AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 2002
REGISTRATION NO. 333-31250
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
JCP&L TRANSITION FUNDING LLC
(Issuer of Securities)
(Exact name as specified in registrant's Certificate of Formation)
Delaware
(State or other jurisdiction of 75-2998870
incorporation or organization) (I.R.S. Employer Identification No.)
JCP&L TRANSITION FUNDING LLC LEILA L. VESPOLI, ESQ.
c/o GPU Service, Inc. Senior Vice President
76 South Main Street and General Counsel
Akron, Ohio 44308-1890 FirstEnergy Corp.
(330) 384-5100 76 South Main Street
(Address, including zip code, and Akron, Ohio 44308-1890
telephone number, including area code, of (330) 384-5100
registrant's principal executive offices) (Name, address, including zip code,
and telephone number, including
area code, of agent for service)
-------------
Copies to:
DOUGLAS E. DAVIDSON, ESQ. RICHARD L. HARDEN, ESQ.
THELEN REID & PRIEST LLP PILLSBURY WINTHROP LLP
40 West 57th Street One Battery Park Plaza
New York, New York 10019 New York, New York 10004
(212) 603-2000 (212) 858-1000
Fax: (212) 603-2001 Fax: (212) 858-1500
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or dividend reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------
CALCULATION OF REGISTRATION FEE
TITLE OF SECURITIES AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TO BE TO BE AGGREGATE PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
Transition Bonds $320,000,000 100% $320,000,000 $29,440(2)
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $264 of this amount has been previously paid by the registrant in
connection with this registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion. Dated , 2002.
Prospectus Supplement to Prospectus dated , 2002.
$
JCP&L TRANSITION FUNDING LLC
ISSUER
JERSEY CENTRAL POWER & LIGHT COMPANY
SELLER AND SERVICER
TRANSITION BONDS, SERIES 2002-A
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE [ ] IN THE ACCOMPANYING PROSPECTUS TO
READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING THE TRANSITION BONDS.
The series 2002-A transition bonds are highly structured. There currently
is no secondary market for the transition bonds, and there is no assurance that
one will develop.
We have applied to have the class __ transition bonds listed on the
Luxembourg Stock Exchange but we cannot assure that these transition bonds will
be listed on the Luxembourg Stock Exchange or any other stock exchange. We will
not apply to have any other class of the series 2002-A transition bonds listed
on any stock exchange.
The transition bonds represent obligations only of JCP&L Transition Funding
LLC, which is the issuer, and are backed only by the assets of the issuer,
consisting primarily of the bondable transition property, which includes the
right to recover from customers, through a transition bond charge, amounts from
which the payments on the series 2002-A transition bonds will be made, as
described further in this prospectus supplement and the accompanying prospectus.
None of Jersey Central Power & Light Company (referred to as "JCP&L"), its
parent, FirstEnergy Corp., or any of their respective affiliates, other than the
issuer, is liable for payments on the series 2002-A transition bonds.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
INITIAL PROCEEDS EXPECTED LEGAL FINAL
INTEREST PRINCIPAL UNDERWRITING TO ISSUER FINAL PAYMENT MATURITY
RATE AMOUNT PRICE (%) DISCOUNTS (%) (1)(2) DATE DATE
---- ------ --------- ------------- ------ ---- ----
Class [ ] % $ % %
Class [ ] % $ % %
Class [ ] % $ % %
- --------------
(1) Before payment of fees and expenses.
(2) The total price to the public is $[ ] and the amount of the underwriting
discounts and other fees is $[ ]. The total amount of proceeds before
deduction of expenses (estimated to be $[ ]) is $[ ].
-----------------------
The underwriters expect to deliver the transition bonds in book-entry form
only through the facilities of The Depository Trust Company against payment in
New York, New York on , 2002.
GOLDMAN, SACHS & CO.
MORGAN STANLEY SALOMON SMITH BARNEY
PROSPECTUS SUPPLEMENT DATED , 2002.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
WHERE TO FIND INFORMATION IN THESE DOCUMENTS............................... S-
INTRODUCTION............................................................... S-
THE SERIES 2002-A TRANSITION BONDS......................................... S-
The Collateral........................................................... S-
Payment Sources.......................................................... S-
Principal Payments....................................................... S-
Optional Redemption...................................................... S-
Distribution Following Acceleration...................................... S-
Interest Payments Generally.............................................. S-
Interest Payments on Floating Rate Transition Bonds...................... S-
Floating Rate Interest Determination..................................... S-
Interest Rate Swap Agreements............................................ S-
Swap Counterparty........................................................ S-
RISK FACTORS RELATING TO SERIES 2002-A FLOATING RATE
TRANSITION BONDS......................................................... S-
Termination of Swap Could Cause a Loss................................... S-
Ratings Downgrade of Any Floating Rate Class of Transition Bonds
Could Cause a Loss for Holders of Those Transition Bonds............... S-
Interest Payments on Series 2002-A Transition Bonds at Floating Rates
Are Dependent on Swap Counterparties................................... S-
CREDIT ENHANCEMENT......................................................... S-
Periodic Adjustment of the Transition Bond Charge........................ S-
Collection Account and Subaccounts....................................... S-
DESCRIPTION OF BONDABLE TRANSITION PROPERTY................................ S-
THE TRANSITION BOND CHARGE................................................. S-
INFORMATION REGARDING JERSEY CENTRAL POWER & LIGHT COMPANY................. S-
UNDERWRITING THE SERIES 2002-A TRANSITION BONDS............................ S-
RATINGS FOR THE SERIES 2002-A TRANSITION BONDS............................. S-
LISTING AND GENERAL INFORMATION RELATED TO FLOATING RATE
CLASSES.................................................................. S-
INCOME TAX MATTERS......................................................... S-
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the accompanying prospectus provide
information about the issuer and JCP&L, including terms and conditions that
apply to the transition bonds. The specific terms of this series of transition
bonds, the series 2002-A transition bonds, are contained in this prospectus
supplement. The terms that apply to all series of transition bonds appear in the
prospectus that follows this prospectus supplement. You should read both of
these documents in full before buying the transition bonds.
We have included cross-references to captions in these materials where you
can find further related discussions. Cross references may be contained in the
introductory sections that will direct you elsewhere in this prospectus
supplement or the accompanying prospectus for a more detailed description of a
particular topic. You can also find references to key topics listed in the Table
of Contents on the preceding page. Attached to the accompanying prospectus is a
glossary of terms which indicates where you may find significant terms used in
this prospectus supplement and the accompanying prospectus.
You should rely only on information on the transition bonds provided in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
S-1
INTRODUCTION
THE ISSUER: JCP&L Transition Funding LLC, a Delaware limited
liability company and a direct wholly-owned
subsidiary of JCP&L.
ISSUER'S ADDRESS: c/o GPU Service, Inc.
76 South Main Street
Akron, Ohio 44308-1890
ISSUER'S TELEPHONE NUMBER: (330) 384-5100
SELLER OF THE BONDABLE JCP&L is a public utility providing retail
TRANSITION PROPERTY: electric service within a territory located in
northern, western and east central New Jersey
having a population of approximately 2.7 million.
JCP&L is a subsidiary of FirstEnergy Corp., a
holding company registered under the Public
Utility Holding Company Act of 1935.
SELLER'S ADDRESS: 76 South Main Street
Akron, Ohio 44308-1890
SELLER'S TELEPHONE NUMBER: (330) 384-5100
SERVICER OF THE BONDABLE JCP&L will act as servicer of all of the bondable
TRANSITION PROPERTY: transition property.
JCP&L will be entitled to a servicing fee of
0.125% per year of the initial principal balance
of the transition bonds, which the servicer may
withhold on a quarterly basis from the transition
bond charge collections. If JCP&L is replaced by a
successor servicer, the successor servicer may be
paid a servicing fee of up to 1.25% per year of
the initial principal balance of the transition
bonds.
TRUSTEE: The Bank of New York
MINIMUM DENOMINATION: $1,000, except for one transition bond of each
class which may be of a smaller denomination.
THE SERIES 2002-A TRANSITION BONDS
The transition bonds will be issued under and secured pursuant to the
indenture between the issuer and the trustee, as supplemented for each series of
transition bonds. The following summary does not purport to be complete and is
qualified by reference to the terms and provisions of the indenture and the
transition bonds.
The series 2002-A transition bonds will be issued in minimum denominations
of $1,000 and in integral multiples of that amount. The series 2002-A transition
bonds will consist of [ ] classes, in the initial class principal amounts,
bearing the interest rates and having the expected final payment dates and legal
final maturity dates set forth below:
S-2
TABLE 1
INITIAL CLASS EXPECTED FINAL LEGAL FINAL
CLASS PRINCIPAL AMOUNT INTEREST RATE PAYMENT DATE MATURITY DATE
- ----- ---------------- ------------- ------------ -------------
$ %
The expected final payment date for each class of the series 2002-A
transition bonds is the date on which there is expected to be no further
outstanding principal balance of that class in accordance with the expected
amortization schedule for that class. The legal final maturity date for each
class of the series 2002-A transition bonds is the date on which the issuer is
required to pay any outstanding principal balance of that class. On each payment
date, payments will be made to the persons that were the holders of record as of
the business day before that payment date (referred to as the "record date").
However, if certificated transition bonds are issued to beneficial owners of the
transition bonds as described in "THE TRANSITION BONDS--CERTIFICATED TRANSITION
BONDS" in the prospectus, the record date will be the last business day of the
calendar month preceding the payment date.
THE COLLATERAL
The series 2002-A transition bonds will be secured primarily by bondable
transition property, a presently existing property right created by the New
Jersey Electric Discount and Energy Competition Act of 1999 (referred to as the
"Competition Act") and a financing order (referred to as the "BPU financing
order") issued by the New Jersey Board of Public Utilities (referred to as the
"BPU"). In general terms, the bondable transition property represents the
irrevocable right to charge, collect and receive, and be paid from collections
of, a non-bypassable transition bond charge payable by JCP&L's customers in an
amount sufficient to pay:
o the fees, expenses, costs, charges, credit enhancement and premiums,
if any, associated with the transition bonds and their issuance; and
o the principal amount of and interest on the transition bonds.
The net proceeds of the series 2002-A transition bonds will be used to
reduce a portion of JCP&L's stranded costs through the retirement of its debt or
equity, or both. Stranded costs are (1) the amount by which the net cost of the
electric public utility's electric generating assets or electric power purchase
contracts, which traditionally would be recoverable in a regulated environment,
exceeds the market value of those assets or contracts in a competitive supply
marketplace, as determined by the BPU, and (2) the costs of buydowns or buyouts
of power purchase contracts. The bondable transition property is described in
more detail under "THE SALE AGREEMENT--JCP&L'S SALE AND ASSIGNMENT OF THE
BONDABLE TRANSITION PROPERTY TO THE ISSUER" in the prospectus.
For convenience of usage in this prospectus supplement and the prospectus,
there are numerous references to the holding and transfer of bondable transition
property by JCP&L and the issuer. However, pursuant to New Jersey state law and
the BPU financing order, bondable transition property arises, and constitutes a
vested, presently existing property right, upon (i) the transfer to an assignee
and (ii) receipt of consideration therefor.
As used throughout this prospectus supplement, a "customer" is an end user
of electricity that is connected to any part of JCP&L's transmission and
distribution system and is located within JCP&L's service territory, other than
(1) the single end user presently taking service under an experimental JCP&L
rate class that accounted for approximately 1.7% of JCP&L's kilowatt hour sales
in 2001 and (2) end users that are connected to JCP&L's transmission and
distribution system but who self-generate from on-site facilities unless new
on-site generation facilities reduce the kilowatt hours distributed in the
aggregate by JCP&L to all of its customers to 92.5% or less of the aggregate
S-3
kilowatt hours distributed by it in 1999. Those customers receiving power
generated from new on-site generation facilities that commence operation after
such threshold is reached will be responsible for payment of the transition bond
charge as if this power were distributed by JCP&L.
In connection with the issuance of the transition bonds, JCP&L will sell
its bondable transition property to the issuer. JCP&L, as servicer of the
bondable transition property, will collect the transition bond charge from
customers on behalf of the issuer. The transition bond charge is non-bypassable,
which means that the charge will be payable by JCP&L customers, even if those
customers elect to purchase electricity from a third party supplier. See "THE
COMPETITION ACT--JCP&L AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS" in the
prospectus. Under certain circumstances, third party suppliers of electricity to
JCP&L's customers may be allowed to bill and collect the transition bond charge
from customers and will then be required to pay the billed amounts to JCP&L, as
servicer. Because the amount of transition bond charge collections will depend
on the amount of electricity consumed by customers within JCP&L's service
territory, these collections may vary substantially from year to year. See
"SERVICING OF THE BONDABLE TRANSITION PROPERTY" in the prospectus.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts scheduled to be paid on
transition bonds from amounts available for withdrawal from trust accounts held
by the trustee or paid pursuant to contracts pledged to secure one or more
series of transition bonds, including collections received from the servicer
with respect to the transition bond charge. All series of transition bonds,
including the series 2002-A transition bonds, will be payable from bondable
transition property. If another series of transition bonds is issued, the
principal source of repayment for that series will also be transition bond
charge collections collected by the servicer. The issuance of other series of
transition bonds is not expected to adversely affect the sufficiency of
transition bond charge collections to make payments on the series 2002-A
transition bonds. This is because the transition bond charge and adjustments
made to it will be based on amounts owed with respect to all transition bonds.
Moreover, any additional series of transition bonds will be issued only if such
issuance will not result in the downgrading or withdrawal of any rating by a
rating agency on any outstanding transition bonds. See "THE
INDENTURE--TRANSITION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES" in the
prospectus.
PRINCIPAL PAYMENTS
On each payment date, the issuer will distribute principal of the series
2002-A transition bonds to the series 2002-A transition bondholders, in
accordance with the expected amortization schedule and to the extent funds are
available, in the following order:
(1) to the holders of the class [ ] series 2002-A transition bonds, until
the principal balance of that class has been reduced to zero;
(2) to the holders of the class [ ] series 2002-A transition bonds, until
the principal balance of that class has been reduced to zero; and
(3) to the holders of the class [ ] series 2002-A transition bonds, until
the principal balance of that class has been reduced to zero.
The issuer will not, however, distribute principal of any class of the
series 2002-A transition bonds on a payment date if making such payment would
reduce the principal balance of a class to an amount lower than that specified
in the expected amortization schedule in Table 2 below (referred to as the
"expected amortization schedule") for that class on that payment date. The
entire unpaid principal balance of each class of the series 2002-A transition
bonds will be due and payable on the legal final maturity date for that class.
S-4
If an event of default under the indenture has occurred and is continuing,
the trustee, or the holders of not less than a majority of the principal balance
of the outstanding transition bonds of all series, voting together as a single
class, may declare the unpaid principal balance of all outstanding transition
bonds together with accrued interest due and payable. If there is a shortfall in
the balance necessary to make principal payments that are due and payable,
including upon an acceleration following an event of default, the trustee will
distribute principal pro rata among the series and classes of transition bonds
in proportion to the amount of principal due and payable for each series or
class. If there is a shortfall in the amount necessary to make scheduled
principal payments, the trustee will distribute principal pro rata among the
series and classes in proportion to the amount scheduled to be paid for each
series or class.
The expected amortization schedule in Table 2 sets forth the principal
balance from the issuance date to the expected final payment date that is
scheduled to remain outstanding for each class of the series 2002-A transition
bonds. The table reflects the principal balance for each class at each payment
date following scheduled payments of principal on that date. In establishing the
expected amortization schedule for the series 2002-A transition bonds, it has
been assumed, among other things, that:
(1) the series 2002-A transition bonds are issued on , 2002;
(2) payments on the series 2002-A transition bonds are made, with respect
to each payment date, on the ____ day of each month in which a payment
date occurs, commencing on , 2002;
(3) the total annual servicing fee for the series 2002-A transition bonds
equals .125% of the initial principal balance of the series 2002-A
transition bonds;
(4) there are no net earnings on amounts on deposit in the collection
account;
(5) operating expenses, including all fees, costs and charges of the
issuer and the trustee, are paid in the amount of $[ ] in the
aggregate for all series on each payment date and that these amounts
are payable in arrears; and
(6) all transition bond charge collections are received in accordance with
JCP&L's forecasts and deposited in the collection account.
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
OUTSTANDING PRINCIPAL BALANCE BY CLASS
EXPECTED EXPECTED EXPECTED EXPECTED
PAYMENT CLASS [ ] CLASS [ ] CLASS [ ] SERIES
DATE BALANCE BALANCE BALANCE 2002-A BALANCE
---- ------- ------- ------- --------------
There can be no assurance that the principal balance of any class of the
series 2002-A transition bonds will be reduced at the rate indicated in the
foregoing table. The actual rates of reduction in class principal balances may
be slower but, except in the case of optional redemption or upon acceleration of
the transition bonds due to an event of default specified in the indenture (both
as discussed below), not faster than those indicated in Table 2. The series
2002-A transition bonds will not be in default if principal is not paid as
specified above in Table 2; however, a default will occur if the entire
outstanding principal balance of any class is not paid on or before the legal
final maturity date of that class.
S-5
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding series 2002-A transition
bonds, at its option, on any payment date if (1) the outstanding principal
balance of the series 2002-A transition bonds (after giving effect to payments
scheduled to be made on that payment date) is less than 5% of the total initial
principal balance of the series 2002-A transition bonds and (2) no interest rate
swap agreement remains in effect. Upon redemption, the issuer will pay the
outstanding principal balance of the series 2002-A transition bonds and interest
accrued and unpaid up to the redemption date. The trustee will give notice of
the redemption to series 2002-A transition bondholders not less than five days
nor more than 45 days prior to the redemption date. The series 2002-A transition
bonds will not be redeemed before the expected final payment date in any other
circumstances other than in the case of acceleration due to an event of default
specified in the indenture.
