Amendment No. 2 to
SEC File No. 70-9529
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-l
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
Jersey Central Power & Light Company ("JCP&L")
2800 Pottsville Pike
Reading, Pennsylvania 19605
(Name of company filing this statement and address of principal
executive office)
GPU, INC. ("GPU")
(Name of top registered holding company parent of applicant)
Terrance G. Howson, Douglas E. Davidson, Esq.
Vice President and Treasurer Berlack, Israels & Liberman LLP
Scott L. Guibord, Secretary 120 West 45th Street
Michael J. Connolly, Esq. New York, New York 10036
Vice President - Law
GPU Service, Inc.
300 Madison Avenue
Morristown, New Jersey 07962
Scott L. Guibord, Secretary
Jersey Central Power & Light
Company
2800 Pottsville Pike
Reading, Pennsylvania 19605
(Names and addresses of agents for service)
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JCP&L hereby amends its Application on Form U-1, docketed in SEC File No.
70-9529, as heretofore amended, as follows:
1. By amending Item 1 thereof to read in its entirety as follows:
JCP&L, a public utility subsidiary of GPU, a registered holding
company, hereby requests authority through December 31, 2001: (1) to form a new
direct or indirect wholly-owned subsidiary ("Special Purpose Issuer") which will
be any one of the following -- a trust, corporation, limited liability company
or partnership; (2) to acquire all of the common equity interests in the Special
Purpose Issuer; (3) to transfer to the Special Purpose Issuer, directly or
indirectly, bondable transition property ("BTP") in exchange for the net
proceeds from the sale of the transition bonds; (4) for the Special Purpose
Issuer to issue and sell transition bonds from time to time through December 31,
2001; and (5) to enter into the Servicing Agreement on the terms discussed
below. Such transaction is commonly referred to as "securitization". JCP&L
requests that the Servicing Agreement be exempted from the requirements of
Section 13(b) of the Act. In addition, JCP&L hereby requests authority to form
one or more additional wholly owned corporate subsidiaries which, if formed,
will directly or indirectly own the Special Purpose Issuer.
B. On February 9, 1999, New Jersey enacted the Electric Discount
and Energy Competition Act, P.L. 1999, c. 23 (N.J.S.A. 48:3-49 et seq.) (the
"Competition Act") to restructure the electric utility and natural gas
industries in New Jersey.
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The Competition Act requires New Jersey electric utilities, including JCP&L, to
unbundle electric services into separate charges for, among other things,
customer account services (metering and billing), distribution, transmission and
generation. While the New Jersey electric generation market will be opened to
competition effective August 1, 1999, electric distribution and, at least
initially, customer account services will continue to be regulated by the New
Jersey Board of Public Utilities (the "BPU" or the "Board"). Transmission
services will be provided by the New Jersey electric utilities pursuant to an
open access transmission tariff filed with the Federal Energy Regulatory
Commission ("FERC"). Under the Competition Act, New Jersey's electric utilities
must reduce rates by at least 10% over three years. The Competition Act requires
utilities to submit restructuring plans to the BPU, which include claims for
each utility's "stranded costs" -- i.e., costs relating to utility investments
and power purchase commitments that would have been recoverable in a regulated
environment but are not expected to be recoverable as a result of the
introduction of competition in the generation market. The Competition Act
expressly recognizes the following potential sources of stranded costs:
utility-owned generation; power purchase agreements ("PPAs") with other
utilities; and PPAs with non-utility generators ("NUGs"). Utilities may recover
these stranded costs from their distribution customers through a non-bypassable
market transition charge ("MTC"), subject to approval by the BPU based upon,
among other things, the Board's findings as to the
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utility's use of all reasonably available mitigation measures and an assessment
of the full market value of the subject generation assets or PPAs. The MTC
recovery is generally limited to eight years except that the BPU may permit: (1)
stranded costs associated with NUG PPAs to be recovered over the term of each
contract; (2) stranded costs related to certain generation assets to be
recovered over eleven years; and (3) the MTC recovery period to be extended to
achieve the mandatory rate reductions.
C. The Competition Act provides for the use of securitization to
facilitate utility restructurings by empowering the BPU, at the request of a
utility to authorize such utility, directly or indirectly, to issue transition
bonds in order to recover and/or finance a portion of its stranded costs and
assist in achieving compliance with the rate reduction requirements of the
Competition Act. Utilities must apply to the BPU for a bondable stranded costs
rate order authorizing the issuance of transition bonds and approving the amount
of the initial transition bond charge ("TBC") to be imposed on all retail
electric distribution customers.
D. Under the Competition Act, the BPU may authorize the issuance of
transition bonds if (1) the utility has taken reasonable measures to mitigate
stranded costs and has the appropriate incentives or plans to do so in the
future; (2) the utility will not otherwise be able to achieve the level of rate
reduction deemed by the BPU to be necessary and appropriate, absent the issuance
of the transition bonds; (3) the issuance of the transition bonds will provide
tangible and quantifiable
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benefits for ratepayers; and (4) the structuring and pricing of the transition
bonds assure that ratepayers will pay the lowest possible TBC consistent with
market conditions and the terms of the related bondable stranded costs rate
order. In general, a utility may issue transition bonds in an amount of up to
75% of the total amount of eligible stranded costs attributable to its owned
generation assets. However, up to the full amount of the stranded costs
attributable to any remaining generation assets may be securitized if the
utility divests a majority of its generation assets and has established the
stranded cost amount attributable to such remaining assets with certainty.(1)
E. Further, under the Competition Act, the transition bonds may have
a scheduled amortization upon issuance of up to 15 years with respect to
stranded costs related to utility-owned generation assets and up to the
remaining term of a PPA with respect to stranded costs related to a buyout or
buydown of such PPA. In general, the TBC is a separate, non-bypassable charge
that will be assessed against all retail electric distribution customers,
regardless of whether they continue to purchase electricity from the
distribution utility. The TBC will be a usage-based charge that will be
sufficient to recover the principal of and interest on the transition bonds and
all other costs associated with the issuance of the transition bonds, including
costs of credit enhancements, costs of retiring existing debt and preferred
equity, costs of defeasance,
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1 This provision generally applies to the Company's Oyster Creek
Nuclear Generating Station ("Oyster Creek").
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servicing fees and certain other related fees and expenses. The relationship
between collections of the TBC and the debt service and expense requirements on
the transition bonds will likely be dependent upon, among other things, the
utility's ability to forecast: (1) sales; (2) delinquencies and charge-offs; and
(3) payment lags.
F. In July 1997, at the direction of the Board in anticipation of
the adoption of the Competition Act, JCP&L filed its restructuring plan with the
Board which, among other things, unbundled generation from transmission and
distribution. The restructuring plan was the subject of extensive hearings and
negotiations, which resulted in a settlement which the BPU approved with some
modification. The Board issued a Summary Order with respect to such approval on
May 24, 1999, and a detailed Final Order is expected shortly. Among other
things, the Board's Summary Order authorizes JCP&L to effect the securitization
transaction described in paragraph G.
G. On August 25, 1999, JCP&L filed a petition with the BPU seeking a
bondable stranded costs rate order to authorize securitization of the stranded
costs attributable to JCP&L's projected net investment in Oyster Creek at
September 1, 2000, net of deferred income taxes and investment tax credits
attributable to the plant. Such amounts relating to Oyster Creek, which would
otherwise be recoverable from JCP&L's ratepayers through the MTC commencing
August 1, 1999, will be
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collected via the TBC once JCP&L has securitized such amounts.(2) In its
petition, JCP&L is seeking BPU authorization to issue approximately $420 million
of transition bonds representing approximately $400 million of the projected
Oyster Creek net investment (gross plant, less accumulated depreciation and
accumulated deferred income taxes, including the additional deferred income
taxes resulting from the retirement of Oyster Creek) at September 1, 2000 and an
estimated $20 million of transaction costs, including related fees and expenses
of issuance and sale of the transition bonds, and to refinance or retire its
debt and preferred equity.(3)
H. The TBC will remain in effect until all principal, interest and
other costs on the related transition bonds are paid in full, and will be
adjusted at least annually, in accordance with the Competition Act, to insure
full payment of debt service and expenses. Under the Competition Act, neither
the BPU nor any other governmental entity may rescind, alter, repeal, modify or
amend a bondable stranded costs rate order, and the State may not limit, alter
or impair any BTP(4) or associated rights. The
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2 On October 15, 1999, GPU signed an agreement with AmerGen Energy
Company LLC,
pursuant to which GPU will sell Oyster Creek to AmerGen for $10 million.
3 The BPU has also authorized JCP&L to defer certain costs on its books
and to securitize the resulting deferred balances, if any. JCP&L is not seeking
Commission authority to securitize such balances now, but will request such
authority if and when JCP&L files a separate petition with the BPU with respect
thereto.
4 Under the Competition Act, Bondable Transition Property (BTP), the
statutory and regulatory right to collect the TBC, is defined as "the property
consisting of the irrevocable right to charge, collect and receive, and be paid
from collections of, transition bond charges in the amount necessary to provide
for the full recovery of bondable stranded costs which are determined to be
recoverable in a bondable stranded costs rate order . . . ." N.J.S.A. 48:3-51.
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transition bonds will not constitute a debt or liability of the State or of
JCP&L, but only of the Special Purpose Issuer.
I. The BTP and the related TBC revenue stream are isolated from any
credit risk associated with the utility because the utility will have
transferred them to the Special Purpose Issuer, which will be structured to be a
"bankruptcy remote" assignee. The Special Purpose Issuer, which is anticipated
to be a Delaware limited liability company, will issue transition bonds secured
by the BTP and the TBC revenue stream. The securitization will be structured so
that the transfer of the BTP will be treated as an absolute transfer of all of
the JCP&L's right, title and interest in the BTP as in a true sale, and not as a
pledge or other financing, other than for Federal and State income and franchise
tax purposes and for certain financial reporting purposes.
J. As the TBC is imposed upon and collected from ratepayers, such
amounts will be used to pay principal and interest on the transition bonds, as
well as fees and expenses related to the securitization transaction.
K. The securitization structure outlined above will enhance the
creditworthiness of the transition bonds because the underlying securitized
assets (the BTP and its associated TBC revenue stream) are isolated from the
risks associated with the other assets of JCP&L, once transferred to the Special
Purpose Issuer. Moreover, as discussed above, the State under the Competition
Act may not reduce the value of the BTP or TBC until the transition bonds are
fully discharged, and the BPU's bondable
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stranded costs rate order is irrevocable under the Competition Act. These
aspects of the securitization transaction will enable the transition bonds to
obtain a higher credit rating than the existing debt instruments of JCP&L. JCP&L
understands that all other utility securitization bonds have received the
highest possible credit rating from the principal rating agencies and,
accordingly, believes that it is reasonable to expect that its transition bonds
will receive such credit rating, although JCP&L has received no such assurances
from any of such rating agencies.
L. Pursuant to a "Sale Agreement", JCP&L will transfer the BTP
created by the irrevocable bondable stranded costs rate order to the Special
Purpose Issuer in exchange for the net proceeds from the sale of the transition
bonds. Such transfer will be treated as a true sale, and not as a secured
financing, for bankruptcy purposes. The Special Purpose Issuer initially will be
capitalized (at least 0.5% of the total principal amount of the transition
bonds) through a direct or indirect capital contribution by JCP&L. The Special
Purpose Issuer will deposit the capital contribution amount into a "Capital
Subaccount."
M. The actual amount of the TBC will be sized to provide for
collection of an amount beyond that needed to pay expected costs and debt
service on the transition bonds (the "Overcollateralization Amount"). The
Overcollateralization Amount, which will be collected ratably over the expected
term of the transition bonds, will enhance the creditworthiness of the
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transition bonds and will be deposited into a subaccount (the
"Overcollateralization Subaccount").
N. JCP&L, as the servicer of the TBC revenue stream, will remit
monthly (or more frequently) all amounts collected in respect of the TBC to a
collection account maintained by the indenture trustee for the benefit of the
holders of the transition bonds (the "Collection Account"). The Special Purpose
Issuer will periodically pay out of the Collection Account, among other amounts
authorized by the BPU, trustee fees, servicing fees, administrative fees,
operating expenses, accrued but unpaid interest on all classes of the transition
bonds, and principal (to the extent scheduled) on transition bonds. Any
remaining balance in the Collection Account will be used to restore the Capital
Subaccount, fund and replenish the Overcollateralization Subaccount (to the
required scheduled level), and then be added to reserves (the "Reserve
Subaccount").
O. JCP&L requests authority for the Special Purpose Issuer to issue
up to $587 million aggregate principal amount of transition bonds. That amount
will include the approximately $400 million(5) attributable to the stranded
costs associated with JCP&L's projected net investment in Oyster Creek at
September 1, 2000, net of deferred income taxes and investment tax credits
attributable to the plant, and will also include an estimated $20 million of
transaction costs. The BPU initially
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5 The exact amount will be determined at the time the transition bonds
are issued based on JCP&L's expected net investment in Oyster Creek at September
1, 2000. At the time of issuance, JCP&L will project its net investment based
upon, among other things, projected expenses associated with future depreciation
and projected capital improvements.
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approved JCP&L's securitization of these amounts in the Summary Order. In
addition to such $400 million, on December 14, 1999 JCP&L filed an amendment to
its securitization petition with the Board seeking authority to allow the
Special Purpose Issuer to issue additional transition bonds of up to $167
million. These additional transition bonds would securitize $78 million, net of
taxes, associated with JCP&L's deposit of this amount into the Oyster Creek
decommissioning trust in connection with the closing of the pending sale of the
plant and up to $89 million associated with the costs of a refueling outage for
Oyster Creek scheduled for the fall of 2000 which will be funded by JCP&L. Thus,
the maximum amount of transition bonds which JCP&L is currently seeking
authority to issue is $587 million which includes the initial $400 million and
the accompanying $20 million of transaction costs; $78 million related to the
decommissioning amounts; and $89 million related to the refueling outage
amounts.
The Special Purpose Issuer may issue transition bonds in one
or more series, and each such series may be issued in one or more classes.
Different series may have different maturities and interest rates and each
series may have classes with such maturities, interest rates and other terms as
JCP&L shall determine from time to time in the future. The TBC for each series
will be structured to provide for the recovery of the principal amount of the
related transition bonds and the related interest, fees and expenses. There will
be a date on which each of the transition bonds is expected to be repaid and a
legal final maturity date by which the transition bonds must be repaid.
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Neither the expected final maturity nor the legal final maturity will be later
than 15 years and 17 years, respectively, from the date of issuance of the
related transition bonds. The expected final maturity date must be earlier than
the legal final maturity date to meet rating agency requirements because the TBC
is calculated by taking into account projections of such variables as the
anticipated level of charge-offs, delinquencies, and usage, which may differ
from the amounts actually experienced.
P. Pursuant to a Servicing Agreement between JCP&L and the Special
Purpose Issuer, JCP&L will act as a servicer of the TBC revenue stream. In this
capacity, JCP&L will, among other things: (1) bill customers and make
collections on behalf of the Special Purpose Issuer and (2) file with the BPU
for periodic adjustments to the TBC to achieve a level which allows for payment
of all debt service and full recovery of amounts authorized by the Board to be
collected through the TBC in accordance with the expected amortization schedule
for each series and class of transition bonds. JCP&L may, subject to certain
conditions, subcontract with other companies to carry out some of its servicing
responsibilities.
Q. JCP&L will be entitled to receive a servicing fee for its
servicing activities and reimbursement for certain of its expenses in the manner
set forth in the Servicing Agreement. The servicing fee must be comparable to
one negotiated at arms-length, which would be reasonable and sufficient for a
similar, unaffiliated entity performing similar services. This rating agency
requirement is meant to assure that the Special Purpose
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Issuer would be able to operate independently and, accordingly, the fee must be
increased to retain a third party servicer if for any reason JCP&L could not
continue to perform these services. JCP&L anticipates that the servicing fee
will be set at approximately $400,000 annually. This fee may not reflect JCP&L's
actual costs of providing the related services and therefore may not meet the
"at cost" requirements of Section 13 (b) of the Act and Rules 90 and 91
thereunder. Thus, JCP&L is seeking an exemption from these requirements. The
$400,000 annual amount is JCP&L's best current estimate of its costs to perform
its services under the Servicing Agreement.
R. Any successor to JCP&L pursuant to any merger, consolidation,
bankruptcy, reorganization or other insolvency proceeding will be required to
assume JCP&L's obligations under the Sale Agreement and the Servicing Agreement
and under the Competition Act.
S. Personnel employed by GPU Service, Inc. ("GPUS") will provide
ministerial services on an as-needed basis to the Special Purpose Issuer
pursuant to an administration agreement ("AA") to be entered into between the
Special Purpose Issuer and GPUS. The services to be provided will consist
primarily of internal administrative matters relating to the Special Purpose
Issuer such as providing notices required under its transition bond
documentation, maintaining its books and records and maintaining authority to do
business in appropriate jurisdictions. Under the AA, the Special Purpose Issuer
will reimburse GPUS for the cost of the services provided, computed in
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accordance with Rules 90 and 91 under the Act, as well as other applicable rules
and regulations. As described above, JCP&L will be retained under the Servicing
Agreement to collect and manage the BTP and associated TBC revenues and to make
appropriate filings with the BPU.
T. JCP&L will use the net proceeds from the sale of the transition
bonds to reduce eligible stranded costs through the retirement of debt or
equity, or both, as permitted by the Competition Act. JCP&L's unbundled rates
being implemented in connection with its restructuring filing provide for the
savings from the transition bonds to be passed through to customers. In
accordance with the Competition Act and the Summary Order, the application of
the proceeds from the sale of the transition bonds will not substantially alter
JCP&L's capital structure, as assessed by the Board.(6) Exhibit J hereto
provides pro forma capitalization tables at December 31, 1999 from both JCP&L
and GPU, which take into account the use of proceeds of the transition bonds.
