allowed to make any modification or substitution that will
materially adversely affect the transition bondholders. The servicer must also
give notice to the rating agencies of any such computer system changes no later
than 60 business days after the date on which all customer accounts are billed
on the new system.
For so long as:
1. JCP&L or any successor to JCP&L's electric public utility business
remains the servicer;
2. no servicer default has occurred and is continuing; and
3. (a) JCP&L, or any successor servicer referred to in this paragraph,
maintains a short-term rating of `A-1' or better by S&P, `P-1' or
better by Moody's, and `F-1' or better by Fitch IBCA Inc.; or
(b) any additional conditions or limitations imposed by the rating
agencies are complied with, and each rating agency has notified the
servicer, the issuer and the trustee that the monthly remittance
will not result in a reduction or withdrawal of the then current
rating of any outstanding class of transition bonds,
the servicer will remit to the trustee, on the ____ day of each calendar month,
or if such ___ day is not a business day, the next business day, referred to as
a monthly remittance date, for each preceding billing month, an amount equal to
the amount of transition bond charge collections estimated to have been received
during the preceding calendar month, based on the average number of days
outstanding of bills then in effect.
If the servicer has not satisfied the conditions specified above, the
servicer will remit estimated payments arising from the transition bond charge
to the trustee within two business days after receipt in the manner described
above.
A business day is any day other than a Saturday or Sunday or a day on which
banking institutions in New York, New York are required or authorized by law or
executive order to close.
Upon five business days' prior written notice to the rating agencies, the
servicing agreement may be amended with the consent of the trustee, but without
the consent of the transition bondholders:
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o to cure any ambiguity;
o to correct or supplement any provision in the servicing agreement;
o to add any provisions to or change in any manner or eliminate any of
the provisions of the servicing agreement; or
o to modify in any manner the rights of the transition bondholders;
provided that the action will not, as certified in a certificate of an officer
of the servicer delivered to the issuer and to the trustee and the managers,
adversely affect in any material respect the interest of any holder of
transition bonds then outstanding.
The servicing agreement may also be amended by the servicer and the issuer
with prior written notice to the rating agencies and with the consent of the
trustee and the transition bondholders evidencing at least a majority in
principal amount of the then outstanding transition bonds of all series, voting
together as a single class, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the servicing
agreement or of modifying in any manner the rights of the transition
bondholders. However, no amendment adopted in this manner may increase or
decrease, or accelerate or delay the timing of, collection of transition bond
charges, or reduce the percentage of transition bondholders required to consent
to amendments. No amendment of the provisions of the servicing agreement
relating to the servicer's remittance and transition bond charge adjustment
obligations will be permitted absent confirmation from the rating agencies that
such amendment will not result in a reduction or withdrawal of the then existing
rating of the transition bonds by the rating agencies (except that with regard
to Moody's it will be sufficient to provide ten days' prior notice of the
amendment). The issuer may also amend the servicing procedures provided in the
servicing agreement solely to address changes to the servicer's method of
calculating payments of transition bond charges received as a result of changes
to the servicer's current computerized information system, if the amendment does
not have a material adverse effect on the transition bondholders then
outstanding, with prior written notice to the trustee and the rating agencies,
but without the consent of the trustee, any rating agency or any transition
bondholder. These changes may include changes which would replace remittances
calculated by estimation procedures with remittances of transition bond charge
collections actually received.
THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS
Among other things, the servicing agreement requires the servicer to file
adjustment requests at least annually. The servicer is permitted under the BPU
financing order to file adjustment requests more often than annually but not
more frequently than quarterly (except that monthly filings are permitted during
the last year before scheduled maturity and continuing until final maturity). In
addition, the BPU financing order grants JCP&L, as servicer, the authority to
make "non-routine" filings for adjustment, under certain circumstances. See "THE
BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE BPU FINANCING ORDER"
in this prospectus. These adjustment requests are based on actual transition
bond charge collections and updated assumptions by the servicer as to projected
future usage of
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electricity by customers, expected delinquencies and write-offs, future payments
and expenses relating to bondable transition property and the transition bonds
and any amounts on deposit in the reserve subaccount. The servicer agrees to
calculate these adjustments to result in the calculations specified in "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE BPU'S TRANSITION BOND
CHARGE ADJUSTMENT PROCESS" in this prospectus.
The servicer will file adjustment requests 30 days in advance of the date
on which the servicer requests the adjustment to be effective. The adjustment
request will become effective on an interim basis 30 days after filing, absent a
determination of manifest error by the BPU, and will become final 60 days
thereafter in the absence of a BPU order to the contrary.
JCP&L'S TRANSITION BOND CHARGE COLLECTIONS
The servicer is required to remit all transition bond charge collections
from whatever source, based on the estimated collections, to the trustee for
deposit pursuant to the indenture on each remittance date. Until transition bond
charge collections are remitted to the collection account, the servicer will not
segregate them from its general funds. See "RISK FACTORS -- THE RISKS ASSOCIATED
WITH POTENTIAL BANKRUPTCY PROCEEDINGS" in this prospectus.
JCP&L'S COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE OF OTHER PARTIES
The issuer agrees to pay the servicer a servicing fee in any applicable
prospectus supplement. The servicing fee, together with any portion of the
servicing fee that remains unpaid from prior periods, will be paid solely to the
extent funds are available therefor as described under "THE INDENTURE -- HOW
FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" in this prospectus. The
servicing fee will be paid prior to the payment of or provision for any amounts
in respect of interest on and principal of the transition bonds. In the
servicing agreement, the servicer releases the issuer and the trustee from any
and all claims whatsoever relating to bondable transition property or the
servicer's servicing activities with respect thereto (other than with respect to
the servicing fees).
JCP&L'S DUTIES AS SERVICER
In the servicing agreement, the servicer has agreed, among other things,
that, in servicing bondable transition property:
1. except where the failure to comply with any of the following would not
have a material adverse effect on the issuer's or the trustee's
respective interests in bondable transition property:
(a) it will manage, service, administer and make collections in
respect of bondable transition property with reasonable care and
in material compliance with applicable law and regulations, using
the same degree of
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care and diligence that the servicer exercises with respect to
billing and collection activities that the servicer conducts for
itself and others;
(b) it will follow customary standards, policies and procedures;
(c) it will use all reasonable efforts, consistent with its customary
servicing procedures, to enforce and maintain rights in respect of
bondable transition property; and
(d) it will calculate the transition bond charge in compliance with
the Competition Act, the BPU financing order and any applicable
tariffs;
2. it will keep on file, in accordance with customary procedures, all
documents related to bondable transition property and will maintain
accurate and complete accounts pertaining to bondable transition
property; and
3. it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of bondable
transition property as they become due.
JCP&L'S REPRESENTATIONS AND WARRANTIES AS SERVICER
In the servicing agreement, the servicer will make representations and
warranties as of the date the seller sells or otherwise transfers bondable
transition property to the issuer to the effect, among other things, that:
1. the servicer is a corporation duly organized and in good standing under
the laws of the state of its incorporation, with the corporate power
and authority to own its properties and conduct its business as its
properties are currently owned and its business is presently conducted
and to execute, deliver and carry out the terms of the servicing
agreement, and has the power, authority and legal right to service the
bondable transition property;
2. the servicer is duly qualified to do business as a foreign corporation
and is in good standing in all jurisdictions in which it is required to
do so, except where the failure to do so would not be reasonably likely
to have a material adverse effect on it or on the transactions
contemplated by the servicing agreement;
3. the servicer's execution, delivery and performance of the servicing
agreement have been authorized by all necessary corporate action;
4. the servicing agreement constitutes a legal, valid and binding
obligation of the servicer, enforceable against the servicer in
accordance with its terms, subject to customary exceptions relating to
bankruptcy and other laws affecting creditors' rights generally and
equitable principles;
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5. the consummation of the transactions contemplated by the servicing
agreement does not conflict with the servicer's certificate of
incorporation or by-laws or any material agreement by which the
servicer is bound, nor result in any lien upon the servicer's
properties or violate any law or regulation applicable to the servicer
or its properties;
6. except for filings under the New Jersey Uniform Commercial Code, no
governmental actions or filings are required for the servicer to
execute, deliver and perform its obligations under the servicing
agreement, except those which have been taken or made;
7. each report or certificate delivered in connection with a transition
bond charge adjustment request to the BPU will be true and correct, or,
if based on predictions and assumptions, will be based on predictions
and assumptions that are reasonably based on historical performance or
facts known to the servicer on the date such report or certificate is
delivered; and
8. no proceeding or investigation is pending or, to the servicer's best
knowledge, threatened, before any court or other governmental authority
having jurisdiction over the servicer or its properties:
(a) except as disclosed by the servicer to the issuer (or as disclosed
in filings with the SEC made by the servicer), seeking any
determination or ruling that might materially and adversely affect
the performance by the servicer of its obligations under, or the
enforceability against the servicer of, the servicing agreement;
or
(b) relating to the servicer and which might adversely affect the
federal or state income tax attributes of the transition bonds.
JCP&L, AS SERVICER, WILL INDEMNIFY THE ISSUER AND OTHER RELATED ENTITIES
Under the servicing agreement, the servicer agrees to indemnify the issuer,
the trustee, for itself and on behalf of the transition bondholders, and related
parties specified in the servicing agreement, against any liabilities of any
kind that may be incurred by or asserted against any of those persons as a
result of:
1. the servicer's willful misfeasance, bad faith or gross negligence in
the performance of its duties under the servicing agreement or the
servicer's reckless disregard of its duties under the servicing
agreement;
2. the servicer's breach of any of its representations or warranties under
the servicing agreement; and
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3. litigation and related expenses relating to its above stated
indemnifications as servicer.
JCP&L, AS SERVICER, WILL PROVIDE STATEMENTS TO THE ISSUER AND TO THE TRUSTEE
For each payment date, the servicer will provide to the issuer and the
trustee a statement indicating, with respect to the bondable transition
property, among other things:
1. the amount to be paid to transition bondholders of each series and
class in respect of principal;
2. the amount to be paid to transition bondholders of each series and
class in respect of interest;
3. the projected outstanding principal balance of all transition bonds and
the projected outstanding principal balance of the transition bonds of
each series and class as of that payment date;
4. the amount on deposit in the overcollateralization subaccount and the
required overcollateralization level as of that payment date;
5. the amount on deposit in the capital subaccount as of that payment
date; and
6. the amount, if any, on deposit in the reserve subaccount as of that
payment date.
On the basis of this information, the trustee will furnish to the
transition bondholders on each payment date the report described under "THE
INDENTURE -- REPORTS TO HOLDERS OF THE TRANSITION BONDS."
On or before each remittance date, but not less frequently than monthly,
the servicer will furnish to the issuer and the trustee a statement setting
forth the aggregate amount remitted or to be remitted by the servicer to the
trustee for deposit on that remittance date pursuant to the indenture. In
addition, under the servicing agreement the servicer is required to give written
notice to the issuer, the trustee and each rating agency, promptly after having
obtained knowledge thereof, but in no event less than five business days
thereafter, of any event which, with the giving of notice or the passage of time
or both, would become a servicer default under the servicing agreement.
JCP&L WILL PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING AGREEMENT
An independent certified public accounting firm will furnish to the issuer,
the trustee and the rating agencies, on or before ______________ of each year, a
statement as to compliance by the servicer during the preceding calendar year,
or the relevant portion thereof, with procedures relating to the servicing of
bondable transition property. This report, which is referred to as the
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annual accountant's report, will state that the firm has performed the
procedures in connection with the servicer's compliance with the servicing
obligations of the servicing agreement, identifying the results of these
procedures and including any exceptions noted. The accounting firm providing the
report will be independent of the servicer within the meaning of the Code of
Professional Ethics of the American Institute of Certified Public Accountants.
The servicing agreement will also provide for delivery to the issuer and the
trustee, on or before ______________of each year, a certificate signed by an
officer of the servicer. This certificate will state that the servicer has
fulfilled its obligations under the servicing agreement for the preceding
calendar year, or the relevant portion thereof, or, if there has been a default
in the fulfillment of any relevant obligation, describing each default. The
servicer will give the issuer, each rating agency, and the trustee notice of any
servicer default under the servicing agreement.
MATTERS REGARDING JCP&L AS SERVICER
Pursuant to the servicing agreement and the BPU financing order, JCP&L may
assign its obligations under the servicing agreement to any successor upon the
satisfaction of certain conditions specified in the servicing agreement. Under
the servicing agreement, any person that succeeds to the major part of the
electric distribution business of the servicer and that assumes the obligations
of the servicer will be the successor of the servicer under the servicing
agreement. The servicing agreement further requires that:
1. immediately after giving effect to the transaction referred to in this
paragraph, no representation or warranty made by the servicer in the
servicing agreement will have been breached and no servicer default,
and no event which, after notice or lapse of time, or both, would
become a servicer default will, have occurred and be continuing;
2. officer's certificates and opinions of counsel will have been delivered
to the issuer, the trustee and the rating agencies; and
3. prior written notice will have been received by the rating agencies,
and the then current ratings on any of the transition bonds will not be
withdrawn or downgraded.