DISTRIBUTION FOLLOWING ACCELERATION
Upon an acceleration of the maturity of the transition bonds, the total
outstanding principal balance of and interest accrued on the series 2002-A
transition bonds will be payable without priority of interest over principal or
principal over interest and without regard to series or class, in the proportion
that the total outstanding principal balance of, and accrued interest on, the
series 2002-A transition bonds bear to the total outstanding principal balances
of, and any interest accrued on, all transition bonds. For purposes of the
preceding sentence, interest includes net swap payments with respect to any
class of series 2002-A floating rate transition bonds.
INTEREST PAYMENTS GENERALLY
Holders of the transition bonds in each class of series 2002-A transition
bonds will receive interest at the rate for that class as set forth in Table 1
above.
Interest on each class of the series 2002-A transition bonds which bears
interest at a fixed rate will accrue from and including the date of issuance to
but excluding the first payment date, and thereafter from and including the
previous payment date to but excluding the applicable payment date, until the
transition bonds have been paid in full, at the interest rates indicated in
Table 1. The issuer is required to pay interest [quarterly] on , , and of each
year, beginning , 2002, or, if any such day is not a business day, the following
business day. Each such day is referred to as a "payment date".
On each payment date, the issuer will pay interest on each class of the
series 2002-A transition bonds as follows:
o if there has been a payment default, any unpaid interest payable on
any prior payment dates, together with any accrued interest on any
such unpaid interest; and
o accrued interest on the principal balance of each class of the series
2002-A transition bonds as of the close of business on the preceding
payment date, or the date of the original issuance of the class of the
series 2002-A transition bonds, as applicable, after giving effect to
all payments of principal made on the preceding payment date.
The issuer will pay interest on the series 2002-A transition bonds prior to
paying principal of the transition bonds. See "THE TRANSITION BONDS--PAYMENTS OF
INTEREST ON AND PRINCIPAL OF THE TRANSITION BONDS" in the prospectus. If the
amount available to pay interest on the series 2002-A transition bonds is less
than the full amount necessary to make such payments, the trustee will
distribute interest pro rata to each class of the series 2002-A transition bonds
based on the interest then due on that class. See "THE INDENTURE--HOW FUNDS IN
THE COLLECTION ACCOUNT WILL BE ALLOCATED" in the prospectus. The issuer will
calculate interest on all classes of the series 2002-A transition bonds paying
interest at a fixed rate on the basis of a 360-day year of twelve 30-day months.
S-6
INTEREST PAYMENTS ON FLOATING RATE TRANSITION BONDS
Interest on each class of series 2002-A transition bonds paying interest at
a floating rate, each referred to as a "floating rate class", will be paid, for
all interest accrual periods, at the rate equal to the London interbank offered
rate, referred to as "LIBOR", for [three-month] United States dollar deposits,
[except with respect to the period from the date of issuance to and including
____________, 2002 when the rate will be based on LIBOR for one-month United
States dollar deposits, in each case,] determined on the applicable floating
rate interest determination date, as described below, plus the percentage spread
above LIBOR applicable to that class. The spread above LIBOR for any floating
rate class is referred to as the "floating rate spread". LIBOR plus the floating
rate spread payable on each floating rate class is referred to as the "floating
rate".
The floating rate spread for the series 2002-A class [ ] transition bonds
will be [0. %] per annum.
Interest on each floating rate class will be calculated on the basis of the
actual number of days from and including the preceding payment date, or, for the
first payment date, from and including the date of issuance of that class, to
but excluding the next payment date, divided by 360. The Luxembourg Stock
Exchange will be advised of the floating rate and the amount of the interest
payment on any floating rate class listed on that exchange for each payment
date.
For the first interest accrual period, interest on each floating rate class
will be paid based on (1) for the period from and including the date of issuance
of that class until and including [ ] LIBOR determined two London banking
days before the date of issuance of that class, plus (2) for the period from and
including [ ] until and including [ ], LIBOR determined on [ ],
plus (3) for the period from and including [ ] up to but excluding the
[ ] payment date, LIBOR determined on [ ]. Payment of the sum of the
amounts calculated for these three periods will be made on the [ ] payment
date.
On or prior to each payment date, the trustee, using LIBOR, will calculate
the amount of interest payable on each floating rate class for the relevant
interest accrual period.
There will be no minimum or maximum interest rate on any floating rate
class.
With respect to any floating rate class, if the interest rate swap
agreement relating to that class is terminated for any reason, interest on that
class will be paid at the gross fixed rate for that class, as described below,
until alternate arrangements can be made to pay the floating rate for that
class. If the swap counterparty defaults in its obligation to make floating rate
payments due under an interest rate swap agreement, the interest rate swap
agreement may terminate under the circumstances described below. See "--INTEREST
RATE SWAP AGREEMENTS--Amounts Payable Under Interest Rate Swap Agreements" and
"--Interest Rate Swap Agreement Events of Default and Termination Events" below
and "RISK FACTORS RELATING TO SERIES 2002-A FLOATING RATE TRANSITION BONDS" in
this prospectus supplement.
FLOATING RATE INTEREST DETERMINATION
The interest determination date for each floating rate class and each
payment date will be the day two London banking days prior to (1) the preceding
payment date or (2) in the case of the first payment date, the dates specified
above. A London banking day is a day on which commercial banks in London are
open for general business.
After the first payment date, interest on each floating rate class will be
paid at the rate equal to LIBOR as determined on each interest determination
date, plus the floating rate spread for that class.
The trustee will determine LIBOR in accordance with the following
provisions:
S-7
1. On each interest determination date, the trustee will determine
LIBOR based on the offered rate for deposits in United States dollars
commencing on the first day of that period that appears on page 3750 of
Bridge Telerate, Inc. as of 11:00 a.m., London time, on that interest
determination date. That display page is referred to as the "Telerate
page". If no offered rate appears on that Telerate page, LIBOR for that
period will be determined as described in clause 2. below.
2. With respect to an interest determination date on which no offered
rate appears on the Telerate page, the trustee will request each of four
major banks in the London interbank market, selected by the trustee, to
provide the trustee with that bank's offered quotation for deposits in
United States dollars for the applicable period, commencing on the second
London banking day immediately following that interest determination date,
to prime banks in the London interbank market at approximately 11:00 a.m.,
London time, on that interest determination date and in a principal amount
that is representative for a single transaction in United States dollars in
that market at that time. The applicable period is [three] months, except
for the period from the date of issuance of the series 2002-A transition
bonds to and including [ ], when the applicable period is one month. If at
least two such quotations are provided, LIBOR will be the arithmetic mean
of those quotations. If fewer than two quotations are provided, LIBOR for
that period will be the arithmetic mean of the rates quoted at
approximately 11:00 a.m. in the City of New York on that interest
determination date by major banks in the City of New York selected by the
swap counterparty for loans in United States dollars to leading European
banks, for the period commencing on the second London banking day
immediately following that interest determination date and in a principal
amount that is representative for a single transaction in United States
dollars in that market at that time.
If LIBOR cannot be determined in accordance with clauses 1 or 2 above, then
that rate will be determined to be the same as the rate which applied (a) during
the previous period or (b) on the date of issuance in the case of a failure to
determine LIBOR for the first payment date.
On each interest determination date, the trustee will notify the servicer,
the issuer and the swap counterparty of LIBOR for the applicable period as
determined by the trustee, and the issuer will notify the Luxembourg Stock
Exchange of that rate to the extent any series 2002-A transition bonds are
listed on that exchange and the rules of that exchange so require.
INTEREST RATE SWAP AGREEMENTS
The issuer will enter into an interest rate swap agreement with a swap
counterparty for each floating rate class, on or before the date of issuance of
that class. The purpose of each interest rate swap agreement is to convert the
cash flows allocable to each floating rate class, which for purposes of the
transition bond charge are determined based on the gross fixed rate for each
floating rate class, into cash flows that are based on a floating rate of
interest.
Amounts Payable Under Interest Rate Swap Agreements. Under each interest
rate swap agreement, for each interest accrual period the issuer will be
obligated to pay the related swap counterparty an amount equal to interest on
the related floating rate class at a fixed rate of interest, referred to as the
"gross fixed rate" for the related floating rate class, and the swap
counterparty will be obligated to pay the issuer an amount equal to interest at
the floating rate for that class. Those obligations will then be netted on the
business day before each payment date. Therefore, for each interest accrual
period, either the issuer will pay the swap counterparty only the amount, if
any, by which interest at the gross fixed rate exceeds interest at the floating
rate, referred to as the "net swap payment", or the swap counterparty will pay
the issuer only the amount, if any, by which interest at the floating rate
exceeds interest at the gross fixed rate, referred to as the "net swap receipt",
as discussed below.
With respect to any payment date, the notional amount in effect under each
interest rate swap agreement for the interest accrual period prior to that
payment date will equal the principal balance of the related floating rate class
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as of the close of business on the preceding payment date. With respect to the
first payment date, the notional amount in effect under each interest rate swap
agreement prior to that payment date will be equal to the initial principal
balance of the related floating rate class.
For each payment date with respect to each floating rate class, the trustee
will allocate to the subaccount established for that class, referred to as a
"class subaccount", an amount equal to interest at the gross fixed rate for that
class times the outstanding principal amount of that class for the preceding
interest accrual period, referred to as the "gross fixed amount" for that class
on that payment date. See "THE INDENTURE--HOW FUNDS IN THE COLLECTION ACCOUNT
WILL BE ALLOCATED" in the prospectus. In addition, any net swap receipt under
the related interest rate swap agreement will be deposited in that class
subaccount, and will be available, together with the gross fixed amount for that
class, to pay interest due on that class on that payment date. Any net swap
payment will be paid to the related swap counterparty only out of funds on
deposit in that class subaccount and the remaining amount in that class
subaccount will be available to pay interest due on that class.
Specifically, for the first payment date, the issuer will pay a net swap
payment equal to the amount, if positive, equal to: (1) an amount equal to the
interest calculated on the outstanding principal amount for the related floating
rate class at the applicable gross fixed rate for the period from and including
the issuance date of the series 2002-A transition bonds to but excluding the
[ ] payment date; minus (2) the sum of: (a) the interest calculated on the
notional amount for that class at the applicable floating rate for the period
from and including that issuance date to and including [ ]; plus (b) the
interest calculated on that notional amount at the applicable floating rate for
the period from and including [ ] to and including [ ]; plus (c) the
interest calculated on that notional amount at the applicable floating rate for
the period from and including [ ] up to but excluding the [ ] payment
date. If this amount is a negative number, a net swap receipt in this amount
will be paid to the issuer by the swap counterparty.
For each payment date after the first payment date, the issuer will pay a
net swap payment equal to the amount, if positive, equal to: (1) the interest
calculated on the outstanding principal amount of the related floating rate
class at the applicable gross fixed rate for the period from and including the
previous payment date to but excluding that payment date; minus (2) the interest
calculated on the notional amount for that class at the applicable floating rate
for that period. If this amount is a negative number, a net swap receipt in this
amount will be paid to the issuer by the swap counterparty.
The gross fixed rate for the floating rate class [ ] transition bonds will
be [ ]% percent per annum.
Each interest rate swap agreement may terminate under the circumstances
described under "--Interest Rate Swap Agreement Events of Default and
Termination Events" below. In the event an interest rate swap agreement
terminates without a replacement interest rate swap agreement being established,
the interest payable on the related floating rate class will convert to the
gross fixed rate for that class. The gross fixed rate will be used to calculate
interest payable on that class starting on the last payment date at which
interest has been paid at the floating rate. See "RISK FACTORS RELATING TO
SERIES 2002-A FLOATING RATE TRANSITION BONDS" in this prospectus supplement.
Swap Counterparty Ratings. The required long-term senior unsecured or
financial program ratings of each swap counterparty under each interest rate
swap agreement will be at least "Aa3" by Moody's Investors Service, Inc.
(referred to as "Moody's"), either at least "A+" or, for short-term obligations,
"A-1" by Standard & Poor's Ratings Services (referred to as "S&P") and, if a
swap counterparty is rated by Fitch, Inc. (referred to as "Fitch"), "A+" or, for
short-term obligations, "F1" by Fitch. These ratings are referred to as the
"swap counterparty minimum ratings".
Swap Counterparty Downgrade Event. An event referred to as a "swap
counterparty downgrade event" will occur if the swap counterparty no longer
meets the swap counterparty minimum ratings.
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If a swap counterparty downgrade event occurs, the swap counterparty will
be required, within 30 days following that event, to either:
a. re-establish the swap counterparty minimum ratings; or
b. establish alternative arrangements to maintain or restore the ratings
of the affected floating rate class that were in effect prior to the
swap counterparty downgrade event. These alternative arrangements by
the swap counterparty may include:
1. posting collateral, arranging for a guarantee or taking similar
action to maintain or restore the ratings; and
2. assigning its rights and obligations under the interest rate swap
agreement to a replacement swap counterparty that meets the swap
counterparty minimum ratings, or that has itself made
arrangements which will maintain or restore the ratings.
Posting collateral, arranging for a guarantee and other arrangements as
described in clauses 1 and 2 above are referred to in this prospectus supplement
as "satisfactory arrangements to maintain or restore the ratings" upon the
swap counterparty downgrade event.
At the end of that 30-day period, if the swap counterparty has failed to
make satisfactory arrangements to maintain or restore the ratings of that
floating rate class that were in effect prior to the swap counterparty downgrade
event, the issuer will appoint a recognized swap dealer that is a member of the
International Swaps and Derivatives Association, Inc. with capital and surplus
of at least $50 million, referred to as the "swap agent", to, within an
additional 30 days, either:
1. find a replacement swap counterparty that meets the swap counterparty
minimum ratings or that has made satisfactory arrangements to maintain
or restore the ratings of the related floating rate class, referred to
as a "qualified replacement counterparty"; or
2. if a qualified replacement counterparty cannot be found, find the
highest rated replacement swap counterparty available, in terms of
long-term senior unsecured or financial program credit rating assigned
by Moody's or S&P, that is higher than that of the existing swap
counterparty and that is approved by the holders of at least 66 2/3%
of the total outstanding principal amount of the related floating rate
class, referred to as an "approved replacement counterparty".
In the case of a qualified replacement counterparty or an approved
replacement counterparty, if there is more than one available replacement swap
counterparty with the same credit rating, the counterparty offering the interest
rate swap terms with the lowest overall cost to the issuer will be selected by
the issuer as the replacement swap counterparty. That replacement swap
counterparty must be willing to intermediate between the issuer and the prior
swap counterparty by entering into an interest rate swap agreement with the
prior swap counterparty that is substantially the same as the prior interest
rate swap agreement to hedge or offset the risk that the replacement swap
counterparty has to the issuer.
If a qualified replacement counterparty or an approved replacement
counterparty has been found, the prior swap counterparty will be required to
assign its rights and obligations under the interest rate swap agreement to that
replacement swap counterparty and the replacement swap counterparty will enter
into a new interest rate swap agreement with substantially the same terms as the
terminated agreement. If a replacement swap counterparty satisfying the above
criteria has not been found within that second 30-day period, a termination
event will occur under the interest rate swap agreement and the interest rate
swap agreement will terminate unless holders representing 66 2/3% of the total
outstanding principal amount of the related floating rate class vote to continue
the interest rate swap agreement with the existing swap counterparty.
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If the interest rate swap agreement is not terminated as described above,
the swap agent will be obligated every [three] months thereafter to renew the
search for a qualified replacement counterparty or an approved replacement
counterparty according to the above procedures. However, the replacement
counterparty will not be required to intermediate between the prior swap
counterparty and the issuer, as described above. At the end of each of these
[three]-month periods, if a swap counterparty meeting the above criteria has not
been found, the interest rate swap agreement will terminate unless holders
representing 66 2/3% of the total outstanding principal amount of the related
floating rate class vote to continue the interest rate swap agreement with the
existing swap counterparty.
All searches for replacement swap counterparties will be at the reasonable
cost of the swap counterparty being replaced.
Interest Rate Swap Agreement Events of Default and Termination Events. The
events referred to as "swap events of default" under each interest rate swap
agreement include:
o the failure of the issuer or the swap counterparty to pay any amount
when due under the interest rate swap agreement if that failure is not
remedied on or before the fifth business day after that failure,
unless, in the case of a failure by the swap counterparty, the holders
of 66 2/3% of the total outstanding principal amount of the related
floating rate class vote to waive that default, within 30 days
following notice of the default, by the issuer or the trustee to the
swap counterparty;
o certain events of bankruptcy of the issuer or the swap counterparty or
a credit support provider of the swap counterparty; or
o a merger of the issuer or the swap counterparty without an assumption
of its obligations under the interest rate swap agreement.
The events referred to as "termination events" under the interest rate swap
agreement are:
o illegality, as described below;
o an acceleration of the related floating rate class;
o a swap counterparty downgrade event, as described above, that is not
cured within the applicable time periods;
o any change in any applicable laws or in the interpretation of any
applicable laws which revokes or renders unenforceable any of the swap
counterparty's obligations under the interest rate swap agreement; and
o any amendment, without the consent of the swap counterparty, of the
formation documents of the issuer, the sale agreement, the bill of
sale, the servicing agreement, the administration agreement, the
indenture, the underwriting agreement or the interest rate swap
agreement [or the securities account control agreement] which, in the
swap counterparty's reasonable and good faith judgment, adversely
affects its rights or obligations under the interest rate swap
agreement.
Each interest rate swap agreement may be terminated by either the issuer or
the swap counterparty upon an illegality, as described below. In addition, upon
acceleration of the transition bonds, other than as a result of an uncured
covenant default not involving a payment failure, either party may elect to
terminate. Any other swap event of default or a termination event can lead to a
termination of the interest rate swap agreement by the party not responsible for
that event. Moreover, as described above, the interest rate swap agreement will
terminate following a swap counterparty downgrade event if that event is not
cured, there is no replacement swap counterparty and the requisite holders of
the related floating rate class do not vote to continue with the existing swap
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counterparty. Except in the cases described above, the issuer may terminate only
at the direction of the holders of 66 2/3% of the total outstanding principal
amount of the related floating rate class.