The tables demonstrate that both JCP&L's and GPU's common stock equity to total
capitalization ratio will remain above 30% after the securitization.
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6 The issuance of the entire $587 million of transition bonds will
decrease JCP&L's and GPU's consolidated common equity ratio from 49.7% to
approximately 39.8%, and from 30.6% to 30.2%, respectively, on a "per books"
basis, because applicable accounting principles require that the transition
bonds be shown as debt on the consolidated financial statements of JCP&L and
GPU. However, the transition bond-related debt is non-recourse to JCP&L, and
thus is non-recourse to GPU, and the principal and interest on the transition
bonds are not serviced by JCP&L's or GPU's revenues. Therefore, rating agencies
will exclude the transition bonds as debt for purposes of assessing JCP&L's and
GPU's financial ratios. The Board will similarly exclude the transition bonds in
assessing JCP&L's financial ratios. Exhibit J contains projected pro forma
capitalization tables for both GPU and JCP&L, both including and excluding the
effect of the transition bonds, as at March 31, 2000.
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U. The specific steps to be taken by JCP&L to reduce its
capitalization will depend, in large part, on the date on which the proceeds
from the sale of transition bonds become available, the then prevailing market
conditions, and the circumstances at that time.
V. Rule 53 Analysis.
(a) As described below, GPU meets all of the conditions of Rule 53
under the Act, except for Rule 53(a)(1). By Order dated November 5, 1997 (HCAR
No. 35-26773) (the "November 5 Order"), the Commission authorized GPU to
increase to 100% of its average "consolidated retained earnings," as defined in
Rule 53, the aggregate amount which it may invest in EWGs and FUCOs. At December
31, 1999, GPU's average consolidated retained earnings was approximately $2.416
billion, and GPU's aggregate investment in EWGs and FUCOs was approximately
$2.172 billion. Accordingly, under the November 5 Order, GPU may invest up to an
additional $244 million in EWGs and FUCOs as of December 31, 1999.
(i) GPU maintains books and records to identify investments in, and
earnings from, each EWG and FUCO in which it directly or indirectly holds
an interest.
(A) For each United States EWG in which GPU directly or
indirectly holds an interest:
(1) the books and records for such EWG will be kept in
conformity with United States generally accepted
accounting principles ("GAAP");
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(2) the financial statements will be prepared in
accordance with GAAP; and
(3) GPU directly or through its subsidiaries undertakes to
provide the Commission access to such books and
records and financial statements as the Commission may
request.
(B) For each FUCO or foreign EWG which is a majority-owned
subsidiary of GPU:
(1) the books and records for such subsidiary will
be kept in accordance with GAAP;
(2) the financial statements for such subsidiary will
be prepared in accordance with GAAP; and
(3) GPU directly or through its subsidiaries undertakes to
provide the Commission access to such books and
records and financial statements, or copies thereof in
English, as the Commission may request.
(C) For each FUCO or foreign EWG in which GPU owns 50% or less
of the voting securities, GPU directly or through its
subsidiaries will proceed in good faith, to the extent
reasonable under the circumstances, to cause:
(1) such entity to maintain books and records in
accordance with GAAP; (2) the financial statements of
such entity to be prepared in accordance with GAAP;
and
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(3) access by the Commission to such books and records
and financial statements (or copies thereof) in
English as the Commission may request and, in any
event, will provide the Commission on request copies
of such materials as are made available to GPU and its
subsidiaries. If and to the extent that such entity's
books, records or financial statements are not
maintained in accordance with GAAP, GPU will, upon
request of the Commission, describe and quantify each
material variation therefrom as and to the extent
required by subparagraphs (a) (2) (iii) (A) and (a)
(2) (iii) (B) of Rule 53.
(ii) No more than 2% of GPU's domestic public utility subsidiary
employees will render any services, directly or indirectly, to any EWG or
FUCO in which GPU directly or indirectly holds an interest.
(iii) Copies of this Application are being provided to the BPU and
the Pennsylvania Public Utility Commission, the only federal, state or
local regulatory agencies having jurisdiction over the retail rates of
GPU's electric utility subsidiaries.(7) In addition, GPU will submit to
each such
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7 Pennsylvania Electric Company ("Penelec"), a public utility subsidiary
of GPU, is also subject to retail rate regulation by the New York Public Service
Commission with respect to retail service to approximately 3,700 customers in
Waverly, New York served by Waverly Electric Power & Light Company, a Penelec
subsidiary. Waverly Electric's revenues are immaterial, accounting for less than
1% of Penelec's total operating revenues.
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commission copies of any amendments to this Application and any Rule 24
certificates required hereunder, as well as a copy of Item 9 of GPU's Form
U5S and Exhibits H and I thereof (commencing with the Form U5S to be filed
for the calendar year in which the authorization herein requested is
granted).
(iv) None of the provisions of paragraph (b) of Rule 53 render
paragraph (a) of that Rule unavailable for the proposed transaction.
(A) Neither GPU nor any subsidiary of GPU having a book value
exceeding 10% of GPU's consolidated retained earnings is
the subject of any pending bankruptcy or similar
proceeding.
(B) GPU's average consolidated retained earnings for the four
most recent quarterly periods (approximately $2.416
billion) represented an increase of approximately $49
million (or approximately 2%) in the average consolidated
retained earnings for the previous four quarterly periods
(approximately $2.367 billion).
(C) GPU did not incur operating losses from direct or indirect
investments in EWGs and FUCOs in 1999 in excess of 5% of
GPU's December 31, 1999 consolidated retained earnings.
As described above, GPU meets all the conditions of Rule 53(a),
except for clause (1). With respect to clause (1), the Commission determined in
the November 5 Order that GPU's
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financing of investments in EWGs and FUCOs in an amount greater than 50% of
GPU's average consolidated retained earnings as otherwise permitted by Rule
53(a)(1) would not have either of the adverse effects set forth in Rule 53(c).
Moreover, even if the effect of the capitalization and earnings of
subsidiary EWGs and FUCOs were considered, there is no basis for the Commission
to withhold or deny approval for the transactions proposed in this Declaration.
The transactions would not, by themselves, or even when considered in
conjunction with the effect of the capitalization and earnings of GPU's
subsidiary EWGs and FUCOs, have a material adverse effect on the financial
integrity of the GPU system, or an adverse impact on GPU's public utility
subsidiaries, their customers, or the ability of State commissions to protect
such public utility customers.
The November 5 Order was predicated, in part, upon the assessment of
GPU's overall financial condition which took into account, among other factors,
GPU's consolidated capitalization ratio and the recent growth trend in GPU's
retained earnings. As of June 30, 1997, the most recent quarterly period for
which financial statement information was evaluated in the November 5 Order,
GPU's consolidated capitalization consisted of 49.2% equity and 50.8% debt. As
stated in the November 5 Order, GPU's June 30, 1997 pro forma capitalization,
reflecting the November 6, 1997 acquisition of PowerNet Victoria, was 39.3%
equity and 60.7% debt.
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At December 31, 1999, GPU's common equity and debtrepresented 30.2% and 66.2%,
respectively. As set forth in Exhibit H hereto, GPU expects its common equity
ratio to increase during 2000 to approximately 35% of consolidated
capitalization, principally as a result of the planned sale of certain FUCO
investments. Thus, since the date of the November 5 Order, there has been no
adverse change in GPU's consolidated capitalization ratio, which remains within
acceptable ranges and limits as evidenced by the credit ratings of GPU's
electric utility subsidiaries.(8)
GPU's consolidated retained earnings grew on average approximately
6.5% per year from 1994 through 1999. Earnings attributable to GPU's investments
in EWGs and FUCOs have contributed positively to consolidated earnings.
Accordingly, since the date of the November 5 Order, the
capitalization and earnings attributable to GPU's investments in EWGs and FUCOs
have not had any adverse impact on GPU's financial integrity.
Reference is made to Exhibit G filed herewith which sets forth GPU's
consolidated capitalization at December 31, 1999 and after giving effect to the
transactions proposed herein. As set forth in such exhibit, the proposed
transactions will not have a material impact on GPU's capitalization or
earnings.
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8 The first mortgage bonds of GPU's public utility subsidiaries --
Penelec, JCP&L and Metropolitan Edison Company -- are rated A+ by Standard &
Poors Corporation, and A2, Baa1 and A3, respectively, by Moody's Investor
Services, Inc.
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2. By amending Item 3 thereof to read in its entirety as follows:
The proposed transactions are subject to Sections 6(a), 7, 9, 10,
12(b), 12(f) and 13(b) of the Act and Rules 90 and 91 thereunder.
3. By filing the following exhibits in Item 6:
D-1 - Petition of JCP&L to the BPU seeking authority to issue
the transition bonds.
D-3 - First Amendment to petition of JCP&L to the BPU seeking
authority to issue the transition bonds.
J - Actual and Pro Forma Capitalization tables reflecting
the sale of transition bonds.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF
1935, THE UNDERSIGNED COMPANY HAS DULY CAUSED THIS STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Jersey Central Power & Light Company
By: /s/ T. G. Howson
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T. G. Howson
Vice President and Treasurer
Date: February 18, 2000
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EXHIBITS TO BE FILED BY EDGAR
Exhibits:
D-1 - Petition of JCP&L to the BPU seeking authority to issue
the transition bonds.
D-3 - First Amendment to petition of JCP&L to the BPU seeking
authority to issue the transition bonds.
J - Actual and Pro Forma Capitalization tables reflecting
the sale of transition bonds.
Exhibit D-1
STATE OF NEW JERSEY
BOARD OF PUBLIC UTILITIES
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In The Matter Of The Verified Petition :
Of Jersey Central Power & Light Company, :
Doing Business As GPU Energy, For A : Docket No. E
Bondable Stranded Cost Rate Order In : -------
Accordance With Chapter 23 Of The Laws :
Of 1999, To Authorize The Imposition Of :
A Non-bypassable Transition Bond Charge, :
The Issuance And Sale Of Up To $420 : VERIFIED PETITION
Million Aggregate Principal Amount Of :
Transition Bonds, Or Such Higher Amount :
As May Be Required As A Result Of :
Internal Revenue Service Tax Rulings, By :
A Financing Entity To Recover :
Petitioner's Bondable Stranded Costs, And :
The Application Of Transition Bond :
Proceeds To Retire Outstanding Debt, :
Equity Or Both, And To Approve The :
Methodology For The Calculation And :
Adjustment Of The Transition Bond Charge :
And Market Transition Charge-Tax Related :
Thereto. :
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Docket No. E
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VERIFIED PETITION
Petitioner, Jersey Central Power & Light Company, doing business as
GPU Energy (the "Company"), an electric public utility subject to the regulatory
jurisdiction of the Board of Public Utilities (the "Board"), and maintaining its
principal New Jersey offices at 300 Madison Avenue, Morristown, New Jersey
07962, in support of the within Verified Petition, respectfully shows:
1. The Company is engaged as a New Jersey public utility in
the production, generation, purchase, transmission, distribution and sale of
electric energy and related utility
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services to more than 950,000 residential, commercial and industrial customers
located within 13 counties and 236 municipalities of the State of New Jersey.
2. Copies of all correspondence and other communications
relating to this proceeding should be addressed to:
Gerald W. Conway, Esq.
Marc B. Lasky, Esq.
Berlack, Israels & Liberman LLP
65 Madison Avenue
Morristown, New Jersey 07960
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Kevin Boutilier
GPU Service, Inc.
310 Madison Avenue
Morristown, New Jersey 07962
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Sally J. Cheong
GPU Energy
300 Madison Avenue
Morristown, New Jersey 07962
3. The Company, in BPU Docket Nos. E097070458, E097070459 and
E097070460 and OAL Docket Nos. PUC-7307-97 and PUC-7308-97, and herein pursuant
to the Electric Discount and Energy Competition Act, Chapter 23 of the Laws of
1999 (the "Act"), requests authority to securitize in the "Transition Bond
Transaction" certain of the Company's bondable stranded costs, to impose a
transition bond charge ("TBC"), and to transfer the Bondable Transition Property
which, in part, embodies the right to charge, collect and receive such charge to
an approved financing entity. The Company also requests approval of the
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methodology for the calculation and adjustment of the tbc and the market
transition charge-tax related thereto.
4. STATUTORY AND REGULATORY OVERVIEW
On February 9, 1999, Governor Whitman signed the Act into law as a
comprehensive restructuring law for the electric power and gas industries. The
Act, among other things, authorizes electric public utilities to securitize
their Bondable Stranded Costs through the issuance of Transition Bonds in order
to facilitate the provision of savings to ratepayers. Capitalized terms defined
in the Act (and not specifically defined herein) are used herein as defined in
the Act.
For purposes of securitizing the recovery of a portion of (i) the
stranded costs deemed eligible for rate recovery by the Board in its order
issued in the Company's restructuring proceedings (as summarized in a Summary
Order therein dated May 24, 1999) (the "Recovery Order"(1)) consistent with the
provisions of Section 13 of the Act, together with (ii) other Bondable stranded
costs described in the Act, and to allow the Company to comply with the rate
reduction requirements determined by the Board to be necessary and appropriate
consistent with the provisions of Sections 4 and 13 of the Act,(2) the Company
hereby
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1 "Recovery Order", as used herein, shall mean the Summary Order until
the more detailed Decision and Order contemplated therein is issued and,
thereafter, shall mean, collectively, the Summary Order and such more detailed
Decision and Order.
2 The Recovery Order recognized that (1) the Company's ability to provide
the rate reductions determined by the Board in the Recovery Order to be
necessary and appropriate was dependent upon the securitization for which
definitive authority is sought in this Petition, and (2) the rate reductions
provided in the Recovery Order already anticipated, and reflected for the
benefit of the Company's ratepayers, the savings expected to be achieved from
such securitization.
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requests that the Board issue an irrevocable Bondable Stranded Costs Rate Order
(the "Financing Order"). The Financing Order must provide, among other things,
for the imposition and collection of a usage-based non-bypassable TBC, and for
the Company to transfer the Bondable Transition Property relating to such TBC to
another entity approved by the Board as described below. The Company further
requests that the Board authorize, under the Financing Order, the issuance of
Transition Bonds by a financing entity to securitize the recovery of the
Company's Bondable Stranded Costs. The net proceeds of the Transition Bonds will
be used by or on behalf of the Company solely for the purposes of reducing the
amount of its otherwise recovery-eligible stranded costs through the retirement
of debt or equity, or both, of the Company consistent with Section 14 of the
Act.
As provided in the Recovery Order, the Company is directed to
include a tax component in its market transition charge (the "MTC-Tax") to
recover federal income taxes and state corporate business taxes, if applicable,
associated with the collection of the TBC until the related Transition Bonds and
Bondable Stranded Costs have been paid in full, and to adjust the MTC-Tax in the
same manner and at the same time the TBC is adjusted as described in this
Petition.
As discussed in footnote 2, the entire amount of cost savings
expected to be achieved as a result of the issuance of the Transition Bonds has
already been passed on to ratepayers in the form of reduced rates for
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electricity as described in the Recovery Order, subject to true-up. (Exhibit A
sets forth a calculation of the present value savings already provided to
ratepayers in the Recovery Order in anticipation of the Transition Bond
Transaction based on such assumed terms.)
5. TRANSITION BOND TRANSACTION
a. Proposed Structure
A general description of the Transition Bond Transaction structure
follows. The proposed structure is subject to modification depending upon: (i)
the requirements of tax authorities; (ii) input from underwriters in connection
with the marketing of the Transition Bonds; and (iii) negotiations with
nationally recognized statistical rating organizations selected by the Company
to assign credit ratings to the Transition Bonds (the "rating agencies"). The
proposed structure is intended to minimize debt service costs and maximize
ratepayer savings by obtaining the best possible rating for the Transition
Bonds.(3) Pricing of the Transition Bonds will be set by the underwriters and
approved by both the Company and a designee of the Board (the "Designee"). The
structure and terms of the Transition Bond Transaction will be fixed based on
such approved pricing.
Pursuant to the Recovery Order, the Board has approved the recovery
by the Company of approximately $400 million of the Company's Bondable Stranded
Costs, plus transaction costs
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3 Although the associated savings have already been provided to
ratepayers in the Recovery Order, any incremental savings realized by obtaining
the best possible rating and terms for the Transition Bonds will further benefit
ratepayers by being reflected in the market transition charge collections and
credited to the Deferred Balance (as defined in the Recovery Order).
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aggregating approximately $20 million, through the issuance of Transition
Bonds.(4) The Company's Bondable Stranded Costs for which it is presently
seeking a Financing Order are attributable to the Company's projected net
investment in the Oyster Creek Nuclear Generating Station ("Oyster Creek") at
September 1, 2000, net of (i) deferred income taxes attributable to the plant
and (ii) certain other tax benefits expected to be realized upon the plant's
anticipated retirement as of September 1, 2000. Although the Company has
announced that it is seeking a buyer for Oyster Creek, a reduction to the
principal amount of the Transition Bonds will be made, to the extent
appropriate, only if such sale is completed before the sale of such Transition
Bonds. If the sale occurs, and is completed, after the sale of the Transition
Bonds, no adjustment will be made to such principal amount.(5)
The Board has also determined that the taxes payable with respect to
the amounts to be collected from ratepayers in
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4 While the Board approved recovery of approximately $420 million of such
Bondable Stranded Costs in the Recovery Order, based on current estimates, the
Company expects that its Bondable Stranded Costs will be approximately $393
million, including Upfront Transaction Costs and Capital Reduction Costs (both
as defined below) aggregating approximately $21 million. Although this Petition
will refer to the $393 million amount, the Company requests authority to
securitize up to $420 million if, at the time of the closing of the Transition
Bond Transaction, the then current estimates of its Bondable Stranded Costs
support such greater amount. The Board has also approved the recovery of an
additional $125 million through such Transition Bonds if the Internal Revenue
Service ("IRS") does not issue the private letter ruling discussed in paragraph
5.r below.