Subject to the foregoing provisions, JCP&L may not resign from the
obligations and duties imposed on it as servicer. However, JCP&L may resign as
servicer upon a determination, communicated to the issuer, the trustee and each
rating agency and evidenced by an opinion of counsel, that the performance of
JCP&L's duties under the servicing agreement is no longer legal. This
resignation will not become effective until a successor servicer has assumed the
duties of JCP&L under the servicing agreement.
Until the transition bonds have been paid in full and all related
obligations have been satisfied, JCP&L is obligated by the Competition Act to
provide electricity through its transmission and distribution system to its
customers and, as servicer, will have the right to meter, charge, bill, collect
and receive the transition bond charge from its customers for the account of the
issuer and the trustee. Each of these rights and obligations may be assigned at
the
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discretion of JCP&L. However, under the Competition Act, if JCP&L defaults in
respect of metering, charging, collecting and receiving revenues derived from
the transition bond charge, the trustee or the issuer may apply to the BPU or
any court of competent jurisdiction for an order designating a trustee or other
entity to act in place of JCP&L as the servicer for the metering, charging,
collecting and receiving the transition bond charge for the account of the
issuer and the trustee. Under the Competition Act, the BPU or the court is
required to issue the order. The BPU may, at its discretion, establish criteria
for the selection of any entity that may become a successor servicer upon
default or other adverse material change in the financial condition of JCP&L.
Except as expressly provided in the servicing agreement, the servicer will
not be liable to the issuer for any action taken or not taken pursuant to the
servicing agreement or for errors in judgment. However, the servicer will be
liable to the extent this liability is imposed by reason of the servicer's
willful misfeasance, bad faith or gross negligence or by reason of reckless
disregard of duties under the servicing agreement.
EVENTS CONSTITUTING A DEFAULT BY JCP&L IN ITS ROLE AS SERVICER
Servicer defaults will include, among other things:
1. any failure by the servicer to deliver to the trustee, on behalf of the
issuer, any required remittance that continues unremedied for a period
of five business days after written notice of such failure is received
by the servicer from the issuer or the trustee;
2. any failure by the servicer to perform in any material respect any
other agreement in the servicing agreement or any other basic document
to which it is a party, which failure materially and adversely affects
bondable transition property and which continues unremedied for 60 days
after notice of this failure has been given to the servicer by the
issuer, the trustee or the holders of not less than 25% of the
outstanding principal amount of the transition bonds of all series and
classes, acting together as a single class, or after discovery of this
failure by an officer of the servicer, as the case may be;
3. any representation or warranty made by the servicer in the servicing
agreement proves to have been incorrect when made, which has a material
adverse effect on any of the transition bondholders or the issuer and
which continues unremedied for 60 days after notice of this failure has
been given to the servicer by the issuer, the trustee or the holders of
not less than 25% of the outstanding principal amount of the transition
bonds of all series and classes, acting together as a single class, or
after discovery of this failure by an officer of the servicer, as the
case may be; or
4. an event of bankruptcy, insolvency, appointment of a receiver,
readjustment of debt, marshaling of assets and liabilities, or similar
proceedings with respect to the servicer or an action by the servicer
indicating its insolvency or inability to pay its debts as they come
due, as specified in the servicing agreement.
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The trustee, with the consent of the holders of not less than a majority of
the outstanding principal amount of the transition bonds of all series and
classes, voting together as a single class, may waive any default by the
servicer, except a default in making any required remittances to the trustee.
THE TRUSTEE'S RIGHTS IF JCP&L DEFAULTS AS SERVICER
As long as a servicer default remains unremedied, the trustee, with the
consent of the holders of not less than a majority of the outstanding principal
amount of the transition bonds of all series and classes, voting together as a
single class, may terminate all the rights and obligations of the servicer under
the servicing agreement. However, the servicer's indemnification obligation and
obligation to continue performing its functions as servicer until a successor
servicer is appointed may not be terminated. Under the servicing agreement, the
trustee, with the consent of the holders of not less than a majority of the
outstanding principal amount of the transition bonds of all series and classes,
voting together as a single class, may appoint a successor servicer. The trustee
may make arrangements for compensation to be paid to any successor servicer.
Only a successor servicer that is an electric public utility may bring an action
against a customer for nonpayment of the transition bond charge, or terminate
service for failure to pay the transition bond charge.
Upon a servicer default based upon the commencement of a case by or against
the servicer under the federal bankruptcy law or similar laws, the trustee and
the issuer may be prevented from effecting a transfer of servicing. See "RISK
FACTORS -- THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS" in this
prospectus. Upon a servicer default because of a failure to make required
remittances, the issuer or the trustee will have the right to apply to the BPU
for an order of sequestration and payment of revenues arising from the bondable
transition property. However, federal bankruptcy law may prevent the trustee and
issuer from applying to the BPU for such an order and/or the BPU from issuing or
enforcing this order.
THE OBLIGATIONS OF A SERVICER THAT SUCCEEDS JCP&L
In accordance with the BPU financing order and the servicing agreement, if
a third party succeeds to the role of the servicer, the predecessor servicer
will cooperate with the issuer, the trustee and the successor servicer in
terminating the predecessor servicer's rights and responsibilities under the
servicing agreement. This procedure includes the transfer to the successor
servicer of all related documentation and cash. The predecessor servicer will be
liable for all reasonable costs and expenses incurred in transferring servicing
responsibilities. A successor servicer may not resign unless it is prohibited
from serving by law. The predecessor servicer is obligated, on an ongoing basis,
to cooperate with the successor servicer and provide whatever information is,
and take whatever actions are, reasonably necessary to assist the successor
servicer in performing its obligations under the servicing agreement.
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THE INDENTURE
The following summary describes the material terms and provisions of the
indenture pursuant to which transition bonds will be issued. The form of the
indenture, including the form of the supplemental indenture, has been filed as
an exhibit to the registration statement of which this prospectus forms a part.
THE SECURITY FOR THE TRANSITION BONDS
To secure the payment of principal of and premium, if any, and interest on,
and any other amounts owing in respect of, the transition bonds pursuant to the
indenture, the issuer will grant to the trustee for the benefit of the
transition bondholders a security interest in all of the issuer's right, title
and interest in and to the following collateral:
1. the bondable transition property sold by the seller to the issuer
pursuant to the sale agreement and all proceeds thereof;
2. the contribution agreement;
3. the sale agreement;
4. all bills of sale delivered by the seller pursuant to the sale
agreement;
5. the servicing agreement;
6. the administration agreement;
7. the collection account, each subaccount therein and all amounts on
deposit therein from time to time, with the exception of $100,000 to be
held in the capital subaccount free of the lien of the indenture to
ensure that the issuer has sufficient assets to pay its expenses as
they come due;
8. any other property of whatever kind owned from time to time by the
issuer (including its general intangibles, accounts, chattel paper and
contract rights), other than:
a. cash or other property released to the issuer from the capital
subaccount in accordance with the indenture, which other property
is not expected to be substantial;
b. any payment received by the issuer pursuant to any hedge agreement
entered into by the issuer; and
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c. proceeds from the sale of the transition bonds used to pay the
costs of issuance of the transition bonds and the purchase price of
the bondable transition property pursuant to the sale agreement;
9. all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing; and
10. all payments on or under and all proceeds of every kind and nature
whatsoever in respect of any or all of the foregoing.
See "-- HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below.
TRANSITION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES
Transition bonds may be issued under the indenture from time to time in
series, to finance the purchase by the issuer of bondable transition property.
Any series of transition bonds may include one or more classes which differ,
among other things, as to interest rate and amortization of principal. The terms
of all transition bonds of the same series will be identical, unless a series
includes more than one class, in which case the terms of all transition bonds of
the same class will be identical. The particular terms of the transition bonds
of any series and class will be set forth in the related supplemental indenture.
The terms of any series and any classes thereof will not be subject to prior
review by, or consent of, the transition bondholders of any previously issued
series. See "RISK FACTORS -- OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE
TRANSITION BONDS," "THE TRANSITION BONDS" and "JCP&L'S RESTRUCTURING" in this
prospectus.
The principal source of repayment for all series of transition bonds will
be the transition bond charges collected by the servicer. Upon the issuance of
additional series of transition bonds, the transition bond charge will increase
by an amount designed to accommodate the payment requirements of the additional
series. The issuance will not be permitted if it would result in the downgrading
or withdrawal of any then current rating by a rating agency on any outstanding
transition bonds.
Under the indenture, the trustee will authenticate and deliver an
additional series of transition bonds only upon receipt by the trustee of, among
other things, a certificate of the issuer that no event of default has occurred
and is continuing, an opinion of counsel to the issuer and evidence from each
rating agency that the issuance of any additional series of transition bonds
will not result in the downgrading or withdrawal of any then current rating by a
rating agency on any outstanding transition bonds.
Opinion of Independent Certified Public Accountants Required for Each
Series or Class. In addition, in connection with the issuance of each new
series, the trustee will have to receive a certificate or opinion of an
independent certified public accounting firm of recognized national reputation.
This certificate will be based on the assumptions used in calculating the
initial transition bond charge with respect to the transferred bondable
transition property or, if
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applicable, the most recent revised transition bond charge with respect to the
transferred bondable transition property. The certificate will state to the
effect that, after giving effect to the issuance of the new series and the
application of the proceeds therefrom, and taking into account any amounts on
deposit in the reserve subaccount, the transition bond charge will be
sufficient:
o to pay all expenses, fees and charges of the issuer;
o to pay interest on each series of transition bonds when due;
o to pay principal of each series of transition bonds in accordance with
the expected amortization schedule for each series; and
o to fund the overcollateralization subaccount to the aggregate required
overcollateralization level as of each payment date.
If the issuance is a refunding issuance, the amount of money necessary to
pay premiums, if any, and the outstanding principal balance of and interest on
the transition bonds being refunded will be deposited into a separate account
with the trustee.
THE COLLECTION ACCOUNT FOR THE TRANSITION BONDS
Under the indenture, the issuer will establish the collection account, with
the trustee or at another eligible institution as described below. Funds
received from collections of the transition bond charge will be deposited into
the collection account. The collection account will be divided into the
following subaccounts, which need not be separate bank accounts:
o the general subaccount;
o the overcollateralization subaccount;
o the capital subaccount;
o if required by the indenture, one or more defeasance subaccounts; and
o the reserve subaccount.
All amounts in the collection account not allocated to any other subaccount
will be allocated to the general subaccount. Unless the context indicates
otherwise, references to the collection account include all of the subaccounts
contained therein. All money deposited from time to time in the collection
account, all deposits therein pursuant to the indenture, and all investments
made in eligible investments will be held by the trustee in the collection
account as part of the collateral, with the exception of $100,000 in the capital
subaccount.
The following institutions are eligible institutions for the establishment
of the collection account:
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(1) the corporate trust department of the trustee; or
(2) a depositary institution organized under the laws of the United States
of America or any state or any domestic branch of a foreign bank,
which:
(a) has either:
(i) a long-term unsecured debt rating of `A+' by S&P and Fitch
IBCA Inc. and `A1' by Moody's; or
(ii) a certificate of deposit rating of `A-1+' by S&P and `P-1' by
Moody's, or any other long-term, short-term or certificate of
deposit rating acceptable to the rating agencies; and
(b) whose deposits are insured by the Federal Deposit Insurance
Corporation.
Appropriate Investments for Funds in the Collection Account. All funds in
the collection account shall be invested in any of the following eligible
investments:
(1) direct obligations of, and obligations fully and unconditionally
guaranteed as to the timely payment by, the United States of America;
(2) demand deposits, time deposits, certificates of deposit of depository
institutions or trust companies specified in the indenture;
(3) commercial paper having, at the time of investment, a rating in the
highest rating category from each rating agency;
(4) demand deposits, time deposits and certificates of deposit which are
fully insured by the Federal Deposit Insurance Corporation;
(5) money market funds which have the highest rating from each rating
agency, including funds for which the trustee or any of its affiliates
is investment manager or advisor;
(6) banker's acceptances issued by any depository institution or trust
company referred to in clause 2 above;
(7) repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America or
agencies or instrumentalities thereof, entered into with depository
institutions or trust companies, in each case as specified in the
indenture; or
(8) repurchase obligations with respect to any security or whole loan, as
provided and with the ratings specified in the indenture.
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These eligible investments may not:
o be sold, liquidated or otherwise disposed of at a loss, prior to the
maturity thereof; or
o mature later than the business day prior to the next payment date,
except for any funds in the collection account in excess of the amount
needed to make all required and scheduled payments and deposits on the
next payment date, which may mature at any time before the second
following payment date.
In the case of a defeasance, the issuer will deposit cash or U.S.