The issuer will not be obligated to pay any termination payment or any
other breakage amounts to the swap counterparty under any interest rate swap
agreement as a result of any termination event, any swap event of default, any
swap counterparty downgrade event or for any other reason, except following an
acceleration of the transition bonds and a liquidation of the collateral as
described under "THE INDENTURE--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" in the prospectus. Any payment made by a replacement swap
counterparty to enter into a replacement interest rate swap agreement will be
paid to the terminated swap counterparty.
Upon a termination of an interest rate swap agreement resulting from a swap
event of default, swap counterparty downgrade event or other termination event,
the swap counterparty may be liable to pay a termination payment to the issuer,
based on the market value of the interest rate swap agreement determined in
accordance with specified procedures set forth therein. Any termination payment
paid by the swap counterparty, including interest thereon, will first be used to
make any payment required to be paid to any replacement swap counterparty and to
the extent not so used will be deposited in the related class subaccount and
paid pursuant to the indenture to the holders of the related floating rate class
on the next payment date, pro rata based on the principal amount held by each
holder, as described under "CREDIT ENHANCEMENT--COLLECTION ACCOUNT AND
SUBACCOUNTS--The Class Subaccounts" in this prospectus supplement.
Illegality means that due to the adoption of, or any change in, any
applicable law after the date on which a swap transaction is entered into, or
due to the promulgation of, or any change in, the interpretation by any court,
tribunal or regulatory authority with competent jurisdiction of any applicable
law after that date, it becomes unlawful for the issuer or the swap
counterparty:
o to perform any absolute or contingent obligation to make a payment or
delivery or to receive a payment or delivery in respect of that swap
transaction or to comply with any other material provision of the
interest rate swap agreement; or
o to perform, or for any credit support provider of that party to
perform, any contingent or other obligation which the party or that
credit support provider has under any credit support document relating
to that swap transaction.
Replacement of Interest Rate Swap Counterparty. Upon a termination event or
a swap event of default under an interest rate swap agreement, the issuer is
required to appoint a swap agent. Upon its appointment, the swap agent will be
required, for a period not exceeding 30 days, either to:
1. find a replacement swap counterparty who meets the swap counterparty
minimum ratings or who has made such other arrangements as will result
in the related floating rate class receiving ratings from the rating
agencies not less than the ratings that would be received if such
replacement swap counterparty met the swap counterparty minimum
ratings; or
2. find the available replacement swap counterparty with the highest
available long-term senior unsecured or financial program credit
rating which is approved by the holders of at least 66 2/3% of the
total outstanding principal amount of the related floating rate class,
if a replacement swap counterparty satisfying clause 1 above cannot be
found.
In case of clause 1 or 2 above, if there is more than one available
replacement swap counterparty with the same credit rating, the counterparty
offering the interest rate swap terms with the lowest overall cost to the issuer
will be selected by the issuer as the replacement swap counterparty. If a
replacement swap counterparty satisfying the above criteria has been found, upon
the termination of the interest rate swap agreement, the replacement swap
counterparty will enter into an interest rate swap agreement with the issuer
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having terms substantially the same as the original interest rate swap
agreement, effective as of the payment date immediately following the date of
the replacement agreement. If a replacement swap counterparty has not been
found, the swap agent will be required to renew such search every three months
until a replacement swap counterparty satisfying the above criteria has been
found and a replacement interest rate swap agreement has been entered into.
Assignment of Interest Rate Swap Agreements. Any swap counterparty may
assign its obligations under any interest rate swap agreement with the prior
written consent of the issuer or, without that consent, either:
o in a consolidation or amalgamation with or merger with or into, or
transfer of all or substantially all of its assets to another entity
which expressly assumes in a written agreement the obligations of the
swap counterparty under the interest rate swap agreement, although if
upon that consolidation, amalgamation or merger, a swap counterparty
downgrade event has occurred, it will be a termination event as
described above; or
o to a replacement swap counterparty following a swap counterparty
downgrade event as described above.
Enforcement, Amendment, Modification or Waiver of Interest Rate Swap
Agreements. If a swap event of default or termination event occurs and is
continuing, the trustee may, and at the direction of at least 66 2/3% of the
total outstanding principal amount of the related floating rate class shall,
exercise all rights, remedies, powers, privileges and claims of the issuer
against the related swap counterparty, and any right of the issuer to take this
action shall be suspended.
An interest rate swap agreement may be amended with the consent of the
trustee and the related swap counterparty, as long as each of Moody's, S&P, and
Fitch confirm that the amendment will not result in the reduction or withdrawal
of its then current rating of the related floating rate class, which
confirmation is referred to as "satisfaction of the rating agency condition",
provided that, in some circumstances, so long as Moody's has been notified of a
proposed amendment, the rating agency condition may be satisfied with respect to
Moody's without such a confirmation. However, this amendment may not adversely
affect in any material respect the interests of the transition bondholders of
the related floating rate class unless the holders of at least 66 2/3% of the
total outstanding principal amount of that class direct the trustee to consent
to the amendment. Moreover, that amendment may not adversely affect in any
material respect the interests of any other transition bondholders or the
counterparty to any other interest rate swap agreement without the consent of
the holders of at least 66 2/3% of the total outstanding principal balance of
the transition bonds of all of those other series or classes, and each
counterparty to any other interest rate swap agreement, materially and adversely
affected thereby.
Except as set forth above under "--Swap Counterparty Downgrade Event" and
"--Interest Rate Swap Agreement Events of Default and Termination Events," with
respect to any action proposed by the issuer to amend, modify, waive, supplement
or surrender the terms of any interest rate swap agreement, or waive timely
performance or observance by the swap counterparty under any interest rate swap
agreement, in a way which would materially and adversely affect the interests of
transition bondholders of the related class, the issuer must satisfy the rating
agency condition. Thereafter, the trustee will consent to this proposed action
only with the consent of (1) 66 2/3% of the total outstanding principal amount
of the transition bonds of the related class, and (2) the consent of the holders
of at least 66 2/3% of the total outstanding principal balance of each other
series or class, and each counterparty to any other interest rate swap
agreement, materially and adversely affected thereby.
SWAP COUNTERPARTY
The swap counterparty is [to be determined].
S-13
RISK FACTORS RELATING TO SERIES 2002-A
FLOATING RATE TRANSITION BONDS
In addition to the following risk factors applicable to the floating rate
classes, additional risk factors apply to all of the transition bonds of any
series. See "RISK FACTORS" in the prospectus.
TERMINATION OF SWAP COULD CAUSE A LOSS
Termination events, swap events of default or swap counterparty downgrade
events under any interest rate swap agreement may result in termination of that
interest rate swap agreement. Each interest rate swap agreement will terminate
if the related swap counterparty defaults in its obligation to make payments
under the interest rate swap agreement and the holders representing 66 2/3% of
the total outstanding principal amount of the related floating rate class do not
vote to waive that default. If any interest rate swap agreement is terminated,
the holders of the related floating rate class will receive a fixed rate of
interest equal to the gross fixed rate for that class, which will take effect
from the last payment date to which interest has been paid at a floating rate.
See "THE SERIES 2002-A TRANSITION BONDS--INTEREST RATE SWAP AGREEMENTS" in this
prospectus supplement. This rate could be substantially less than the floating
rate for that class at the time of the termination, which could adversely affect
the yield to maturity, and holders of the related floating rate class could
suffer a loss on their investment.
RATINGS DOWNGRADE OF ANY FLOATING RATE CLASS OF TRANSITION BONDS COULD CAUSE A
LOSS FOR HOLDERS OF THOSE TRANSITION BONDS
If a swap counterparty downgrade event occurs, and (1) the swap
counterparty fails to make satisfactory arrangements to maintain or restore the
prior ratings and (2) holders representing 66 2/3% of the total outstanding
principal amount of the related floating rate class either approve a replacement
swap counterparty that does not maintain or restore the prior ratings or such
holders vote to continue the existing interest rate swap agreement, that class
of transition bonds may be downgraded by the rating agencies. See "THE SERIES
2002-A TRANSITION BONDS--INTEREST RATE SWAP AGREEMENTS" in this prospectus
supplement. In that event, the trading price of these transition bonds may be
reduced, and holders of these transition bonds could suffer a loss on their
investment.
INTEREST PAYMENTS ON SERIES 2002-A TRANSITION BONDS AT FLOATING RATES ARE
DEPENDENT ON SWAP COUNTERPARTIES
If any swap counterparty defaults in its obligation to make any payment
required to be made under the interest rate swap agreement, the agreement may
terminate in the absence of the required waiver by the holders of the related
class, and the holders of the related class of series 2002-A floating rate
transition bonds will receive interest at the gross fixed rate for that class.
There can be no assurance that any alternate arrangements will be made to obtain
a suitable replacement swap counterparty or otherwise to obtain payment of the
floating rate for that class. The gross fixed rate for that class could be
substantially less than the floating rate for that class at the time of that
failure to pay, and holders of that class of transition bonds could suffer a
loss on their investment. See "THE SERIES TRANSITION 2002-A BONDS--INTEREST RATE
SWAP AGREEMENTS" in this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement for the series 2002-A transition bonds is intended to
protect you against losses or delays in scheduled payments on your transition
bonds. See "RISK FACTORS--TRANSITION BONDHOLDERS MAY EXPERIENCE PAYMENT DELAYS
OR LOSSES AS A RESULT OF THE LIMITED SOURCES OF PAYMENT FOR THE TRANSITION BONDS
AND LIMITED CREDIT ENHANCEMENT" in the prospectus.
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PERIODIC ADJUSTMENT OF THE TRANSITION BOND CHARGE
Credit enhancement for the transition bonds includes mandatory periodic
adjustments by the BPU to the transition bond charge to be billed to customers,
upon the petition by JCP&L, as servicer. The servicer is permitted under the BPU
financing order to file adjustment requests more often than annually but not
more frequently than quarterly, except that monthly filings are permitted in the
last year before expected maturity of the transition bonds and continuing until
their legal final maturity. Under the servicing agreement, the servicer is
required to petition for adjustments at least annually through [ ], 20__
and [quarterly] commencing with [ ], 20__. The periodic adjustments will be
designed to ensure, among other things, that sufficient funds for timely
payments of principal and interest on the transition bonds will be available in
accordance with the expected amortization schedule set forth in Table 2 above.
See "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE--THE BPU'S
TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in the prospectus. The adjustments
will be made if the transition bond charge does not produce sufficient
collections after taking into account any excess collections:
(1) to pay ongoing transaction expenses and fees;
(2) to make timely principal and interest payments on the transition bonds
(which in the case of interest on any floating rate class will be
calculated at the applicable gross fixed rate) in accordance with the
expected amortization schedule; and
(3) to fund or replenish any of the subaccounts, including the series
capital subaccount and the series overcollateralization subaccount, to
their required levels.
COLLECTION ACCOUNT AND SUBACCOUNTS
The trustee will establish a collection account to hold the capital
contribution from JCP&L to the issuer and amounts remitted by the servicer from
time to time. The collection account will contain the funds securing the
transition bonds. The collection account will consist of subaccounts including
the following:
o the general subaccount;
o one or more series subaccounts;
o one or more series capital subaccounts;
o one or more class subaccounts;
o one or more series overcollateralization subaccounts; and
o the reserve subaccount.
Withdrawals from and deposits to all of these subaccounts will be made as
described under "THE INDENTURE--THE COLLECTION ACCOUNT FOR THE TRANSITION BONDS"
and "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" in the prospectus.
The General Subaccount. Transition bond charge collections remitted by the
servicer to the trustee will be deposited into the general subaccount.
On each payment date, the trustee will allocate amounts in the general
subaccount to make the allocations described in "THE INDENTURE-- HOW FUNDS IN
THE COLLECTION ACCOUNT WILL BE ALLOCATED" in the prospectus.
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The Series Subaccount. Upon the issuance of the series 2002-A transition
bonds, a series subaccount will be established with respect to that series. On
each payment date, or the day before the payment date in the case of interest
allocated to the applicable class subaccounts, as described below, the trustee
will allocate from amounts on deposit in the general subaccount to the series
subaccount for each series an amount sufficient to pay, to the extent available:
(1) current and past due interest payable on that series on that payment
date, including interest on past due interest to each class on a pro
rata basis based on the amount of interest payable to that class, or,
in the case of any floating rate class, based on the gross fixed
amount for that class, which gross fixed amount will in turn be
allocated to the related class subaccount;
(2) the principal of any series payable as a result of an acceleration
following the occurrence of an event of default, the principal of any
series payable on the legal final maturity date of that series, or the
principal of any series payable on a redemption date; and
(3) principal scheduled to be paid on any series on that payment date, as
set forth in the expected amortization schedule, excluding amounts
provided for in item (2) above.
On each payment date, allocations will be made to each series subaccount as
described under "THE INDENTURE--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" in the prospectus. On each payment date, the trustee will withdraw
funds from each series subaccount to make payments on the related series of
transition bonds.
The Series Capital Subaccount. Upon the issuance of the series 2002-A
transition bonds, JCP&L will deposit $ in the series capital subaccount,
which represents [0.50%] of the initial principal balance of that series. This
amount is the required capitalization amount for that series and shall be held
in the capital subaccount. If amounts available in the general subaccount, the
series subaccount, the reserve subaccount and the series overcollateralization
subaccount are not sufficient on any payment date to pay the expenses, fees and
charges specified in the indenture and to make scheduled payments of interest
and principal to the series 2002-A transition bondholders, the trustee will
withdraw amounts from the series capital subaccount to make those payments. The
required capitalization amount has been set at a level sufficient to obtain the
ratings on the series 2002-A transition bonds that are described below under
"RATINGS FOR THE SERIES 2002-A TRANSITION BONDS" in this prospectus supplement.
The required capitalization amount for each future series of transition bonds
will be set at an amount at least equal to 0.50% of the initial principal
balance of that future series, or at such greater amount as may be necessary to
preclude any downgrading or withdrawal of the ratings on the series 2002-A
transition bonds upon the issuance of that future series of transition bonds and
will be set forth in the applicable prospectus supplement for that future
series. Upon any future issuance, the required capitalization amount at any time
will equal the aggregate of the required capitalization amounts for all
outstanding series. See also "THE TRANSITION BONDS--CREDIT ENHANCEMENT FOR THE
TRANSITION BONDS" in the prospectus.
The Class Subaccounts. Upon the issuance of any floating rate class, a
subaccount, referred to as the "class subaccount", will be established for that
floating rate class. On the business day preceding each payment date, the
trustee will allocate to each class subaccount from the related series
subaccount an amount equal to the gross fixed amount for the related floating
rate class on that payment date. On the business day preceding the payment date,
any net swap payment will be paid to the related swap counterparty from that
class subaccount, or any net swap receipt from the related swap counterparty
will be deposited into that class subaccount. On the related payment date,
amounts in each class subaccount will be paid as interest to the holders of the
related floating rate class. See "THE INDENTURE--HOW FUNDS IN THE COLLECTION
ACCOUNT WILL BE ALLOCATED" in the prospectus. In the event of a shortfall of
funds in a class subaccount to make a net swap payment due to the related swap
counterparty and to pay interest on the related floating rate class of
transition bonds, those amounts will be paid on a pro rata basis based on the
relative amounts due in respect of the swap and the interest on the class of
transition bonds. Any termination payment paid by a swap counterparty upon
S-16
termination of the related interest rate swap agreement, to the extent not paid
to a replacement swap counterparty, will be deposited in the class subaccount
for the related floating rate class and will be paid pursuant to the indenture
to the holders of the related floating rate class on the next payment date pro
rata based on the principal amount held by each holder. Any balance remaining in
any class subaccount after payments have been made to the holders of the related
floating rate class on a payment date will be transferred to the collection
account for allocation on the next payment date.
The Series Overcollateralization Subaccount. Upon the issuance of the
series 2002-A transition bonds, an overcollateralization subaccount will be
established for the series 2002-A transition bonds. The required
overcollateralization amount for the series 2002-A transition bonds is $[ ]
million, which represents [0.50]% of the initial principal balance of that
series. The overcollateralization amount will be collected and deposited in the
series overcollateralization subaccount for the 2002-A transition bonds over the
life of the transition bonds. The trustee will deposit in the series
overcollateralization subaccount transition bond charge collections, together
with any earnings on investments in the collection account, sufficient to
maintain that subaccount at an amount which is referred to as the required
overcollateralization level, which is equal to the amounts shown in Table 3
below for each payment date. The required overcollateralization level has been
set so as to provide amounts sufficient to obtain the ratings on the series
2002-A transition bonds that are described below under "RATINGS FOR THE SERIES
2002-A TRANSITION BONDS" in this prospectus supplement. The required
overcollateralization level for each future series of transition bonds will be
set at an amount at least equal to 0.50% of the initial principal balance of
that future series, or at such greater amount as may be necessary to preclude
any downgrading or withdrawal of the ratings on the series 2002-A transition
bonds upon the issuance of that future series of transition bonds and will be
set forth in the applicable prospectus supplement for that future series. Upon
any future issuance, the required overcollateralization level at any time will
equal the aggregate of the required overcollateralization levels for all
outstanding series. See also "THE TRANSITION BONDS--CREDIT ENHANCEMENT FOR THE
TRANSITION BONDS" in the prospectus.
TABLE 3
REQUIRED OVERCOLLATERALIZATION LEVEL SCHEDULE
REQUIRED OVER- REQUIRED OVER-
PAYMENT DATE COLLATERALIZATION LEVEL PAYMENT DATE COLLATERALIZATION LEVEL
- ------------ ----------------------- ------------ -----------------------
If amounts available in the general subaccount, the related series
subaccount and the reserve subaccount are not sufficient on any payment date to
pay the expenses, fees and charges specified in the indenture and to make
scheduled payments to the transition bondholders, the trustee will withdraw
amounts from the related series overcollateralization subaccount to make those
payments.