5 However, any "benefit" derived from such a sale of Oyster Creek will be
flowed through to ratepayers in a manner approved by the Board, as provided in
the Recovery Order. The mechanism for flowing through such benefit to ratepayers
will in no way impact the TBC.
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connection with the securitization, i.e. the grossed up revenue requirement
associated with the recovery of the approximately $400 million of stranded costs
to be securitized plus transaction costs, are legitimate recoverable stranded
costs that may be separately recovered through the MTC-Tax as approved in the
Recovery Order. The Company also requests in this Petition the authority to
recover through the Transition Bond Transaction related Bondable Stranded Costs
including, (1) the costs, estimated at $15.6 million, to retire the Company's
existing debt or preferred equity,(6) or both ("Capital Reduction Costs"); (2)
the costs, estimated at $5.2 million, incurred to issue Transition Bonds (the
"Upfront Transaction Costs") (estimated Capital Reduction Costs and Upfront
Transaction costs are detailed in Exhibit B); and (3) principal and interest on
the Transition Bonds, together with the costs of paying, refinancing,
administering and servicing, credit enhancing and overcollateralizing the
Transition Bonds, as more fully described in paragraph 5.d below (the "Ongoing
Transition Bond Costs") (estimated Ongoing Transition Bond Costs are detailed in
Exhibit C). All such costs constitute Bondable Stranded Costs, as more fully
defined in the Act. The Company also requests approval of the methodology for
the calculation and adjustment of the TBC and MTC-Tax related thereto.
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6 The Company also may retire existing common equity, but there will be
no transaction costs associated with such retirement.
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The Company requests authority to securitize the recovery, through the proceeds
of the Transition Bonds, of approximately $393 million of its Bondable Stranded
Costs, including its Capital Reduction Costs and Upfront Transaction Costs.(7)
Such Bondable Stranded Costs -- as reflected in the Ongoing Transition Bond
Costs -- will be recovered through the assessment and collection of the TBC. The
TBC will be a separate, non-bypassable, usage-based charge assessed and
collected from all of the Company's ratepayers and/or the ratepayers of any
successor electric distribution company operating within the Company's existing
service territory as it exists on the date of this Petition (a "Successor
Utility"), except as provided in Section 28 of the Act.
The principal asset supporting the Transition Bonds will be the
Bondable Transition Property, a property right created by the Act, which
includes the irrevocable right to charge, collect and receive the TBC and to
obtain periodic adjustments of such TBC, and all revenues, collections,
payments, money and proceeds thereof. Pursuant to Section 16 of the Act, the
Financing Order and the TBC are irrevocable upon the Financing Order becoming
effective under the Act, and the Financing Order cannot be rescinded, altered,
repealed, modified or amended by the Board or any other governmental entity, nor
can it be impaired by the State of New Jersey, as pledged by the State of New
Jersey in Section 17 of the Act.
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7 The Company also requests authority to securitize the recovery, in the
same manner, of additional amounts equal to the deferred taxes attributable to
Oyster Creek, in the circumstances described in paragraph 5.r below.
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To implement the Transition Bond Transaction, the Company intends to
form a wholly-owned, non-utility Delaware corporate subsidiary ("New Sub"). The
Company will make a capital contribution to New Sub of its Bondable Transition
Property. New Sub will then transfer the Bondable Transition Property to a newly
formed, non-utility, bankruptcy-remote special purpose entity (the "SPE"), which
will be wholly-owned by New Sub.(8) New Sub will either loan or dividend the
payment for the Bondable Transition Property it receives from the SPE to the
Company. The Company's formation and use of New Sub to implement the Transition
Bond Transaction is subject to obtaining a ruling from New Jersey taxing
authorities to the effect that the Company, New Sub and the SPE will not be
subject to any state corporate business taxes on the TBC collections. If the
Company does not receive such a tax ruling, the transfer of such Bondable
Transition Property will be effected directly from the Company to the SPE.(9)
Under Section 23 of the Act, the transfer to the SPE will be
treated, for bankruptcy purposes, as a true sale and absolute transfer to the
SPE, notwithstanding the fact that the Company acts as the collector or servicer
of the TBC; the treatment of such transfer as a financing for federal, state or
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8 The Company, directly or through New Sub, will make a capital
contribution to the SPE in an amount anticipated to equal no less than 0.5% of
the aggregate principal amount of the Transition Bonds. The capitalization
amount will be held in a separate account (the "Capital Subaccount") as
described in more detail below.
9 References to the SPE in this Petition shall be deemed to mean the SPE
and/or New Sub, as appropriate in the context.
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local tax purposes or financial accounting purposes; the capitalization of the
SPE by the Company, directly or through New Sub; or the retention or acquisition
of any rights listed in Section 23(a)(4) of the Act. The SPE will be a
"financing entity" for purposes of the Act. Board approval of the SPE and the
Transition Bond Transaction will constitute a finding that the SPE's activities
will not violate any affiliate relation standards currently in effect or that
the Board may adopt in the future.
The SPE will issue and sell Transition Bonds, which will be either
fixed or floating rate instruments, under an indenture ("Indenture") between the
SPE and an institutional trustee (the "Bond Trustee"), and will purchase the
Bondable Transition Property from the Company with the proceeds received from
the sale of the Transition Bonds. The SPE will issue and sell the Transition
Bonds in a negotiated, fully underwritten public offering as asset-backed
securities ("ABS"). All prior securitizations of utility stranded costs in other
jurisdictions have been structured as ABS and sold on a negotiated basis. The
expertise of an underwriter is critical to the structuring, pricing and
marketing of securities in the ABS market. Indeed, in other states where
competitive bidding requirements generally exist, such as Massachusetts,
competitive bidding of stranded cost securitization transactions either has been
waived or has not been required. The Company believes that a negotiated sale, as
opposed to one accomplished through competitive bidding, will
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ensure that the Transition Bonds will receive the highest possible credit rating
from the rating agencies and will incur the lowest possible interest and
transaction costs, in compliance with the requirement of Section 14(b)(4) of the
Act that the Company's ratepayers pay the lowest TBC consistent with market
conditions at time of pricing.
All of the assets of the SPE, including, without limitation, the
Bondable Transition Property and the other collateral of the SPE (the "Other SPE
Collateral"), will be pledged as collateral to the Bond Trustee to secure the
Transition Bonds. The Other SPE Collateral will include, without limitation:
(1) the rights of the SPE under the Transition Bond Transaction
documents, including the agreement by which the SPE acquires the Bondable
Transition Property; (2) the rights of the SPE under a servicing agreement by
which the Company or any successor to the Company acts as servicer of the
Bondable Transition Property; (3) the rights of the SPE under an administration
agreement by which the SPE will be administered; (4) various trust accounts(10)
of the SPE into which payments arising from the TBC,(11) together with the
pledged funds of the SPE, will be deposited; (5) any investment earnings on
amounts
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10 Such trust accounts are the general account (the "General
Subaccount"), the Capital Subaccount, the reserve account (the "Reserve
Subaccount") and the overcollateralization account (the "Overcollateralization
Subaccount" and collectively, the "Collection Account").
11 The Company intends to reconcile annually, with the SPE, the
difference between actual TBC collections and deemed TBC collections.
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held by the Bond Trustee; and (6) the equity capital of the SPE.
While the Company requests that the Board approve Transition
Bonds with scheduled amortizations not exceeding 15 years at issuance in
accordance with Section 14 of the Act, the Company also requests that the Board
approve final legal maturities of up to two years beyond the expected final
scheduled maturity date of each class of Transition Bonds (i.e., a maximum of 17
years in the case of the last such class). Rating agencies have required such
additional time in similar securitization transactions in order to deliver their
highest possible credit rating.(12) These objectives should result in lower
interest costs, and thus benefits to ratepayers.
A diagram of the proposed transaction is attached as Exhibit D to
this Petition.
b. Recovery of Upfront Transaction Costs
The Company will incur Upfront Transaction Costs as a result of
the Transition Bond Transaction. Such costs are necessary to effectuate the
Transition Bond Transaction and therefore must be included in the
securitization on which the ratepayer savings embodied in the Recovery Order
are based. Based on the current estimated initial Transition Bond offering
of approximately $393 million, the Company estimates that such amount will
include Upfront Transaction Costs of approximately $5.2 million which may
vary, in part, based on, among other items, the underwriting fee, rating
agency fees, accounting fees,
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12 The additional time acts as a "cushion" in the repayment of the bonds
if there is a shortfall in expected TBC collections.
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Securities and Exchange Commission registration fees, printing and marketing
expenses, trustees' fees, legal fees, servicing set-up fees and the
administrative costs of forming the SPE.
Pursuant to the Recovery Order and the Act, the Company requests
authority to recover the Upfront Transaction Costs from the proceeds of the sale
of the Transition Bonds and to include such costs as Bondable Stranded Costs.
Thus, the right to recover such amounts will constitute a portion of the
Bondable Transition Property. To the extent prior payment is required, the
Company will pay such costs and then will be reimbursed from the proceeds of the
Transition Bonds.
c. Recovery of Capital Reduction Costs
Pursuant to the Recovery Order and the Act, the Company requests
authority to recover the costs, estimated at approximately $15.6 million, of
retiring the Company's debt and/or preferred equity,(13) including any accrued
interest, premium and other fees, costs and charges relating thereto, out of the
proceeds of the sale of the Bondable Transition Property and to include such
costs as Bondable Stranded Costs. Thus, the right to recover such amounts will
constitute a portion of the Bondable Transition Property.(14) To the extent that
both actual Capital Reduction Costs and actual Upfront Transaction Costs are
greater or less than the Company estimates, any difference will
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13 As previously noted, there will be no Capital Reduction Costs
associated with the retirement of common equity.
14 The specific issues and amounts to be retired will be determined based
upon market conditions at the time of retirement and cannot currently be
identified.
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be applied to the market transition charge and will be included in a future
true-up of that charge.
d. Ongoing Transition Bond Costs
Pursuant to the Recovery Order and the Act, the Company requests
that the Board authorize the recovery of the Ongoing Transition Bond Costs
through the TBC. The primary Ongoing Transition Bond Costs are the periodic
payments of principal and interest on the Transition Bonds. Other Ongoing
Transition Bond Costs include the servicing fee (the "Servicing Fee") paid to
the Company, in its capacity as the Servicer (as defined below), the ongoing
costs of credit enhancement, if any, and the costs of overcollateralization.
Ongoing Transition Bond Costs also include any unpaid Ongoing Transition Bond
Costs from prior periods.
The Company anticipates that there will be a small amount of
additional Ongoing Transition Bond Costs associated with the Transition Bond
Transaction, such as an administration fee, legal and accounting fees, directors
or managers fees, rating agency fees, trustee fees and other costs of operating
the SPE. These costs will be Bondable Stranded Costs as defined in the Act and
will be recovered through the TBC in accordance with the Act, and the right to
recover these costs as Bondable Stranded Costs will constitute a portion of the
Bondable Transition Property.
e. Approval of Final Terms and Conditions: Transition Bond
Transaction
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Upon the pricing of the Transition Bonds and inaccordance with Sections 14 and
15 of the Act, the Board's Designee will file with the Board a certificate (i)
approving the pricing of the Transition Bonds and (ii) stating that the
structure and pricing of the Transition Bonds assures that the Company's
ratepayers pay the lowest TBC consistent with market conditions and the terms of
the Financing Order. Such certificate will represent the Designee's final and
irrevocable approval of the pricing of the Transition Bonds and the terms and
conditions of the Transition Bond Transaction. Such terms and conditions,
including the expected principal amortization schedule (the "Expected
Amortization Schedule"), will be fixed based on such approved pricing, and will
include scheduled amortization up to 15 years and legal maturities of up to 17
years, as are required to obtain the highest possible credit rating on the
Transition Bonds. Payments on the Transition Bonds will be made semi-annually or
quarterly, depending upon market conditions at the time of pricing. It is
anticipated that the sum of principal and interest payments in the Transition
Bond Transaction will be levelized as in a mortgage amortization, although the
ultimate Expected Amortization Schedule may be altered as a result of market
conditions or rating agency requirements. The associated MTC-Tax collections may
be adjusted from time to time to reflect the changing principal and interest
components of the Transition Bond debt service.
If the structure, pricing, terms and conditions meet the
requirements discussed above, the Company will be authorized
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under the Financing Order to undertake the Transition Bond Transaction. Prior to
the pricing of the Transition Bonds, the Designee may obtain from the Board's
financial advisors recent secondary market trading levels of existing utility
stranded cost securitization bonds, to the extent such information is available
through public sources. To the extent such information is available, it is
anticipated that such information may, in part, be considered in connection with
the pricing of the Transition Bonds. The Designee may also conduct conference
calls and meetings with the Board's financial advisors to discuss the background
of the ABS market, current market conditions, investor perception of recent
utility stranded cost securitization bond issues, pricing levels of ABS and
recent secondary market trading levels, to the extent available. Finally, the
Designee may elect to be present at pricing, either in person or by telephone.
Not later than the closing of the Transition Bond Transaction, the
Company will confirm to the Board, in an "Issuance Advice Letter", the actual
interest rates on the Transition Bonds, the Expected Amortization Schedule, the
Required Overcollateralization Schedule (as defined in paragraph 5.f below) and
the initial TBC and MTC-Tax, which will be calculated using the methodology
approved in the Financing Order and described in Attachment E-3 to Exhibit E. At
such time, the Company will also file revised tariff sheets with the Board
setting forth the initial TBC and the Market Transition Charge. The Issuance
Advice Letter will also include a reconciliation
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between the TBC and the Market Transition Charge to reflect the actual structure
and terms of the Transition Bonds, as compared to the terms assumed in the
Recovery Order. The initial TBC and MTC-Tax and related revised tariff sheets
will become effective the same day the Company files the Issuance Advice Letter
and the revised tariff sheets, without further action by the Board.
f. TBC
In accordance with Section 18 of the Act, the TBC shall apply
equally to each ratepayer, regardless of class, based on the amount of
electricity delivered to each ratepayer through the transmission and
distribution system of the Company or any Successor Utility. The TBC will be
periodically adjusted, from time to time, in accordance with the methodology
approved in the Financing Order, to a level intended to recover the Ongoing
Transition Bond Costs, including without limitation: (i) the principal of
(determined in accordance with the Expected Amortization Schedule as detailed in
the Issuance Advice Letter), and interest on, the Transition Bonds authorized by
the Board in the Financing Order; (ii) the costs of operating and administering
the SPE; (iii) the costs of servicing the Transition Bonds, including the
Servicing Fee and trustee fees, expenses and indemnities; (iv) amounts required
to fund or replenish the Overcollateralization Subaccount in accordance with the
overcollateralization schedule (the "Required Overcollateralization Schedule")
confirmed in the Issuance Advice Letter; (v) the reimbursement of any amounts
withdrawn from the
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Capital Subaccount; and (vi) the ongoing annual expenses of any other credit
enhancement arrangement.
In Attachment E-3 to Exhibit E, the Company sets forth the
methodology by which it proposes to establish and adjust from time to time the
TBC and the MTC-Tax. The TBC and the MTC-Tax will be set and adjusted based on
assumptions described in Attachment E-3 to Exhibit E, as those assumptions are
adjusted from time to time, based on various factors including but not limited
to energy sales forecasts, ratepayer payment and charge-off patterns, defaults
by third party suppliers (as described herein), the Ongoing Transition Bond
Costs (including unpaid amounts from prior periods and replenishment of credit
enhancement, if applicable) and, with respect to the MTC-Tax, the applicable
income tax rates in effect from time to time. In Attachment E-2 to Exhibit E,
the Company projects the initial TBC and MTC-Tax using the methodology described
in Attachment E-3 to Exhibit E and assuming the Ongoing Transition Bond Costs as
shown in Attachment E-1 to Exhibit E.
The TBC will remain in effect until the SPE, as owner of the
Bondable Transition Property, has received TBC collections sufficient to pay all
Ongoing Transition Bond Costs and Bondable Stranded Costs.
Each ratepayer's monthly bill will note that a portion of the
charges on such bill represents amounts being collected on behalf of the SPE as
owner of the Bondable Transition Property.
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g. Periodic Adjustments to the TBC and MTC-Tax
Section 15 of the Act requires that the Financing Order provide for
mandatory periodic adjustments (each, a "TBC True-Up") to be made by the Board
at least annually upon petition of the Company, its assignee or a financing
entity, to ensure receipt of revenues sufficient to make payments related to
Ongoing Transition Bond Costs (including unpaid amounts from prior periods and
replenishment of credit enhancements, if applicable) by the payment date
designated by the Company in its TBC True-Up filing, such that the Transition
Bonds will be retired in accordance with the Expected Amortization Schedule. The
TBC True-Up must be formula-based and the Company intends to use the
formula-based methodology described in Attachment E-3 to Exhibit E. As Servicer,
the Company will be responsible for filing with the Board documentation for any
TBC True-Up. (The Company, as servicer under the servicing agreement, and any
successor to the Company as servicer are herein referred to as the "Servicer".)
Although the Company, as Servicer, expects to file for TBC True-Ups at least
annually, the Company requests authorization to file for adjustments as often as
quarterly (or monthly in the last year before the scheduled maturity of the
Transition Bonds and continuing until final maturity of the Transition Bonds) as
may be determined to be necessary to achieve the highest possible credit rating.
Each TBC True-Up will become effective 30 days after filing thereof with the
Board absent a determination by the Board of manifest error. Under Section 15
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of the Act, the Company, as Servicer, shall propose such TBC True-Ups in a
filing with the Board made at least 30 days in advance of the proposed effective
date. Such TBC True-Up shall become effective on an interim basis on such date
and, in the absence of a Board order to the contrary finding a manifest error,
shall become final 60 days thereafter.