Government Obligations in the defeasance subaccount. U.S. Government Obligations
are direct obligations, or certificates representing an ownership interest in
those obligations, of the United States of America, including any agency or
instrumentality thereof, for the payment of which the full faith and credit of
the United States of America is pledged and which are not callable at the
issuer's option. No money held in the collection account may be invested, and no
investment held in the collection account may be sold, unless the security
interest in the collection account will continue to be perfected in the
investment or the proceeds of the sale.
Remittances to the Collection Account. On each remittance date, the
servicer will remit to the trustee for deposit in the collection account (1) the
estimated transition bond charge collections based upon the average number of
days outstanding of bills and (2) any indemnity amounts to the trustee under the
indenture. An indemnity amount is any amount paid by JCP&L to the trustee, for
the trustee itself or on behalf of the transition bondholders, in respect of
indemnification obligations pursuant to the indenture, the contribution
agreement, the sale agreement or the servicing agreement. See "THE INDENTURE",
"THE CONTRIBUTION AGREEMENT," "THE SALE AGREEMENT" and "THE SERVICING AGREEMENT"
in this prospectus.
Collection Account. On the business day preceding each payment date, the
trustee will allocate amounts in the collection account as described under "HOW
FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below.
General Subaccount. Transition bond charge collections remitted to the
collection account will be deposited into the general subaccount.
Allocations from the general subaccount will be made as described under
"HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below. On each payment
date, the trustee will withdraw funds, to the extent available following payment
of the expenses of the trustee and servicer and certain other fees and expenses,
from the general subaccount to make payments on all series of transition bonds
as follows:
(1) current and past due interest payable on that payment date, including
interest on past due interest;
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(2) the principal of any series payable as a result of an acceleration
following the occurrence of an event of default, the principal of any
series payable on the legal final maturity date of that series, or the
principal of any series payable on a redemption date; and
(3) principalscheduled to be paid on any series on that payment date,
excluding amounts provided for in item (2) above.
Capital Subaccount. Upon the issuance of each series of transition bonds,
JCP&L will, through JCP&L Sub and the seller, make a capital contribution to the
issuer from JCP&L's general funds in an amount equal to the required
capitalization amount. The issuer will transfer this amount to the trustee for
deposit into the capital subaccount, which will be invested in eligible
investments. The trustee will draw on amounts in the capital subaccount to the
extent that, after allocating funds as described in "HOW FUNDS IN THE COLLECTION
ACCOUNT WILL BE ALLOCATED" below, amounts on deposit in the general subaccount,
the reserve subaccount and the overcollateralization subaccount are insufficient
to make scheduled principal and interest distributions and payments of fees and
expenses specified in items (1) through (7) of that section. Upon the retirement
of any series of outstanding transition bonds, the amounts on deposit in the
capital subaccount in excess of the sum of the aggregate required capitalization
amount for all remaining series will be released to the issuer, free of the lien
of the indenture. The issuer is contractually obligated to pay over to JCP&L any
amounts released to the issuer from the capital subaccount upon any retirement.
Overcollateralization Subaccount. Transition bond charge collections to the
extent available as described in "HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" below will be allocated to the overcollateralization subaccount on
each payment date. Each prospectus supplement will specify the required
overcollateralization level for that series on each payment date. The
overcollateralization amount for any series will be funded over the life of the
transition bonds of that series and in the aggregate will equal the amount
stated in the related prospectus supplement for that series, which is referred
to as the required overcollateralization amount for that series. The required
overcollateralization level for the overcollateralization subaccount at any time
will equal the aggregate of the required overcollateralization levels for all
outstanding series.
Amounts in the overcollateralization subaccount will be invested in
eligible investments. On each payment date, the trustee will draw on the
overcollateralization subaccount to the extent that, after allocating funds as
described in "HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below,
amounts on deposit in the general subaccount and the reserve subaccount are
insufficient to make scheduled principal and interest distributions and payment
of fees and expenses specified in items (1) through (7) of that section. Upon
retirement of any series of outstanding transition bonds, the amounts on deposit
in the overcollateralization subaccount in excess of the sum of the aggregate
required overcollateralization level for all remaining series will be released
to the issuer, free of the lien of the indenture.
Reserve Subaccount. Transition bond charge collections available on any
payment date that are not necessary to pay the amounts specified in items (1)
through (11) in "HOW FUNDS
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IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below will be allocated to the
reserve subaccount. Amounts in the reserve subaccount will be invested in
eligible investments. On each payment date, the trustee will draw on the reserve
subaccount, if any, to the extent that, after allocating funds as described in
"HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below, amounts on
deposit in the general subaccount are insufficient to make scheduled principal
and interest distributions and payments of fees and expenses specified in items
(1) through (7), (9) and (10) of that section.
Defeasance Subaccount. In the event funds are remitted to the trustee in
connection with the exercise of the legal defeasance option or the covenant
defeasance option, the issuer will establish a defeasance subaccount for each
series. If this occurs, funds set aside for future payment of the transition
bonds will be deposited into the applicable defeasance subaccount. All amounts
in a defeasance subaccount will be applied by the trustee to the payment to the
holders of the affected transition bonds. These amounts will include all sums
due for principal, premium, if any, and interest. These amounts will be applied
in accordance with the provisions of the transition bonds and the indenture. See
"THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS" below.
HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED
Amounts remitted from the servicer to the trustee, and all investment
earnings on the subaccounts in the collection account other than the capital
subaccount, will be deposited into the general subaccount of the collection
account. On each payment date, the trustee will pay or allocate all amounts in
the general subaccount in the following priority:
(1) payment of all amounts owed to the trustee and all amounts owed
to the independent managers of the issuer;
(2) payment of the servicing fees and all unpaid servicing fees
from prior periods;
(3) payment of the administration fee in an amount specified in the
administration agreement between the issuer and GPU Service,
Inc.;
(4) so long as no event of default has occurred and is continuing
or would be be caused by this payment, the payment of current
operating expenses of the issuer (up to an annual aggregate of
$ for all series);
(5) payment of interest as follows:
o first, unpaid interest on any series from prior periods,
including payment of any amount payable to any swap or
hedge counterparty on any interest rate swap or hedge
agreement, including interest on past due interest;
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o then, payment of the current interest then due on the
transition bonds of each series, including payment of any
amount payable to the swap counterparty on any interest
rate swap;
(6) payment of the principal then legally required to be paid on
the transition bonds of any series as follows:
o the unpaid principal amount of any series if such payment
date is on or after the legal final maturity date of that
series; plus
o the unpaid principal amount of any transition bonds called
for redemption; plus
o the unpaid principal amount of any series due upon an
acceleration following an event of default;
(7) payment of the principal then scheduled to be paid on the
transition bonds of any series;
(8) payment of any remaining unpaid operating expenses and
indemnity amounts then owed by the issuer;
(9) replenishment of any withdrawals from the capital subaccount,
up to the aggregate required capitalization amount;
(10) allocation of any required amount necessary to cause the amount
in the overcollateralization subaccount to equal the aggregate
required overcollateralization level;
(11) payment of any termination or breakage amounts payable under
any swap or hedge agreement relating to any floating rate
transition bonds;
(12) so long as no event of default has occurred and is continuing,
release to the issuer of an amount equal to investment earnings
since the preceding payment date on amounts in the capital
subaccount; and
(13) allocation of the remainder, if any, to the reserve subaccount.
Following repayment of all outstanding series of transition bonds, the
balance, if any, remaining in the general subaccount will be released to the
issuer, free of the lien of the indenture.
If on any payment date funds in the general subaccount are insufficient to
make the allocations contemplated by items (1) through (11) above, the trustee
will draw from amounts on deposit in the following subaccounts in the following
order up to the amount of the shortfall:
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o from the reserve subaccount, for allocations described in items (1)
through (7), (9) and (10);
o from the overcollateralization subaccount, for allocations described in
items (1) through (7); and
o from the capital subaccount, for allocations described in items (1)
through (7).
If the amount in the reserve subaccount is insufficient to cover the
shortfalls for all outstanding series, the trustee will allocate funds in the
reserve subaccount pro rata, as follows, unless otherwise provided in the
prospectus supplement. If there is a shortfall in the amounts necessary to make
interest payments, the trustee will distribute interest pro rata to each series
and class of transition bonds based on the interest then due on that series or
class. If there is a shortfall in the amount necessary to make principal
payments that are due and payable, including upon an acceleration following an
event of default, the trustee will distribute principal pro rata among the
series and classes of transition bonds in proportion to the amount of principal
due and payable for each series or class. If there is a shortfall in the amount
necessary to make scheduled principal payments, the trustee will distribute
principal pro rata among the series and classes in proportion to the amount
scheduled to be paid for each series or class.
REPORTS TO HOLDERS OF THE TRANSITION BONDS
With respect to each series of transition bonds, on or prior to each
payment date, the trustee will deliver a statement prepared by the trustee to
each transition bondholder of that series. This statement will include, to the
extent applicable, the following information, as well as any other information
so specified in the related supplemental indenture, as to the transition bonds
of that series with respect to that payment date or the period since the
previous payment date:
o the amount to be paid to transition bondholders of that series and
class in respect of principal;
o the amount to be paid to transition bondholders of that series and
class in respect of interest;
o the projected outstanding principal balance of all transition bonds and
the projected outstanding principal balance of the transition bonds for
that series and class as of that payment date;
o the amount on deposit in the overcollateralization subaccount and the
required overcollateralization level as of that payment date;
o the amount on deposit in the capital subaccount as of that payment
date; and
o the amount, if any, on deposit in the reserve subaccount as of that
payment date.
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THE ISSUER AND THE TRUSTEE MAY MODIFY THE INDENTURE
Modifications That Do Not Require Consent of Transition Bondholders.
Without the consent of any of the holders of the outstanding transition bonds
but with prior notice to the rating agencies, the issuer and the trustee may
execute a supplemental indenture for any of the following purposes:
o to correct or amplify the description of the collateral, or better to
confirm unto the trustee the collateral, or to subject to the lien of
the indenture additional property;
o to evidence the succession, in compliance with the indenture, of
another person to the issuer, and the assumption by the successor of
the covenants of the issuer in the indenture and in the transition
bonds;
o to add to the covenants of the issuer, for the benefit of the holders
of the transition bonds, or to surrender any right or power conferred
upon the issuer in the indenture;
o to assign any property to or with the trustee;
o to cure any ambiguity, to correct any inconsistent provision of the
indenture or any supplemental indenture or to make any other provisions
with respect to matters arising under the indenture or in any
supplemental indenture; but:
o this action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
transition bondholder; and
o the then current ratings on any outstanding transition bonds shall
not be withdrawn or downgraded;
o to provide for a successor trustee and to facilitate the administration
of the trusts under the indenture by more than one trustee, pursuant to
the indenture;
o to modify the indenture to effect the qualification of the indenture
under the Trust Indenture Act of 1939, as amended ("Trust Indenture
Act") or any similar federal statute hereafter enacted and to add to
the indenture any other provisions as may be expressly required by the
Trust Indenture Act; or
o to set forth the terms of any series that has not theretofore been
authorized by a supplemental indenture, provided that the then current
ratings on any outstanding transition bonds have not been withdrawn or
downgraded.
Modifications That Require the Approval of the Transition Bondholders. The
issuer and the trustee also may, with prior notice to the rating agencies and
with the consent of the holders of not less than a majority of the outstanding
principal amount of the transition bonds of all
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series or classes to be affected thereby, voting together as a single class,
execute a supplemental indenture to add any provisions to, or change in any
manner or eliminate any of the provisions of, the indenture or modify in any
manner the rights of the transition bondholders under the indenture. However,
such a supplemental indenture may not, without the consent of the holder of each
outstanding transition bond of each series or class affected thereby:
o change the date of payment of any scheduled payment of principal of or
premium, if any, or interest on any transition bond, or reduce the
principal amount thereof, the interest rate specified thereon or the
redemption price or the premium, if any, with respect thereto, change
the provisions of the indenture and the applicable supplemental
indenture relating to the application of collections on, or the
proceeds of the sale of, the collateral to payment of principal of or
premium, if any, or interest on the transition bonds, or change the
currency in which any transition bond or any interest thereon is
payable;
o impair the right to institute suit for the enforcement of the
provisions of the indenture regarding payment;
o reduce the percentage of the principal amount of the outstanding
transition bonds, or of a series or class thereof, the consent of the
holders of which is required for any supplemental indenture, or the
consent of the holders of which is required for any waiver of
compliance with specified provisions of the indenture or of defaults
and their consequences;
o reduce the percentage of the principal amount of the outstanding
transition bonds required to direct the trustee to direct the issuer to
liquidate the collateral;
o modify the section of the indenture relating to the consent of
transition bondholders with respect to supplemental indentures, except
to increase any percentage specified therein or to provide that those
provisions of the indenture or the basic documents specified in the
indenture cannot be modified or waived without the consent of each
outstanding transition bondholder affected thereby;
o modify the indenture to affect the amount of any payment of interest,
principal or premium, if any, payable on any transition bond on any
payment date or change the redemption dates, expected amortization
schedules or series legal final maturity dates or class legal final
maturity dates of any transition bonds;
o decrease the required capital amount, the overcollateralization amount
or the required overcollateralization level with respect to any payment
date;
o modify the indenture regarding the voting of transition bonds held by
the issuer, the seller, an affiliate of either of them or any obligor
on the transition bonds;
o decrease the percentage of the principal amount of the outstanding
transition bonds required to amend the sections of the indenture which
specify the applicable
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percentage of the principal amount of the outstanding transition bonds
necessary to amend the indenture or other related agreements specified
therein; or
o permit the creation of any lien ranking prior to or on a parity with
the lien of the indenture with respect to any of the collateral for the
transition bonds or, except as otherwise contemplated in the indenture,
terminate the lien of the indenture on any property or deprive the
holder of any transition bond of the security of the indenture.