The Reserve Subaccount. The reserve subaccount will be funded with any
transition bond charge collections and earnings on amounts in the collection
account, other than the capital subaccount, in excess of the amount necessary to
pay the following amounts on any payment date:
(1) fees and expenses of the trustee and the servicer and other fees and
expenses;
(2) principal and interest payments on the transition bonds, which in the
case of interest on any floating rate class will be the gross fixed
amount for that class on that payment date, payable or scheduled to be
paid on that payment date, including past due amounts;
S-17
(3) any amount required to replenish the capital subaccount to the
required capitalization amount; and
(4) the amounts required to fund or replenish the overcollateralization
subaccount for each series to the required overcollateralization
level.
Disregarding interest earnings on funds held in the collection account, the
transition bond charge is calculated so that, if projected consumption is
realized exactly, there should not be any amounts in the reserve subaccount. In
the event that there are amounts in the reserve subaccount, the transition bond
charge will be adjusted periodically in a manner designed to eliminate these
amounts. See also "THE TRANSITION BONDS--CREDIT ENHANCEMENT FOR THE TRANSITION
BONDS" and "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE--THE BPU'S
TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in the prospectus.
On any payment date, if amounts available in the general subaccount and the
series subaccount are not sufficient to pay the expenses, fees and charges
specified in the indenture, and to make scheduled payments to the transition
bondholders, the trustee will first withdraw amounts from the reserve subaccount
to make those payments before withdrawing amounts from the series
overcollateralization subaccount and, then, from the series capital subaccount.
No amounts in the series overcollateralization subaccount, the series
capital subaccount or the reserve subaccount may be used to cover any shortfalls
in interest on a floating rate class to the extent that shortfall is due to the
swap counterparty's failure to pay any net swap receipt due under the related
interest rate swap agreement. However, amounts in those subaccounts will be
available to pay the applicable gross fixed amount with respect to each floating
rate class.
DESCRIPTION OF BONDABLE TRANSITION PROPERTY
Bondable transition property is a presently existing property right created
by the Competition Act and a bondable stranded costs rate order such as the BPU
financing order. In general, bondable transition property represents the
irrevocable right of an electric public utility to charge, collect and receive,
and be paid from collections of, a non-bypassable transition bond charge, in
amounts sufficient to pay debt service on the transition bonds and ongoing costs
related to the transaction, which includes recovery of the following, referred
to as "bondable stranded costs":
(1) the stranded costs of an electric public utility approved by the BPU
for recovery through the issuance of transition bonds;
(2) the cost of retiring existing debt or equity capital of the electric
public utility, including accrued interest, premiums, and other
related fees, costs and charges, as approved by the BPU, with the
proceeds of the financing of bondable transition property; and
(3) the costs incurred to issue, service or refinance the transition
bonds, including interest, acquisition or redemption premium, and
other financing costs and related fees, costs and charges, whether
paid upon issuance or over the life of the transition bonds, including
but not limited to credit enhancements, service charges,
overcollateralization, interest rate caps, swaps or collars, yield
maintenance, maturity guarantees and other hedging agreements, equity
investments, operating costs and other related fees, costs and
charges, or to assign, sell or otherwise transfer bondable transition
property, as approved by the BPU.
Bondable transition property also includes (1) the right of an electric public
utility to obtain periodic adjustments of the transition bond charge and (2) all
revenues, collections, payments, money and proceeds with respect to all of the
foregoing elements of bondable transition property.
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THE TRANSITION BOND CHARGE
The bondable stranded costs authorized in the BPU financing order are to be
recovered from customers of JCP&L through the assessment of the non-bypassable
transition bond charge.
JCP&L Will Assess the Transition Bond Charge on Customers. JCP&L, in its
capacity as servicer of the bondable transition property under the servicing
agreement, will assess the transition bond charge on the bills of its customers.
See "SUMMARY OF TERMS--THE COLLATERAL" in the prospectus for a description of
JCP&L's customers. The transition bond charge will be a uniform non-bypassable
per kilowatt hour charge assessed against customers on their bills, regardless
of customer rate class, as part of JCP&L's regular billing. The amount of the
charge will depend generally on the amount of electricity delivered to the
customer through JCP&L's transmission and distribution system. Any third party
electric power supplier of electricity to JCP&L's customers must pay JCP&L the
transition bond charge billed by such third party electric power supplier to
JCP&L's customers.
JCP&L Will Calculate the Transition Bond Charge. JCP&L, as servicer, will
calculate the transition bond charge based on the total amount required to be
billed to customers to generate transition bond charge collections sufficient to
provide funds for the timely payment of scheduled principal of and interest on
the transition bonds and the other amounts required to be paid by the issuer.
The charge will be reflected in each customer's bill. Actual transition bond
charge collections may vary from projected collections due to changes in
electricity consumption patterns, total usage, the number of customers, rates of
delinquencies and write-offs and other factors. See Tables 1 through 7 under
"SERVICING OF THE BONDABLE TRANSITION PROPERTY" in the prospectus. JCP&L, as
servicer, is required to seek adjustments to the transition bond charge as
described under "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE" in the
prospectus, in order to adjust for such variations.
The initial transition bond charge will be calculated on the basis of:
o the issuance of $320 million of the series 2002-A transition bonds;
o the projected total payments required in relation to the transition
bonds during the period commencing immediately after the date of
issuance of the series 2002-A transition bonds and ending [December
31, 2002]; and
o the estimated amount of kilowatt-hours of electricity delivered, and
for which JCP&L bills and collects during that period.
The BPU's Transition Bond Charge Adjustment Process. Transition bond charge
collections are intended to be neither more nor less than the amount necessary
to pay the principal balance of the transition bonds of each series in
accordance with the expected amortization schedule, to pay interest on each
series, which in the case of interest on any floating rate class will be
calculated at the applicable gross fixed rate, to pay related expenses and to
fund or replenish the subaccounts. The BPU financing order does not limit the
number of transition bond charge adjustments that may be sought and implemented,
except to provide that adjustments may not occur more frequently than quarterly,
except that monthly filings are permitted in the last year before the expected
maturity of the transition bonds and continuing until their legal final
maturity. Furthermore, New Jersey law requires that the BPU continue to approve
transition bond charge adjustments calculated in accordance with the formula
until there are no transition bonds outstanding and all fees, costs and expenses
of the issuer have been paid. In order to enhance the likelihood that the proper
transition bond charge amount is collected, the servicing agreement requires
that the servicer petition the BPU to approve adjustments to the transition bond
charge. The servicer is required to file those petitions annually through
_____________, and quarterly commencing on ___________, for so long as the
series 2002-A transition bonds are outstanding. The adjustments will increase or
decrease the transition bond charge so that transition bond charge collections
will be in an amount sufficient to amortize principal on the transition bonds in
accordance with the expected amortization schedule for each series of the
transition bonds, and to pay interest, which in the case of interest on any
S-19
floating rate class will be calculated at the applicable gross fixed rate, fees
and expenses, and will be in an amount required to provide revenues sufficient
to provide for the full recovery of bondable stranded costs. Each periodic
adjustment will become effective on an interim basis 30 days after filing,
absent a determination of manifest error by the BPU, and will become final 60
days after filing in the absence of a BPU order to the contrary. Under the BPU
financing order, "manifest error" means an arithmetic error evident on the face
of the filing.
Initially, JCP&L estimates that the transition bond charge will be
approximately 0.20291 cents per kilowatt hour (excluding New Jersey sales and
use tax) for customers of all rate classes, beginning not later than the
issuance date for the series 2002-A transition bonds. This charge represents, on
average, 2% of the projected average rate to be paid for the year 2002 by
customers who do not purchase electric generation service from third party
suppliers. See "THE COMPETITION ACT" and "THE BPU FINANCING ORDER AND THE
TRANSITION BOND CHARGE" in the prospectus.
INFORMATION REGARDING JERSEY CENTRAL POWER & LIGHT COMPANY
JCP&L's earnings for 2000 were $203.9 million, compared to 1999 earnings of
$162.9 million. JCP&L's return on average common equity was 14.5% in 2000,
compared to 10.7% in 1999. The increase was primarily due to a non-recurring
gain of $16.5 million, in 2000, for the reversal of certain deferred taxes and
realization of an investment tax credit related to the sale of Oyster Creek and
the absence of a non-recurring charge of $68 million after-tax as a result of a
restructuring-related BPU order issued to JCP&L in 1999. Excluding these
non-recurring items, earnings for 2000 would have been $187.4 million, compared
to 1999 earnings of $230.9 million. The decrease in earnings on this basis was
due primarily to the impact of electric utility restructuring in New Jersey and
lower electric delivery rates charged to customers. Partially offsetting the
decrease was lower operation and maintenance and depreciation expenses.
Operating revenues decreased $38.9 million to $1.98 billion in 2000, and
decreased $51.4 million to $2.02 billion in 1999.
For the nine months ended September 30, 2001, JCP&L reported earnings of
$184.5 million on revenues of $1,655 million as compared to earnings of $177.3
million on revenues of $1,548 million for the nine months ended September 30,
2000.
Effective November 7, 2001, GPU Inc. merged with FirstEnergy Corp. so that
JCP&L is now a wholly owned subsidiary of FirstEnergy Corp. As of December 31,
2001, JCP&L's assets comprised approximately 20% of FirstEnergy Corp.'s
consolidated assets. On September 26, 2001, the BPU had approved the merger
subject to the terms and conditions set forth in a settlement agreement with
major intervenors. As part of the settlement, FirstEnergy Corp. agreed to reduce
JCP&L's costs deferred for future recovery by $300 million, in order to ensure
that customers received the benefit of future merger savings. Accordingly, JCP&L
wrote off $300 million of its deferred costs in October 2001 upon receipt of the
final regulatory approval for the merger, which occurred on October 29, 2001.
JCP&L is required to provide basic generation service (BGS) to its electric
customers who do not choose to purchase their electricity from third party
through July 2002. For the period from August 1, 2002 to July 31, 2003,
the BPU has authorized the auctioning of BGS to meet the electric demands of
customers who have not selected an alternative supplier. The auction was
successfully concluded on February 13, 2002, eliminating JCP&L's obligation to
provide for the energy requirements of BGS. Beginning August 1, 2003, the
approach to be taken in procuring the energy needs for BGS has not been
determined. The BPU has recently initiated a formal proceeding to decide how BGS
will be handled after July 31, 2003.
UNDERWRITING THE SERIES 2002-A TRANSITION BONDS
The issuer, JCP&L and the underwriters for the offering named below, for
whom Goldman, Sachs & Co. is acting as the representative, have entered into an
underwriting agreement with respect to the series 2002-A transition bonds.
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Subject to certain conditions, each underwriter has severally agreed to purchase
the principal amount of the series 2002-A transition bonds indicated in the
following table.
PRINCIPAL AMOUNT
UNDERWRITERS OF CLASS
------------ --------
A-1 A-2 A-3
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
Salomon Smith Barney Inc.
Total
Under the underwriting agreement, the underwriters will purchase all of the
series 2002-A transition bonds if any are purchased. Series 2002-A transition
bonds sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus
supplement. Any series 2002-A transition bonds sold by the underwriters to
securities dealers may be sold at a discount from the initial public offering
price of up to % of the principal amount of the Class [ ] transition bonds, ___%
of the principal amount of the Class [ ] transition bonds and ___% of the
principal amount of the Class [ ] transition bonds. Any such securities dealers
may resell any series 2002-A transition bonds purchased from the underwriters to
certain other brokers or dealers at a discount from the initial public offering
price of up to % of the principal amount of the Class [ ] transition bonds, ___%
of the principal amount of the Class [ ] transition bonds and ___% of the
principal amount of the Class [ ] transition bonds. If all the series 2002-A
transition bonds are not sold at the initial public offering price, the
underwriters may change the offering price and the other selling terms.
The series 2002-A transition bonds are a new issue of securities with no
established trading market. They will not be listed on any securities exchange,
with the exception of any floating rate class that may be listed on the
Luxembourg Stock Exchange. The issuer has been advised by the underwriters that
the underwriters intend to make a market in the series 2002-A transition bonds
but are not obligated to do so and may discontinue market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the series 2002-A transition bonds.
In connection with this offering, the underwriters may purchase and sell
series 2002-A transition bonds in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of the series 2002-A transition bonds than they are required to
purchase in this offering. Stabilizing transactions consist of certain bids or
purchases made for the purpose of preventing or retarding a decline in the
market price of the series 2002-A transition bonds while this offering is in
progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representative has repurchased the series
2002-A transition bonds sold by or for the account of such underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the series 2002-A transition bonds. As a result, the
price of the series 2002-A transition bonds may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued by the underwriters at any time. These transactions may
be effected in the over-the-counter market or otherwise.
The issuer estimates that its total expenses for this offering, excluding
underwriting discounts and commissions, will be approximately $[_________].
S-21
The issuer and JCP&L have agreed to reimburse the several underwriters for
certain expenses and to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking and related
services to JCP&L and its affiliates for which they have in the past received,
and in the future may receive, customary fees.
Each underwriter has represented and agreed that (a) it only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of any floating rate class to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or who is a person to
whom the document may otherwise lawfully be issued or passed on, (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 of Great Britain with respect to anything done by it in
relation to any floating rate class of, in, from or otherwise involving the
United Kingdom and (c) if that underwriter is an authorized person under the
Financial Services Act 1986, it has only promoted and will only promote (as that
term is defined in Regulation 1.02 of the Financial Services (Promotion of
Unregulated Schemes) Regulations 1991) to any person in the United Kingdom the
scheme described herein if that person is of a kind described either in Section
76(2) of the Financial Services Act 1986 or in Regulation 1.04 of the Financial
Services (Promotion of Unregulated Schemes) Regulations 1991.
RATINGS FOR THE SERIES 2002-A TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the series
2002-A transition bonds that the series 2002-A transition bonds be rated AAA by
S&P, Aaa by Moody's and AAA by Fitch.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the rating agency.
No person is obligated to maintain the rating on the transition bonds, and,
accordingly, there can be no assurance that the ratings assigned to any class of
the transition bonds upon initial issuance will not be revised or withdrawn by a
rating agency at any time thereafter. If a rating of any class of the transition
bonds is revised or withdrawn, the liquidity of that class may be adversely
affected. In general, ratings address credit risk and do not represent any
assessment of any particular rate of principal payments on the transition bonds
other than payment in full of each class of the transition bonds by the
applicable legal final maturity date, as well as timely payment of interest.
For so long as any floating rate class is listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, the issuer will notify the
Luxembourg Stock Exchange if any rating assigned to those transition bonds is
reduced or withdrawn and will cause this notice to be published in a daily
newspaper published in Luxembourg, which is expected to be the Luxemburger Wort.
LISTING AND GENERAL INFORMATION
RELATED TO FLOATING RATE CLASSES
Application will be made to list each floating rate class on the Luxembourg
Stock Exchange. There can be no assurance that any floating rate class will be
listed on the Luxembourg Stock Exchange or any other stock exchange. Purchasers
of any class of series 2002-A transition bonds should not rely on these
transition bonds being listed on the Luxembourg Stock Exchange or any other
stock exchange. You should consult with Kredietbank S.A. Luxembourgeoise, the
Luxembourg listing agent for each floating rate class, Boulevard Royal 43,
L-2955 Luxembourg, phone number 352 47971, referred to as the "listing agent",
to determine whether or not a particular floating rate class is listed on the
Luxembourg Stock Exchange.
In connection with the listing application, copies of the certificate of
incorporation and by-laws of JCP&L, the certificate of formation and amended and
restated limited liability company agreement of the issuer, as well as legal
S-22
notice relating to the issuance of the series 2002-A transition bonds, will be
deposited prior to listing with the Chief Registrar of the District Court of
Luxembourg, where copies thereof may be obtained, free of charge, upon request.
Once any floating rate class has been so listed, trading of those transition
bonds may be effected on the Luxembourg Stock Exchange. Each floating rate class
will be submitted for clearing through the facilities of DTC, Clearstream and
Euroclear. See "THE TRANSITION BONDS--TRANSITION BONDS WILL BE ISSUED IN
BOOK-ENTRY FORM" in the prospectus.
The International Securities Identification Number (referred to as "ISIN"),
Common Code number and the CUSIP number for each floating rate class are as
follows:
Class ISIN Common Code CUSIP
----- ---- ----------- -----
The issuer represents that, as of the date of this prospectus supplement,
there has been no material adverse change in its financial position since the
date of its formation. The issuer is not involved in litigation or arbitration
proceedings relating to claims on amounts which are material in relation to the
issuance of any floating rate class nor, so far as the issuer is aware, is any
litigation or arbitration of this type involving it pending or threatened.
Except as disclosed in this prospectus supplement or the prospectus, as of the
date of this prospectus supplement, the issuer has no outstanding loan capital,
borrowings, indebtedness or contingent liabilities, nor has the issuer created
any mortgages, charges or guarantees.
The transactions contemplated in this prospectus supplement were authorized
by resolutions adopted by JCP&L's Board of Directors on or about [ ] and by
the issuer's managers on or about [ ].
If any floating rate class is listed on the Luxembourg Stock Exchange,
copies of the indenture, the series 2002-A supplemental indenture, the sale
agreement, the servicing agreement, the administration agreement, the reports of
independent certified public accountants described in "THE SERVICING
AGREEMENT--JCP&L, AS SERVICER, WILL PROVIDE STATEMENTS TO THE ISSUER AND TO THE
TRUSTEE" and "--JCP&L WILL PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING
AGREEMENT" in the prospectus, the documents listed under "JERSEY CENTRAL POWER &
LIGHT COMPANY" and "WHERE YOU CAN FIND MORE INFORMATION" in the prospectus and
the reports to transition bondholders referred to under "REPORTS TO TRANSITION
BONDHOLDERS" and "THE INDENTURE--REPORTS TO TRANSITION Bondholders" and "--THE
TRUSTEE MUST PROVIDE A REPORT TO ALL TRANSITION BONDHOLDERS" in the prospectus,
will be available free of charge at the offices of the trustee in The City of
New York and the listing agent in Luxembourg. Financial information regarding
JCP&L is included in its annual report on Form 10-K for the fiscal year ended
December 31, 2000, and is also available at the offices of the trustee in the
City of New York and the listing agent in Luxembourg. For so long as any
floating rate class is outstanding and listed on the Luxembourg Stock Exchange,
copies of each annual report on Form 10-K for subsequent fiscal years will also
be available at the offices of the trustee in The City of New York and the
listing agent in Luxembourg.