As provided in the Recovery Order, the Company will be entitled to
request, and the Board will approve, mandatory periodic adjustments of the
MTC-Tax (the "MTC-Tax True-Up"). Each MTC-Tax True-Up will be made at least
annually to reconcile the income tax recovered to the income taxes required to
be assessed to the Company on the taxable net revenue from the TBC. The
reconciliation will be made in the same manner and at the same time as the TBC
True-Up to ensure receipt of revenues sufficient to assure recovery of the
MTC-Tax. Upon petition of the Company, the MTC-Tax will be adjusted based upon
assumptions described in Attachment E-3 to Exhibit E to this Petition, as those
assumptions are adjusted from time to time in accordance with such Attachment
E-3. No delay in the MTC-Tax True-Up will influence or affect the TBC True-Up.
The Company also requests that the Board grant the Company authority to
make "non-routine" adjustments to the TBC and the MTC-Tax. Such filings for
non-routine adjustments would be made to accommodate changes to the methodology
described in Attachment E-3 to Exhibit E. Any such filing must be made at least
90 days prior to the proposed effective date, and will be subject to Board
approval before implementation.
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h. Remittance of the TBC Collections
Unless permitted to do so on a monthly basis by the rating agencies,
the Servicer will remit daily to the Bond Trustee payments arising from the TBC,
based on the Company's collection history. If such amounts are not required to
be remitted to the SPE daily, the Servicer may, as authorized by Section 15 of
the Act, commingle such amounts with other ratepayer payments until the Servicer
remits such amounts to the Bond Trustee.
Payments from each ratepayer will be applied first to sales taxes
(which the Company will collect as trustee for the State and not for its own
account or that of the SPE, and which are not "charges" for purposes of the
following allocations), then to charges in arrears, if any, and then to current
charges. With respect to each billing period, partial payments of charges will
be allocated: (i) to the TBC; (ii) to the MTC-Tax; and (iii) to the Company's
other charges, pro rata, based on the proportions that the TBC, the MTC-Tax and
the Company's other charges bear to the total charges billed. If the Transition
Bonds are issued in more than one series by more than one SPE, partial payments
of the TBC will be allocated to the respective SPEs for the Transition Bonds so
issued, pro rata, based on the proportions that the TBC representing the
Bondable Transition Property and any TBC established pursuant to other
subsequent financing orders bear to the total TBC billed.
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The amounts remitted by the Servicer to the Bond Trustee (the
"Deemed TBC Collections"), will be retained by the Bond Trustee until it pays to
the appropriate parties all periodically required Ongoing Transition Bond Costs,
including scheduled principal and interest payments, Servicing Fees, other fees
and expenses and any unpaid amounts from prior payment dates related to the
aforementioned. These payments are expected to be made on a quarterly basis. The
Bond Trustee will hold all Deemed TBC Collections received from the Servicer
from the remittance date to the distribution date in the General Subaccount of
the Collection Account. The Bond Trustee will invest the funds in the Collection
Account in securities that mature on or before the next scheduled distribution
date, in accordance with rating agency criteria for investment of such funds.
Investment earnings on funds in the Collection Account held by the
Bond Trustee may: (i) be used to satisfy currently scheduled interest and
principal payments on the Transition Bonds and other Ongoing Transition Bond
Costs; (ii) be used to restore Capital Subaccount amounts previously withdrawn
therefrom to meet periodically required Ongoing Transition Bond Costs; and (iii)
be applied to meet the Required Overcollateralization Schedule. Investment
earnings on funds in the Collection account in excess of the amount applied as
described above will be held in the Reserve Subaccount, except for such
investment earnings in the Capital Subaccount, which will be distributed to the
SPE.
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Upon retirement of all outstanding Transition Bonds, including
payment of all interest thereon, and the payment of all related Ongoing
Transition Bond Costs and Bondable Stranded Costs, any remaining amounts held by
the Bond Trustee will be released to the SPE, and ultimately distributed to the
Company. The Company will credit, against the distribution charges it bills to
its ratepayers, any amounts so received from the SPE that exceed the initial
amount of the equity contribution to the SPE and the investment earnings on
funds in the Capital Subaccount, less any amount of any unpaid MTC-Tax amounts.
i. Credit Enhancement
The Transition Bond documents will provide for the TBC True-Up as is
authorized by Section 15 of the Act as described in paragraph 5.g above and for
overcollateralization amounts as described below or other means of credit
enhancement as required by the rating agencies or taxing authorities.
A portion of the TBC will be applied to an "overcollateralization
amount" which will be deposited into the Overcollateralization Subaccount to
meet the Required Overcollateralization Schedule. The collection of the
overcollateralization amount will be in addition to the collection of the
principal (which will be collected in accordance with the Expected Amortization
Schedule) and interest payable on the Transition Bonds, and the collection of
the other Ongoing Transition Bond Costs, all of which will be recovered through
the TBC. The total overcollateralization requirement needed to satisfy rating
agency requirements, which will be no
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less than 0.5% of the initial Transition Bond balance, will be determined by the
Company prior to the time the Transition Bonds are priced, based on criteria
from the rating agencies, and will be reflected in the Issuance Advice Letter.
All of the components of the TBC, including overcollateralization
amounts, will be incorporated into each TBC True-Up to the extent necessary.
The Company will reduce the distribution charges payable by its
ratepayers by an amount equal to the amount remaining in the Collection Account
(including amounts in the Overcollateralization Subaccount), except for amounts
in the Capital Subaccount including any investment earnings on funds in such
subaccount, after payment in full of all Ongoing Transition Bond Costs and
Bondable Stranded Costs, less the amount of any unpaid MTC-Tax charges. Thus,
credit enhancement in the form of overcollateralization will not reduce customer
benefits from the Transition Bond Transaction.
j. Formation of SPE and New Sub
The Company will form the SPE and New Sub prior to the issuance of
the Transition Bonds. The SPE will be a wholly-owned, non-utility, indirect
subsidiary of the Company and is expected to be a Delaware limited liability
company. In the alternative, the SPE may be a Delaware business trust. New Sub
will be a Delaware corporation and a wholly-owned subsidiary of the Company.
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The fundamental organizational documents of the SPE will impose significant
limitations upon the permitted activities of the SPE. The Company or New Sub, if
it is formed, will be the sole member of the SPE, but the ability of New Sub to
take actions as the holder of the equity interest therein will be limited. For
example, the SPE will be formed for the limited purpose of acquiring the
Bondable Transition Property and Other SPE Collateral and issuing and selling
the Transition Bonds. The SPE will not be permitted to engage in any other
activities, and will have no assets other than the Bondable Transition Property
and Other SPE Collateral.
k. Bondable Transition Property
The Company's Bondable Transition Property will consist of (i) the
irrevocable right to charge, collect and receive, and be paid from collections
of, the TBC in the amount necessary to provide for the full payment of Ongoing
Transition Bond Costs and Bondable Stranded Costs, (ii) all rights of the
Company under the Financing Order, including, without limitation, all rights to
obtain periodic adjustments of the TBC pursuant to TBC True-Ups and (iii) all
revenues, collections, payments, money and proceeds arising under, or with
respect to, the TBC. Pursuant to Sections 16 and 22 of the Act, when the Company
receives payment for the Bondable Transition Property from the SPE, the Bondable
Transition Property will constitute a vested presently existing property right
which will continuously exist as property for all purposes as provided in the
Act and the Financing Order, whether or not the revenues and proceeds arising
with respect thereto
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have accrued and notwithstanding the fact that the value of the property right
will depend upon consumers using electricity or the Servicer performing
services. The validity of any sale, assignment or other transfer of the Bondable
Transition Property will not be defeated or adversely affected by the
commingling by the Company of revenues recovered or payments arising from
amounts billed, collected and received on account of the Bondable Transition
Property with other funds of the Company.
l. Transfer of Bondable Transition Property to SPE
The Company requests that the Board approve the transfer by the
Company of the Bondable Transition Property to the SPE in one or more
transactions each of which, in accordance with Section 23 of the Act, will be
treated as a true sale and absolute transfer to the SPE, for bankruptcy
purposes, even though such transactions may be treated as a financing, and not a
sale, for federal and state tax purposes, for financial accounting purposes or
for other purposes. The SPE will have all of the rights originally held by the
Company with respect to the Bondable Transition Property, including the right to
exercise, through the Company or any Successor Utility, any and all rights and
remedies to collect any amounts payable by any ratepayer in respect of the
Bondable Transition Property. Under no circumstances will the holders of the
Transition Bonds have the right to enforce the ratepayers' obligations to pay
such amounts. The SPE will thus have the right to direct the Company or any
Successor Utility to discontinue electric power supply to a
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particular ratepayer to the extent permitted in accordance with law and any
applicable regulations. The SPE and other third parties, however, will not have
any right to exercise any direct control over the distribution and transmission
system of the Company. Any direction to the Company or any Successor Utility to
shut off the electric power supply to a ratepayer would be subject to Board
policies and procedures and any applicable laws then in effect.
The agreement which will govern the transfer of the Bondable
Transition Property to the SPE may include representations and warranties with
respect to, among other things, the Act, the validity of the Financing Order and
the Bondable Transition Property and the title thereto, and may provide specific
covenants, indemnities and/or repurchase obligations in connection with such
transfer for the benefit of the holders of Transition Bonds.
m. Issuance of Transition Bonds
The Company requests that the Board approve the issuance of
Transition Bonds by the SPE. The Transition Bonds will, by their terms, permit
the holders to have recourse only to the SPE's credit and assets, and will be
secured by a pledge to the Bond Trustee of all of the right, title and interest
of the SPE in its Bondable Transition Property and Other SPE Collateral.
Transition Bonds may be issued in series and classes with different terms.
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n. Non-bypassable Transition Bond Charge
Under Section 18 of the Act, the TBC is non-bypassable and will be
assessed against and collected from all ratepayers of the Company or any
Successor Utility until all Ongoing Transition Bond Costs and Bondable Stranded
Costs are paid in full, even past the legal maturity, except as provided in
Section 28 of the Act. The TBC shall apply equally to each ratepayer, regardless
of class, based on the amount of electricity delivered to the ratepayer through
the transmission and distribution system of the Company or of any Successor
Utility.
o. Electric Power Suppliers
The Transition Bond Transaction currently contemplates that the
Company, in its capacity as Servicer, will have sole responsibility for the
billing, collection and remittance of the TBC. There is the possibility,
however, that a third party electric power supplier ("EPS") may seek to assume
such role. Permitting an EPS to bill, collect and remit the TBC in place of the
Company may increase the risk of shortfalls in TBC Collections or MTC-Tax
collections by exposing the cash flow to potential interruption due to the
default, bankruptcy or insolvency of the EPS. This potential interruption will
increase risks to investors, and may result in an increase to the required
credit enhancement for, reduction of the credit rating of, and/or an increase in
the interest rate on, the Transition Bonds. Additionally, such EPS billing may
necessitate an increase to the TBC or to the MTC-Tax component if EPS billing
causes interruption or delay in payment to the Servicer.
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In order to mitigate against these risks, satisfy rating agency
requirements and reduce the cost to ratepayers, the Company requests that any
EPS the Board authorizes to bill, collect and remit the TBC be required to
comply with the billing, collection and remittance procedures and information
access requirements set forth below. These procedures and requirements are
comparable to those in effect in other states in which utilities have
securitized their stranded costs. These requirements are largely derived from
rating agencies' criteria. Attached as Exhibit F is a comparison of the
guidelines required in different jurisdictions for EPSs or their equivalents,
and the guidelines proposed by the Company for the Transition Bond Transaction.
The Company requests that the Board authorize an EPS to bill and
collect the TBC and associated MTC-Tax with respect to power sold by it, for
remittance to the Servicer, only if (i) such EPS agrees to remit the full amount
of all charges it bills to customers for services provided by the Company,
together with amounts related to the TBC and the MTC-Tax, regardless of whether
payments are received from such customers, within 15 days of the Company's (or
any successor Servicer's) bill for such charges; (ii) such EPS agrees to provide
the Servicer with total monthly kWh usage information for each customer in a
timely manner to enable the Servicer to fulfill its obligations, because such
information is the basis for assessing the required level of such
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remittances; and (iii) the Servicer is entitled, seven days after a default by
the EPS in remitting any charges payable to the Company, including amounts
related to the TBC and the MTC-Tax, to assume responsibility for billing all
charges for services provided by the Company or any Servicer, including the TBC
and the MTC-Tax, or to transfer such billing responsibility to a qualifying
third party. In addition, if and so long as such EPS does not maintain at least
a "BBB" (or the equivalent) long-term unsecured credit rating from Moody's
Investors Service and Standard & Poor's, such EPS would be required to maintain,
with the Servicer or as directed by the Servicer, a cash deposit or comparable
security equal to two months' maximum estimated collections of all charges
payable to the Company, including amounts related to the TBC and the MTC-Tax, as
agreed upon by the Company (or any successor Servicer) and the EPS. In the event
of a default in the remittance of any such amounts by an EPS, any shortfall in
TBC Collections or MTC-Tax collections by an EPS would be included in the TBC
True-Up and the MTC-Tax True-Up as described in Exhibit E.
p. Servicing
Pursuant to Section 22 of the Act, the Company will enter into a
servicing agreement with the SPE to perform servicing functions on behalf of the
SPE. Under such servicing agreement, the Company will act as Servicer of the
Bondable Transition Property. The Company will be responsible for compiling
customer kWh billing and usage information, and for billing, collecting and
remitting payments arising from the TBC.
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The Company, as Servicer, will contract with the SPE to collect
amounts in respect of the TBC for the benefit and account of the SPE, and to
account for and remit these amounts to or for the account of the SPE. The
servicing agreement will provide that the Company, as initial Servicer, may not
voluntarily resign from its position as Servicer without obtaining the prior
approval of the Board or if such resignation will result in the reduction or
withdrawal of the credit ratings of Transition Bonds then in effect. If the
Company defaults under the servicing agreement, or if the Company were required
to discontinue its billing and collection functions, a successor Servicer
acceptable to the Bond Trustee and the rating agencies and meeting such criteria
as the Board may establish therefor, will replace the Company, as Servicer, and
will assume such billing and collection functions. Criteria for appointing a
successor Servicer include, among other things, credit and data-processing
quality and expertise in performing servicing functions related to the
Transition Bond Transaction.
If the Company ceases acting as Servicer, the Servicing Fee
discussed below will be paid directly to the successor Servicer and the
Company's future rates will not be adjusted to reflect this loss of revenues.
The servicing agreement may include the Company's representations,
warranties, agreements, covenants and indemnities for the benefit of the holders
of Transition Bonds.
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An annual Servicing Fee equaling 0.10% (10 basis points) of the
initial principal balance of the Transition Bonds, which may be payable on
Transition Bond payment dates or more frequently, will be recovered through the
TBC.(15) The Servicing Fee represents a reasonable good faith estimate of the
Company's incremental cost to service Transition Bonds, which will involve
activities including billing, monitoring, collecting, receiving, accounting for
and remitting the payments arising from the TBC, systems modifications related
to the TBC including billing, monitoring, collecting and remitting the payments
arising from the TBC, reporting requirements imposed by the servicing agreement,
procedures required to coordinate with each EPS, required audits related to the
Company in its capacity as Servicer and legal and accounting fees related to the
servicing obligation, together with a reasonable net return. The Servicing Fee
is comparable to one negotiated at arms-length and thus protects the
"bankruptcy-remote" nature of the SPE. The Servicing Fee, if paid to the
Company, will be lower than the Servicing Fee paid to a successor Servicer.
Because any successor Servicer would not bill the TBC concurrently with charges
for other services, as would the Company, such successor Servicer would incur
higher costs and require a larger annual Servicing Fee. The rating agencies
expect an annual Servicing Fee as high as 1.25% of the original Transition Bond
principal
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15 By way of example, if the initial principal balance of the Transition
Bonds is $393 million, the annual Servicing Fee will be $393,000.
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amount to be authorized in the Financing Order for any such successor Servicer.
Such increase in the Servicing Fee will be reflected in Ongoing Transition Bond
Costs and recouped through a corresponding increase in the TBC. This higher
Servicing Fee would assure that a successor Servicer would be willing to act as
Servicer.
q. Tax Recoveries - Accounting and Related Issues
Pursuant to the Recovery Order, the Company has been directed to
recover the federal income taxes and state corporate business taxes associated
with the collection of the TBC through the ongoing collection of the MTC-Tax,
until the SPE has received full payment of principal of and interest on the
Transition Bonds. However, if the state tax ruling is received and the structure
discussed in paragraph 5.a above is adopted, there will be no state corporate
business taxes included in the MTC-Tax. In any event, the Recovery Order
authorizes the MTC-Tax to be collected over essentially the same period as the
TBC. The Recovery Order also directs that the MTC-Tax be subject to mandatory
periodic adjustment (at the same time and in the same manner as the TBC) to
reconcile the MTC-Tax collections with the income tax required to be assessed on
the taxable revenue from the TBC and the MTC-Tax. The Company will maintain
separate accounting for the MTC-Tax collections and the Bondable Transition
Property. As provided in Section 23(a)(4) of the Act, the Company's retention of
the MTC-Tax until remittance to the appropriate taxing authority will in no way
affect or impair
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treatment of the transfer of the Bondable Transition Property to the SPE as a
true sale and absolute transfer for bankruptcy purposes, or otherwise affect the
legal rights and attributes of the Bondable Transition Property under the Act.
r. Deferred Income Taxes
The regulatory treatment of the deferred income taxes attributable
to Oyster Creek provided for in the Recovery Order will be subject to the
Company's receipt of a ruling from the IRS to the effect that such treatment is
in compliance with all of the normalization requirements applicable under the
Internal Revenue Code (the "Code"). As soon as is reasonably practicable, the
Company will file a request for such a ruling with the IRS. If the IRS should
determine that the treatment of the deferred income taxes as provided for in the
Recovery Order would fail to comply with any of the normalization requirements
applicable under the Code, the Company requests that the Board allow the amount
or amounts so determined not to be in compliance with such normalization
requirements to be recoverable through the market transition charge or, if the
Company so elects, through the TBC. Thus, the Company further requests that the
Board permit the securitization of such additional amount through the issuance
of Transition Bonds in the Transition Bond Transaction, if the Company so
elects.