Enforcement of the Contribution Agreement, Sale Agreement and Servicing
Agreement. The indenture will provide that the issuer will take all lawful
actions to enforce the issuer's rights under the contribution agreement, the
sale agreement and the servicing agreement. The indenture will also provide that
the issuer will take all lawful actions to compel or secure the performance and
observance by each of JCP&L, JCP&L Sub and the seller of its obligations to the
issuer under the contribution agreement, the sale agreement and the servicing
agreement. So long as no event of default occurs and is continuing, the issuer
may exercise any and all rights, remedies, powers and privileges lawfully
available to the issuer under or in connection with the contribution agreement,
the sale agreement and the servicing agreement. However, if the issuer and the
servicer propose to amend, modify, waive, supplement, terminate or surrender, or
agree to any amendment, modification, supplement, termination, waiver or
surrender of, the process for adjusting the transition bond charge, the issuer
must notify the trustee and the trustee must notify transition bondholders of
this proposal. In addition, the trustee may consent to this proposal only with
the consent of the holders of not less than a majority of the outstanding
principal amount of the transition bonds of all series or classes materially and
adversely affected thereby, voting together as a single class , and only if
consent to this proposal will not result in a reduction or withdrawal of the
then current rating of any outstanding transition bonds.
If an event of default occurs and is continuing, the trustee may, and at
the direction of the holders of not less than a majority of the outstanding
principal amount of the transition bonds of all series or classes, voting
together as a single class, shall, exercise all rights, remedies, powers,
privileges and claims of the issuer against JCP&L, JCP&L Sub, the seller or the
servicer under or in connection with the contribution agreement, the sale
agreement and the servicing agreement, and any right of the issuer to take this
action shall be suspended. In the event of a foreclosure, there is likely to be
a limited market, if any, for the bondable transition property, and, therefore,
foreclosure may not be a realistic or practical remedy.
Modifications to the Contribution Agreement, the Sale Agreement and the
Servicing Agreement. With the consent of the trustee, the contribution
agreement, the sale agreement and the servicing agreement may be amended at any
time and from time to time, without the consent of the transition bondholders.
However, such an amendment may not adversely affect the interest of any
transition bondholder in any material respect without the consent of the holders
of not less than a majority of the outstanding principal amount of the
transition bonds of all series or classes materially and adversely affected
thereby, voting together as a single class.
Notification of the Rating Agencies, the Trustee and the Transition
Bondholders of any Modification. If the issuer, the seller, JCP&L Sub or JCP&L:
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o proposes to amend, modify, waive, supplement, terminate or surrender,
or agree to any other amendment, modification, waiver, supplement,
termination or surrender of, the terms of the contribution agreement,
the sale agreement, or the servicing agreement; or
o waives timely performance or observance under the contribution
agreement, the sale agreement or the servicing agreement;
in each case in a way which would materially and adversely affect the interests
of transition bondholders, the issuer must first notify the rating agencies of
the proposed amendment. Upon receiving notification from the rating agencies
regarding whether such amendment would affect the then current ratings on all
outstanding transition bonds, the issuer must thereafter notify the trustee and
the trustee must notify the transition bondholders of the proposed amendment and
whether the then current ratings on the transition bonds have been affected. The
trustee will consent to this proposed amendment, modification, supplement or
waiver only with the consent of the holders of not less than a majority of the
outstanding principal amount of the transition bonds of all series or classes
materially and adversely affected thereby, voting as a class, and only if such
action will not result in a reduction or withdrawal of the then current rating
of any outstanding transition bonds.
WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION BONDS
An "Event of Default" is defined in the indenture as:
o a default for five business days in the payment of any interest on any
transition bond;
o a default in the payment of the principal of any transition bond of any
series on the legal final maturity date for that series or, if
applicable, any class on the legal final maturity date for that class;
o a default in the payment of the redemption price for any transition
bond on the redemption date therefor;
o a default in the observance or performance of any covenant or agreement
of the issuer made in the indenture (other than those specifically
dealt with in the first three items above) and the continuation of that
default for a period of 30 days after the earlier of the date (a)
notice is given to the issuer by the trustee; (b) notice is given to
the issuer and the trustee by the holders of not less than 25% of the
outstanding principal amount of the transition bonds; or (c) the issuer
has knowledge of the default; and
o specified events of bankruptcy, insolvency, receivership or liquidation
of the issuer.
If an event of default occurs and is continuing, the trustee or holders of
not less than a majority of the outstanding principal amount of the transition
bonds of all series, voting together as a single class , may declare the
principal of all series of the transition bonds to be immediately due and
payable. This declaration may, under the circumstances specified in the
indenture, be
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rescinded by the holders of not less than a majority of the outstanding
principal amount of the transition bonds of all series, voting together as a
single class.
When the Trustee Can Sell the Collateral. If the transition bonds of all
series have been declared to be due and payable following an event of default,
the trustee may, in its discretion, either:
o sell the collateral; or
o elect to have the issuer maintain possession of the collateral and
continue to apply distributions on the collateral as if there had been
no declaration of acceleration.
The trustee is prohibited from selling the collateral following an event of
default other than a default in the payment of any principal, a default for five
days or more in the payment of any interest on any transition bond of any series
or a default in the payment of the redemption price for any transition bond on
the redemption date therefor unless:
o the holders of 100% of the outstanding principal amount of the
transition bonds of all series consent to this sale; or
o the proceeds of this sale are sufficient to pay in full the principal
of and premium, if any, and accrued interest on all outstanding
transition bonds; or
o the trustee determines that funds provided by the collateral would not
be sufficient on an ongoing basis to make all payments on the
transition bonds of all series as these payments would have become due
if the transition bonds had not been declared due and payable, and the
trustee obtains the consent of the holders of not less than 66 2/3% of
the outstanding principal amount of the transition bonds of all series.
Right of Transition Bondholders to Direct Proceedings. Subject to the
provisions for indemnification and the limitations contained in the indenture,
the holders of not less than a majority of the outstanding principal amount of
the transition bonds of all series, voting together as a single class, will have
the right to direct the time, method and place of conducting any proceeding or
any remedy available to the trustee or exercising any trust or power conferred
on the trustee; provided that, among other things:
o this direction shall not conflict with any rule of law or with the
indenture;
o subject to the provisions specified in the indenture, any direction to
the trustee to sell or liquidate the collateral shall be by the holders
of 100% of the outstanding principal amount of the transition bonds of
all series; and
o the trustee may take any other action deemed proper by the trustee that
is not inconsistent with this direction.
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In case an event of default occurs and is continuing, the trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the direction of any of the holders of transition bonds of any series if it
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with this
request. The trustee does not need to take any action pursuant to the direction
of the transition bondholders if it determines that this action might materially
and adversely affect the rights of any transition bondholder not consenting to
this action.
Waiver of Default. The holders of not less than a majority of the
outstanding principal amount of the transition bonds of all series, voting
together as a single class, may, in those cases specified in the indenture,
waive any default with respect thereto. However, they may not waive a default in
the payment of principal of or premium, if any, or interest on any of the
transition bonds or a default in respect of a covenant or provision of the
indenture that cannot be modified without the waiver or consent of the holders
of all of the outstanding transition bonds of all affected series and classes.
No transition bondholder will have the right to institute any proceeding,
judicial or otherwise, or to avail itself of the right to foreclose on the
bondable transition property or otherwise enforce the lien on the bondable
transition property, with respect to the indenture, unless:
o the holder previously has given to the trustee written notice of a
continuing event of default;
o the holders of not less than 25% of the outstanding principal amount of
the transition bonds of all series have made written request of the
trustee to institute the proceeding in its own name as trustee;
o the holder or holders have offered the trustee security or indemnity
reasonably satisfactory to the trustee against the liabilities to be
incurred in complying with the request;
o the trustee for 60 days after its receipt of the notice, request and
offer of indemnity has failed to institute the proceeding; and
o no direction inconsistent with this written request has been given to
the trustee during the 60-day period referred to above by the holders
of not less than a majority of the outstanding principal amount of the
transition bonds of all series.
COVENANTS OF THE ISSUER
The issuer will keep in effect its existence as a limited liability company
under Delaware law, provided that the issuer may consolidate with or merge into
another entity or sell substantially all of its assets to another entity and
dissolve if:
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o the entity formed by or surviving the consolidation or merger or to
whom substantially all of its assets are sold is organized under the
laws of the United States or any state thereof and expressly assumes by
a supplemental indenture the due and punctual payment of the principal
of and premium, if any, and interest on all transition bonds and the
performance of the issuer's obligations under the indenture;
o the entity expressly assumes all obligations and succeeds to all rights
of the issuer under the contribution agreement, the sale agreement and
the servicing agreement pursuant to an assignment and assumption
agreement executed and delivered to the trustee;
o no default or event of default will have occurred and be continuing
immediately after giving effect to the merger, consolidation or sale;
o there has not been a reduction or withdrawal of the then current rating
of any outstanding class or series of transition bonds;
o the issuer has received an opinion of counsel to the effect that this
consolidation or merger or sale would have no material adverse tax
consequence to the issuer or any transition bondholder, the
consolidation or merger or sale complies with the indenture and all
conditions precedent therein relating to the consolidation or merger or
sale and will result in the trustee maintaining a continuing valid
first priority security interest in the collateral;
o none of the bondable transition property, the BPU financing order or
the seller's, the servicer's or the issuer's rights under the
Competition Act or the BPU financing order are impaired thereby; and
o any action that is necessary to maintain the lien and security interest
created by the indenture will have been taken.
Additional Covenants of the Issuer. The issuer will take any action
necessary or advisable to, among other things, maintain and preserve the lien
and security interest, and priority thereof, of the indenture. The issuer will
not permit the validity of the indenture to be impaired, the lien to be amended,
subordinated, terminated or discharged, or any person to be released from any
covenants or obligations, except as expressly permitted by the indenture. The
issuer will also not permit any lien, charge, claim, security interest, mortgage
or other encumbrance, other than the lien and security interest created by the
indenture, to be created on or extend to or otherwise arise upon or burden the
collateral or any part thereof or any interest therein or the proceeds thereof.
Finally, the issuer will not permit the lien of the indenture not to constitute
a continuing valid first priority security interest in the collateral.
The issuer may not, among other things:
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o except as expressly permitted by the indenture, dispose of any of the
collateral unless directed to do so by the trustee in accordance with
the indenture; or
o claim any credit on, or make any deduction from the principal or
premium, if any, or interest payable in respect of, the transition
bonds, other than amounts properly withheld under the Internal Revenue
Code, or assert any claim against any present or former transition
bondholder because of the payment of taxes levied or assessed upon the
issuer.
The issuer may not engage in any business other than purchasing and owning
the bondable transition property, issuing transition bonds from time to time,
pledging its interest in the collateral to the trustee to secure the transition
bonds, and performing activities that are necessary, suitable or convenient to
accomplish the foregoing.
The Issuer May Not Engage in Any Other Financial Transactions. The issuer
may not issue, incur, assume or guarantee any indebtedness except for the
transition bonds and any obligations under any credit enhancement or hedge
agreement for any series of transition bonds. Also, the issuer may not guarantee
or otherwise become contingently liable in connection with the obligations,
stocks or dividends of, or own, purchase, repurchase or acquire, or agree
contingently to acquire any stock, obligations, assets or securities of, or any
other interest in, or make any capital contribution to, any other person, other
than the eligible investments. The issuer may not make any loan or advance or
credit to any person. The issuer will not make any expenditure for capital
assets or lease any capital asset other than bondable transition property
purchased from the seller pursuant to, and in accordance with, the contribution
agreement and the sale agreement. The issuer may not make any payments,
distributions or dividends to any member of the issuer in respect of its
membership interest in the issuer, other than any amount released to the issuer
by the trustee in accordance with the indenture and except as otherwise provided
in the indenture.
The servicer will deliver to the trustee, annually, the report of the
independent certified public accounting firm, as well as compliance certificates
and monthly reports regarding distributions and other statements, required by
the servicing agreement. See "THE SERVICING AGREEMENT" in this prospectus.