In the event that any floating rate class is listed on the Luxembourg Stock
Exchange, certificated transition bonds are issued and the rules of the
Luxembourg Stock Exchange require a Luxembourg transfer agent, the Luxembourg
paying agent will be appointed as a transfer agent.
The indenture provides that the trustee and the paying agent shall pay to
the issuer upon request any amounts held by them for the payment of principal of
and interest on any class of transition bonds, including without limitation, any
floating rate class, which amounts remain unclaimed for two years after they
become due and payable. After payment to the issuer, holders of any class of
series 2002-A transition bonds entitled to these funds must look to the issuer
for payment as general creditors unless an abandoned property law designates
otherwise.
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According to Chapter VI, Article 3, point A/II/2 of the Rules and
Regulations of the Luxembourg Stock Exchange, the floating rate transition bonds
will be freely transferable and therefore no transaction made on the Luxembourg
Stock Exchange will be cancelled.
The indenture, the series 2002-A supplemental indenture, the sale
agreement, the servicing agreement and the administration agreement are governed
by the laws of the State of New Jersey. The certificate of formation and the
amended and restated limited liability company agreement are governed by the
laws of the State of Delaware.
INCOME TAX MATTERS
See "MATERIAL U.S. FEDERAL INCOME TAX MATTERS FOR THE TRANSITION
BONDHOLDERS" and "MATERIAL STATE OF NEW JERSEY TAX MATTERS FOR THE TRANSITION
BONDHOLDERS" in the prospectus.
S-24
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated [ ], 2002
PROSPECTUS
JCP&L TRANSITION FUNDING LLC
Issuer of the Transition Bonds
TRANSITION BONDS
JERSEY CENTRAL POWER & LIGHT COMPANY
Seller and Servicer
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE [ ] OF THIS
PROSPECTUS BEFORE BUYING THE TRANSITION BONDS.
The transition bonds represent obligations only of JCP&L Transition Funding
LLC, which is the issuer, and are backed only by the assets of the issuer. None
of Jersey Central Power & Light Company, its parent, FirstEnergy Corp., or any
of their respective affiliates, other than the issuer, is liable for payments on
the transition bonds.
There currently is no secondary market for the transition bonds, and there
is no assurance that one will develop.
This prospectus, together with the applicable prospectus supplement,
constitutes a summary of material terms of the offering of a series of
transition bonds. Prospective investors are urged to read both this prospectus
and the prospectus supplement in full. Sales of the transition bonds may not be
consummated unless the purchaser has received both this prospectus and the
prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, NOR HAVE THEY
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
, 2002
TABLE OF CONTENTS
PROSPECTUS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
FORWARD-LOOKING STATEMENTS
SUMMARY OF TERMS
Parties to the Transaction
The Collateral
Payment Sources
Priority of Distributions
Floating Rate Transition Bonds
Credit Enhancement and Accounts
State Pledge
Allocations and Distributions
Payments of Interest and Principal
Optional Redemption
Payment Dates and Record Dates
Material Income Tax Considerations
ERISA Considerations
REPORTS TO TRANSITION BONDHOLDERS
RISK FACTORS
Transition Bondholders May Experience Payment Delays or Losses as a Result
of the Limited Sources of Payment for the Transition Bonds and Limited
Credit Enhancement
JUDICIAL, LEGISLATIVE OR REGULATORY ACTION THAT MAY ADVERSELY AFFECT YOUR
INVESTMENT
The Law Which Underpins the Transition Bonds May Be Invalidated
The Competition Act May Be Overturned by the Federal Government Without
Full Compensation
Future State Legislative Action May Invalidate the Transition Bonds or
Their Underlying Assets
The BPU May Take Action Which Reduces the Value of the Transition Bonds
(i)
SERVICING RISKS
Inaccurate Consumption Forecasting or Unanticipated Delinquencies or
Write-Offs Could Result in Insufficient Funds to Make Scheduled Payments on
the Transition Bonds
Uncertainties Associated with Collecting the Transition Bond Charge and the
Unpredictability of a Deregulated Electricity Market May Reduce the Amount
of Funds Available for Payments on the Transition Bonds
Your Investment Relies on Jcp&L or a Successor Acting as Servicer of the
Bondable Transition Property
Billing and Collection Practices May Reduce the Amount of Funds Available
for Payments on the Transition Bonds
It May Be Difficult to Collect the Transition Bond Charge from Third Party
Electric Power Suppliers Who Provice Electricity to JCP&L's Customers
JCP&L's Customer Payments May Decline Due to Confusion
Inability to Terminate Service to Certain Delinquent Customers in Winter
May Temporarily Reduce Amounts Available for Payments on the Transition
Bonds
Technological Change May Make Alternative Energy Sources More Attractive
and Reduce the Number of Customers Paying Transition Bond Charges
THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
JCP&L Will Commingle the Transition Bond Charge Collections with Other
Revenues, Which May Obstruct Access to the Issuer's Funds in Case of
Bankruptcy of JCP&L
Bankruptcy of JCP&L Could Result in Losses or Delays in Payments on the
Transition Bonds
Bankruptcy of Third Party Electric Power Supplier Could Result in Losses or
Delays in Payments on the Transition Bonds
The Sale of the Bondable Transition Property Could Be Construed as a
Financing and Not a Sale in Case of JCP&L's Bankruptcy
A Sequestration Order for Bondable Transition Property in Case of Default
Might Not Be Enforceable in Bankruptcy
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS
Risks Associated with the Use of Interest Rate Swap Transactions
Absence of Secondary Market for Transition Bonds Could Limit Your Ability
to Resell Transition Bonds
JCP&L's Ratings May Affect the Market Value of the Transition Bonds
The Issuer May Issue Additional Series of Transition Bonds that Will Share
Available Credit Enhancement and Whose Holders May Have Interests that
Conflict with Yours
(ii)
The Ratings Have a Limited Function and They are no Indication of the
Expected Rate of Payment of Principal of the Transition Bonds
JCP&L's Obligation to Indemnify the Issuer for a Breach of a Representation
or Warranty May Not Be Sufficient to Protect Your Investment
You May Have to Reinvest Principal of Your Transition Bonds at a Lower Rate
of Return Because of an Optional Redemption of Bonds
Risks Associated with the Use of Credit Enhancement or Swap Transactions
You Might Receive Principal Payments Later, or in Limited Circumstances,
Earlier, Than You Expected
JERSEY CENTRAL POWER & LIGHT COMPANY
WHERE YOU CAN FIND MORE INFORMATION
THE COMPETITION ACT
Recovery of Stranded Costs is Allowed for JCP&L and
Other New Jersey Utilities
JCP&L and Other Utilities May Securitize Stranded Costs
JCP&L'S RESTRUCTURING
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
THE BPU FINANCING ORDER
The BPU's Transition Bond Charge Adjustment Process
SERVICING OF THE BONDABLE TRANSITION PROPERTY
JCP&L'S CUSTOMER CLASSES
Billed Electric Revenue, Number of Customers and Consumption
Percentage Concentration Within JCP&L's Large Commercial and
Industrial Customers
How JCP&L Forecasts the Number of Customers and
the Amount of Electricity Usage
Credit Policy; Billing; Collections; Termination of Service
LOSS AND DELINQUENCY EXPERIENCE
How JCP&L Will Apply Partial Payments by Its Customers
(iii)
JCP&L TRANSITION FUNDING LLC, THE ISSUER
USE OF PROCEEDS
THE TRANSITION BONDS
General Terms of the Transition Bonds
Payments of Interest on and Principal of the Transition Bonds
Optional Redemption of the Transition Bonds
Floating Rate Transition Bonds
Credit Enhancement for the Transition Bonds
Transition Bonds will be Issued in Book-Entry Form
CERTIFICATED TRANSITION BONDS
WEIGHTED AVERAGE LIFE AND YIELD CONSOIDERATIONS FOR THE TRANSITION BONDS
THE SALE AGREEMENT
JCP&L'S Sale and Assignment of the Bondable Transition Property to the Issuer
JCP&L'S Representations and Warranties
JCP&L'S Covenants
JCP&L'S Obligation to Indemnify the Issuer and the Trustee and
to Take Legal Action
Successors to Jcp&L
THE SERVICING AGREEMENT
JCP&L's Servicing Procedures
The BPU's Transition Bond Charge Adjustment Process
JCP&L's Transition Bond Charge Collections
JCP&L's Compensation for Its Role as Servicer and
Its Release of Other Parties
JCP&L's Duties as Servicer
JCP&L's Representations and Warranties as Servicer
JCP&L, as Servicer, Will Indemnify the Issuer and Other Related Entities
JCP&L, as Servicer, Will Provide Statements to the Issuer and
to the Trustee
(iv)
JCP&L Will Provide Compliance Reports Concerning the Servicing Agreement
Matters Regarding JCP&L as Servicer
Events Constituting a Default by Jcp&L in Its Role as Servicer
The Trustee's Rights if JCP&L Defaults as Servicer
The Obligations of a Servicer that Succeeds Jcp&L
THE INDENTURE
The Security for the Transition Bonds
Transition Bonds May Be Issued in Various Series or Classes
The Collection Account for the Transition Bonds
How Funds in the Collection Account will be Allocated
Reports to Transition Bondholders
The Issuer and the Trustee May Modify the Indenture; The Issuer Must Enforce the
Sale Agreement, the Servicing Agreement and Any Interest Rate Swap Agreement
What Constitutes an Event of Default on the Transition Bonds
Covenants of the Issuer
Access to the List of Holders of the Transition Bonds
The Issuer Must File an Annual Compliance Statement
The Trustee Must Provide a Report to All Transition Bondholders
What Will Trigger Satisfaction and Discharge of the Indenture
The Issuer's Legal Defeasance and Covenant Defeasance Options
The Trustee
Governing Law
HOW A BANKRUPTCY OF JCP&L OR THE SERVICER MAY AFFECT YOUR INVESTMENT
MATERIAL U.S. FEDERAL INCOME TAX MATTERS FOR THE TRANSITION BONDholderS
General
Taxation of U.S. Holders
Taxation of Non-U.S. Holders
(v)
MATERIAL STATE OF NEW JERSEY TAX MATTERS FOR THE TRANSITION BONDHOLDERS
ERISA CONSIDERATIONS
Prohibited Transactions Issues
Plan Asset Issues
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS
RATINGS FOR THE TRANSITION BONDS
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS
INDEPENDENT AUDITORS
(vi)
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS
You should rely only on information about the transition bonds provided in
this prospectus and in the related prospectus supplement. No dealer, salesperson
or other person has been authorized to give any information or to make any
representations other than those contained in this prospectus and the related
prospectus supplement and, if given or made, the information or representations
must not be relied upon as having been authorized by the issuer or by Jersey
Central Power & Light Company (referred to as "JCP&L"), the underwriters or any
dealer, salesperson or other person. Neither the delivery of this prospectus and
the related prospectus supplement nor any sale made hereunder shall, under any
circumstances, create an implication that information herein is correct as of
any time since the date of this prospectus or the related prospectus supplement.
This prospectus and the related prospectus supplement do not constitute an offer
to sell, or a solicitation of an offer to buy, any security in any jurisdiction
in which it is unlawful to make any similar offer or solicitation.
1
FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus and the related prospectus
supplement concerning expectations, beliefs, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts, are
forward-looking statements within the meaning of the federal securities laws.
Although JCP&L and the issuer believe that the expectations and the underlying
assumptions reflected in these statements are reasonable, there can be no
assurance that these expectations will prove to have been correct. The
forward-looking statements involve a number of risks and uncertainties and
actual results may differ materially from the results discussed in the
forward-looking statements. The following are among the important factors that
could cause actual results to differ materially from the forward-looking
statements:
o changes in national and regional economic conditions;
o changing commodity market prices;
o the availability and cost of capital;
o inability to accomplish or realize anticipated benefits of strategic
goals (including those related to JCP&L's becoming a wholly-owned
subsidiary of FirstEnergy Corp. as a result of FirstEnergy Corp.'s
merger with GPU, Inc.);
o legislative and regulatory changes (including revised environmental
requirements);
o economic or weather conditions affecting future sales and margins;
o operating performance of third party suppliers;
o the payment patterns of customers, including the rate of
delinquencies;
o the speed and nature of increased competition and deregulation in the
electric utility industry; and
o outcomes of legal proceedings.
Any forward-looking statements should be considered in light of these
important factors and in conjunction with JCP&L's other documents on file with
the Securities and Exchange Commission (referred to as the "SEC").
New factors that could cause actual results to differ materially from those
described in forward-looking statements emerge from time to time. It is not
possible for JCP&L or the issuer to predict all of these factors, or the extent
to which any factor or combination of factors may cause actual results to differ
from those contained in any forward-looking statement. Any forward-looking
statement speaks only as of the date on which the statement is made and neither
JCP&L nor the issuer undertakes any obligation to update the information
contained in the statement to reflect subsequent developments or information.
2
SUMMARY OF TERMS
This summary contains a brief description of the transition bonds that
applies to all series of transition bonds issued under this prospectus.
Information that relates to a specific series of transition bonds can be found
in the prospectus supplement related to that series. You will find a detailed
description of the terms of the offering of the transition bonds in "THE
TRANSITION BONDS" in this prospectus.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE [ ] OF THIS PROSPECTUS.
THE ISSUER: JCP&L Transition Funding LLC, a Delaware limited
liability company (referred to as the "issuer").
The issuer was formed solely to purchase bondable
transition property and to issue one or more
series of transition bonds secured by the bondable
transition property.
ISSUER'S ADDRESS: c/o GPU Service, Inc., 76 South Main Street,
Akron, Ohio 44308-5100
ISSUER'S TELEPHONE NUMBER: (330) 384-5100
SELLER OF THE BONDABLE JCP&L, a public utility furnishing electric
TRANSITION PROPERTY TO service wholly within the State of New Jersey, and
THE ISSUER: a subsidiary of FirstEnergy Corp., a holding
company registered under the Public Utility
Holding Company Act of 1935. JCP&L provides retail
electric service within a territory located in
northern, western and east central New Jersey
having a population of approximately 2.7 million.
SELLER'S ADDRESS: 76 South Main Street, Akron, Ohio 44308-5100
SELLER'S TELEPHONE NUMBER: (330) 384-5100
SERVICER OF THE BONDABLE JCP&L, acting as servicer, and any successor
TRANSITION PROPERTY: servicer, will service the bondable transition
property, including the billing, collection and
remittance of the transition bond charge pursuant
to a servicing agreement with the issuer.
JCP&L will be entitled to a quarterly servicing
fee that will be payable from the transition bond
charge collections. JCP&L, as servicer, will be
entitled to withhold the quarterly servicing fee,
which amount will be specified in the related
prospectus supplement, from transition bond charge
collections. If JCP&L is replaced by a successor
servicer that does not concurrently bill the
transition bond charge with other charges for
electric services, the successor servicer will be
paid an annual fee that may be higher than that
paid to JCP&L.
3
TRUSTEE: The Bank of New York
THE ASSETS OF THE ISSUER: The issuer will own:
o the bondable transition property sold to the
issuer (See "THE SALE AGREEMENT--JCP&L'S SALE
AND ASSIGNMENT OF THE BONDABLE TRANSITION
PROPERTY TO THE ISSUER" in this prospectus);
o trust accounts held by the trustee;
o rights under any interest rate swap
agreement; and
o other credit enhancement acquired or held to
provide for payment of the transition bonds,
if any.
TRANSACTION OVERVIEW: The Electric Discount and Energy Competition Act
of 1999 (referred to as the "Competition Act"),
enacted in New Jersey in 1999, permits electric
public utilities, such as JCP&L, to recover the
costs of generation-related investments and other
obligations that cannot be recouped through
market-based rates in a competitive electricity
generation retail market. These costs are commonly
known as stranded costs. The New Jersey Board of
Public Utilities (referred to as the "BPU") may
authorize an electric public utility or a
transferee to issue debt securities, referred to
as transition bonds, secured by the right to
charge, collect and receive, and be paid from
collections of, a non-bypassable transition bond
charge payable by the utility's customers, by
means of which the utility pays debt service and
other costs relating to the transition bonds. This
right to charge, collect and receive transition
bond charges will be a presently existing property
right of the issuer referred to as "bondable
transition property." See "THE TRANSITION BONDS"
in this prospectus.
The following sets forth the primary steps of the
transaction underlying the offering of the
transition bonds:
o JCP&L will sell the bondable transition
property to the issuer in exchange for the
net proceeds from the sale of the transition
bonds.
4
o The issuer, whose primary asset will be the
bondable transition property, will sell the
transition bonds to the underwriters named in
the prospectus supplement.
o JCP&L will act as the servicer of the
bondable transition property.
o Initially, GPU Service, Inc., an affiliate of
JCP&L, will act as administrator of the
issuer. Another service company affiliate of
JCP&L may eventually serve as administrator.
The transition bonds and the bondable transition
property securing the transition bonds are not
obligations of JCP&L, FirstEnergy Corp. or any of
their respective affiliates, other than the
issuer. The transition bonds and the bondable
transition property are also not obligations of
the State of New Jersey or any governmental
agency, authority or instrumentality of the State.
PARTIES TO THE TRANSACTION
The following diagram represents a general summary of the parties to the
transactions underlying the offering of the transition bonds, their roles and
their various relationships to the other parties:
[Diagram omitted]
THE COLLATERAL
The transition bonds will be secured primarily by the bondable transition
property, a presently existing property right created by the Competition Act and
a financing order (referred to as the "BPU financing order") issued by the BPU
to JCP&L on February 6, 2002, which provides, among other things, for the
issuance of transition bonds. In general terms, the bondable transition property
represents the irrevocable right to charge, collect and receive, and be paid
from collections of, a non-bypassable transition bond charge payable by JCP&L's
customers in an amount designed to pay:
o the fees, expenses, costs, charges, credit enhancement and premiums,
if any, and other amounts associated with the transition bonds and
their issuance; and
o the principal of and interest on the transition bonds.