6. RATEPAYER BENEFITS AND RELATED FINDINGS
In connection with its issuance of the Recovery Order the Board has
found that (i) the Company has taken all reasonable
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measures, and has the appropriate incentives or plans in place to take
reasonable measures, to mitigate the total amount of its recoverable stranded
costs, (ii) the Company could not achieve the level of rate reduction deemed by
the Board to be necessary and appropriate pursuant to the provisions of Sections
4 and 13 of the Act, as embodied for the benefit of ratepayers in the Recovery
Order, absent the issuance of Transition Bonds and the recovery of the MTC-Tax
for the term of the Transition Bonds, and (iii) the issuance of the Transition
Bonds provides tangible and quantifiable benefits to ratepayers, including
greater rate reductions than would have been achieved absent the issuance of the
Transition Bonds and net present value savings over the term of the Transition
Bonds.
As previously noted, the rate reductions embodied in the Recovery
Order already anticipate and incorporate net present value savings and rate
reductions resulting from the anticipated issuance of the Transition Bonds. The
Company could not have provided such rate reductions without the securitization
that is the subject of this Petition and, therefore, such rate reductions are
greater than would be possible if the Transition Bonds were not to be issued.
Based upon its most recent rate case, the Company has a pre-tax rate of return
of 14.38%, which is equivalent to an after-tax rate of return of 8.46%,
resulting in net present value savings of approximately $140 million, as
compared to recovery of, and a return on, the net Oyster Creek investment at the
Company's authorized rate of return (see
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Exhibit A). The rate reduction reflected in the Recovery Order with respect to
Oyster Creek took effect on August 1, 1999. The TBC reflected in the Recovery
Order was calculated based on projected interest rates and amortization terms of
the Transition Bonds. If such projections are inaccurate, the market transition
charge will be adjusted to account for any discrepancy. Pricing, structure,
terms and conditions of the Transition Bonds will be approved by the Designee in
accordance with the Financing Order and such items will be confirmed to the
Board in the Issuance Advice Letter.
7. USE OF PROCEEDS
The SPE will remit the proceeds, net of underwriting discount, other
Upfront Transaction Costs and Capital Reduction Costs, from the sale of
Transition Bonds to the Company in consideration for the Company's transfer of
its Bondable Transition Property to the SPE. In accordance with Section 14 of
the Act, the Company will use such proceeds, after paying the Upfront
Transaction Costs, to reduce its Bondable Stranded Costs through the retirement
of its debt or equity, or both, including transactions completed prior to the
issuance of the Transition Bonds. Attached as Exhibit G is a pro forma
capitalization table for the Company giving effect to the Transition Bond
Transaction and the use of proceeds therefrom.
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8. RELATED ISSUES
There are several related issues that have a potentially
significant impact on the Transition Bond Transaction, as described below.
a. Tax Considerations
The Company's undertaking of the Transition Bond Transaction will be
subject to the Company obtaining rulings from the IRS to the effect that, for
federal income tax purposes, (i) the Transition Bonds to be issued pursuant to
the Financing Order will be treated as obligations of the Company, and (ii)
neither the issuance of the Financing Order nor the issuance of the Transition
Bonds pursuant to the Financing Order will result in gross income to the
Company. As soon as practicable after the filing of this Petition, the Company
will file an application with the IRS requesting it to issue the foregoing
rulings. Although the Company believes that the IRS will issue such rulings on
the basis of the terms of the Transition Bond Transaction and the Financing
Order described in this Petition, the Company reserves the right to request the
Board to authorize changes in such terms, if the IRS should require such changes
in order to issue the requested ruling.
b. Accounting and Financial Reporting
The Transition Bonds are expected to be recorded in accordance with
generally accepted accounting principles ("GAAP") as long term debt on the
balance sheet of the SPE for financial reporting purposes. Because such SPE will
be a wholly-owned subsidiary of the Company, GAAP requires that such SPE be
consolidated with the Company for financial reporting purposes. Therefore, the
SPE's debt will appear on the consolidated balance
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sheet of the Company in its financial statements filed with the Securities
and Exchange Commission.
While the TBC and the MTC-Tax will be part of regulated rates
charged to ratepayers, for purposes of financial reporting to the Board the
Company will exclude the SPE's debt from its capital structure and exclude
interest on the Transition Bonds and other Ongoing Transition Bond Costs from
its regulated cost of service in any future base rate proceeding.
The Transition Bond Transaction is not expected to impact the
Company's credit ratings, as it is expected that the rating agencies will
determine that the Transition Bonds, which are not supported by the Company's
general revenue stream and not collateralized by its assets, do not adversely
affect the Company's creditworthiness. Therefore, it is anticipated that the
rating agencies will exclude the Transition Bonds as debt for purposes of
calculating financial ratios.
c. Rating Agency Considerations
(i) Bankruptcy-Related Opinions
At the time Transition Bonds are issued, the rating agencies will
request opinions of bankruptcy counsel providing assurance that the Bondable
Transition Property will not be treated as property of the Company if the
Company were to declare bankruptcy. To receive such treatment, the transfer of
the Bondable Transition Property from the Company to the SPE must constitute a
"true sale" for bankruptcy purposes such that if the Company were to become the
subject of a bankruptcy or insolvency
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case, the Bondable Transition Property would not be part of its bankruptcy
estate and therefore would not be subject to the claims of its creditors.
Another element of the bankruptcy analysis focuses on the separate
legal status of the Company and the SPE. Although the Company will wholly-own
the SPE, the Transition Bond Transaction will be structured so that, in the
event of a bankruptcy of the Company, the SPE's separate legal existence would
be maintained and the assets and liabilities of the SPE would remain separate
from the estate of the Company, thus insulating bondholders from the risk of the
Company's bankruptcy. The structural elements supporting such separate existence
include requirements that the SPE be adequately capitalized, that the Company be
adequately compensated for the servicing functions it performs in billing the
TBC and collecting and remitting payments arising from the TBC based on a fee
that is comparable to one negotiated at arms-length, and that the Company and
the SPE take steps to ensure that creditors are not misled as to their separate
existence. Without these structural protections, a bankruptcy court might invoke
the doctrine of "substantive consolidation" and disregard the SPE's separate
existence.
(ii) Credit Enhancement
Credit enhancements are mechanisms that provide investors with added
assurance that they will timely recover their principal and interest as
scheduled. Examples of credit enhancement generally provided by the sellers of
transition
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property in securitization transactions or from proceeds of transition bonds
include: (i) the capitalization of the SPE; (ii) true-up mechanisms; (iii)
overcollateralization amounts; and (iv) liquidity reserves, if applicable.
Examples of credit enhancement provided by third parties include bond insurance
and letters of credit.(16) The Transition Bond Transaction will incorporate the
TBC True-Up authorized by Section 15 of the Act as described above and will
provide for the Capital Subaccount and the overcollateralization amounts
deposited into the Overcollateralization Subaccount in accordance with the
Required Overcollateralization Schedule or other means of credit enhancement as
may be required by the rating agencies.
The purpose of the overcollateralization amounts is to provide
security to investors and to enhance the credit rating of Transition Bonds by
providing an additional amount to cover any shortfall in TBC Collections. As a
result, a portion of the TBC will be applied to collect overcollateralization
amounts over time, which will be deposited into the Overcollateralization
Subaccount in accordance with the Required Overcollateralization Schedule. The
collection of the overcollateralization amounts is in addition to the collection
of principal (which will be paid periodically in accordance with the Expected
Amortization Schedule) and interest payable on the Transition Bonds, and the
collection of other Ongoing Transition Bond Costs recovered through the TBC. As
discussed in paragraph 5.i, the total
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16 Generally, the use of overcollateralization is less expensive than
such third party credit enhancement.
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overcollateralization requirement will be determined by the Company based on the
requirements of the rating agencies and tax authorities prior to pricing and
will be submitted to the Designee for approval at pricing. As with other
components of the TBC, the overcollateralization amount component, any
deficiencies from past due payments and any excess in Deemed TBC Collections
deposited in the Collection Account will be incorporated into the TBC True-Up.
Ratepayers will receive credit equal to any amounts in the
collection Account so received from the SPE remaining after payment in full of
Ongoing Transition Bond Costs and Bondable Stranded Costs, to the extent such
amounts exceed (i) the initial amount of the Company's equity contribution to
the SPE and (ii) the investment earnings on funds in the Capital Subaccount.
Thus, overcollateralization amounts and excess TBC collections will not reduce
customer benefits from the Transition Bond Transaction.
d. Allocation of Collection Shortfalls
In order to preserve the bankruptcy-remote status of the Bondable
Transition Property and Other SPE Collateral once it is transferred to the SPE,
the Company may not have any claim on the Bondable Transition Property. In its
capacity as Servicer, the Company will collect the TBC with other charges for
services rendered by the Company in its capacity as a transmission and
distribution utility. If the Company collects less than the full amount that is
billed to such ratepayers, it will not favor
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itself over the SPE, as owner of Bondable Transition Property. As described
above, upon the issuance of Transition Bonds, amounts collected from a ratepayer
will be applied first to sales taxes (which the Company will collect as trustee
for the State and not for its own account or that of the SPE, and which are not
"charges" for purposes of the following allocations), then to charges in
arrears, if any, and then to current charges. With respect to each billing
period, partial payments of charges will be allocated to the TBC, to the MTC-Tax
and to the Company's other charges, pro rata, based on the proportions that each
of such charges bears to the total charges billed. If the Transition Bonds are
issued in more than one series by more than one SPE, partial payments of amounts
deemed to be TBC collections will be allocated to the respective SPEs for the
Transition Bonds so issued, pro rata, based on the proportions that the TBC
servicing the Bondable Transition Property and any TBC established pursuant to
other subsequent financing orders bear to the TBC billed.
e. SPE Administration and Other Transactions With the SPE
The SPE will enter into an administration agreement with GPU
Service, Inc. ("GPUS"), an affiliate of the Company, pursuant to which GPUS will
perform ministerial services and provide facilities for the SPE so that it is
able to perform such day-to-day operations as are necessary to maintain its
existence and satisfy its obligations under the Transition Bond Transaction
documents. GPUS will be paid an administration fee of an amount
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equal to its costs in accordance with the Public Utility Holding Company Act of
1935. The periodic costs associated with such fee will be included in the
Ongoing Transition Bond Costs for such period.
WHEREFORE, the Company therefore prays that your Honorable Board
approve the Company's proposal by issuing an irrevocable bondable stranded costs
rate order to authorize (1) the imposition of a non-bypassable TBC and the
collection of such charge, (2) the sale of the right to receive such charge to
an approved financing entity, (3) the issuance of Transition Bonds by a
financing entity to recover the Company's Bondable Stranded Costs and to apply
the proceeds of such bonds to retire the Company's outstanding debt, equity or
both, and (4) the methodology for the calculation and adjustment of the
transition bond charge and the MTC-Tax related thereto.
Respectfully submitted,
Dated: August 25, 1999 BERLACK, ISRAELS & LIBERMAN LLP
Attorneys for Petitioner,
Jersey Central Power & Light
Company, doing business as
GPU Energy
By: /s/ M. B. Lasky
-----------------------------
Marc B. Lasky
Of Counsel
65 Madison Avenue
Morristown, New Jersey 07960
(973) 644-3400
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AFFIDAVIT
OF
VERIFICATION
Michael J. Filippone, being duly sworn upon his oath, deposes and
says:
1. I am Director of Rates - New Jersey for Jersey Central Power &
Light Company, doing business as GPU Energy, the Petitioner named in the
above-captioned matter, and I am duly authorized by said Petitioner to make this
Affidavit of Verification on its behalf.
2. I have read the contents of the foregoing Verified Petition, and
have reviewed the underlying documentation regarding the Petitioner's request
for a bondable stranded costs rate order. Based thereon, I hereby verify that
the statements of fact and other information contained therein are true and
correct to the best of my knowledge, information and belief.
/s/ M. J. Filippone
-------------------
Michael J. Filippone
Sworn to and subscribed before
me this 24 day of August, 1999
- --------------------------------------
-44-
<PAGE>
EXHIBIT E
Attachment E-1 Debt Design
Attachment E-2 Transition Bond Charge (TBC): Charge Development and
True-up; MTC-Tax: Charge Development and True-up
Attachment E-3 Development of Transition Bond Charge, MTC-Tax and True-up
Methodology
<PAGE>
<TABLE>
<CAPTION>
Exhibit A
Calculation of Estimated Customer Savings
-----------------------------------------
Traditional
($Millions) Ratemaking Stipulation Securitization
(1) (2) (3)
<S> <C> <C> <C>
Net Plant (incl. M&S Inventory) @ July 31, 1999 609 609 609
Plant Additions @ August 31, 2000 4 4 4
Less: Accum. Depre / Amort (August 1999 to August 2000) 68 37 37
Net Plant (Incl. M&S Inventory) @ August 31, 2000 545 576 576
Accum. Deferred Income Taxes @ August 31, 2000 (77) (95) (95)
Deferred Taxes - Plant Retirement (109) (109) (109)
Net Rate Base-Related Investments @ September 1, 2000 359 372 372
Projected Securitization Transaction Costs 21
Total Securitization 393
Total Revenue Requirements:
Depreciation 613
Return on Rate Base Investment @ 14.38% 351
Amortization (August 1999 to August 2000) 37 37
Return on Regulatory Assets @ 7% (8/1999 to 8/2000) 37 37
Annuity Debt Service @ 7% (12 Years) 563
Tax Gross-Up (Assumed 40.85%) 244
Securitization Debt Service @ 7% (15 Years) 648
MTC-Tax Gross-up (Assumed 35%) 202
Cumulative Revenue Requirements 964 881 924
NPV Revenue Requirements (4) 660 520 495
NPV Customer Savings (5) 140
NPV Securitization True-up (6) 25
Note:
(1) Assumed traditional ratemaking treatment of O.C. net investments @
allowed ROR (14.38% pre-tax) through year 2009.
(2) Based on BPU Summary Order on O.C. net investments annuity @ 7% over 12
years (mirroring a securitization).
1
</TABLE>
<PAGE>
Note cont'd:
(3) Assumed securitization on O.C. net investments and related transaction
costs @ 7% over 15 years.
(4) Discount rate @ 8.46%.
(5) Customer savings already reflected in rates effective August 1, 1999
as part of the 5% rate reduction per Stipulation and Summary Order.
(6) Reflects NPV revenue requirements difference between annuity (per
Stipulation and Summary Order) and the proposed securitization. Any
incremental difference will be reflected in MTC collections and credited
to the Deferred Balance as defined in the Summary Order.
2
<PAGE>
Exhibit B
Estimated Upfront Transaction Costs, including
Capital Reduction Costs
The Company estimates that it will incur Upfront Transaction Costs, including
Capital Reduction Costs, in the approximate amount of $ 20,800,000 related to
the issuance of Transition Bonds. These estimated costs are outlined in Table I
below.
TABLE 1
SEC Registration Fee (1) $ 109,167
Legal Fees 1,500,000
Original Issue Discount 150,000
Rating Agency Fees 465,000
Blue Sky Fees and Expenses 7,500
Trustee Fees 60,000
SPE Setup Fees (2) 25,000
Accounting Fees 275,000
Printing Fees 375,000
Marketing Fees 75,000
Underwriter Fees (3) 1,866,750
Capital Reduction Costs (4) 15,600,000
Servicing Set-up Costs 50,000
Miscellaneous Expenses 241,583
------------
Total Issuance Expense $ 20,800,000
==========
(1) Equals 1/36 of 1% of the face amount of securities
registered ($393,000,000).
(2) Includes trustee legal fees.
(3) Based upon gross underwriting spread of 0.475%
(4) Assumes tender of $200,000,000 of outstanding debt.
<PAGE>
Exhibit C
Estimated Ongoing Transition Bond Costs
The Company estimates that it will incur annual Ongoing Transition Bond Costs in
the approximate amount of $800,000 per year related to the issuance of
Transition Bonds, exclusive of principal and interest payments on the Transition
Bonds. These estimated costs are outlined in Table II below.
Table II
Rating Agency Fees $ 20,000
SPE Operating and Administrative Fees 100,000
Trustee Fees 15,000
Accounting/Legal Fees 60,000
Servicing Fees(1) 393,000
Overcollateralization Amounts(2) 131,000
Miscellaneous Expenses 81,000
----------
Total $ 800,000
(1) Equals 0.10% of the initial principal balance of the
Transition Bonds.
(2) Equals 1/15 of expected total overcollateralization requirement of 0.50%
of the initial principal balance of the Transition Bonds.