ACCESS TO THE LIST OF HOLDERS OF THE TRANSITION BONDS
Any transition bondholder may, by written request to the trustee, obtain
access to the list of all transition bondholders maintained by the trustee for
the purpose of communicating with other transition bondholders with respect to
their rights under the indenture or the transition bonds. The trustee may elect
not to afford a requesting transition bondholder access to the list of
transition bondholders if the trustee agrees to mail the desired communication
or proxy, on behalf and at the expense of the requesting transition bondholder,
to all transition bondholders.
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THE ISSUER MUST FILE AN ANNUAL COMPLIANCE STATEMENT
The issuer will be required to file annually with the trustee a written
statement as to the fulfillment of its obligations under the indenture. In
addition, the issuer will furnish to the trustee an opinion of counsel
concerning filings made by the issuer on an annual basis and before the
effectiveness of any amendment to the contribution agreement, the sale agreement
or the servicing agreement.
THE TRUSTEE MUST PROVIDE A REPORT TO ALL TRANSITION BONDHOLDERS
As required by the Trust Indenture Act, the trustee will be required to
mail each year to all transition bondholders a report stating, among other
items:
o the trustee's eligibility and qualification to continue as the trustee
under the indenture;
o any amounts advanced by it under the indenture;
o the amount, interest rate and maturity date of specific indebtedness
owing by the issuer to the trustee in the trustee's individual
capacity;
o the property and funds physically held by the trustee;
o any additional issue of a series of transition bonds not previously
reported; and
o any action taken by it that materially affects the transition bonds of
any series and that has not been previously reported.
WHAT WILL TRIGGER SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the transition bonds of
any series upon the delivery to the trustee of funds sufficient for the payment
in full of all of the transition bonds of that series. In addition, the issuer
must deliver to the trustee the officer's certificate and opinion of counsel
specified in the indenture. The deposited funds will be segregated and held
apart solely for paying the transition bonds of that series, and the transition
bonds of that series will not be entitled to any amounts on deposit in the
collection account other than amounts on deposit in the defeasance subaccount
for the transition bonds of that series.
THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
The issuer may, at any time, by defeasing the transition bonds, terminate:
o all of its obligations under the indenture with respect to the
transition bonds of any series; or
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o its obligations to comply with some of the covenants in the indenture,
including all of the covenants described under "COVENANTS OF THE
ISSUER" above.
The legal defeasance option is the right of the issuer to terminate at any
time its obligations under the indenture with respect to the transition bonds of
any series. The covenant defeasance option is the right of the issuer at any
time to terminate its obligations to comply with the covenants in the indenture.
The issuer may exercise the legal defeasance option with respect to any series
of transition bonds notwithstanding its prior exercise of the covenant
defeasance option with respect to that series. If the issuer exercises the legal
defeasance option with respect to any series, that series will be entitled to
payment only from the funds or other obligations set aside under the indenture
for payment thereof on the expected final payment date or redemption date
therefor as described below. That series will not be subject to payment through
redemption or acceleration prior to the expected final payment date or
redemption date, as applicable. If the issuer exercises the covenant defeasance
option with respect to any series, the final payment of the transition bonds of
that series may not be accelerated because of an event of default relating to a
default in the observance or performance of any covenant or agreement of the
issuer made in the indenture.
The issuer may exercise the legal defeasance option or the covenant
defeasance option with respect to any series of transition bonds only if:
(1) the issuer irrevocably deposits or causes to be deposited in trust with
the trustee cash or U.S. Government Obligations for the payment of
principal of and premium, if any, and interest on that series to the
expected final payment date or redemption date therefor, as applicable,
such deposit to be made in the defeasance subaccount for that series;
(2) the issuer delivers to the trustee a certificate from an independent
certified public accounting firm of recognized national reputation
expressing its opinion that the payments of principal and interest on
the U.S. Government Obligations when due and without reinvestment plus
any cash deposited in the defeasance subaccount will provide cash at
times and in sufficient amounts to pay in respect of the transition
bonds of that series:
(a) principal in accordance with the expected amortization schedule
therefor, and/or if that series is to be redeemed, the redemption
price on the redemption date therefor; and
(b) interest when due;
(3) in the case of the legal defeasance option, 95 days pass after the
deposit is made and during the 95-day period no default relating to
events of bankruptcy, insolvency, receivership or liquidation of the
issuer occurs and is continuing at the end of the period;
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(4) no default has occurred and is continuing on the day of this deposit
and after giving effect thereto;
(5) in the case of the legal defeasance option, the issuer delivers to the
trustee an opinion of counsel stating that:
(a) the issuer has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the date of execution of the indenture, there has been a
change in the applicable federal income tax law; and
in either case confirming that the holders of the transition bonds of
that series will not recognize income, gain or loss for federal income
tax purposes as a result of the exercise of the legal defeasance option
and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if the
legal defeasance had not occurred;
(6) in the case of the covenant defeasance option, the issuer delivers to
the trustee an opinion of counsel to the effect that the holders of the
transition bonds of that series will not recognize income, gain or loss
for federal income tax purposes as a result of the exercise of the
covenant defeasance option and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if the covenant defeasance had not occurred; and
(7) the issuer delivers to the trustee a certificate of an authorized
officer of the issuer and an opinion of counsel, each stating that all
conditions precedent to the satisfaction and discharge of the
transition bonds of that series have been complied with as required by
the indenture.
Unless otherwise specified in a supplemental indenture, there will be no
other conditions to the exercise by the issuer of its legal defeasance option or
its covenant defeasance option.
THE TRUSTEE
_________ will be the trustee under the indenture. The trustee may resign
at any time upon 30 days notice by so notifying the issuer. The holders of not
less than a majority of the outstanding principal amount of the transition bonds
of all series, voting together as a single class, may remove the trustee by so
notifying the trustee and may appoint a successor trustee. The issuer will
remove the trustee if the trustee ceases to be eligible to continue in this
capacity under the indenture, the trustee becomes insolvent, a receiver or other
public officer takes charge of the trustee or its property or the trustee
becomes incapable of acting. If the trustee resigns or is removed or a vacancy
exists in the office of trustee for any reason, the issuer will be obligated
promptly to appoint a successor trustee eligible under the indenture. No
resignation or removal of the trustee will become effective until acceptance of
the appointment by a successor trustee.
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The trustee must at all times satisfy the requirements of the Trust Indenture
Act and the Investment Company Act of 1940. The trustee must also have a
combined capital and surplus of at least $50 million and a long term debt rating
of at least `BBB'- by S&P and Fitch IBCA Inc. and at least `Baa3' by Moody's. If
the trustee consolidates with, merges or converts into, or transfers all or
substantially all of its corporate trust business or assets to, another entity,
the resulting, surviving or transferee entity will without any further action be
the successor trustee.
HOW A BANKRUPTCY OF THE SELLER, JCP&L SUB OR THE SERVICER MAY
AFFECT YOUR INVESTMENT
Sale or Financing. JCP&L will represent and warrant in the contribution
agreement that the assignment and transfer of the bondable transition property
in accordance with that agreement constitutes a valid assignment and transfer by
JCP&L to JCP&L Sub, and by JCP&L Sub to the seller. JCP&L, in the contribution
agreement, and the seller, in the sale agreement, will each represent and
warrant that the sale and transfer of the bondable transition property in
accordance with the sale agreement constitutes a valid sale and transfer by the
seller to the issuer of the bondable transition property. JCP&L will also
represent and warrant in the contribution agreement and the seller will also
represent and warrant in the sale agreement, and it is a condition of closing
for the sale and transfer of bondable transition property, that the appropriate
actions will be taken under the Competition Act and the New Jersey Uniform
Commercial Code, including filing a financing statement, to perfect this sale
and transfer. The Competition Act provides that a transfer of bondable
transition property by an electric utility to an assignee which the parties have
in the governing documentation expressly stated to be a sale or other absolute
transfer, in a transaction approved in a financing order, shall be treated as an
absolute transfer of all the transferor's right, title and interest, as in a
sale or other absolute transfer, and not as a pledge or other financing, of the
relevant bondable transition property. The Competition Act also provides that
the characterization of a transfer as a sale or other absolute transfer shall
not be affected or impaired in any manner by treatment of the transfer as a
financing for federal, state or local tax purposes or financial accounting
purposes. JCP&L, the seller and the issuer will treat the transaction as a sale
under applicable law, although for financial accounting and federal and state
income tax purposes the transaction will be treated as a financing and not a
sale. See "THE COMPETITION ACT -- JCP&L AND OTHER UTILITIES MAY SECURITIZE
STRANDED COSTS" in this prospectus. In the event of a bankruptcy of JCP&L or
another party to the contribution agreement, a party in interest in the
bankruptcy might take the position that the sale and transfer of the bondable
transition property to the issuer was a financing transaction and not a "sale or
other absolute transfer." The party in interest might argue that the treatment
of the transaction for financial accounting and tax purposes as a financing and
not a sale lends weight to the position that the transaction should be treated
as a financing and not a sale. However, as noted above, the Competition Act
specifically provides for the treatment of the transaction as a sale as a matter
of state law and that this treatment is not affected by treatment of the
transfer as a financing for federal, state or local tax purposes or financial
accounting purposes. If a court were nonetheless to characterize the transaction
as a financing rather than a sale, the issuer would be treated as a secured
creditor of the bankrupt entity in the bankruptcy proceedings. Although, as
noted below, the issuer would in that case have a security interest in the
bondable transition property, it would not likely be entitled to access to the
transition bond charge collections during the bankruptcy. As a result, repayment
on the transition bonds could be significantly delayed and
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a plan of reorganization in the bankruptcy might permanently modify the amount
and timing of payments to the issuer of transition bond charge collections and
therefore the amount and timing of funds available to the issuer to pay
transition bondholders. Even if a court did not ultimately characterize the
transaction as a financing transaction, the mere commencement of a bankruptcy by
JCP&L or another party to the contribution agreement and the attendant possible
uncertainty surrounding the treatment of the transaction could result in delays
in payments on the transition bonds.
In order to mitigate the impact of the possible recharacterization of a
sale of bondable transition property as a financing transaction, financing
statements will be filed with the New Jersey Secretary of State in accordance
with the New Jersey Uniform Commercial Code and the Competition Act so that if
the transfer is thereafter held to constitute a financing transaction and not a
sale or other absolute transfer, the financing statement will constitute a
filing with respect to a security interest. The contribution agreement and sale
agreement require that financing statements with respect to the bondable
transition property under the New Jersey Uniform Commercial Code be filed in the
appropriate offices in New Jersey. As a result of these filings, in the event of
the bankruptcy of JCP&L or another party to the contribution agreement, the
issuer would be a secured creditor of the bankrupt entity and entitled to
recover against the security, which is the collateral (except as described in
"Status of Bondable Transition Property as Current Property" below). None of
this, however, mitigates the risk of payment delays and other adverse effects
caused by a bankruptcy of JCP&L or another party to the contribution agreement.
Further, if, for any reason, a financing statement is not filed in accordance
with the New Jersey Uniform Commercial Code and the Competition Act or the
issuer fails to otherwise perfect its interest in the bondable transition
property, and the transfer is thereafter deemed not to constitute a sale or
other absolute transfer, the issuer would be an unsecured creditor of the
bankrupt entity. In that event, the issuer's sole source of payment for the
transition bonds would be whatever it recovered on its unsecured claim in the
bankruptcy case, which could differ materially from the amount and timing of
transition bond charge collections that were intended to fund payments on the
transition bonds.
Consolidation of the Issuer and JCP&L, the Seller and JCP&L Sub in
Bankruptcy. If JCP&L or another party to the contribution agreement were to
become a debtor in a bankruptcy case, a party in interest in the bankruptcy may
attempt to substantively consolidate the assets and liabilities of the issuer
and the bankrupt entity. JCP&L and the other parties to the contribution
agreement and the sale agreement have taken steps to attempt to minimize this
risk (as discussed in "JCP&L TRANSITION FUNDING LLC, THE ISSUER" in this
prospectus). However, no assurance can be given that if JCP&L, JCP&L Sub, the
seller or another affiliate of JCP&L other than the issuer were to become a
debtor in a bankruptcy case, a court would not order that the assets and
liabilities of the issuer be consolidated with those of the bankrupt entity. If
the assets and liabilities were ordered consolidated, the claims of the
transition bondholders against the issuer would be treated as secured claims
against the consolidated entities and would share in the bankrupt estate with
claims of creditors of the consolidated entities. Payment of those claims would
be subject to substantial delay and to adjustment in timing and amount under a
plan of reorganization in the bankruptcy case.
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Claims in Bankruptcy; Challenge to Indemnity Claims. If JCP&L or another
party to the contribution agreement were to become a debtor in a bankruptcy
case, claims including indemnity claims by the issuer against the bankrupt
entity under the contribution agreement or the sale agreement and the other
documents executed in connection therewith would be unsecured claims and would
be subject to being discharged in the bankruptcy case. In addition, a party in
interest in the bankruptcy may request that the bankruptcy court estimate any
contingent claims of the issuer against the bankrupt entity. That party may then
take the position that these claims should be estimated at zero or at a low
amount because the contingency giving rise to these claims is unlikely to occur.