As used throughout this prospectus, a "customer" is an end user of
electricity that is connected to any part of JCP&L's transmission and
distribution system and is located within JCP&L's service territory, other than
(1) the single end user presently taking service under an experimental JCP&L
rate class that accounted for approximately 1.7% of JCP&L's kilowatt hour sales
in 2001 and (2) end users that are connected to JCP&L's transmission and
distribution system but who self-generate from on-site facilities unless new
on-site generation facilities reduce the kilowatt hours distributed in the
aggregate by JCP&L to all of its customers to 92.5% or less of the aggregate
kilowatt hours distributed by it in 1999. Those customers receiving power
generated from new on-site generation facilities that commence operation after
such threshold is reached will be responsible for payment of the transition bond
charge as if this power were distributed by JCP&L.
5
JCP&L will sell the bondable transition property to the issuer. The
bondable transition property is described in more detail under "THE SALE
AGREEMENT--JCP&L'S SALE AND ASSIGNMENT OF THE BONDABLE TRANSITION PROPERTY TO
THE ISSUER" in this prospectus. JCP&L, as servicer of the bondable transition
property, will bill and collect the transition bond charge from customers on
behalf of the issuer. However, under certain circumstances, third party electric
power suppliers to JCP&L's customers may be allowed to bill and collect the
transition bond charge, as well as other billed amounts, from JCP&L's customers.
Any such third party electric power supplier will be required to pay the
transition bond charges to the servicer, whether or not the customers pay the
third party electric power supplier. See "SERVICING OF THE BONDABLE TRANSITION
PROPERTY" in this prospectus.
The net proceeds from the sale of the transition bonds will be used to
reduce a portion of JCP&L's stranded costs through the retirement of its debt or
equity, or both. Stranded costs are the amount by which an electric public
utility's net electric generation-related costs, which traditionally would be
recoverable in a regulated retail electric generation market, exceed those costs
recoverable in a competitive retail electric generation market, as determined by
the BPU.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts due on the transition
bonds from:
o transition bond charges remitted by the servicer to the trustee on
behalf of the issuer during the related collection period;
o investment earnings on amounts held in certain trust accounts
established under the indenture;
o amounts payable to the issuer under any interest rate swap agreement;
o amounts received as payment for any indemnity obligations of JCP&L
under the sale agreement or the servicing agreement;
o any third party credit enhancement; and
o amounts available in the trust accounts held by the trustee.
These accounts are described in greater detail under "THE INDENTURE--THE
COLLECTION ACCOUNT FOR THE TRANSITION BONDS" in this prospectus.
PRIORITY OF DISTRIBUTIONS
On each payment date, the trustee will pay or allocate transition bond
charges received from the servicer and all investment earnings on the amounts
held in the general subaccount of the collection account, except for amounts
held in any series capital subaccount, to the extent funds are available in the
general subaccount, in the following priority:
(1) Payment of all amounts owed to the trustee and all amounts owed to the
independent managers of the issuer.
(2) Payment of the servicing fees and all unpaid servicing fees from prior
periods, if these fees have not been withheld by the servicer from
transition bond charge collections for that purpose.
6
(3) Payment of the administration fee in an amount determined in
accordance with the administration agreement between the issuer and
GPU Service, Inc., or its successor as administrator in an amount not
to exceed the administrator's actual costs.
(4) So long as no event of default has occurred and is continuing or would
be caused by this payment, the payment of operating expenses of the
issuer excluding items (1), (2) and (3) above, up to an annual
aggregate of $[ ] for all series.
(5) Payment of interest as follows:
o first, unpaid interest on any series from prior periods,
including payment of any amount payable to any swap counterparty
on any interest rate swap agreement, including interest on past
due interest; and
o then, payment of the current interest then due on the transition
bonds of each series, including payment of any amount payable to
the swap counterparty on any interest rate swap agreement.
(6) Payment of the principal then legally required to be paid on the
transition bonds of any series as follows:
o the unpaid principal balance of any series if such payment date
is on or after the legal final maturity date of that series; plus
o the unpaid principal balance of any transition bonds called for
redemption; plus
o the unpaid principal balance of any series due upon an
acceleration following an event of default.
(7) Payment of the principal then scheduled to be paid on the transition bonds
of any series according to the applicable expected amortization schedule
other than principal paid under item (6) above.
(8) Payment of any remaining unpaid operating expenses and indemnity amounts
then owed by the issuer.
(9) Replenishment of each series capital subaccount pro rata, up to the
aggregate required capitalization amount for each series.
(10) Allocation of any required amount necessary to cause the amount in each
series overcollateralization subaccount up to the aggregate required
overcollateralization level for each series as of that payment date.
(11) Payment of any termination or breakage amounts payable under any interest
rate swap agreement relating to any floating rate transition bonds.
(12) So long as no event of default has occurred and is continuing, release to
the issuer of an amount equal to investment earnings since the preceding
payment date (or, in the case of the first payment date, since the issuance
date) on amounts in each series capital subaccount.
(13) Allocation of the remainder, if any, to the reserve subaccount.
7
See also "THE INDENTURE--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" in this prospectus. A diagram depicting how the transition bond
charge collections will be allocated may be found on page [ ] of this
prospectus.
FLOATING RATE TRANSITION BONDS
If, in connection with the issuance of any class of transition bonds paying
interest at a floating rate, referred to as a "floating rate class", the issuer
arranges for any interest rate swap transactions, the material terms of those
transactions will be described in the related prospectus supplement.
CREDIT ENHANCEMENT AND ACCOUNTS
Unless otherwise specified in any prospectus supplement, the primary form
of credit enhancement for the transition bonds will be mandatory periodic
adjustments (which will be made at least annually) to the transition bond
charge. The BPU is required to make periodic adjustments to the transition bond
charge upon petition by JCP&L, as servicer, on behalf of the issuer, to provide
revenues sufficient to recover all amounts required to be distributed,
including:
o for each series of transition bonds, principal of each class of such
series in accordance with the expected amortization schedule;
o interest on the transition bonds, which in the case of interest on any
floating rate class of any series will be calculated at the gross
fixed rate;
o other ongoing transaction costs and expenses as specified in items (1)
through (8) and (11) above;
o for each payment date for each series of transition bonds, the funding
of each series overcollateralization subaccount in amounts sufficient
to bring the balance in that subaccount to the aggregate required
overcollateralization level for that series;
o for each payment date for each series of transition bonds, the funding
of each series capital subaccount in amounts sufficient to bring the
balance in that subaccount to the aggregate required capitalization
amount for that series; and
o to cause the reserve subaccount to equal zero;
all by the earlier of (1) the payment date immediately preceding the next
adjustment and (2) the expected final payment date.
Transition bond charge adjustments are required to include an amount
sufficient to fully compensate for delays or losses that would otherwise result
from either the delinquent payment or non-payment of the transition bond charge.
The servicer will petition the BPU to approve these adjustments to make up for
any shortfall or excess in transition bond charge collections. Under the BPU
financing order, JCP&L, as servicer, is permitted to petition the BPU for
adjustments at least annually but not more frequently than quarterly, except
that monthly filings are permitted in the last year before the expected maturity
of the transition bonds and continuing until their legal final maturity. Under
the servicing agreement, the servicer is required to petition for adjustments at
least annually through the [ ], 20__ petition and quarterly commencing with the
[ ], 20__ petition. Those adjustments will become effective on an interim basis
30 days after filing and final 60 days after filing, in each case absent a
determination by the BPU of manifest error. Expressed generally, the most likely
causes of a shortfall or excess in transition bond charge collections include
the following situations:
o the actual electric consumption by JCP&L's customers varying from
JCP&L's forecasts; and
8
o the actual rate of collection of billed transition bond charges
varying from JCP&L's expected rate of collection due to delinquencies
and write-offs, including shortfalls created by third party electric
power suppliers that default in payments of transition bond charges to
the servicer.
See "RISK FACTORS--SERVICING RISKS" in this prospectus. The transition bond
charge collections will fund the collection account and various subaccounts as
set forth below. These accounts are additional credit enhancement for the
transition bonds.
Collection Account. Under the indenture, the trustee will maintain a single
collection account, divided into various subaccounts, some of which may be
series specific and some of which may be held for all series of transition
bonds. The primary subaccounts for credit enhancement purposes are:
(1) Capital Subaccount. An amount specified in the prospectus supplement
for each series of transition bonds will be deposited into that series
capital subaccount on the date of issuance of that series. Any
shortfall in the capital subaccount for an existing series that is not
otherwise replenished will be replenished by periodic adjustments to
the transition bond charge. The issuer will receive all interest
earned on amounts held in all capital subaccounts not used to meet
current obligations. The required capitalization amount at any time
will equal the aggregate of the required capitalization amounts for
all outstanding series.
(2) Overcollateralization Subaccount. The prospectus supplement for each
series of transition bonds will specify a funding amount for that
series overcollateralization subaccount. That amount will be funded
over the term of such series, as specified in the prospectus
supplement, through transition bond charge collections. The required
overcollateralization level at any time will equal the aggregate of
the required overcollateralization levels for all outstanding series.
(3) Reserve Subaccount. Any excess amount of transition bond charge
collections, indemnity payments and investment earnings on amounts
held in the collection account, other than earnings on amounts held in
any series capital subaccount, after payments have been made on a
payment date, will be held in the reserve subaccount for all series of
transition bonds and be used to meet payment obligations on subsequent
payment dates or, to the extent not so used, be applied to reduce the
transition bond charge in connection with the next periodic
adjustment.
Each of the capital subaccount and the overcollateralization subaccount for
each series will be available to make payments for that series on each payment
date and all other amounts as described in items (1) through (7) in "--PRIORITY
OF DISTRIBUTIONS" above. The reserve subaccount will be available to make
payments for all series on each payment date and other amounts as described in
items (1) through (7) and in items (9) and (10) above for all series. To the
extent that amounts on deposit in the reserve subaccount are needed to make
payments for more than one series, but are insufficient, the amounts on deposit
will be allocated to each series in proportion to the amounts payable or
scheduled to be paid from such subaccount with respect to each series on that
payment date.
Although it is not anticipated, additional credit enhancement for any
series may include surety bonds or letters of credit. Additional forms of credit
enhancement, if any, for each series will be specified in the related prospectus
supplement. The servicer may, but is not obligated to, obtain insurance or a
letter of credit in support of its obligation to remit transition bond charge
collections to the trustee. Credit enhancement for the transition bonds is
intended to protect you against losses or delays in scheduled payments on your
transition bonds.
9
STATE PLEDGE
Under the Competition Act, the State of New Jersey pledges and agrees with
the holders of the transition bonds and with the issuer not to limit, alter or
impair the bondable transition property or the other rights vested in an
electric public utility or any assignee or pledgee of the utility or any
financing entity, such as the issuer, or vested in the holders of any transition
bonds pursuant to a bondable stranded costs rate order, such as the BPU
financing order, until the related transition bonds are fully paid and
discharged. In addition, the State pledges and agrees that it will not in any
way limit, alter, impair or reduce the value or amount of the bondable
transition property approved by a financing order except as contemplated by the
periodic adjustments to the transition bond charge.
Under certain circumstances, the State of New Jersey may not be required to
adhere to its pledge. Any action by New Jersey which would constitute a
violation of its pledge would have to be a reasonable exercise of the state's
sovereign power and of a character reasonable and appropriate to the state's
public purpose in order to justify such an action. However, there is no existing
case law addressing the exercise of the State of New Jersey's sovereign powers
with respect to transition bonds. Alternatively, the State of New Jersey may not
be required to adhere to its pledge if it pays just compensation to transition
bondholders. There is also no existing case law addressing the issue of just
compensation in the context of transition bonds.
ALLOCATIONS AND DISTRIBUTIONS
The following diagram represents a general summary of the allocations and
distributions described in "--PRIORITY OF DISTRIBUTIONS" above.
[Diagram omitted]
PAYMENTS OF INTEREST AND PRINCIPAL
Interest on each class of transition bonds will accrue at the interest rate
specified in the related prospectus supplement. On each payment date, the
trustee will distribute interest accrued on each class of transition bonds and
the scheduled principal payment for that class, if any, to the extent funds are
available, until the outstanding principal balance of that class has been
reduced to the level designated for each payment date in accordance with the
expected amortization schedule.
Failure to pay the entire outstanding balance of the transition bonds of
any class or series by that series' expected final payment date will not result
in a default with respect to that class or series; however, a default will occur
if the entire outstanding balance of any class or series is not paid on or
before the legal final maturity date of that class or series. The expected final
payment date and the legal final maturity date of each series and class of
transition bonds will be specified in the related prospectus supplement.
To the extent that available funds are insufficient to pay principal,
interest or any other of items (1) through (11) in "--PRIORITY OF DISTRIBUTIONS"
above, and amounts payable or scheduled to be paid are different for different
series, those funds available for payment of that item will be allocated in
proportion to the amount payable or scheduled to be paid with respect to that
item for each series on that payment date.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding transition bonds of any
series, at its option, only if, on any payment date, the outstanding principal
balance of the transition bonds of that particular series (after giving effect
to payments scheduled to be made on that payment date) is less than 5% of the
initial principal balance of the transition bonds of that series. Unless
otherwise specified in a prospectus supplement, there will be no other optional
redemption for a series.
10
PAYMENT DATES AND RECORD DATES
The payment dates and record dates for each series of transition bonds will
be specified in the related prospectus supplement.
MATERIAL INCOME TAX CONSIDERATIONS
In the opinion of Carter, Ledyard & Milburn, for federal income tax
purposes, and in the opinion of Thelen Reid & Priest LLP, for New Jersey state
income tax purposes, the transition bonds will constitute debt obligations of
JCP&L.
JCP&L has received a private letter ruling from the Internal Revenue
Service regarding certain of the federal income tax aspects of the transactions
described above. Tax counsel have relied, in part, on that ruling in rendering
their respective opinions that the transition bonds will be treated as debt of
JCP&L. If you purchase a transition bond, you agree to treat it as debt of JCP&L
for federal, state and local tax purposes.
ERISA CONSIDERATIONS
Pension plans and other investors subject to the Employee Retirement Income
Security Act of 1974, as amended (referred to as "ERISA"), may acquire the
transition bonds subject to specified conditions. The acquisition and holding of
the transition bonds could be treated as an indirect prohibited transaction
under ERISA. Accordingly, by purchasing the transition bonds, each investor
purchasing on behalf of a pension plan will be deemed to certify that the
investor's purchase and subsequent holding of the transition bonds would be
exempt from the prohibited transaction rules of ERISA. For further information
regarding the application of ERISA, see "ERISA CONSIDERATIONS" in this
prospectus.
11
REPORTS TO TRANSITION BONDHOLDERS
With respect to each series and class of transition bonds, on or prior to
each payment date, the trustee will deliver a statement prepared by the trustee
to each transition bondholder of that series. This statement will include, to
the extent applicable, the following information, as well as any other
information so specified in the related supplemental indenture, as to the
transition bonds of that series and class with respect to that payment date or
the period since the previous payment date or, in the case of the first payment
date, from the issuance date:
(1) the amount to be paid to transition bondholders of that series and
class as principal;
(2) the amount to be paid to transition bondholders of that series and
class as interest;
(3) the projected transition bond principal balance and the actual
transition bond principal balance for that series and class as of that
payment date;
(4) the amount on deposit in the overcollateralization subaccount for that
series and the required overcollateralization level for that series,
as of that payment date;
(5) the amount on deposit in the capital subaccount for that series and
the required capitalization amount for that series as of that payment
date;
(6) the amount, if any, on deposit in the reserve subaccount as of that
payment date;
(7) the amount to be paid to any swap counterparty under any interest rate
swap agreement;
(8) the amount paid to the trustee since the preceding payment date;
(9) the amount paid to the servicer since the preceding payment date; and
(10) any other transfers and payments made pursuant to the indenture.
If any transition bonds are listed on the Luxembourg Stock Exchange, and
the rules of that exchange so require, notice that this report is available with
the listing agent in Luxembourg will be given to holders of those listed
transition bonds by publication in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort.
12
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase transition bonds.
TRANSITION BONDHOLDERS MAY EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT OF
THE LIMITED SOURCES OF PAYMENT FOR THE TRANSITION BONDS AND LIMITED CREDIT
ENHANCEMENT
You may suffer payment delays or losses on your transition bonds if the
assets of the issuer are insufficient to pay the principal balance of the
transition bonds in full. The only source of funds for payments on the
transition bonds will be the assets of the issuer. These assets are limited to:
o the bondable transition property, including the right to charge,
collect and receive the transition bond charge and to adjust the
transition bond charge at least annually;
o the funds on deposit in the collection account and the related
subaccounts held by the trustee;
o contractual rights under various contracts, including the sale
agreement; and
o any other credit enhancements described in a prospectus supplement.
Any floating rate transition bonds will also have the proceeds of any swap
agreement available as a payment source.
The transition bonds will not be insured or guaranteed by JCP&L, including
in its capacity as servicer, or by its parent, FirstEnergy Corp., or by any of
their affiliates, the trustee or any other person or entity. Furthermore, it is
not anticipated that the transition bonds will have the benefit of any liquidity
facility or of any third-party credit enhancement, such as letters of credit or
insurance. However, the servicer may, but is not obligated to, obtain insurance
or letter of credit in support of its obligation to remit transition bond charge
collections to the trustee. Thus, you must rely for payment of the transition
bonds solely upon collections of the transition bond charge, funds on deposit in
the collection account held by the trustee and any other credit enhancement
described in the related prospectus supplement. See "JCP&L TRANSITION FUNDING
LLC, THE ISSUER" in this prospectus. The Issuer's organizational documents
restrict its right to acquire other assets unrelated to the transactions
described in this prospectus.