<PAGE>
Exhibit D
This page left intentionally blank
<PAGE>
Exhibit E
Attachment E-1
Debt Design
($000's)
Debt Design Variables
----------------------
Original Principal $393,000
Interest Rate 7.00%
Maturity 15 Years
Annual Cost:
Overcollateralization (.50%) 131
Admin and Other Fees 276
Servicing Fees (.10%) 393
Tax Rates:
Federal Income Tax Rate 35%
NJ State Sales Tax Rate 6%
<TABLE>
1 2 3 4 5 6 7 8 9 10
TBC Sales TBC TBC Debt
Billed Tax Billed Collected Admin Servicing Over- Balance
Year (Including Billed (Excluding (Excluding Interest Principal Fees Fee Collaterali Outstanding
Sales Tax) Sales Tax) Sales Tax) ization
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 54,376 3,078 51,298 43,246 26,047 16,399 276 393 131 376,601
2001 44,413 2,514 41,899 43,246 25,947 16,499 276 393 131 360,102
2002 46,238 2,617 43,621 43,246 24,781 17,665 276 393 131 342,437
2003 45,904 2,598 43,306 43,246 23,510 18,936 276 393 131 323,501
2004 45,966 2,602 43,365 43,247 22,150 20,297 276 393 131 303,204
2005 45,955 2,601 43,354 43,247 20,692 21,755 276 393 131 281,449
2006 45,955 2,601 43,353 43,245 19,128 23,317 276 393 131 258,132
2007 45,957 2,601 43,356 43,247 17,454 24,993 276 393 131 233,139
2008 45,955 2,601 43,354 43,246 15,658 26,788 276 393 131 206,351
2009 45,957 2,601 43,356 43,247 13,734 28,713 276 393 131 177,638
2010 45,957 2,601 43,356 43,247 11,671 30,776 276 393 131 146,862
2011 45,957 2,601 43,356 43,247 9,460 32,987 276 393 131 113,874
2012 45,957 2,601 43,355 43,247 7,090 35,357 276 393 131 78,517
2013 45,955 2,601 43,354 43,246 4,549 37,897 276 393 131 40,620
2014 38,839 2,198 36,641 43,246 1,826 40,620 276 393 131 0
689,342 39,019 650,323 648,697 243,697 393,000 4,140 5,895 1,965
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
11 12 13 14 15 16
Aggregate
Customer Federal Federal
Charge Income Tax Income Tax
for TBC TBC MTC - Tax Billed Collected
& MTC Tax (see above) Billed Sales Tax (Excluding (Excluding
Year (Including (Including (Including Billed Sales Tax) Sales Tax)
Sales Tax) Sales Tax) Sales Tax)
<S> <C> <C> <C> <C> <C> <C>
2000 60,770 54,376 6,395 362 6,033 5,086
2001 53,558 44,413 9,145 518 8,628 8,205
2002 56,690 46,238 10,451 592 9,860 9,645
2003 56,665 45,904 10,761 609 10,152 10,082
2004 57,696 45,966 11,730 664 11,066 10,897
2005 58,469 45,955 12,514 708 11,806 11,662
2006 59,398 45,955 13,443 761 12,682 12,515
2007 60,369 45,957 14,412 816 13,596 13,421
2008 61,412 45,955 15,457 875 14,582 14,393
2009 62,533 45,957 16,577 938 15,638 15,436
2010 63,733 45,957 17,776 1,006 16,770 16,553
2011 65,019 45,957 19,062 1,079 17,983 17,750
2012 66,396 45,957 20,440 1,157 19,283 19,034
2013 67,872 45,955 21,917 1,241 20,676 20,409
2014 52,909 38,839 14,070 796 13,273 16,434
903,492 689,342 214,150 12,122 202,028 201,523
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Attachment E-2
Transition Bond Charge (TBC): Charge Development and True -up
(000's)
Year Year
1 2
<S> <C> <C> <C>
Principal 16,399 16,499
Interest 26,047 25,947
Servicing Fee 0.10% 393 393
Overcollateralization Amount 0.50% 131 131
Rating Agency Fees 20 20 20
Trustee Fees 15 15 15
Accounting/Legal Fees 60 60 60
SPE Operating and Administrative Fees 100 100 100
Miscellaneous 57 81 81
A Total Transition Bond Requirement 43,246 43,246
B Less TBC Billed and expected to be collected
during the upcoming period 0 7,924
C TBC to be billed and collected during the
period 43,246 35,322
D True-up Adjustment for Under/
(Over) collections of prior period N/A 0
E Total TBC to be billed and collected
during the period 43,246 35,322
F Projected kwh's to be delivered, billed
and cash collected during
the period (in millions) 16,017 16,289
G TBC- before NJ Sales Tax (cents per kwh)
0.27000 0.21685
H TBC- including NJ Sales Tax (cents per kwh)
0.28620 0.22986
A= Total Annual Transition Bond Debt Service Requirement and Fees Related to Debt Service
(See Attachment E-1)
B= TBC Revenues billed in the prior period and expected to be collected in the
current period.
C= Amount of total Debt Service required to be funded through TBC collections during the
period. (A minus B)
D= Amount of Under or (Over) collection of the prior period TBC as computed
under the methodology described in Attachment E-3.
E= Total amount required to be collected during the upcoming period through the
TBC (C plus D)
F= Projected kwh's that will be delivered, billed and collected during the
upcoming period. This amount is computed by multiplying forecasted kwh sales
on a monthly basis times a percentage expected to be collected in cash each
month subsequent to the sale. The collection percentage is developed based on
historical collection experience. This methodology takes into account the
collection lag and uncollectable experience
inherent in GPU's electric sales. See Attachment E-4.
G= TBC before statutory addition of NJ sales tax (E divided by F)
H= TBC including statutory addition of NJ sales tax (G times 1.06)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Attachment E-2
MTC - Tax: Charge Development and True -up
($000's)
Year Year
1 2
Tax Computation:
<S> <C> <C>
A Forecasted TBC Billed (excluding 51,298 41,899
sales tax)
B Forecasted MTC-Tax Billed 6,033 8,628
C Total Taxable Revenue 57,330 50,527
less deductible expenses:
Interest 26,047 25,947
Amortization of Bond Issuance 341 341
Expense
Uncollectable accounts 143 126
Administrative and 669 669
servicing fees
Deductible Use of Proceeds 15,600 -
D Total Deductions 42,800 27,083
E Federal Taxable Income 14,531 23,444
F Federal Income Tax Rate 35% 35%
G Federal Income Tax 5,086 8,205
H Less MTC-Tax Billed and expected to be collected during the 0 932
upcoming period
I Tax obligation to be Billed and collected during the upcoming period 5,086 7,274
J True-up Adjustment for Under and 0 0
(Over)
collections of the prior
period
K Total MTC-Tax to be billed and
collected
during the period 5,086 7,274
L Projected kwh's to be delivered, billed
and cash
collected during the period (in 16,017 16,289
millions)
M MTC - Tax Charge before NJ sales tax (cents per kwh) 0.03175 0.04465
N MTC-Tax Charge including NJ sales tax(cents per kwh) 0.03366 0.04733
A= Forecasted TBC Billed - TBC rate(excluding sales tax) multiplied by
forecasted kwh sales for the period.
B= Forecasted MTC-Tax Billed - MTC-Tax Charge rate (excluding sales tax) times
forecasted kwh sales for the period
C= Total taxable revenue associated with the transition bonds. (A plus B) (See
Attachment E-1)
</TABLE>
<PAGE>
D= Deductible expenses associated with the transition bonds. (See Attachment
E-1) Amortization of Transition Bond issuance costs equals issuance costs
divided by term of the transition bonds (15 years). Deduction for
uncollectable accounts is estimated based on historical collection
experience.
E= Federal Taxable Income (C minus D)
F= Federal statutory Corporate Income Tax Rate (currently 35%)
G= Federal Corporate Income Tax obligation associated with the TBC (E times
F)
H= MTC - Tax Charge billed in the prior period and expected to be collected
in the current period
I= Amount of total Tax Obligation required to be funded through MTC
collections during the period (G minus H)
J= Amount of Under or (Over) collection of the prior period MTC - Tax Charge
as computed under the methodology described in Attachment E-3
K= Total amount required to be collected during the upcoming period through
the MTC - Tax Charge (I plus J)
L= Projected kwh's that will be delivered, billed and collected during the
upcoming period. This amount is computed by multiplying forecasted kwh
sales on a monthly basis times a percentage expected to be collected in
cash each month subsequent to the sale. The collection percentage is
developed based on historical collection experience. This methodology
takes into account the collection lag and uncollectable experience
inherent in GPU's electric sales. See Attachment E-4.
M= MTC - Tax Charge before statutory addition of NJ sales tax =. (K divided
by L)
N= MTC - Tax Charge including statutory addition of NJ sales tax. (M times
1.06)
2
<PAGE>
Attachment E-3
Development of the Transition Bond Charge, MTC-Tax and True-up Methodology
The TBC is designed to insure full and timely recovery of all Bondable Stranded
Costs including finance charges and related costs. A separate MTC-Tax is
designed to recover all income taxes associated with the TBC and the related
MTC-Tax revenues. The TBC which is designed to service the Transition Bonds is
computed first and then the MTC-Tax which is designed to recover the tax on the
TBC and the gross-up on such tax is developed taking into account the projected
billed TBC, projected Transition Bond interest expense accrued, the current
statutory Federal income tax rates, the current state corporate business tax
rate, if applicable, and projected collections of the MTC- Tax. The detailed
mechanics of this procedure are described below:
Phase 1 - Development of Transition Bond Charge: Attachment E-2
The TBC is developed as follows: A total Transition Bond requirement is
developed by deriving the total cash requirement necessary to service all of the
SPE's obligations. These obligations include, but are not limited to, principal
on Transition Bonds, interest on Transition Bonds, Servicing Fee, the
overcollateralization amounts, rating agency fees, trustee fees,
accounting/legal fees, and miscellaneous costs, any unpaid amounts related
thereto from the prior payment date and any true-up amount computed below (note
that there will be no true-up adjustment used in developing the initial charge)
less any TBC collections expected to be received in the current period from
prior TBC billings. The total of these obligations results in the TBC required
to be billed and collected during the upcoming period. That result is then
divided by the projected KwHs of electric distribution through-put expected to
be billed and collected from ratepayers during the corresponding period. The
result is a charge per KwH that will generate the expected collections necessary
to pay required debt service and expenses and account for prior period
shortfalls or excesses. The resulting TBC is multiplied by 1 plus the New Jersey
state sales tax rate to appropriately include sales tax in the charge.
Phase 2 - Tax Gross-up Adjustment: MTC- Tax - Attachment E-2
The first step of the calculation of the MTC-Tax is to compute the income tax
due on the net projected TBC and MTC-Tax revenue (excluding sales tax). This
computation is made as follows: (i) add projected TBC and MTC-Tax charges to be
billed to ratepayers during the upcoming period to determine total accruable
taxable revenue (note that this requires an iterative computation since the
MTC-Tax charges billed are an input into the equation and also a function of the
resulting MTC-Tax charge rate); (ii) from total accruable taxable revenue,
subtract projected accrued interest on the Transition Bonds for the period, any
accruable fees for administrative or servicing services to be provided to the
SPE, any tax deductible amortization of Transition Bond issuance costs (limited,
in the aggregate, to the amount recoverable through the TBC), any deductible
expenses or losses on the debt retired by Transition Bond proceeds (limited, in
the aggregate, to the amount recoverable through
<PAGE>
the TBC), and any projected allowable deduction for uncollectible accounts which
subtraction results in Federal taxable income; (iii) multiply this amount by the
statutory regular Federal income tax rate in effect for the period, currently
35%, and the result is Federal income tax; (iv) the result is then divided by
projected KwH's of electric distribution through-put expected to be billed and
collected from ratepayers during the corresponding period; (v) the result is a
charge per KwH that will generate the expected collections necessary to pay the
forecasted tax liability resulting from the net combined charge revenues in the
upcoming period. The resulting MTC-Tax charge is multiplied by 1 plus the New
Jersey state sales tax rate to appropriately include sales tax in the charge.
Phase 3 - Computing True-up Adjustments
True-up adjustments are designed to adjust the charges to ensure that the
principal and interest of the Transition Bonds, related fees and taxes are fully
and timely recovered from the ratepayers and that ratepayers pay no more than is
required to satisfy these costs. As in the case of the development of the TBC
and MTC-Tax, the true-up adjustments are completed in two steps - step one for
the TBC and step two for the MTC-Tax.
Step 1: TBC True-up Adjustment
The TBC is to be adjusted at least annually to ensure full and timely recovery
of all Bondable Stranded Costs, finance charges and related costs. The
adjustment is computed as follows:
1. TBC Shortfalls: TBC collections are remitted to the Bond Trustee and used to
service the Transition Bonds and pay related expenses. To the extent TBC
collections are insufficient to fund required debt service, the Bond Trustee
will fund the shortfall first with any excess collection from the prior period,
then from funds held by the Bond Trustee in the Overcollateralization Subaccount
and then with equity capital of the SPE. If these additional amounts are not
sufficient to fund debt service, the Bond Trustee will pay interest on the
Transition Bonds first and then principal to the extent there are funds
remaining. To the extent overcollateralization or equity funds are used to
service debt, these amounts will be added as a true-up adjustment to be factored
in to the subsequent period's TBC to fully replenish those accounts to their
scheduled amounts within the next period months. In addition, any principal
shortfall will be added to the subsequent years' TBC via the true-up.
2. TBC Over-collections: To the extent TBC collections are in excess of the
amount needed for the current period, such excess will be retained in the
Reserve Subaccount maintained by the Bond Trustee. Such excess will be invested
by the Bond Trustee in eligible investments and retained by the Bond Trustee
until it is required to service debt, replenish accounts to their scheduled
levels or until the next periodic true-up, whichever comes first. Any balance in
the Reserve Subaccount including interest on hand at the time of a periodic
true-up is subtracted as a true-up adjustment in determining the subsequent
period's TBC.
-2-
<PAGE>
3. Investment Earnings on the trust accounts held by the Bond Trustee (other
than the Capital Subaccount) will be used to service debt or fund or replenish
the trust accounts to their required levels and, if not needed for that purpose,
will be retained in the Reserve Subaccount and will be subtracted as a true-up
adjustment as of the next true-up date.
4. Periodic True-up: On at least an annual basis, any true-up adjustment,
addition or subtraction, computed above will be used to develop a new TBC rate
for the upcoming period. This amount will be added to or subtracted from the
amount of required debt service used in developing the TBC for the subsequent
period described in Phase 1 above.
Step 2 - MTC-Tax True-up Adjustment
1. Using the methodology described in Phase 2 above, compute the income tax
associated with net combined charges for the prior period by substituting actual
amounts for the prior period for the projected amounts.
2. Compute Tax True-up amount: Subtract the tax liability computed in 1 above
from the actual MTC-Tax collections for the same period to derive the shortfall
or over-collection with respect to taxes. Interest will be added to any over or
under collection to ensure that no party is economically harmed by any such over
or under collection. The net adjustment plus accrued interest will be added or
subtracted to the projected amount of total income tax associated with net
combined charges used in developing the MTC-Tax charge for the subsequent period
described in Phase 2 above.
-3-
<PAGE>
EXHIBIT F
EPS Consolidated Billing Credit Requirements
--------------------------------------------
The ability for an EPS to bill for and collect some or all charges related to
the provision and delivery of electricity, including the TBC ("Consolidated
Billing"), may present a risk to the TBC revenue stream dedicated to the
repayment of the total Ongoing Transition Bond Costs and Bondable Stranded
Costs. If EPS Consolidated Billing is contemplated during the life of the
Transition Bonds, the rating agencies will require that EPS credit requirements
be developed and codified, prior to the issuance of Transition Bonds, which are
consistent with the rating sought on the Transition Bonds. The table below
outlines credit requirements for EPS equivalents as adopted in four states with
completed stranded cost securitizations, as well as the Company's proposal for
EPS Consolidated Billing Credit Requirements:
<TABLE>
California Illinois Pennsylvania Massachusetts New Jersey
(Proposed)
<S> <C> <C> <C> <C> <C>
Supplier w/in 17 days w/in 15 days w/in 20/25 days w/in 15 days w/in 15 days
Remittance after billing by of billing (Res./Nonres.) after billing after billing
Servicer utility by Servicer of billing by by Servicer by Servicer
utility or Servicer utility utility
w/in 7 days utility
of collection
(1)(2)
Remittance 100% of billed 100% of billed 100% of 100% of 100% of
Amount Due amounts (or collected) undisputed billed billed
amounts billed amounts amounts electric
charges
EPS Credit `BBB' (one 'BBB-' or 'BBB-' or 'BBB' ( `BBB'
Standards rating agency) better better Moody's and (Moody's and
S&P) S&P)
EPS Security two months' one month's one month's one month's two month's
Deposit expected TBC estimated TBC estimated TBC maximum maximum
Requirements billings collections collections estimated TBC estimated
collections electric
charge
collections
Dual-billing 7 days after 10 days after As of remittance --- ---
Notice to remittance is remittance is due date (20
EPS and due (24 days due (25 days days Res./25
Customers after billing) after billing days Nonres.
or 17 days after billing)
after
collection)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Dual-billing 13 days after 15 days after 20 days after 7 days after 7 days after
Commences remittance is remittance is remittance is remittance is remittance is
due (30 days du (30 days due (40/45 days due (22 days due (22 days
after billing) after billing after billing) after billing) after
or 22 days billing)
after
collection)
Supplier Yes Yes Yes Yes Yes
Defaults
Recovered
Through
Securitization
True-up Mechanism?
(1) An EPS must notify Servicer utility of remittance election in writing.
Arrangement may not be altered for one calendar year from date of
election.
(2) If an EPS is otherwise required to remit payments to Servicer utility more
frequently, the TBC shall be remitted on the same schedule.