If JCP&L or another party to the contribution agreement were to become a debtor
in a bankruptcy case and the indemnity provisions of the contribution agreement
or the sale agreement were triggered, a party in interest in the bankruptcy
might challenge the enforceability of the indemnity provisions. If a court were
to hold that the indemnity provisions were unenforceable, the issuer would be
left with a claim for actual damages against the bankrupt entity based on breach
of contract principles. The actual amount of these damages would be subject to
estimation and/or calculation by the court.
No assurances can be given as to the result of any of the above-described
actions or claims. Furthermore, no assurance can be given as to what percentage
of their claims, if any, unsecured creditors would receive in any bankruptcy
proceeding involving JCP&L or another party to the contribution agreement.
Status of Bondable Transition Property as Current Property. JCP&L has
represented in the contribution agreement, the seller has represented in the
sale agreement and the Competition Act provides, that the bondable transition
property constitutes a vested, presently existing property right upon transfer
to an assignee for consideration and that it thereafter exists continuously for
all purposes. Nevertheless, no assurance can be given that, in the event of a
bankruptcy of JCP&L or another party to the contribution agreement or another
affiliate of JCP&L other than the issuer, a party in interest in the bankruptcy
would not attempt to take the position that the bondable transition property
comes into existence only as customers use electricity. Bondable transition
property is the right to charge, collect and receive the transition bond charge
(and not simply the right to receive revenues arising from the collection of the
transition bond charge). Therefore, JCP&L, JCP&L Sub, the seller and the issuer
believe that the bondable transition property will constitute a presently
existing right at the time the transition bonds are issued. Nonetheless, if a
court were to adopt the position that the property comes into existence only as
customers use electricity, no assurance can be given that a security interest in
favor of the transition bondholders would attach to transition bond charge
collections in respect of electricity consumed after the commencement of the
bankruptcy case. If it were determined that the bondable transition property had
not been transferred to the seller or sold to the issuer, and the security
interest in favor of the transition bondholders did not attach to transition
bond charge collections in respect of electricity consumed after the
commencement of the bankruptcy case, then the issuer would be an unsecured
creditor of the bankrupt entity. If so, there would be delays or reductions in
payments on the transition bonds. Whether or not a court determined that the
bondable transition property had been sold to the issuer, no assurances can be
given that a court would not rule that any transition bond charge relating to
electricity consumed after the commencement of the bankruptcy cannot be
transferred to the issuer or the trustee.
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In addition, in the event of a bankruptcy of JCP&L, a party in interest in
the bankruptcy could assert that the issuer should pay a portion of JCP&L's
costs associated with the generation, transmission or distribution of the
electricity, consumption of which gave rise to the transition bond charge
collections used to make payments on the transition bonds.
Regardless of whether JCP&L or another party to the contribution agreement
is the debtor in a bankruptcy case, if a court were to accept the argument that
the bondable transition property comes into existence only as customers use
electricity, a tax or government lien or other nonconsensual lien on property of
the bankrupt entity arising before the bondable transition property came into
existence could have priority over the issuer's interest in the bondable
transition property. Adjustments to the transition bond charge may be available
to mitigate this exposure, although there may be delays in implementing these
adjustments.
Enforcement of Rights by Trustee. Upon an event of default under the
indenture, the Competition Act permits the trustee to enforce the security
interest in the bondable transition property in accordance with the terms of the
indenture. In this capacity, the trustee is permitted to request the BPU to
order the sequestration and payment to transition bondholders of all revenues
arising with respect to the bondable transition property. The Competition Act
provides that this order will remain in full force and effect notwithstanding
bankruptcy, reorganization or other insolvency proceedings with respect to JCP&L
or its assignee. There can be no assurance, however, that the trustee would be
permitted to seek such an order or that the BPU would issue this order after a
bankruptcy of JCP&L or another party to the contribution agreement in light of
the automatic stay provisions of Section 362 of the United States Bankruptcy
Code or, alternatively, that a bankruptcy court would lift the automatic stay to
permit this action by the BPU. In that event, the trustee may under the
indenture seek an order from the bankruptcy court lifting the automatic stay
with respect to this action by the BPU, and an order requiring an accounting and
segregation of the revenues arising from the bondable transition property. There
can be no assurance that a court would grant either order.
Bankruptcy of Servicer. The servicer is entitled to commingle transition
bond charge collections with its own funds until each remittance date. The
Competition Act provides that the relative priority of a lien created under the
Competition Act is not defeated or adversely affected by the commingling of
transition bond charge collections arising with respect to the bondable
transition property with funds of JCP&L. However, in the event of a bankruptcy
of the servicer, a party in interest in the bankruptcy might assert, and a court
might rule, that transition bond charge collections commingled by the servicer
with its own funds and held by the servicer as of the date of bankruptcy were
property of the servicer as of that date and are therefore property of the
servicer's bankruptcy estate, rather than property of the issuer. If the court
so rules, then the court would likely rule that the trustee has only a general
unsecured claim against the servicer for the amount of commingled transition
bond charge collections held as of that date and could not recover the
commingled transition bond charge collections held as of the date of bankruptcy.
However the court rules on the ownership of the commingled transition bond
charge collections, the automatic stay arising upon the bankruptcy of the
servicer could delay the trustee from receiving the commingled transition bond
charge collections held by the servicer as of the date of the bankruptcy until
the court grants relief from the stay. A court ruling on any request
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for relief from the stay could be delayed pending the court's resolution of
whether the commingled transition bond charge collections are property of the
issuer or of the servicer, including resolution of any tracing of proceeds
issues.
The servicing agreement provides that the trustee, as assignee of the
issuer, together with the other persons specified therein, may vote to appoint a
successor servicer that satisfies any conditions imposed by any rating agency.
The servicing agreement also provides that the trustee, together with the other
persons specified therein, may petition the BPU or a court of competent
jurisdiction to appoint a successor servicer that meets these conditions.
However, the automatic stay might delay a successor servicer's replacement of
the servicer. Even if a successor servicer may be appointed and may replace the
servicer, a successor servicer may be difficult to obtain and may not be capable
of performing all of the duties that JCP&L as servicer was capable of
performing.
MATERIAL INCOME TAX MATTERS FOR THE HOLDERS
OF THE TRANSITION BONDS
GENERAL
The following is a summary of material U.S. federal income tax consequences
relevant to the purchase, ownership and disposition of the transition bonds and
applicable to initial purchasers of transition bonds who acquire and hold the
transition bonds as capital assets within the meaning of section 1221 of the
Internal Revenue Code of 1986, as amended ("Code"). It is intended as a summary
of only certain of the more generally applicable U.S. federal income tax
consequences relating to the purchase, ownership and disposition of the
transition bonds. It does not purport to furnish information in the level of
detail or with the attention to an investor's specific tax circumstances that
would be provided by an investor's tax adviser. This summary also does not
address the consequences to holders of the transition bonds under state, local
or foreign tax laws. This summary is based upon current provisions of the Code,
Treasury Regulations issued thereunder, current administrative rulings, judicial
decisions and other applicable authorities in effect as of the date hereof, all
of which are subject to change, possibly with retroactive effect. Legislative,
judicial or administrative changes may occur, perhaps with retroactive effect,
which could affect the accuracy of the statements and conclusions set forth
herein as well as the tax consequences to holders of the transition bonds.
ALL PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE
EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
JCP&L has received a ruling from the Internal Revenue Service ("IRS") to
the effect that the transition bonds will be treated as obligations of the
seller for U.S. federal income tax purposes. Based in part on that ruling and on
representations made by JCP&L and its affiliates that no election will be made
to the contrary, and assuming that the seller at all relevant times will be the
sole member of the issuer, Carter Ledyard & Milburn, special federal income tax
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counsel to JCP&L, JCP&L Sub, the seller and the issuer, referred to as special
tax counsel, will render its opinion that the issuer will not be subject to U.S.
federal income tax as an entity separate from the seller, and that the
transition bonds will be treated as debt obligations of the seller for U.S.
federal income tax purposes.
The following summary of material U.S. federal income tax consequences
relevant to the purchase, ownership and disposition of the transition bonds is
based on the advice of special tax counsel, and assumes that, in conformity with
the opinion referred to above, the transition bonds will constitute debt
obligations of the seller for federal income tax purposes.
For purposes of the discussion below, a U.S. Holder means a beneficial
owner of a transition bond that is a U.S. Person, and a Non-U.S. Holder means a
beneficial owner of a transition bond that is not a U.S. Person.
For these purposes, a U.S. Person means:
(1) an individual who is a citizen or resident of the United States for
U.S. federal income tax purposes;
(2) a corporation, partnership or other entity (treated as a corporation or
a partnership for federal income tax purposes) created or organized in
or under the laws of the United States, or any state or the District of
Columbia (other than a partnership that is not treated as a U.S. Person
under any applicable Treasury Regulations);
(3) an estate the net income of which is subject to U.S. federal income
taxation regardless of its source; or
(4) a trust, if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or
more U.S. persons have the authority to control all substantial
decisions of such trust. Certain trusts in existence on or before
August 20, 1996, that were treated as U.S. Persons under the law in
effect on such date that fail to qualify as U.S. Persons under current
law, may continue to be treated as U.S. Persons if they have so elected
in accordance with applicable Treasury Regulations.
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TAXATION OF U.S. HOLDERS
Payment of Interest. Stated interest on the transition bonds will be
taxable to a U.S. Holder as ordinary interest income at the time it is paid or
accrued in accordance with the holder's method of accounting for tax purposes.
The preceding sentence assumes that, in the case of any series or class of
floating rate transition bonds, such floating rate transition bonds will qualify
as "variable rate debt instruments" as defined in Treasury Regulation section
1.1275-5(a) and that interest on such floating rate transition bonds will be
unconditionally payable, or will be constructively received under section 451 of
the Code, in cash or in property at least annually at a single "qualified
floating rate" or "objective rate." If such assumption is incorrect with respect
to a series or class of floating rate transition bonds, the taxation of interest
on such floating rate transition bonds will be addressed in the related
prospectus supplement.
Original Issue Discount. This discussion assumes that the transition bonds
will not be considered to be issued with original issue discount ("OID"). OID is
generally defined as any excess of the stated redemption price at maturity over
the issue price which is greater than a de minimis amount (0.25% of a bond's
stated redemption price at maturity multiplied by the bond's weighted average
maturity), all within the meaning of the Code and the Treasury Regulations
promulgated thereunder ("OID Regulations"). If the transition bonds are issued
with OID, U.S. Holders of transition bonds generally will be subject to the
special tax accounting rules for original issue discount obligations provided
under the OID Regulations. U.S. Holders of transition bonds issued with OID
should be aware that they generally must include OID in income for U.S. federal
income tax purposes as it accrues, in advance of the receipt of cash
attributable to that income. As stated above, U.S. Holders must include all
interest payments, other than payments of OID, in gross income under their
normal method of tax accounting. If any series of transition bonds is issued
with OID, prospective holders will be so informed in the related prospectus
supplement.
Sale, Exchange or Redemption of Transition Bonds. Upon the sale, exchange,
redemption or other taxable disposition of transition bonds, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized
(other than amounts attributable to, and taxable as, accrued stated interest)
and the U.S. Holder's adjusted tax basis in the transition bonds. A U.S.
Holder's adjusted tax basis in the transition bonds generally will equal the
cost thereof, reduced by any payments of principal on the transition bonds. Any
such gain or loss will be a capital gain or loss and will be a long-term capital
gain or loss if the transition bonds have been held for more than one year.
Long-term capital gains of non-corporate taxpayers are generally subject to
lower rates of U.S. federal income taxation than ordinary income. The
deductibility of capital losses is subject to limitations.
Information Reporting and Backup Withholding. In general, information
reporting will apply to payments of principal of, and interest on, and to the
proceeds from the sale of, transition bonds made to U.S. Holders, other than
certain exempt recipients (such as corporations). Moreover, a 31% "backup"
withholding tax will apply to those payments if the U.S. Holder (1) fails to
provide a taxpayer identification number (a "TIN"), (2) furnishes an incorrect
TIN, (3) is notified by the IRS that it has failed to properly report payments
of interest and dividends, or (4) under certain circumstances, fails to certify,
under penalties of perjury, that it has furnished a
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correct TIN and has not been notified by the IRS that it is subject to backup
withholding. Any amounts withheld under the backup withholding rules generally
will be allowed as a refund or credit against a U.S. Holder's U.S. federal
income tax liability, provided the required information is furnished to the IRS.
TAXATION OF NON-U.S. HOLDERS
A Non-U.S. Holder generally will not be subject to U.S. federal withholding
tax on payments of interest on the transition bonds, assuming that the interest
income is not effectively connected with the Non-U.S. Holder's conduct of a
trade or business in the United States and provided that the Non-U.S. Holder
complies with the requirements listed below.