JUDICIAL, LEGISLATIVE OR REGULATORY ACTION
THAT MAY ADVERSELY AFFECT YOUR INVESTMENT
THE LAW WHICH UNDERPINS THE TRANSITION BONDS MAY BE INVALIDATED
The bondable transition property is the creation of the Competition Act and
the BPU financing order issued to JCP&L pursuant to the Competition Act. The
Competition Act was adopted in February 1999. A court decision might overturn or
otherwise invalidate either the Competition Act or the BPU financing order. If
this occurs, you may lose some or all of your investment or you may experience
delays in recovering your investment. Because the bondable transition property
is a creation of statute, any proceeding affecting the validity of the relevant
legislative provisions could have an adverse effect on the transition bonds
because the transition bonds are secured primarily by the bondable transition
property. For example, if the provisions of the Competition Act which create
bondable transition property as a presently existing property were invalidated,
JCP&L, as servicer, could lose the right to collect the transition bond charge.
As another example, if the provisions of the Competition Act which allow for
periodic adjustment of the transition bond charge were invalidated, the servicer
could be prevented from obtaining the adjustments required to provide sufficient
funds for the scheduled payments on the transition bonds. Similar legislation in
other states has been challenged but not overturned as discussed below.
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There is uncertainty associated with investing in bonds payable from an
asset that depends on recently enacted legislation for its existence because of
the absence of any judicial or regulatory precedent implementing and
interpreting the legislation. See "THE BPU FINANCING ORDER AND THE TRANSITION
BOND CHARGE" in this prospectus.
In October and November of 1999, appeals were filed challenging the
validity of a BPU financing order and restructuring order issued to another New
Jersey electric utility. The Appellate Division of the New Jersey Superior Court
unanimously affirmed these BPU financing and restructuring orders and the New
Jersey Supreme Court affirmed the Appellate Division decision. One of the
appellants in this case filed a petition for review of the New Jersey Supreme
Court's decision with the United States Supreme Court which the United States
Supreme Court subsequently denied.
If a court were to determine that the relevant provisions of the
Competition Act or the BPU financing order are unlawful, invalid or
unenforceable in whole or in part, or if a court were in any way to impair the
security of the transition bondholders, such actions could adversely affect the
validity of the transition bonds, the State of New Jersey's pledge against
limitation, alteration or impairment of the bondable transition property or the
issuer's ability to make payments on the transition bonds, and may not trigger
any requirement for JCP&L to indemnify you. In that case, you could suffer a
loss on your investment in the transition bonds.
Electricity generation deregulation laws similar to the Competition Act
have been enacted in other states, including Arkansas, California, Connecticut,
Illinois, Massachusetts, Michigan, Montana, New Hampshire, Pennsylvania and
Texas. The validity of similar legislation in other states has been upheld in
those states where court challenges have been made and the judicial process has
been completed. While the issuer is not aware of any significant challenges to
similar legislation currently pending in other states, a court might yet nullify
a similar statute in another state in response to a future or pending claim.
Such a decision would not automatically invalidate the Competition Act or the
BPU financing order, but it might give rise to a challenge to the Competition
Act or the BPU financing order. Therefore, legal activity in other states may
indirectly affect the value of your investment.
Neither the issuer, JCP&L nor any successor will indemnify you for any
changes in the law that may affect the value of your transition bonds.
THE COMPETITION ACT MAY BE OVERTURNED BY THE FEDERAL GOVERNMENT WITHOUT FULL
COMPENSATION
In the past, bills have been introduced in Congress prohibiting the
recovery of stranded costs, and this prohibition could negate the existence of
bondable transition property. Although Congress has never passed such a bill, no
prediction can be made as to whether any future bills that prohibit the recovery
of stranded costs, or securitized financing for the recovery of these costs,
will become law or, if they become law, what their final form or effect will be.
There is no assurance that the courts would consider this preemption a "taking"
from the transition bondholders. Moreover, even if this preemption of the
Competition Act and/or the BPU financing order by the federal government were
considered a "taking" under the United States Constitution for which the
government had to pay just compensation to transition bondholders, there is no
assurance that this compensation would be sufficient to pay the full amount of
principal of and interest on the transition bonds or to pay these amounts on a
timely basis.
Neither the issuer, JCP&L nor any successor will indemnify you for any
changes in the law that may affect the value of your transition bonds.
FUTURE STATE LEGISLATIVE ACTION MAY INVALIDATE THE TRANSITION BONDS OR THEIR
UNDERLYING ASSETS
Unlike the citizens of the states of California, Massachusetts and some
other states, the citizens of the State of New Jersey do not have the
constitutional right to adopt or revise laws by initiative or referendum. Thus,
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absent an amendment of the Constitution of the State of New Jersey, the
Competition Act cannot be amended or repealed by the electorate.
Under the Competition Act, the State of New Jersey has pledged not to
diminish the value of the bondable transition property. For a description of
this pledge, see "THE COMPETITION ACT--JCP&L AND OTHER UTILITIES MAY SECURITIZE
STRANDED COSTS" in this prospectus. Despite this pledge, the legislature of the
State of New Jersey may attempt in the future to repeal or amend the Competition
Act in a manner which might limit or alter the bondable transition property so
as to reduce its value or the value of the transition bonds.
To date, no cases addressing these issues in the context of transition
bonds have been decided. There have been cases in which courts have applied the
contract clause of the United States Constitution and parallel state
constitutional provisions to strike down legislation reducing or eliminating
taxes, public charges or other sources of revenues servicing bonds issued by
public instrumentalities or private issuers, or otherwise reducing or
eliminating the security for bonds. Based upon this case law, in the opinion of
Thelen Reid & Priest LLP, counsel to JCP&L and the issuer, with respect to
applicable federal and state constitutional principles relating to the
impairment of contracts, the State of New Jersey, including the BPU, could not,
absent a demonstration that such action was necessary to serve a significant and
legitimate public purpose, repeal or amend the Competition Act by means of the
legislative process, or take or refuse to take (through the BPU or otherwise)
any action required under its pledge described above, or take or refuse to take
any other action, if any such repeal or amendment or the action or inaction
would substantially impair the rights of the owners of the bondable transition
property or the transition bondholders or otherwise limit, alter, impair or
reduce the value or amount of the bondable transition property, unless that
action is a reasonable exercise of the State of New Jersey's sovereign powers
and of a character reasonable and appropriate to the public purpose justifying
that action.
In addition, it may be possible for the New Jersey legislature to repeal or
amend the Competition Act without violating the State's pledge if the
legislature acts in order to serve a significant and legitimate public purpose,
such as protecting the public health and safety. Even if the legislature
provides you with an amount deemed to be just compensation, it may not be
sufficient for you to fully recover your investment. Any action of the New
Jersey legislature adversely affecting the bondable transition property or the
ability to collect transition bond charges may be considered a "taking" under
the United States or New Jersey Constitutions. In such event, the New Jersey
legislature would then be obligated to pay the estimated value of the bondable
transition property at the time of the taking. The issuer cannot assure you of
the likelihood or legal validity of any action of this type by the New Jersey
legislature, or whether the action would be considered a taking. As of the date
of this prospectus, the issuer is not aware of any pending legislation in the
New Jersey legislature that would affect any provisions of the Competition Act
affecting the transition bonds.
There can be no assurance that a repeal of or amendment to the Competition
Act will not be sought or adopted or that any action by the State of New Jersey
may not occur, any of which might constitute a violation of the State of New
Jersey's pledge and agreement with the transition bondholders. In any event,
costly and time-consuming litigation might ensue. Any litigation of this type
might adversely affect the price and liquidity of the transition bonds and the
dates of payments of interest on and principal of the transition bonds and,
accordingly, their weighted average lives. Moreover, given the lack of judicial
precedent directly on point, and the novelty of the security for the transition
bondholders, the outcome of any litigation cannot be predicted with certainty,
and accordingly, no assurances can be made that transition bondholders would not
incur a loss of their investment.
JCP&L has agreed to take legal or administrative actions, including
instituting and prosecuting legal actions, as may be reasonably necessary to
block or overturn any attempts to cause a repeal, modification or supplement to
the Competition Act, the BPU financing order or the bondable transition
property. JCP&L has also agreed to resist proceedings of third parties, which,
if successful, would result in a breach of its representations concerning the
bondable transition property, the BPU financing order or the Competition Act.
See "THE SALE AGREEMENT" in this prospectus. However, there is no assurance that
15
JCP&L would be able to take any action or that any action JCP&L is able to take
would be successful.
Neither the issuer, JCP&L, nor any successor will indemnify you for any
changes in the law that may affect the value of your transition bonds.
THE BPU MAY TAKE ACTION WHICH REDUCES THE VALUE OF THE TRANSITION BONDS
Pursuant to the Competition Act, the BPU financing order issued to JCP&L
became irrevocable upon issuance and the BPU may not, directly or indirectly, by
any subsequent action, rescind or amend the BPU financing order or reduce or
impair the amount of bondable stranded costs authorized to be recovered through
the issuance of transition bonds under the BPU financing order. The BPU
nevertheless might attempt to revise or rescind any of its regulations or orders
in ways that ultimately have an adverse impact upon the bondable transition
property or the transition bond charge. Apart from the terms of the BPU
financing order, the BPU retains the power to adopt, revise or rescind rules or
regulations affecting JCP&L or a successor electric public utility. Any new or
amended regulations or orders by the BPU, for example, could affect the ability
of the servicer to collect the transition bond charge on a full and timely
basis. JCP&L has agreed to take legal or administrative actions, including
instituting and pursuing legal actions, as may be reasonably necessary to block
or overturn any attempts to cause a repeal of, modification of, or supplement to
the Competition Act, the BPU financing order, the BPU restructuring order (to
the extent it affects the rights of transition bondholders or the validity or
value of the bondable transition property), the letter to be delivered by JCP&L
to the BPU within five business days following the issuance of each series of
transition bonds specifying the terms of that series (referred to as an
"issuance advice letter"), the bondable transition property or the rights of
transition bondholders by legislative enactment or constitutional amendment if
such repeal, modification or supplement would be adverse to the issuer, the
trustee or the transition bondholders. JCP&L has also agreed to resist
proceedings of third parties, which, if successful, would result in a breach of
any of its representations contained in the sale agreement, including those
concerning the bondable transition property transferred pursuant to the sale
agreement, the BPU financing order or the Competition Act. See "THE SALE
AGREEMENT" in this prospectus. However, there is no assurance that JCP&L would
be able to take this action or that any action JCP&L takes would be successful.
Future BPU regulations or orders may affect the credit rating of the transition
bonds, their price or the rate of transition bond charge collections and,
accordingly, the amortization of transition bonds and their weighted average
lives. As a result, you could suffer a loss on your investment.
JCP&L, as servicer, is required to file at least annually with the BPU, on
behalf of the issuer, requests for adjustments of the transition bond charge.
These adjustments are intended to provide, among other things, for timely
payment of the transition bonds. The BPU may challenge JCP&L's calculation of a
proposed adjustment, which may cause delay, or may refuse to permit an
adjustment to take effect on the grounds that the adjustment contains a
"manifest error." Under the BPU financing order, "manifest error" means an
arithmetic error evident on the face of the filing. Any such delay in the
implementation of the adjustment could cause a delay in the payments on the
transition bonds.
There is uncertainty associated with investing in transition bonds whose
timely payment of principal and interest may depend on true-up adjustments
because of the absence of any judicial or regulatory experience implementing and
interpreting the provisions of the Competition Act providing for such
adjustments. There can be no assurance that the adjustment procedures and
adjustments will not be challenged. Such challenges could result in costly and
time-consuming litigation. A shortfall or material delay in transition bond
charge collections due to inaccurate forecasts or delayed implementation of
true-up adjustments could result in principal of and interest on the transition
bonds not being paid according to the expected amortization schedule,
lengthening the weighted average life of the transition bonds or in payments of
principal and interest not being made at all, and may materially reduce the
value of the transition bondholders' investment.
16
SERVICING RISKS
INACCURATE CONSUMPTION FORECASTING OR UNANTICIPATED DELINQUENCIES OR WRITE-OFFS
COULD RESULT IN INSUFFICIENT FUNDS TO MAKE SCHEDULED PAYMENTS ON THE TRANSITION
BONDS
Because the transition bond charge is assessed based on estimates which are
projected from historical consumption of electricity by JCP&L's customers, a
shortfall of payments arising from the transition bond charge could result if
the servicer inaccurately forecasts electricity consumption or underestimates
customer delinquencies or write-offs when setting or adjusting the transition
bond charge. A shortfall in transition bond charge collections could result in
shortfalls in payments of interest on and principal of the transition bonds, the
lengthening of the weighted average life of the transition bonds, or payments of
principal and interest not being made at all.
Inaccurate forecasting of electricity consumption by the servicer could
result from, among other things:
o warmer winters or cooler summers, resulting in less electricity
consumption than forecasted;
o general economic conditions being worse than expected, causing
customers to migrate from JCP&L's service territory or reduce their
electricity consumption;
o the occurrence of a natural disaster, such as a hurricane or blizzard,
unexpectedly disrupting electrical service and reducing consumption;
o problems with energy generation, transmission or distribution
resulting from a change in the market structure of the electric
industry;
o large customers ceasing business or departing JCP&L's service
territory;
o increases in energy prices resulting in decreased consumption;
o changes in JCP&L's forecasting methodology;
o customers consuming less electricity because of increased conservation
efforts; or
o large customers switching to self-generation of electric power without
being required to pay the transition bond charge under the Competition
Act. See "THE COMPETITION ACT" in this prospectus.
Inaccurate forecasting of delinquencies or write-offs by the servicer could
result from, among other things:
o unexpected deterioration of the economy or the occurrence of a natural
disaster, causing greater delinquencies and write-offs than expected
or forcing JCP&L or a successor electric public utility to grant
additional payment relief to more customers than originally forecast;
o a change in law, rules or regulations that makes it more difficult for
JCP&L or a successor electric public utility to disconnect nonpaying
customers, or that requires JCP&L or a successor electric public
utility to apply more lenient credit standards in accepting customers;
o the introduction into the energy markets of third party electric power
suppliers who bill and collect payments arising from the transition
bond charge but who fail to remit transition bond charges to the
servicer in a timely manner; or
17
o the failure of third party suppliers who bill and collect payments
arising from the transition bond charge to submit accurate and timely
information to the servicer regarding their respective collections and
charge offs. See "-- IT MAY BE DIFFICULT TO COLLECT THE TRANSITION
BOND CHARGE FROM THIRD PARTY ELECTRIC POWER SUPPLIERS WHO PROVIDE
ELECTRICITY TO JCP&L'S CUSTOMERS" below.
UNCERTAINTIES ASSOCIATED WITH COLLECTING THE TRANSITION BOND CHARGE AND THE
UNPREDICTABILITY OF A DEREGULATED ELECTRICITY MARKET MAY REDUCE THE AMOUNT OF
FUNDS AVAILABLE FOR PAYMENTS ON THE TRANSITION BONDS
Although JCP&L has had limited experience in imposing a non-bypassable,
market transition charge, JCP&L has not previously calculated a transition bond
charge for customers, nor has it made all of the associated calculations and
projections which are inherent in the calculations, before it made the
calculations required in connection with the BPU financing order and the
issuance of transition bonds. The projections are based on primarily historical
performance of customer energy usage and collection of payments for which JCP&L
has records available. These usage and collection records, however, do not
reflect customers' payment patterns or energy usage in a competitive market,
which is significant because competition has been introduced only recently in
New Jersey. These records also do not reflect the introduction of consolidated
billing by third party electric power suppliers. Because the possibility for
this kind of billing has only just recently been introduced in New Jersey, there
are potentially unforeseen factors in that billing which may impact on the
collection of payments. Therefore, the records which JCP&L has to date may have
limited value in calculating the initial transition bond charge and the proposed
transition bond charge adjustments if third party billing is undertaken in the
JCP&L service territory. Furthermore, the servicer does not have any experience
administering the transition bond charge on behalf of an independent issuer.
Risks are associated with the servicer's inexperience in calculating, billing
and collecting the transition bond charge and in managing customer payments on
behalf of the issuer.
YOUR INVESTMENT RELIES ON JCP&L OR A SUCCESSOR ACTING AS SERVICER OF THE
BONDABLE TRANSITION PROPERTY
JCP&L, as servicer, will be responsible for billing and collecting
transition bond charges from customers and from third party electric power
suppliers that bill and collect from customers and for filing requests with the
BPU to adjust this charge. If JCP&L ceased servicing the bondable transition
property, it might be difficult to find a successor servicer. Upon a servicer
default based upon the commencement of a case by or against the servicer under
federal bankruptcy law, the trustee and the issuer may be prevented from
effecting a transfer of servicing. A successor servicer may experience
difficulties in collecting transition bond charges, determining appropriate
adjustments to transition bond charges, terminating service to customers or
otherwise taking actions against customers for non-payment of their transition
bond charges. If JCP&L were to be replaced as servicer, any of these factors and
others could delay the timing of payments and may reduce the value of your
investment. Also, a change in the servicer or the reclaiming of billing
functions by the servicer from any third party electric power supplier that has
defaulted may cause billing and/or payment arrangements to change, which may
lead to a period of disruption in which customers continue to remit payments
according to the former arrangement, resulting in delays in collection that
could result in delays in payments on your transition bonds. See "THE SERVICING
AGREEMENT" in this prospectus.
Upon a servicer default because of a failure to make required remittances,
the issuer or the trustee would have the right to apply to the BPU for an order
of sequestration and payment of revenues arising from the bondable transition
property. However, federal bankruptcy law may prevent the trustee and the issuer
from applying to the BPU for such an order and the BPU from issuing or enforcing
this order. In either case of a servicer default, payments on the transition
bonds may be suspended. See "--THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" below.
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BILLING AND COLLECTION PRACTICES MAY REDUCE THE AMOUNT OF FUNDS AVAILABLE FOR
PAYMENTS ON THE TRANSITION BONDS
The methodology of determining the amount of the transition bond charge the
issuer may impose on each customer is specified in the BPU financing order.