</TABLE>
<PAGE>
Exhibit G
Pro Forma Capitalization Table
Forecasted Forecasted
Capitalization Capitalization
12/31/99 12/31/99
Before After
Securitization Securitization
-------------- --------------
Common Stockholder's Equity $ 1,486 $ 1,300
Cumulative Preferred Stock 119 119
Company-Obligated Mandatory
Redeemable
Preferred Securities 125 125
Long Term Debt
First Mortgage Bonds 1,134 948
Transition Bonds - 393
Securities due within one year 43 43
------- ------
Total Long Term Debt 1,177 1,384
Notes Payable 66 66
----- -----
Total $ 2,973 $ 2,994
===== =====
Exhibit D-3
STATE OF NEW JERSEY
BOARD OF PUBLIC UTILITIES
- ---------------------------------------- :
In The Matter Of The Verified Petition :
Of Jersey Central Power & Light Company, :
Doing Business As GPU Energy, For A : Docket No. EF99080615
Bondable Stranded Cost Rate Order In :
Accordance With Chapter 23 Of The Laws :
Of 1999, To Authorize The Imposition Of :
A Non-bypassable Transition Bond Charge, :
The Issuance And Sale Of Up To $587 : AMENDMENT NO. 1
Million Aggregate Principal Amount Of : TO
Transition Bonds By A Financing Entity : VERIFIED PETITION
To Recover Petitioner's Bondable :
Stranded Costs, And The Application Of :
Transition Bond Proceeds To Retire :
Outstanding Debt, Equity Or Both, And To :
Approve The Methodology For The :
Calculation And Adjustment Of The :
Transition Bond Charge And Market :
Transition Charge-Tax Related Thereto. :
:
- ----------------------------------------
Petitioner, Jersey Central Power & Light Company, doing business as
GPU Energy (the "Company"), an electric public utility subject to the regulatory
jurisdiction of the Board of Public Utilities (the "Board"), and maintaining its
principal New Jersey offices at 300 Madison Avenue, Morristown, New Jersey
07962, hereby amends its Verified Petition ("Initial Petition") in the
above-referenced docket as set forth below. (Capitalized terms defined in the
Initial Petition and used herein shall have the meaning ascribed to them in the
Initial Petition.) Overview
1. As stated in the Initial Petition, at the time the Initial
Petition was filed with the Board, the Company was seeking a buyer for Oyster
Creek. On October 15, 1999, the
<PAGE>
Company executed definitive agreements with AmerGen Energy Company, LLC
("AmerGen") providing for the sale of Oyster Creek to AmerGen for $10 million.
Under the terms of the sale, the Company will provide funding for Oyster Creek's
decommissioning trusts up to $430 million, which will require the Company to
contribute an estimated $132 million to the trusts at closing ("Decommissioning
Closing Contribution"), assuming an April 1, 2000 closing. AmerGen will then
assume all decommissioning liabilities and obligations. In addition, the Company
will fund the costs for the next refueling outage at Oyster Creek, scheduled for
the fall of 2000, up to $88.6 million ("Outage Funding"), subject to
reimbursement by AmerGen as described in para 6 below.
2. As set forth in more detail in the Petition seeking approval of
the sale of Oyster Creek ("Oyster Creek Petition"), even after providing for the
Company's full recovery of the Decommissioning Closing Contribution and the
Outage Funding, the sale transaction will save ratepayers approximately $169
million through 2009, or approximately $109 million on a net present value
basis, as compared to the amounts that would be collected from ratepayers upon
the retirement of Oyster Creek in September 2000 pursuant to the rate structure
already approved by the Board in the Recovery Order.(1)
- ---------------
1 As noted in the Oyster Creek Petition, the inability to flow certain
tax benefits through to ratepayers after the plant's retirement under the
shutdown scenario reflected in the Recovery Order would increase these savings
to approximately $195 million, or approximately $125 million on a net present
value basis.
2
<PAGE>
3. The Decommissioning Closing Contribution and the Outage Funding
are properly deemed Bondable Stranded Costs under the Electric Discount and
Energy Competition Act, N.J.S.A. 48:3-62 et seq. (the "Act"). Consequently, the
Company now hereby amends its Petition in the above-referenced docket to seek an
increase in the amount of Bondable Stranded Costs it will securitize in the
Transition Bond Transaction by $167 million ("Additional Amount"), such that the
total aggregate principal amount of Transition Bonds that the Company seeks to
issue in the Transition Bond Transaction is now $587 million.(2)
4. In the Initial Petition, the Company also sought authority to
issue up to approximately $125 million principal amount of additional Transition
Bonds in the event of certain IRS tax rulings (see paragraphs 5.a and 5.r of
the Initial Petition). The Company has now determined that this additional
authority is not needed and withdraws such request. The Company requested this
authority because it initially believed that reducing the amount of the net
investment in the plant recoverable through securitization, by the accumulated
deferred income taxes attributable to the plant, might be regarded by the IRS as
a violation of the Code's "normalization" requirements. However, upon further
analysis, the Company is satisfied that this will not be the case. This is
because the "OTC" component of the MTC provides a recovery of the Company's net
investment in the plant, unreduced by the accumulated deferred income taxes,
through a 12-
- ---------------
2 Accordingly, this Amendment has revised the caption in this docket to
reflect this larger principal amount of Transition Bonds now covered by the
amended Petition, and also to delete from the caption the reference to possible
additional Transition Bonds related to IRS tax rulings (see para 4 below).
3
<PAGE>
year annuitization. When securitization is implemented, the TBC will reduce but
will not supersede the foregoing annuity included in the OTC/MTC. As a result,
the Company believes that it will continue to recover the entire amount of its
net investment in the plant, through the combined effect of the TBC and the
OTC/MTC. The Company believes that in these circumstances, the proposed
regulatory treatment of the accumulated deferred income taxes for purposes of
the Transition Bond Transaction will not raise an issue requiring an IRS ruling.
Decommissioning
5. As noted above, the Company has agreed to fund the Oyster Creek
nuclear decommissioning trusts at the closing of the Oyster Creek sale by making
the Decommissioning Closing Contribution. The Company's funding obligation is
subject to adjustment based upon the date of closing of the Oyster Creek sale,
the allocation of assets between the qualified and nonqualified decommissioning
funds at the time of closing and the present value of the potential income taxes
attributed to the unrealized investment gains or losses in the qualified
decommissioning trust fund at the time of closing. As of the date of closing,
all liabilities and obligations for the decommissioning of Oyster Creek will be
assumed by AmerGen and the Company will have no further liabilities or
obligations with respect to the Oyster Creek decommissioning. Refueling Outage
6. Pursuant to the Purchase and Sale Agreement ("PSA") executed by
the Company and AmerGen with respect to Oyster Creek, the Company will fund,
through the Outage Funding,
4
<PAGE>
the outage costs for Oyster Creek's next refueling (expected to occur in the
fall of 2000), including additional nuclear fuel costs which are expected to be
incurred in connection with the refueling, subject to an outage cost cap of
$88.6 million (the "Outage Cost Cap"). In accordance with the PSA, AmerGen will
reimburse the Company for any outage costs up to the Outage Cost Cap in nine
equal annual installments, without interest, beginning one year after the
closing date.(3) The party owning Oyster Creek during the next refueling outage,
which will presumably be AmerGen, will be solely responsible for any outage
costs in excess of the Outage Cost Cap.
Securitization
7. The Decommissioning Closing Contribution and the Outage Funding
constitute utility generation plant stranded costs and are therefore eligible
for securitization under Section 14.a and Section 13.a(1) of the Act. In effect,
these amounts represent additional investments that the Company must make in
Oyster Creek in order to effectuate the sale to AmerGen and provide the benefits
to ratepayers described in para 2 above. Moreover, the decommissioning costs
represent investments that the Company would be required to make, and entitled
to recover, in any event if it retained ownership of the plant. As such, they
are includable in the "net cost" of the plant and in the calculation of stranded
costs (the difference between net cost and market value (see definition of
"stranded cost" in Section 3 of the Act)). Moreover, as discussed below, there
are ample
- ---------------
3 As set forth in the Oyster Creek Petition, following the Transition
Bond Transaction these payments will be credited to the Deferred Balance as
received, for the benefit of ratepayers.
5
<PAGE>
bases for the Board to make the findings required by Section 14.b of the Act.
First, the Board has already found in the Recovery Order that the
Company has taken reasonable measures, and has the appropriate incentives or
plans in place to take reasonable measures, to mitigate the total amount of its
stranded costs. (See Section 14.b(1).)
Further, the securitization of these amounts will permit the
Company's future rates to be reduced from the levels that otherwise would be
collected from ratepayers, as approved in the Recovery Order, to an extent that
could not be achieved absent the issuance of the Transition Bonds. Indeed, when
compared to the recovery of these amounts at a full return, to which the Company
would otherwise be entitled,(4) securitization will reduce the amount to be
collected in respect of the Decommissioning Closing Contribution and the Outage
Funding by $72 million on a net present value basis (see Exhibit H).
This reduction in the amount that would otherwise be required to be collected
from ratepayers will then be
credited to the Deferred Balance. Such credit will reduce the future burden on
ratepayers who are required by the Recovery Order to pay rates sufficient to
provide for the full recovery of the Deferred Balance.(5) Thus,
- ---------------
4 In light of the substantial savings to ratepayers from the sale of
Oyster Creek, as discussed in para 2 of this Amendment, it would be unfair to
require the Company to consummate a transaction with such substantial ratepayer
savings without allowing the Company to recover all of the costs (including
financing costs) it incurs to achieve such benefits. See para 40 of the Oyster
Creek Petition and footnote 10 thereto.
5 Because most of the savings are in the early years, securitization of
the Decommissioning Closing Contribution will reduce the Deferred Balance at
July 31, 2003 by approximately $29 million (plus interest) and securitization of
the Outage Funding will reduce the Deferred Balance at July 31, 2003 by an
additional approximately $29 million (plus interest).
6
<PAGE>
securitization of these amounts will create additional quantifiable benefits for
ratepayers. (See Section 14.b(2) & (3).)
Finally, for the reasons set forth in the Initial Petition, the structuring and
pricing of the Transition Bonds will assure that the Company's ratepayers pay
the lowest Transition Bond Charge consistent with market conditions. (See
Section 14.b(4).)
8. The Attachments to Exhibits I and J provide information with
respect to the debt design and the initial TBC and MTC-Tax for the
Decommissioning Closing Contribution and the Outage Funding, respectively, in a
manner that corresponds to Attachments E-1 and E-2 to Exhibit E to the Initial
Petition. Exhibits I and J use the same methodology described in Attachment E-3
to Exhibit E to the Initial Petition.
Other Related Modifications
9. Securitization of the Decommissioning Closing Contribution and
the Outage Funding will increase the Upfront Transaction Costs by $.9 million.
Such additional costs constitute "Bondable Stranded Costs", as defined in the
Act, and are included in the principal amount of Transition Bonds to be issued
in the Transition Bond Transaction as set forth above.
10. Because an increase in the size of the Transition Bond
Transaction will not materially increase the cost of servicing the Transition
Bonds, the Servicing Fee will be reduced to .075% of the aggregate initial
principal amount of the Transition Bonds.
7
<PAGE>
Use of Proceeds
11. The Company will use any net proceeds it receives in connection
with the securitization of the Additional Amount to reduce its Bondable Stranded
Costs through the retirement of debt or equity, or both, so as not to
substantially alter the Company's overall capital structure, in accordance with
Section 14 of the Act and the Recovery Order.
Respectfully submitted,
Dated: December 14, 1999 BERLACK, ISRAELS & LIBERMAN LLP
Attorneys for Petitioner,
Jersey Central Power & Light
Company, doing business as
GPU Energy
By:
------------------------
Marc B. Lasky
Of Counsel
65 Madison Avenue
Morristown, NJ 07960
(973) 644-3400
8
<PAGE>
AFFIDAVIT
OF
VERIFICATION
Michael J. Filippone, being duly sworn upon his oath, deposes and
says:
1. I am Director of Rates - New Jersey for Jersey Central Power &
Light Company, doing business as GPU Energy, the Petitioner named in the
above-captioned matter, and I am duly authorized by said Petitioner to make this
Affidavit of Verification on its behalf.
2. I have read the contents of the foregoing Amendment No. 1 to
Verified Petition, and have reviewed the underlying documentation regarding the
Petitioner's request for a bondable stranded costs rate order. Based thereon, I
hereby verify that the statements of fact and other information contained
therein are true and correct to the best of my knowledge, information and
belief.
---------------------
Michael J. Filippone
Sworn to and subscribed before
me this ___ day of December, 1999
- ----------------------------------
Marc B. Lasky
An Attorney at Law of the
State of New Jersey
9
<PAGE>
<TABLE>
<CAPTION>
Exhibit H
Calculation of Estimated Customer Savings
-----------------------------------------
Traditional Sale
($Millions) Ratemaking Agreement Securitization
Decommissioning Closing Contribution (1) (2) (3)
- --------------------------------------
<S> <C> <C> <C>
Decommissioning Costs (4/2000 to 7/2000) 8
Decommissioning Costs (8/2000 to 8/2009) 312
Upfront Payment on Decommissioning Costs 132 132
Less: Deferred Taxes 54 54
Total Investor Supplied Decommissioning Funds 78
Total Securitization (Included $0.4 Upfront Transaction Costs) 78
Return on Regulatory Assets @ 14.38% (4/2000 to 8/2009) 60
Amortization (4/2000 to 8/2009) 132
Annuity Debt Service @ 7.57% (15 Years) 133
Tax Gross-Up (Assumed 36.46%) (4) 45
Total Revenue Requirements Decommissioning 320 192 178
NPV Revenue Requirements (5) 202 132 98
Outage Funding
Outage Funding Up to $88.6 million 89
Total Securitization (Included $0.5 Upfront Transaction Costs) 89
Return on Regulatory Assets @ 14.38% 78
Amortization Net of Payments from Purchaser (6) 0
Annuity Debt Service @ 7.57% (15 Years) 151
Tax Gross-Up (Assumed 36.46%) (4) 51
Less: Payments from Purchaser w/ Tax Gross-up (Assumed 40.85%) 150
Total Revenue Requirements Outage Funding 78 52
NPV Revenue Requirements (5) 52 14
Total Revenue Requirements Decomm and Outage 320 270 230
NPV Revenue Requirements (5) 202 184 112
Total Customer Savings 50 90
NPV Total Customer Savings (7) 18 90
</TABLE>
<PAGE>
Note:
(1) Assumed traditional ratemaking of O.C.decommissioning annual costs of
$22.5 million through July 2000 and $34.4 million starting August 2000
through August 2009 per Summary Order.
(2) Based on O.C. Sale Agreement dated October 15, 1999. Assumed April 1,
2000 sale date.
(3) Assumed securitization of net O.C. decommissioning and outage funding per
Sale Agreement.
(4) Assumed investment company tax structure.
(5) Discount rate @ 8.46%.
(6) Amortization assumed 4/2000 to 8/2009 to be offset with payments from
purchaser per Sale Agreement, including tax effects.
(7) Customer savings would be reflected in MTC collections and credited to
Deferred Balance as defined in the Summary Order.
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit I
Attachment I-1
Debt Design - Additional $78.43 Issuance
($000's)
Debt Design Variables
Original Principal $ 78,425
Interest Rate 7.57%
Maturity 15 Years
Average Life 8.93
Annual Cost:
Overcollateralization (.50%) 26
Admin and Other Fees -
Servicing Fees (.075%) 59
Tax Rates:
Federal Income Tax Rate 35%
State Income Tax Rate 2.25%
NJ State Sales Tax Rate 6%
1 2 3 4 5 6 7 8 9 10
TBC TBC TBC
Billed Sales Tax Billed Collected Admin Servicing Over- Debt Balance
Year (Including Billed (Excluding (Excluding Interest Principal Fees Fee Collateralization Outstanding
Sales Tax) Sales Tax) Sales Tax)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 11,139 631 10,508 8,859 5,532 3,242 - 59 26 75,183
2001 9,098 515 8,583 8,859 5,537 3,237 - 59 26 71,946
2002 9,473 536 8,937 8,860 5,315 3,460 - 59 26 68,486
2003 9,404 532 8,872 8,860 5,073 3,702 - 59 26 64,784
2004 9,417 533 8,884 8,860 4,815 3,960 - 59 26 60,824
2005 9,415 533 8,882 8,860 4,536 4,239 - 59 26 56,585
2006 9,414 533 8,881 8,859 4,211 4,563 - 59 26 52,022
2007 9,414 533 8,881 8,859 3,856 4,918 - 59 26 47,104
2008 9,414 533 8,881 8,859 3,473 5,301 - 59 26 41,803
2009 9,414 533 8,881 8,859 3,060 5,714 - 59 26 36,089
2010 9,414 533 8,881 8,859 2,614 6,160 - 59 26 29,929
2011 9,414 533 8,881 8,859 2,126 6,648 - 59 26 23,281
2012 9,414 533 8,881 8,859 1,598 7,176 - 59 26 16,105
2013 9,413 533 8,880 8,858 1,028 7,745 - 59 26 8,360
2014 7,956 450 7,506 8,859 414 8,360 - 59 26 -
141,214 7,993 133,220 132,887 53,188 78,425 - 882 392
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11 12 13 14 15 16 17 18 19 20
Aggregate Federal & Federal &
Customer Charge State Income State Income
for TBC TBC MTC - Tax Tax Billed Tax Collected TBC MTC- Total GWh Sales
& MTC Tax (see above) Billed Sales Tax (Excluding (Excluding Charge Tax Charges Related
Year (Including (Including (Including Billed Sales Tax) Sales Tax) (cents/kWh) (cents/kWh) (cents/kWh) Charges
Sales Tax) Sales Tax) Sales Tax)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 14,764 11,139 3,626 205 3,420 2,883 0.05531 0.01800 0.07331 18,999
2001 10,321 9,098 1,223 69 1,154 1,501 0.04442 0.00597 0.05039 19,322
2002 11,934 9,473 2,461 139 2,322 2,136 0.04529 0.01176 0.05705 19,734
2003 11,609 9,404 2,205 125 2,080 2,112 0.04415 0.01035 0.05451 20,094
2004 11,922 9,417 2,505 142 2,363 2,314 0.04349 0.01157 0.05506 20,427
2005 12,046 9,415 2,632 149 2,483 2,458 0.04280 0.01196 0.05476 20,754
2006 12,266 9,414 2,852 161 2,691 2,652 0.04214 0.01277 0.05491 21,076
2007 12,482 9,414 3,068 174 2,894 2,855 0.04152 0.01353 0.05504 21,392
2008 12,721 9,414 3,307 187 3,120 3,077 0.04093 0.01438 0.05531 21,696
2009 12,977 9,414 3,563 202 3,361 3,316 0.04036 0.01528 0.05564 22,004
2010 13,254 9,414 3,840 217 3,623 3,573 0.03977 0.01622 0.05599 22,334
2011 13,558 9,414 4,144 235 3,910 3,856 0.03918 0.01725 0.05642 22,669
2012 13,886 9,414 4,472 253 4,219 4,161 0.03860 0.01834 0.05693 23,009
2013 14,238 9,413 4,825 273 4,552 4,489 0.03802 0.01949 0.05751 23,354
2014 11,058 7,956 3,102 176 2,926 3,622 0.03166 0.01234 0.04401 23,705
189,038 141,214 47,824 2,707 45,117 45,004 320,569
2
</TABLE>
<PAGE>
Attachment I-2
Transition Bond Charge (TBC): Charge Development and True -up
(000's)
Year Year
1 2
Principal 3,242 3,237
Interest 5,532 5,537
Servicing Fee 0.075% 59 59
Overcollateralization Amount 0.50% 26 26
Rating Agency Fees - -
Trustee Fees - -
Accounting/Legal Fees - -
SPE Operating and Administrative Fees - -
Miscellaneous - -
A Total Transition Bond Requirement 8,859 8,859
B Less TBC Billed and expected to be collected
during the upcoming period 0 1,623
C TBC to be billed and collected during the
period 8,859 7,236
D True-up Adjustment for Under/
(Over) collections of prior period N/A 0
E Total TBC to be billed and collected
during the period 8,859 7,236
F Projected kwh's to be delivered, billed
and cash collected during
the period (in millions) 16,017 16,289
G TBC- before NJ Sales Tax (cents per kwh) 0.05531 0.04442
H TBC- including NJ Sales Tax (cents per kwh) 0.05863 0.04709
A= Total Annual Transition Bond Debt Service Requirement and Fees Related to
Debt Service (See Attachment I-1)
B= TBC Revenues billed in the prior period and expected to be collected in
the current period.