Withholding Taxation on Interest Received before 2001. Payments of interest
income on the transition bonds received by a Non-U.S. Holder that does not hold
its transition bonds in connection with the conduct of a trade or business in
the United States on or prior to December 31, 2000, will not be subject to
United States federal income or withholding tax, or to backup withholding and
information reporting, provided that:
1. such Non-U.S. Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the
seller entitled to vote;
2. such Non-U.S. Holder is not a controlled foreign corporation that is
related to the seller through stock ownership; and
3. the issuer or its paying agent receives:
a. from the Non-U.S. Holder, a properly completed Form W-8, or
substitute Form W-8 (or applicable successor form), signed under
penalties of perjury, which provides its name and address and
certifies that it is not a U.S. Person; or
b. from a security clearing organization, bank or other financial
institution that holds the transition bonds in the ordinary course
of its trade or business, which is referred to as a Financial
Institution, on behalf of such Non-U.S. Holder, a certification
signed under penalties of perjury, that a Form W-8, or substitute
Form W-8 (or applicable successor form), has been received by it,
or by another Financial Institution, from the Non-U.S. Holder, and
a copy of the Form W-8, or substitute Form W-8 (or applicable
successor form), is furnished to the issuer or to its paying
agent.
Withholding Taxation on Interest Received After December 31, 2000. Payments
of interest income on the transition bonds received by a Non-U.S. Holder that
does not hold its Transition Bonds in connection with the conduct of a trade or
business in the United States after December 31, 2000, will not be subject to
United States federal income or withholding tax, or to backup withholding and
information reporting, provided that requirements 1 and 2 of the preceding
paragraph are satisfied and the issuer or its paying agent:
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1. receives from such Non-U.S. Holder appropriate documentation to treat
the payment as made to a foreign beneficial owner under Treasury
Regulations issued under section 1441 of the Code;
2. receives a withholding certificate from a person claiming to be a
foreign partnership and such foreign partnership has received
appropriate documentation to treat the payment as made to a foreign
beneficial owner in accordance with the Treasury Regulations issued
under section 1441 of the Code;
3. receives a withholding certificate from a person representing to be a
"qualified intermediary" that has assumed primary withholding
responsibility under the Treasury Regulations issued under section 1441
of the Code and the qualified intermediary has received appropriate
documentation from a foreign beneficial owner in accordance with its
agreement with the IRS; or
4. receives a statement, under penalties of perjury, from an authorized
representative of a Financial Institution, stating that the Financial
Institution has received from the beneficial owner a withholding
certificate described in the Treasury Regulations issued under section
1441 of the Code or that it has received a similar statement from
another Financial Institution acting on behalf of the foreign
beneficial owner.
In general, it will not be necessary for a Non-U.S. Holder to obtain or
furnish a United States taxpayer identification number to the issuer or its
paying agent in order to claim any of the foregoing exemptions from United
States withholding tax on payments of interest.
Interest payments made to a Non-U.S. Holder will be subject to a United
States withholding tax of 30%, except where the conditions described above have
been satisfied or where an applicable tax treaty provides for the reduction or
elimination of the withholding tax. However, provided that the issuer or its
paying agent receives an appropriate certification form containing a taxpayer
identification number, a Non-U.S. Holder generally will not be subject to
withholding on payments of interest and will be taxable in the same manner as a
United States corporation or resident with respect to interest income from the
transition bonds if the interest income is effectively connected with the
Non-U.S. Holder's conduct of a trade or business in the United States.
Effectively connected income received by a Non-U.S. Holder that is a corporation
may in some circumstances be subject to an additional "branch profits tax" at a
30% rate, or if applicable, a lower rate provided by a treaty.
Capital Gains Tax Issues. A Non-U.S. Holder generally will not be subject
to U.S. federal income or withholding tax on gain realized on the sale or
exchange of transition bonds, unless:
1. the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more during the taxable year and the gain is
from United States sources; or
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2. the gain is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States and certain other
conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Compliance with the conditions described in the preceding section would
establish an exemption from information reporting and backup withholding of U.S.
federal income tax at a rate of 31% on payments made in respect of the
transition bonds to Non-U.S. Holders, provided neither the issuer nor its paying
agent has actual knowledge that the beneficial owner of the transition bonds is
a U.S. Person.
The payment of the proceeds from the sale of a transition bond through the
U.S. office of a broker will be subject to information reporting and possible
backup withholding at a rate of 31%. To avoid these requirements, a Non-U.S.
Holder must certify that it is not a U.S. Person under penalties of perjury or
otherwise establish an exemption in accordance with applicable Treasury
Regulations. The payment of the proceeds of the sale of a transition bond to or
through the foreign office of a broker generally will not be subject to
information reporting or backup withholding tax. However, in the case of the
payment of the proceeds from the sale of a transition bond through the foreign
office of a broker that is (i) a U.S. Person, (ii) a controlled foreign
corporation or (iii) a person that is not a U.S. Person but 50% or more of whose
gross income from all sources for a specified period is derived from activities
that are effectively connected with the conduct of a trade or business in the
United States, information reporting will apply to such payment unless the
broker has documentary evidence in its files that the owner of the payment is
not a U.S. Person and the broker has no actual knowledge to the contrary.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder would be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax, provided the required information is furnished
to the IRS.
MATERIAL STATE OF NEW JERSEY TAX MATTERS
[In the opinion of ___________, Special New Jersey tax counsel to JCP&L,
JCP&L Sub, the seller and the issuer, interest from transition bonds received by
a person who is not otherwise subject to corporate or personal income tax in the
State of New Jersey will not be subject to these taxes. Neither the State of New
Jersey nor any of its political subdivisions presently impose intangible
personal property taxes and therefore New Jersey residents will not be subject
to these taxes.]
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 ("ERISA") and/or
section 4975 of the Code impose certain requirements on employee benefit plans
and certain other plans and arrangements, including individual retirement
accounts and annuities, Keogh plans, and certain collective investment funds or
insurance company general or separate accounts in which such plans or
arrangements are invested, that are subject to ERISA and/or the Code
(collectively, "Plans"), and on persons who are fiduciaries with respect to the
investment of assets treated as
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"plan assets" of a Plan. Government plans and some church plans are not subject
to the fiduciary responsibility provisions of ERISA or the provisions of section
4975 of the Code, but may be subject to substantially similar rules under state
or other federal law.
In contemplating an investment of a portion of Plan assets in transition
bonds, the Plan fiduciary responsible for making such investment should
carefully consider, taking into account the facts and circumstances of the Plan,
the "Risk Factors" discussed above and whether such investment is consistent
with its fiduciary responsibilities, including, but not limited to: (a) whether
the fiduciary has the authority to make the investment under the appropriate
governing plan instrument; (b) whether the investment constitutes a direct or
indirect non-exempt prohibited transaction with a party in interest (see
"Prohibited Transaction Issues" below); (c) whether the investment is made
solely in the interest of participants and beneficiaries of the Plan; (d) the
Plan's funding objectives; (e) the tax effects of the investment; and (f)
whether under the general fiduciary standards of investment prudence and
diversification such investment is appropriate for the Plan, taking into account
the overall investment policy of the Plan, the composition of the Plan's
investment portfolio and the Plan's need for sufficient liquidity to pay
benefits when due in the event that there is no ready market for transition
bonds at such time.
PROHIBITED TRANSACTIONS ISSUES
ERISA and section 4975 of the Code generally prohibit certain transactions
involving the assets of a Plan and persons who have certain specified
relationships to the Plan ("parties in interest" under ERISA and "disqualified
persons" under the Code, collectively "parties in interest"), unless a statutory
or administrative exemption is applicable to the transaction. The acquisition or
holding of transition bonds by a Plan could be a prohibited transaction if the
issuer, JCP&L or any of its affiliates are parties in interest with respect to
the Plan. However, such prohibited transaction may be treated as exempt under
ERISA and the Code if transition bonds were acquired pursuant to and in
accordance with one or more "class exemptions" issued by the Department of Labor
(the "DOL"). Potentially applicable prohibited transaction class exemptions
("PTCEs"), include the following:
a. PTCE 84-14, which exempts specific transactions effected on behalf of a
Plan by a "qualified professional asset manager;"
b. PTCE 90-1, which exempts specific transactions involving insurance company
pooled separate accounts;
c. PTCE 91-38, which exempts specific transactions involving bank collective
investment funds;
d. PTCE 95-60, which exempts specific transactions involving insurance company
general accounts;
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e. PTCE 96-23, which exempts specific transactions effected on behalf of a
Plan by specific "in-house" asset managers.
It should be noted, however, there can be no assurance that any of these
class exemptions will be available with respect to any transaction involving the
transition bonds. In addition, even if the conditions specified in one or more
of the foregoing exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions. If the purchase of transition bonds were to be a
non-exempt prohibited transaction, the purchase might have to be rescinded and
an excise tax or other liabilities may apply.
In this regard, any potential investor that is an insurance company
investing assets of its general account should consider the United States
Supreme Court's decision in John Hancock Mut. Life Ins. Co. v. Harris Trust and
Sav. Bank, 510 U.S. 86 (1993), which holds that in certain circumstances an
insurance company's general account may be deemed to include assets of the Plan
investing in the general account, such as through the Plan's purchase of an
annuity contract. Such insurance company could, therefore, be treated as a party
in interest with respect to the Plan by virtue of this investment. Moreover, it
should be noted that the Small Business Job Protection Act of 1996 added a new
Section 401(c) to ERISA relating to the status of the assets of insurance
company general accounts under ERISA and section 4975 of the Code. Pursuant to
Section 401(c), the DOL is required to issue general account regulations with
respect to insurance policies issued on or before December 31, 1998 that are
supported by an insurer's general account. These regulations are to provide
guidance on which assets held by an insurer constitute "plan assets" for
purposes of the fiduciary responsibility provisions of ERISA and section 4975 of
the Code. Until the date that is 18 months after such regulations are finalized,
no liability under the fiduciary responsibility and prohibited transaction
provisions of ERISA and section 4975 may result on the basis of a claim that the
assets of the general account of an insurance company constitute the plan assets
of any Plan, except in cases of avoidance of the regulations or actions brought
by the Secretary of Labor relating to breaches of fiduciary duty that also
constitute a breach of Federal or state criminal law. As of the date hereof, the
DOL has issued only Proposed Regulation (Section)2550.401c-1.
PRIOR TO MAKING AN INVESTMENT IN THE TRANSITION BONDS OF ANY SERIES, A PLAN
INVESTOR AND EACH FIDUCIARY CAUSING THE TRANSITION BONDS TO BE PURCHASED WITH
PLAN ASSETS OF A PLAN THAT IS SUBJECT TO THE PROHIBITED TRANSACTION RULES OF
ERISA OR SECTION 4975 OF THE CODE (OR, IN THE CASE OF A GOVERNMENTAL OR CHURCH
PLAN, ANY SUBSTANTIALLY SIMILAR FEDERAL, STATE OR LOCAL LAW), INCLUDING WITHOUT
LIMITATION AN INSURANCE COMPANY GENERAL ACCOUNT, MUST DETERMINE WHETHER, AND
SHALL BE DEEMED TO HAVE REPRESENTED AND WARRANTED THAT, THE USE OF PLAN ASSETS
TO PURCHASE AND HOLD THE TRANSITION BONDS DOES NOT AND WILL NOT CONSTITUTE OR
RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION IN VIOLATION OF SECTION 406 OR 407
OF ERISA OR SECTION 4975 OF THE CODE (OR, IN THE CASE OF A GOVERNMENTAL PLAN OR
CHURCH PLAN, ANY SUBSTANTIALLY SIMILAR FEDERAL, STATE OR LOCAL LAW.)
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PLAN ASSET ISSUES
The "plan asset" regulations issued by the DOL state that if a Plan makes
an "equity" investment in a corporation, partnership, trust or other specified
entities, the underlying assets and properties of the entity will be deemed for
purposes of ERISA and Section 4975 of the Code to be assets of the investing
Plan unless certain exceptions set forth in the regulations apply. Although
there is little statutory or regulatory guidance on this subject, and there can
be no assurances in this regard, it appears that the transition bonds should not
be treated as equity interests for purposes of these regulations.
The sale of transition bonds to a Plan shall not be deemed a representation
by JCP&L, JCP&L Sub, the seller, the issuer or the underwriters that such
investment meets all relevant legal requirements with respect to Plans generally
or any particular Plan. Due to the complexity of these rules and the penalties
that may be imposed upon persons involved in non-exempt prohibited transactions,
IT IS PARTICULARLY IMPORTANT THAT PLAN FIDUCIARIES OR OTHER PERSONS CONSIDERING
PURCHASING THE TRANSITION BONDS ON BEHALF OF OR WITH "PLAN ASSETS" OF ANY PLAN
CONSULT WITH THEIR OWN LEGAL COUNSEL REGARDING THE POTENTIAL CONSEQUENCES
THEREOF UNDER THE PROVISIONS OF ERISA AND THE CODE DISCUSSED ABOVE.
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PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS
The transition bonds of each series may be sold to or through the
underwriters by a negotiated firm commitment underwriting and public reoffering
by the underwriters. The transition bonds may also be sold to or through any
other underwriting arrangement as may be specified in the related prospectus
supplement or may be offered or placed either directly or through agents. The
issuer and the trustee intend that transition bonds will be offered through
various methods from time to time. The issuer also intends that offerings may be
made concurrently through more than one of these methods or that an offering of
a particular series of transition bonds may be made through a combination of
these methods.
The distribution of transition bonds may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to the
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
The transition bonds may be offered through one or more different methods,
including offerings through underwriters. It is not anticipated that any of the
transition bonds will be listed on any securities exchange. There can be no
assurance that a secondary market for any series of transition bonds will
develop or, if one does develop, that it will continue.
Compensation to Underwriters. In connection with the sale of the transition
bonds, underwriters or agents may receive compensation in the form of discounts,
concessions or commissions. Underwriters may sell transition bonds to particular
dealers at prices less a concession. Underwriters may allow, and these dealers
may reallow, a concession to other dealers. Underwriters, dealers and agents
that participate in the distribution of the transition bonds of a series may be
deemed to be underwriters. Any discounts or commissions received by the
underwriters from the issuer and any profit on the resale of the transition
bonds by them may be deemed to be underwriting discounts and commissions under
the Securities Act. These underwriters or agents will be identified, and any
compensation received from the issuer will be described, in the related
prospectus supplement.
Other Distribution Issues. Under agreements which may be entered into by
JCP&L, JCP&L Sub, the seller, the issuer and the trustee, underwriters and
agents who participate in the distribution of the transition bonds may be
entitled to indemnification by JCP&L, JCP&L Sub, the seller and the issuer
against liabilities specified therein, including under the Securities Act.
RATINGS FOR THE TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the
transition bonds that each series or class be rated investment grade, that is,
in one of the four highest rating categories, by each of S&P, Moody's, Fitch
IBCA Inc. and Duff & Phelps. The required amount of credit enhancement for any
series of transition bonds will be set forth in the applicable prospectus
supplement.
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Limitations of Security Ratings. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating agency. No person is obligated to maintain the
rating on any transition bonds, and, accordingly, there can be no assurance that
the ratings assigned to any series or class of transition bonds upon initial
issuance will not be lowered or withdrawn by a rating agency at any time
thereafter. If a rating of any series or class of transition bonds is revised or
withdrawn, the liquidity of this class of transition bonds may be adversely
affected. In general, ratings address credit risk and do not represent any
assessment of any particular rate of principal payments on the transition bonds
other than the payment in full of each series or class of transition bonds by
the applicable legal final maturity date for such series or class.
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS
Some legal matters relating to the issuer and the issuance of the
transition bonds will be passed upon for the issuer by Berlack, Israels &
Liberman LLP, New York, New York and for the underwriters by Winthrop, Stimson,
Putnam & Roberts, New York, New York. Some legal matters relating to JCP&L,
JCP&L Sub and the seller will be passed upon for JCP&L, JCP&L Sub and the seller
by Berlack, Israels & Liberman LLP, New York, New York. Some legal matters
relating to the federal tax consequences of the issuance of the transition bonds
will be passed upon for the issuer by Carter Ledyard & Milburn, New York, New
York. Some legal matters relating to State of New Jersey tax consequences of the
issuance of the transition bonds will be passed upon for the issuer by
______________. Some legal matters relating to the issuer, JCP&L Sub and the
seller will be passed upon for the issuer, JCP&L Sub and the seller by Richards,
Layton & Finger, P.A., Wilmington, Delaware.
114
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INDEX TO FINANCIAL STATEMENTS OF JCP&L TRANSITION FUNDING LLC
Page
Report of Independent Accountants....................................... F-
Statement of Net Assets Available for Issuer Activities............. F-
Statement of Changes in Net Assets Available for Issuer
Activities....................................................... F-
Notes to Financial Statements........................................... F-
115
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No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus supplement and the
accompanying prospectus. You must not rely on any unauthorized information or
representations. This prospectus supplement and accompanying prospectus is an
offer to sell only the securities offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus supplement and the accompanying prospectus is current only as of
the date of this prospectus supplement and the accompanying prospectus.
--------------------------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Where to Find Information in These Documents............................
Introduction............................................................
Risk Factors ...........................................................
The Series 2000-A Transition Bonds......................................
Credit Enhancement......................................................
Description of Bondable Transition Property.............................
The Transition Bond Charge..............................................
Underwriting the Series 2000-A Transition Bonds.........................
Ratings for the Series 2000-A Transition Bonds..........................
Income Tax Matters......................................................
PROSPECTUS
Summary of Terms........................................................
Risk Factors ...........................................................
Forward Looking Statements..............................................
Jersey Central Power & Light Company....................................
Where You Can Find More Information.....................................
The Competition Act ....................................................
JCP&L's Restructuring...................................................
The BPU Financing Order and the Transition Bond Charge..................
Servicing of the Bondable Transition Property...........................
JCP&L Transition Funding LLC, the Issuer................................
How the Issuer will use the Proceeds of the Transition
Bonds..............................................................
The Transition Bonds....................................................
Weighted Average Life and Yield Considerations for the Transition
Bonds...................................................................
The Contribution Agreement..............................................
The Sale Agreement......................................................
The Servicing Agreement.................................................
The Indenture...........................................................
How a Bankruptcy of the Issuer, the Seller, JCP&L Sub or the Servicer
May Affect Your Investment.........................................
Material Income Tax Matters for the Holders of the Transition
Bonds..............................................................
ERISA Considerations....................................................
Plan of Distribution for the Transition Bonds...........................
Ratings for the Transition Bonds........................................
Various Legal Matters Relating to the Transition Bonds..................
Experts.................................................................
Index to Financial Statements...........................................
Through and including _______(the 90th day after the date of this prospectus
supplement and the accompanying prospectus), all dealers effecting transactions
in these securities, whether or not participating this offering, may be required
to deliver a prospectus supplement and the accompanying prospectus. This is in
addition to a dealer's obligation to deliver a prospectus supplement and the
accompanying prospectus when acting as an underwriter and when offering an
unsold allotment or subscription.
$
JCP&L TRANSITION
FUNDING LLC
ISSUER OF THE TRANSITION BONDS
JERSEY CENTRAL POWER & LIGHT COMPANY
SERVICER
Series 2000-A Transition Bonds
$ Class ____
$ Class ____
$ Class ____
------------------
PROSPECTUS SUPPLEMENT
------------------
GOLDMAN, SACHS & CO.
<PAGE>
PART II
ITEM 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the transition bonds being offered hereunder
other than underwriting discounts and commissions:*
Registration Fee............................................. $
Printing and Engraving Expenses.............................. $
Trustee's Fees and Expenses.................................. $
Legal Fees and Expenses...................................... $
Blue Sky Fees and Expenses................................... $
Accountants' Fees and Expenses............................... $
Rating Agency Fees........................................... $
Miscellaneous Fees and Expenses.............................. $
Total........................................................ $
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* To be provided by amendment.
ITEM 15. Indemnification of Members and Managers.
Section 18-108 of the Delaware Limited Liability Company Act provides that,
subject to specified standards and restrictions, if any, as are set forth in the
limited liability company agreement, a limited liability company shall have the
power to indemnify and hold harmless any member or manager or other person from
and against any and all claims and demands whatsoever.
The limited liability company agreement (the "LLC Agreement") of JCP&L
Transition Funding LLC provides that, to the fullest extent permitted by law,
JCP&L Transition Funding LLC shall indemnify its members and managers against
any liability incurred in connection with any proceeding in which any member or
manager may be involved as a party or otherwise by reason of the fact that the
member or manager is or was serving in its capacity as a member or manager,
unless this liability is based on or arises in connection with the member's or
manager's own willful misconduct or gross negligence, the failure to perform the
obligations set forth in the LLC Agreement, or taxes, fees or other charges on,
based on or measured by any fees, commissions or compensation received by the
managers in connection with any of the transactions contemplated by the LLC
Agreement and related agreements.
2
<PAGE>
ITEM 16. Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of JCP&L Transition Funding LLC. *
4.2 Certificate of Formation of JCP&L Transition Funding LLC. *
4.3 Form of Amended and Restated Limited Liability Company Agreement of
JCP&L Transition Funding LLC.*
4.4 Form of Indenture.*
4.5 Form of Transition Bonds.*
5.1 Opinion of Berlack, Israels & Liberman LLP, relating to legality of the
Transition Bonds.*
5.2 Opinion of Richards, Layton & Finger, P.A. with respect to State of
Delaware matters. *
8.1 Opinion of Carter Ledyard & Milburn with respect to material Federal
tax matters.*
8.2 Opinion of _________ with respect to material State of New Jersey tax
matters.*
10.1 Form of Contribution Agreement. *
10.2 Form of Sale Agreement. *
10.3 Form of Servicing Agreement.*
10.4 Form of Administration Agreement*
10.5 Financing Order of the BPU issued _______, 2000.*
23.1.1 Consent of Berlack, Israels & Liberman LLP (included in its opinion
filed as Exhibit 5.1).*
23.1.2 Consent of Richards, Layton & Finger, P.A. (included in its opinion
filed as Exhibit 5.2). *
23.1.3 Consent of Carter Ledyard & Milburn (included in its opinion filed as
Exhibit 8.1).*
23.1.4 Consent of ________ (included in its opinion filed as Exhibit 8.2).*
23.2 Consent of PriceWaterhouseCoopers.*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of ________, as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Restructuring Order of the BPU issued __________ __, 2000.*
99.2 Internal Revenue Service Private Letter Ruling pertaining to Transition
Bonds.*
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* To be filed by amendment
ITEM 17. Undertakings
The undersigned Registrant hereby undertakes as follows:
a. (1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act, (ii) to
reflect in the prospectus any facts or events arising
3
<PAGE>
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement (notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of the Securities Act, if, in
the aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" Table in the effective registration statement); and (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change in
this information in the registration statement; provided, however, that
(a)(1)(i) and (a)(1)(ii) will not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed pursuant to Section 13 or Section 15(d) of the Exchange
Act, that are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each relevant post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of these securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
b. That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act, (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) with
respect to the Registrant that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of these securities at that time
shall be deemed to be the initial bona fide offering thereof.
c. That insofar as indemnification for liabilities arising under the
Securities Act, may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the SEC this
indemnification is against public policy as expressed in the Act and is,
theretofore, unenforceable. In the event that a claim for indemnification
against these liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer of controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by the
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether this indemnification by it is against public
policy as expressed in the Securities Act, and will be governed by the final
adjudication of this issue.
4
<PAGE>
d. That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)() or (4) or 497(h)
under the Securities Act, shall be deemed to be part of this registration
statement as of the time it was declared effective.
e. That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of these securities at that time shall be
deemed to be the initial bona fide offering thereof.
f. The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act, in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Trust Indenture Act.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and that the security rating requirement of
Form S-3 will be met by the time of sale, and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Morris, State of New Jersey, on February 28,
2000.
JCP&L Transition Funding LLC
By: /s/ T.G. Howson
-------------------------
Name: T.G. Howson
Title: Manager
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
February 28, 2000 /s/ T.G. Howson
------------------------------------
Name: T.G. Howson
Title: Manager
February 28, 2000 /s/ S.H. Somich
------------------------------------
Name: S.H. Somich
Title: Manager
February 28, 2000 /s/ M.E. Gramlich
------------------------------------
Name: M.E. Gramlich
Title: Manager
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of JCP&L Transition Funding LLC. *
4.2 Certificate of Formation of JCP&L Transition Funding LLC. *
4.3 Form of Amended and Restated Limited Liability Company Agreement of
JCP&L Transition Funding LLC.*
4.4 Form of Indenture.*
4.5 Form of Transition Bonds.*
5.1 Opinion of Berlack, Israels & Liberman LLP, relating to legality of the
Transition Bonds.*
5.2 Opinion of Richards, Layton & Finger, P.A. with respect to State of
Delaware matters. *
8.1 Opinion of Carter Ledyard & Milburn with respect to material Federal
tax matters.*
8.2 Opinion of _________ with respect to material State of New Jersey tax
matters.*
10.1 Form of Contribution Agreement. *
10.2 Form of Sale Agreement. *
10.3 Form of Servicing Agreement.*
10.4 Form of Administration Agreement*
10.5 Financing Order of the BPU issued _______, 2000.*
23.1.1 Consent of Berlack, Israels & Liberman LLP (included in its opinion
filed as Exhibit 5.1).*
23.1.2 Consent of Richards, Layton & Finger, P.A. (included in its opinion
filed as Exhibit 5.2). *
23.1.3 Consent of Carter Ledyard & Milburn (included in its opinion filed as
Exhibit 8.1).*
23.1.4 Consent of ________ (included in its opinion filed as Exhibit 8.2).*
23.2 Consent of PriceWaterhouseCoopers.*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of ________, as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Restructuring Order of the BPU issued __________ __, 2000.*
99.2 Internal Revenue Service Private Letter Ruling pertaining to Transition
Bonds.*
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* To be filed by amendment