C= Amount of total Debt Service required to be funded through TBC
collections during the period. (A minus B)
D= Amount of Under or (Over) collection of the prior period TBC as computed
under the methodology described in Attachment E-3.
E= Total amount required to be collected during the upcoming period through
the TBC (C plus D)
F= Projected kwh's that will be delivered, billed and collected during the
upcoming period. This amount is computed by multiplying forecasted kwh
sales on a monthly basis times a percentage expected to be collected in
cash each month subsequent to the sale. The collection percentage is
developed based on historical collection experience. This methodology
takes into account the collection lag and uncollectable experience
inherent in GPU's electric sales. See Attachment E-4.
G= TBC before statutory addition of NJ sales tax (E divided by F)
H= TBC including statutory addition of NJ sales tax (G times 1.06)
<PAGE>
Attachment I-2
MTC - Tax: Charge Development and True -up
($000's)
Year Year
1 2
Tax Computation:
A Forecasted TBC Billed (excluding sales tax) 10,508 8,583
B Forecasted MTC-Tax Billed 3,420 1,154
C Total Taxable Revenue 13,929 9,737
less deductible expenses:
Interest 5,532 5,537
Amortization of Bond Issuance Expense
- -
Uncollectable accounts 35 24
Administrative and servicing fees 59 59
Deductible Use of Proceeds 395 -
D Total Deductions 6,021 5,620
E Federal and State Taxable Income 7,908 4,117
F Federal and State Income Tax Rate 36.4625% 36.4625%
G Federal and State Income Tax 2,883 1,501
H Less MTC-Tax Billed and expected
to be collected during the upcoming period 0 528
I Tax obligation to be Billed and
collected during the upcoming period 2,883 973
J True-up Adjustment for Under and (Over)
collections of the prior period 0 0
K Total MTC-Tax to be billed and collected
during the period 2,883 973
L Projected kwh's to be delivered, billed and
cash collected during the period (in 16,017 16,289
millions)
M MTC - Tax Charge before NJ sales tax (cents per kwh) 0.01800 0.00597
N= MTC-Tax Charge including NJ sales tax(cents per kwh) 0.01908 0.00633
A= Forecasted TBC Billed - TBC rate(excluding sales tax) multiplied by
forecasted kwh sales for the period.
B= Forecasted MTC-Tax Billed - MTC-Tax Charge rate (excluding sales tax)
times forecasted kwh sales for the period
C= Total taxable revenue associated with the transition bonds. (A plus B)
(See Attachment I-1)
D= Deductible expenses associated with the transition bonds. (See Attachment
I-1) Amortization of Transition Bond issuance costs equals issuance costs
divided by term of the transition bonds (15 years). Deduction for
uncollectable accounts is estimated based on historical collection
experience.
E= Federal and State Taxable Income (C minus D)
F= Combined Federal and State Tax Rate - Federal statutory Corporate Income
Tax Rate (35%) and NJ State Income Tax Rate (2.25%)
G= Federal and State Corporate Income Tax obligation associated with the TBC
(E times F)
<PAGE>
H= MTC - Tax Charge billed in the prior period and expected
to be collected in the current period
I= Amount of total Tax Obligation required to be funded through MTC
collections during the period (G minus H)
J= Amount of Under or (Over) collection of the prior period MTC - Tax Charge
as computed under the methodology described in Attachment E-3
K= Total amount required to be collected during the upcoming period through
the MTC - Tax Charge (I plus J)
L= Projected kwh's that will be delivered, billed and collected during the
upcoming period. This amount is computed by multiplying forecasted kwh
sales on a monthly basis times a percentage expected to be collected in
cash each month subsequent to the sale. The collection percentage is
developed based on historical collection experience. This methodology
takes into account the collection lag and uncollectable experience
inherent in GPU's electric sales. See Attachment E-4.
M= MTC - Tax Charge before statutory addition of NJ sales tax =. (K divided
by L)
N= MTC - Tax Charge including statutory addition of NJ sales tax. (M times
1.06)
2
<PAGE>
Exhibit J
Attachment J-1
Debt Design - Additional $89.10 Issuance
($000's)
Debt Design Variables
Original Principal $89,100
Interest Rate 7.57%
Maturity 15 Years
Average Life 8.93
Annual Cost:
Overcollateralization (.50%) 30
Admin and Other Fees -
Servicing Fees (.075%) 67
Tax Rates:
Federal Income Tax Rate 35%
State Income Tax Rate 2.25%
NJ State Sales Tax Rate 6%
<TABLE>
<CAPTION>
1 2 3 4 5 6 7 8 9 10
TBC TBC TBC
Billed Sales Billed Collected Admin Servicing Over- Debt
Year (Including Tax (Excluding (Excluding Interest Principal Fees Fee Collateral Balance
Sales Tax) Billed Sales Tax) Sales Tax) ization Outstanding
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 12,655 716 11,939 10,065 6,285 3,684 - 67 30 85,417
2001 10,337 585 9,752 10,065 6,290 3,679 - 67 30 81,738
2002 10,761 609 10,152 10,065 6,038 3,931 - 67 30 77,808
2003 10,684 605 10,079 10,065 5,763 4,206 - 67 30 73,602
2004 10,698 606 10,092 10,065 5,469 4,500 - 67 30 69,103
2005 10,695 605 10,090 10,065 5,153 4,816 - 67 30 64,287
2006 10,696 605 10,090 10,065 4,785 5,184 - 67 30 59,104
2007 10,696 605 10,090 10,065 4,381 5,588 - 67 30 53,516
2008 10,696 605 10,090 10,065 3,946 6,023 - 67 30 47,494
2009 10,696 605 10,090 10,065 3,477 6,492 - 67 30 41,002
2010 10,696 605 10,090 10,065 2,970 6,999 - 67 30 34,004
2011 10,696 605 10,090 10,065 2,415 7,554 - 67 30 26,450
2012 10,696 605 10,090 10,065 1,816 8,153 - 67 30 18,298
2013 10,696 605 10,090 10,065 1,169 8,800 - 67 30 9,498
2014 9,039 512 8,528 10,065 471 9,498 - 67 30 1
160,435 9,081 151,354 150,975 60,428 89,100 - 1,002 446
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
11 12 13 14 15 16 17 18 19 20
Aggregate Federal & Federal &
Customer State State GWh
Charge TBC Income Income Tax Sales
for TBC (see MTC - Tax Sales Tax Billed Collected Total Related
& MTC Tax above) Billed Tax (Excluding (Excluding TBC Charge MTC -Tax Charges to
Year (Including (Including (Including Billed Sales Tax) Sales Tax) (cents/kWh) (cents/kWh) (cents/kWh) Charges
Sales Tax) Sales Tax) Sales Tax)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 16,762 12,655 4,106 232 3,874 3,266 0.06284 0.02039 0.08323 18,999
2001 11,731 10,337 1,394 79 1,315 1,707 0.05047 0.00681 0.05728 19,322
2002 13,555 10,761 2,794 158 2,636 2,425 0.05145 0.01336 0.06480 19,734
2003 13,189 10,684 2,506 142 2,364 2,400 0.05016 0.01176 0.06192 20,094
2004 13,544 10,698 2,846 161 2,685 2,629 0.04941 0.01315 0.06255 20,427
2005 13,685 10,695 2,989 169 2,820 2,792 0.04862 0.01359 0.06221 20,754
2006 13,936 10,696 3,240 183 3,057 3,013 0.04788 0.01450 0.06238 21,076
2007 14,181 10,696 3,485 197 3,288 3,244 0.04717 0.01537 0.06254 21,392
2008 14,453 10,696 3,757 213 3,544 3,496 0.04651 0.01634 0.06284 21,696
2009 14,743 10,696 4,048 229 3,819 3,767 0.04586 0.01735 0.06321 22,004
2010 15,058 10,696 4,363 247 4,116 4,060 0.04518 0.01843 0.06361 22,334
2011 15,404 10,696 4,709 267 4,442 4,381 0.04451 0.01960 0.06411 22,669
2012 15,776 10,696 5,080 288 4,793 4,727 0.04385 0.02083 0.06468 23,009
2013 16,178 10,696 5,482 310 5,172 5,100 0.04321 0.02215 0.06535 23,354
2014 12,563 9,039 3,523 199 3,324 4,115 0.03597 0.01402 0.05000 23,705
214,759 160,435 54,324 3,075 51,249 51,121 320,569
</TABLE>
2
<PAGE>
Attachment J-2
Transition Bond Charge (TBC): Charge Development and True -up
(000's)
Year Year
1 2
Principal 3,684 3,679
Interest 6,285 6,290
Servicing Fee 0.08% 67 67
Overcollateralization Amount 0.50% 30 30
Rating Agency Fees - -
Trustee Fees - -
Accounting/Legal Fees - -
SPE Operating and Administrative Fees - -
Miscellaneous - -
A Total Transition Bond Requirement 10,065 10,065
B Less TBC Billed and expected to be
collected during the upcoming period 0 1,844
C TBC to be billed and collected
during the period 10,065 8,221
D True-up Adjustment for Under/
(Over) collections of prior period N/A 0
E Total TBC to be billed and collected
during the period 10,065 8,221
F Projected kwh's to be delivered, billed
and cash collected during
the period (in millions) 16,017 16,289
G TBC- before NJ Sales Tax (cents per kwh)
0.06284 0.05047
H TBC- including NJ Sales Tax (cents per kwh)
0.06661 0.05350
A= Total Annual Transition Bond Debt Service Requirement and Fees Related to
Debt Service (See Attachment J-1)
B= TBC Revenues billed in the prior period and expected to be collected in
the current period.
C= Amount of total Debt Service required to be funded through TBC
collections during the period. (A minus B)
D= Amount of Under or (Over) collection of the prior period TBC as computed
under the Methodology described in Attachment E-3.
E= Total amount required to be collected during the upcoming period through
the TBC (C plus D)
F= Projected kwh's that will be delivered, billed and collected during the
upcoming period. This amount is computed by multiplying forecasted kwh
sales on a monthly basis times a percentage expected to be collected in
cash each month subsequent to the sale. The collection percentage is
developed based on historical collection experience. This Methodology
takes into account the collection lag and uncollectable experience
inherent in GPU's electric sales. See Attachment E-4.
G= TBC before statutory addition of NJ sales tax (E divided by F) H= TBC
including statutory addition of NJ sales tax (G times 1.06)
<PAGE>
Attachment J-2
MTC - Tax: Charge Development and True -up
($000's)
Year Year
1 2
Tax Computation:
A Forecasted TBC Billed (excluding sales tax) 11,939 9,752
B Forecasted MTC-Tax Billed 3,874 1,315
C Total Taxable Revenue 15,813 11,067
less deductible expenses:
Interest 6,285 6,290
Amortization of Bond Issuance Expense - -
Uncollectable accounts 40 28
Administrative and servicing fees 67 67
Deductible Use of Proceeds 465 -
D Total Deductions 6,856 6,384
E Federal and State Taxable Income 8,956 4,683
F Federal and State Income Tax Rate 36.4625% 36.4625%
G Federal and State Income Tax 3,266 1,707
H Less MTC-Tax Billed and expected to be
collected during the upcoming period 0 598
I Tax obligation to be Billed and
collected during the upcoming period 3,266 1,109
J True-up Adjustment for Under and (Over) 0 0
collections of the prior period
K Total MTC-Tax to be billed and collected
during the period 3,266 1,109
L Projected kwh's to be delivered, billed and cash
collected during the period (in millions) 16,017 16,289
M MTC - Tax Charge before NJ sales tax (cents per kwh) 0.02039 0.00681
N= MTC-Tax Charge including NJ sales tax(cents per kwh) 0.02161 0.00722
A= Forecasted TBC Billed - TBC rate(excluding sales tax) multiplied by
forecasted kwh sales for the period.
B= Forecasted MTC-Tax Billed - MTC-Tax Charge rate (excluding sales tax)
times forecasted kwh sales for the period
C= Total taxable revenue associated with the transition bonds. (A plus B)
(See Attachment J-1)
D= Deductible expenses associated with the transition bonds. (See Attachment
J-1) Amortization of Transition Bond issuance costs equals issuance costs
divided by term of the transition bonds (15 years). Deduction for
uncollectable accounts is estimated based on historical collection
experience.
E= Federal and State Taxable Income (C minus D)
F= Combined Federal and State Tax Rate - Federal statutory Corporate Income
Tax Rate (currently 35%) and NJ State Income Tax Rate (2.25%)
G= Federal and State Corporate Income Tax obligation associated with the TBC
(E times F)
H= MTC - Tax Charge billed in the prior period and expected to be collected
in the current period
I= Amount of total Tax Obligation required to be funded through MTC
collections during the period (G minus H)
J= Amount of Under or (Over) collection of the prior period MTC - Tax Charge
as computed under the methodology described in Attachment E-3
K= Total amount required to be collected during the upcoming period through
the MTC - Tax Charge (I plus J)
L= Projected kwh's that will be delivered, billed and collected during the
upcoming period. This amount is computed by multiplying forecasted kwh
sales on a monthly basis times a percentage expected to be collected in
cash each month subsequent to the sale. The collection percentage is
developed based on historical collection experience. This methodology
takes into account the collection lag and uncollectable experience
inherent in GPU's electric sales. See Attachment E-4.
M= MTC - Tax Charge before statutory addition of NJ sales tax =. (K divided
by L)
N= MTC - Tax Charge including statutory addition of NJ sales tax. (M times
1.06) 2
Exhibit J
<TABLE>
<CAPTION>
Jersey Central Power & Light
Proforma Capitalization
(In Thousands of Dollars)
Proforma Securitization Proforma
Actual % of Without Sec. % of Use of With Sec. % of
12/31/1999 Total 03/31/2000 Total Proceeds 03/31/2000 Total
Common Stockholder's Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stockholder's Equity $1,385,367 49.8% $1,381,903 49.7% $(199,525) $1,182,379 39.8%
Cumulative Preferred Stock/ MIPS
Cumulative preferred stock:
With mandatory redemption 73,167 73,167 - 73,167
Without mandatory redemption 12,649 12,649 0 12,649
Company-obligated mandatorily redeemable
preferred securities 125,000 125,000 - 125,000
Total preferred stock/mandatorily redeemable
preferred securities $210,816 7.6% $210,816 7.6% $0 $210,816 7.2%
Total Debt
Long-term debt
First Mortgage Bonds 1,133,760 1,133,760 (199,524) 934,236
Transition Bonds 587,525 587,525
Securities due within one year 50,846 10,846 10,846
Notes Payable - 41,300 41,300
Total Debt $1,184,606 42.6% $1,185,906 42.7% $388,001 $1,573,906 53.0%
Total Capitalization $2,780,789 100.0% $2,778,625 100.0% $188,476 $2,967,101 100.0%
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
GPU, Inc.
Proforma Capitalization
(In Thousands of Dollars)
Proforma Securitization Proforma
Actual % of Without Sec. % of Use of With Sec. % of
12/31/1999 Total 03/31/2000 Total Proceeds 03/31/2000 Total
Common Stockholder's Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stockholder's Equity $3,464,953 30.2% $3,570,149 30.6% $- $3,570,149 30.2%
Cumulative Preferred Stock/ MIPS
Cumulative preferred stock:
With mandatory redemption 73,167 73,167 - 73,167
Without mandatory redemption 12,649 12,649 0 12,649
Company-obligated mandatorily redeemable
preferred securities 125,000 125,000 - 125,000
Trust preferred securities 200,000 200,000 200,000
Total preferred stock/mandatorily
redeemable preferred securities $410,816 3.6% $410,816 3.6% $0 $410,816 3.4%
Total Debt
Long-term debt
Long Term Debt including securities 6,431,742 6,391,742 (399,049) 5,992,693
due within one year
Transition Bonds 587,525 587,525
Notes Payable 1,171,869 1,279,269 1,279,269
Total Debt $7,603,611 66.2% $7,671,011 65.8% $188,476 $7,859,487 66.4%
Total Capitalization $11,479,380 100.0% $11,651,976 100.0% $188,476 $11,840,452 100.0%
2
</TABLE>