Thus, neither the issuer nor JCP&L can change this methodology. However, JCP&L,
as servicer, may set its own billing and collection arrangements with each
customer. For example, to recover part of an outstanding electricity bill, JCP&L
may agree to extend a customer's payment schedule or to write off the remaining
portion of the bill. Also, JCP&L, or a successor to JCP&L as servicer, may
change billing and collection practices. Any change to billing and collection
practices may have an adverse or unforeseen impact on the timing and amount of
customer payments, by impacting the servicer's capacity to bill and collect
efficiently and in a timely manner, or otherwise, and may reduce the amount of
transition bond charge collections and thereby limit the issuer's ability to
make scheduled payments on the transition bonds. See "SERVICING OF THE BONDABLE
TRANSITION PROPERTY--HOW JCP&L FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT
OF ELECTRICITY USAGE" in this prospectus. Similarly, the BPU may require changes
to these practices. Any changes in billing and collection regulation might
adversely affect the billing terms and the terms of remittances by third party
electric power suppliers to the servicer or make it more difficult for the
servicer to collect the transition bond charge. These changes may adversely
affect the value of the transition bonds and their amortization and,
accordingly, their weighted average lives. See "THE BPU FINANCING ORDER AND THE
TRANSITION BOND CHARGE" in this prospectus.
IT MAY BE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE FROM THIRD PARTY
ELECTRIC POWER SUPPLIERS WHO PROVIDE ELECTRICITY TO JCP&L'S CUSTOMERS
In the future, customers may be billed by, and pay transition bond charges
to, third parties who supply them with electric power. These third party
electric power suppliers will be obligated to forward the amount billed in
respect of the transition bond charge to JCP&L, as servicer, regardless of
whether and to what extent these amounts are collected from customers. JCP&L
will have limited rights to collect transition bond charges directly from those
customers who receive their electricity bills from third party electric power
suppliers. If many customers elect to be billed by and receive aggregated
electricity bills from third party electric power suppliers, the issuer may have
to rely on a relatively small number of third party electric power suppliers to
remit the bulk of the transition bond charges from those customers. A remittance
default by a third party electric power supplier which collects from a large
number of customers would have a greater impact than a default by a single
customer and, therefore, would have a greater impact on transition bond charge
collections and, in turn, on the issuer's ability to make timely payments on the
transition bonds. Although third party electric power suppliers will be required
to post a deposit with JCP&L, as servicer, if they do not have a credit rating
of at least 'Baa2' by Moody's Investors Service (referred to as "Moody's") or
'BBB' by Standard & Poor's Ratings Services (referred to as "S&P"), there can be
no assurance that such deposit will be sufficient to compensate fully for a
remittance default by a third party electric power supplier.
JCP&L will not pay any shortfalls resulting from the failure of any third
party electric power supplier to forward billed transition bond charges to
JCP&L, as servicer. Additionally, there can be no assurance that third party
electric power suppliers will use the same customer credit standards as the
servicer. Therefore, it is possible that customers served by third party
electric power suppliers may have a higher rate of delinquencies and write-offs
than those served by JCP&L. Also, there can be no assurance that the servicer
will be able to mitigate credit risks relating to these third party electric
power suppliers in the same manner or to the same extent to which it mitigates
the risks relating to its customers.
The adjustment mechanism, the deposits required from certain customers and
third party electric power suppliers as a prerequisite to service or the ability
to do business, as applicable, and any other credit enhancement will be
available to compensate for a failure by a third party electric power supplier
to remit the billed transition bond charges to the servicer. However, the amount
of credit enhancement funds may not be sufficient to prevent a delay in payments
on the transition bonds. For example, in the event of the bankruptcy of a third
party electric power supplier, there is no assurance that a bankruptcy court
19
would permit the servicer to assume billing and collection responsibility for
sales by the third party electric power supplier; thus, shortfalls in the
payment of transition bond charges could result. See "THE BPU FINANCING ORDER
AND THE TRANSITION BOND CHARGE" in this prospectus.
JCP&L'S CUSTOMER PAYMENTS MAY DECLINE DUE TO CONFUSION
Although a similar non-bypassable market transition charge has been imposed
upon JCP&L's customers since August 1999, the transition bond charge is being
introduced to JCP&L's customers for the first time. Commercial and industrial
customers receive bills with separate line items showing charges for
distribution, transmission and generation services, as well as market
transition, societal benefits and, when imposed, transition bond charges.
Residential customers receive bills showing some of these charges bundled into a
single line item. All customer bills will have a footnote stating that a
transition bond charge is being collected on behalf of the issuer. Any change in
customer billing and payment arrangements may result in customer confusion and
the misdirection or delay of payments, which could have the effect of causing
delays in transition bond charge collections. Any problems arising from new and
untested systems or any lack of experience on the part of the third party
electric power suppliers or other third parties with customer billing and
collections responsibilities could also cause delays in billing and collecting
the transition bond charge. These delays could result in shortfalls in
transition bond charge collections and, therefore, reduce the ability of the
issuer to make timely payments on the transition bonds.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT CUSTOMERS IN WINTER MAY
TEMPORARILY REDUCE AMOUNTS AVAILABLE FOR PAYMENTS ON THE TRANSITION BONDS
A winter moratorium prevents JCP&L from terminating service to certain
delinquent residential customers from November 15 of each year until at least
March 15 of the following year unless JCP&L has received special approval from
the BPU. As a result, JCP&L must provide service to these residential customers
during this period without recouping the transition bond charge from these
customers. This reduces the amount of transition bond charge collections
available for payments on the transition bonds, although the expected associated
reduction in payments will be factored into the transition bond charge
adjustment. See "SERVICING OF THE BONDABLE TRANSITION PROPERTY--CREDIT POLICY;
BILLING; COLLECTIONS; TERMINATION OF SERVICE" in this prospectus.
TECHNOLOGICAL CHANGE MAY MAKE ALTERNATIVE ENERGY SOURCES MORE ATTRACTIVE AND
REDUCE THE NUMBER OF CUSTOMERS PAYING TRANSITION BOND CHARGES
The continuous process of technological development may result in the
introduction for an increasing number of customers of economically attractive
alternatives to purchasing electricity through JCP&L's transmission and
distribution facilities. Previously, only the largest industrial and
institutional users with large process steam requirements could use cogeneration
or self-generation installations cost-effectively. However, manufacturers of
self-generation facilities continue to develop smaller-scale, more
fuel-efficient generating units that can be cost-effective options for customers
with smaller electric energy requirements. Those customers may not have to pay
transition bond charges under provisions of the Competition Act. Technological
developments may allow greater numbers of customers to avoid transition bond
charges under such provisions, which may reduce the total number of customers
from which transition bond charges will be collected. A reduction in the number
of payers of transition bond charges could result in delays in or a failure to
make payments of interest on and principal of the transition bonds.
THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
For a detailed discussion of the following bankruptcy risks, please refer
to "HOW A BANKRUPTCY OF JCP&L OR THE SERVICER MAY AFFECT YOUR INVESTMENT" in
this prospectus.
20
JCP&L WILL COMMINGLE THE TRANSITION BOND CHARGE COLLECTIONS WITH OTHER REVENUES,
WHICH MAY OBSTRUCT ACCESS TO THE ISSUER'S FUNDS IN CASE OF BANKRUPTCY OF JCP&L
JCP&L will not segregate the transition bond charge collections from the
other funds it collects from its customers. The transition bond charge
collections will be segregated only after JCP&L makes payment to the trustee.
Except in circumstances described in "THE SERVICING AGREEMENT--JCP&L'S
SERVICING PROCEDURES" in this prospectus, and subject to further BPU
authorization, JCP&L will be required to remit transition bond charge
collections within two business days of the deemed collection date. Despite
these requirements, JCP&L might fail to pay the full amount of the transition
bond charge collections to the trustee or might fail to do so on a timely basis.
This failure could materially reduce the value of your investment and cause
material delays in payment.
The Competition Act provides that the rights of the issuer to the bondable
transition property are not affected by the commingling of these funds with
JCP&L's other funds. In a bankruptcy of JCP&L, however, a bankruptcy court might
rule that federal bankruptcy law takes precedence over the Competition Act and
does not recognize the right of the issuer to collections of the transition bond
charge that are commingled with other funds of JCP&L as of the date of
bankruptcy. If so, the collections of the transition bond charge held by JCP&L
as of the date of bankruptcy would not be available to pay amounts owing on the
transition bonds. In this case, the issuer would have a general unsecured claim
against JCP&L for those amounts. This scenario could cause material delays in
payment or losses on your transition bonds and could materially reduce the value
of your investment.
BANKRUPTCY OF JCP&L COULD RESULT IN LOSSES OR DELAYS IN PAYMENTS ON THE
TRANSITION BONDS
The Competition Act and the BPU financing order provide that as a matter of
New Jersey state law:
o bondable transition property, including the right to charge, collect
and receive the transition bond charge, constitutes presently existing
property for all purposes;
o JCP&L may sell, assign and otherwise transfer that property and JCP&L
or the issuer may pledge or grant a security interest in the property
as collateral for transition bonds; and
o a transfer of the bondable transition property from JCP&L to the
issuer, either directly or through one or more subsidiaries, is a sale
or other absolute transfer of the bondable transition property, not a
pledge of the bondable transition property to secure a financing by
JCP&L.
See "THE COMPETITION ACT" in this prospectus. These three provisions are
important to maintaining payments on the transition bonds in accordance with
their terms during any bankruptcy of JCP&L. In addition, the transaction has
been structured with the objective of keeping the issuer separate from JCP&L in
the event of a bankruptcy of JCP&L.
A bankruptcy court generally follows state property law on issues such as
those addressed by the three provisions described above. However, a bankruptcy
court has authority not to follow state law if it determines that the state law
is contrary to a paramount federal bankruptcy policy or interest. If a
bankruptcy court in a JCP&L bankruptcy refused to enforce one or more of the
state property law provisions described above for this reason, the effect of
this decision on you as a transition bondholder would be similar to the
treatment you would receive in a JCP&L bankruptcy if the transition bonds had
been issued directly by JCP&L. A decision by the bankruptcy court that, despite
the separateness of JCP&L and the issuer, the two companies should be
consolidated for the purposes of the bankruptcy proceeding, would have a similar
effect on you as a transition bondholder. That treatment could cause material
21
delays in payment of, or losses on, your transition bonds and could materially
reduce the value of your investment. For example:
o the bankruptcy court could order the trustee to exchange the bondable
transition property for other property, which might be of lower value;
o tax or other government liens on JCP&L's property that arose after the
transfer of the bondable transition property to the issuer might
nevertheless have priority over the trustee's lien and might be paid
from transition bond charge collections before you receive payments on
the transition bonds;
o the trustee's lien might not be properly perfected in bondable
transition property collections that were commingled with other funds
JCP&L collects from its customers as of the date of JCP&L's
bankruptcy, or might not be properly perfected in all of the bondable
transition property, and the lien could therefore be set aside in the
bankruptcy, with the result that the transition bonds would represent
only general unsecured claims against JCP&L
o the bankruptcy court might rule that the transition bond charge
collected by the servicer should be used to pay a portion of the cost
of providing electric service;
o the bankruptcy court might rule that the remedy provisions of the sale
agreement are unenforceable, leaving the issuer with a claim of actual
damages against JCP&L, which may be difficult to prove;
o the trustee could not, without permission from the bankruptcy court
(which could be denied):
- exercise any remedies against JCP&L on your behalf;
- recover funds to repay the transition bonds;
- use funds in the subaccounts under the indenture to make payments
on the transition bonds; or
- replace JCP&L as the servicer;
o the bankruptcy court might rule that neither the issuer's property
interest nor the trustee's lien extends to transition bond charge
collections in respect of electricity consumed after the commencement
of JCP&L's bankruptcy case, with the result that the transition bonds
would represent only general unsecured claims against JCP&L;
o neither JCP&L nor the issuer may be obligated to make any payments on
the transition bonds during the pendency of the bankruptcy case; or
o JCP&L may be able to alter the terms of the transition bonds as part
of its plan of reorganization.
Furthermore, if JCP&L enters into bankruptcy, it may be permitted to stop
acting as servicer. See "HOW A BANKRUPTCY OF JCP&L OR THE SERVICER MAY AFFECT
YOUR INVESTMENT" in this prospectus.
BANKRUPTCY OF THIRD PARTY ELECTRIC POWER SUPPLIER COULD RESULT IN LOSSES OR
DELAYS IN PAYMENTS ON THE TRANSITION BONDS
22
In the event of the bankruptcy of a third party electric power supplier,
there could be shortfalls in the payments of the transition bond charges to the
servicer, which could reduce the ability of the issuer to make timely payments
on the transition bonds.
THE SALE OF THE BONDABLE TRANSITION PROPERTY COULD BE CONSTRUED AS A FINANCING
AND NOT A SALE IN CASE OF JCP&L'S BANKRUPTCY
The Competition Act provides that the characterization of a transfer of
bondable transition property as a sale or other absolute transfer will not be
affected or impaired in any manner by treatment of the transfer as a financing
for federal or state tax purposes or financial accounting purposes. JCP&L and
the issuer will treat the transaction as a sale under applicable law, although
for financial reporting and federal and state tax purposes, the transition bonds
will be treated as a financing and not a sale. In the event of a bankruptcy of
JCP&L, a party in interest in the bankruptcy may assert that the sale of the
bondable transition property to the issuer was a financing transaction and not a
"sale or other absolute transfer" and that the treatment of the transaction for
financial reporting and tax purposes as a financing and not a sale lends weight
to that position. If a court were to characterize the transaction as a
financing, the issuer would be treated as a secured creditor of JCP&L in the
bankruptcy proceedings. Although the issuer would in that case have a security
interest in the bondable transition property, it would not likely be entitled to
access to the transition bond charge collections during the bankruptcy. As a
result, repayment on the transition bonds could be significantly delayed and a
plan of reorganization in the bankruptcy might permanently modify the amount and
timing of payments to the issuer of transition bond charge collections and
therefore the amount and timing of funds available to the issuer to pay
transition bondholders.
A SEQUESTRATION ORDER FOR BONDABLE TRANSITION PROPERTY IN CASE OF DEFAULT MIGHT
NOT BE ENFORCEABLE IN BANKRUPTCY
If JCP&L defaults on its obligations as servicer, the Competition Act
allows the BPU or any court of competent jurisdiction to order the sequestration
and payment of all transition bond charge collections to the transition
bondholders. The Competition Act states that this BPU or court order would be
effective even if made while JCP&L or its successor is in bankruptcy. However,
federal bankruptcy law may prevent the BPU from issuing or enforcing such an
order. The indenture requires that the trustee request an order from the
bankruptcy court to permit the BPU to issue and enforce this order. However, the
bankruptcy court may deny the request. In this scenario, the issuer would lose
access to the transition bond charge collections and thereby lose its source of
funds for scheduled payments on the transition bonds.
OTHER RISKS ASSOCIATED WITH
AN INVESTMENT IN THE TRANSITION BONDS
RISKS ASSOCIATED WITH THE USE OF INTEREST RATE SWAP TRANSACTIONS
The related prospectus supplement will contain the risk factors, if any,
associated with any interest rate swap that may be entered into by the issuer
with respect to a series or class of floating rate transition bonds.
ABSENCE OF SECONDARY MARKET FOR TRANSITION BONDS COULD LIMIT YOUR ABILITY TO
RESELL TRANSITION BONDS
The underwriters for the transition bonds may assist in resales of the
transition bonds, but they are not required to do so. A secondary market for the
transition bonds may not develop. If it does develop, it may not continue or it
may not be sufficiently liquid to allow you to resell any of your transition
bonds.
JCP&L'S RATINGS MAY AFFECT THE MARKET VALUE OF THE TRANSITION BONDS
23
A downgrading of the credit ratings on the debt of JCP&L could have an
adverse effect, at least temporarily, on the market value of your transition
bonds.
THE ISSUER MAY ISSUE ADDITIONAL SERIES OF TRANSITION BONDS THAT WILL SHARE
AVAILABLE CREDIT ENHANCEMENT AND WHOSE HOLDERS MAY HAVE INTERESTS THAT CONFLICT
WITH YOURS
The issuer may issue other series of transition bonds without your prior
review or approval. These series may include terms and provisions that would be
unique to that particular series. A new series of transition bonds may not be
issued if it would result in the credit ratings on any outstanding series of
transition bonds being reduced or withdrawn. There can be no assurance that the
issuance of additional series of transition bonds would not cause reductions or
delays in payments on your transition bonds. Any additional series of transition
bonds issued by the issuer will have the right to share equally in all of the
bondable transition property owned by the issuer with all of the outstanding
transition bonds. Moreover, JCP&L may sell bondable transition property to one
or more entities other than the issuer in connection with the issuance of a new
series of transition bonds. In that case, JCP&L will need to obtain a separate
financing order from the BPU. That separate financing order will specify an
additional amount of transition bond charges to be collected from customers for
the additional series of transition bonds. Any additional series of transition
bonds issued by another entity will have an equal right to share in transition
bond charge collections with the issuer. See "THE TRANSITION BONDS" and "THE
INDENTURE" in this prospectus. In addition, some matters may require the vote of
the holders of all series and classes of transition bonds, voting as a single
class. Your interests in these votes may conflict with the interests of the
transition bondholders of another series or of another class. Thus, these votes
could result in an outcome that is materially unfavorable to you.
In the event that other series of transition bonds are issued, amounts
deposited with respect to your series of transition bonds, including amounts in
the series capital subaccount and the series overcollateralization subaccount,
may be used to pay amounts relating to those other series. Payment dates may not
be the same for all series, and available credit enhancement may be exhausted on
a payment date preceding that applicable to your transition bonds.
THE RATINGS HAVE A LIMITED FUNCTION AND THEY ARE NO INDICATION OF THE EXPECTED
RATE OF PAYMENT OF PRINCIPAL OF THE TRANSITION BONDS
The transition bonds will be rated by at least two nationally recognized
statistical rating organizations (referred to as the "rating agencies"). The
ratings are limited to analyzing the probability that the issuer will repay the
total principal balance of each class of the transition bonds at its legal final
maturity and will make timely interest payments. The ratings do not otherwise
assess the speed at which the issuer will repay the principal of the transition
bonds. Thus, the issuer may repay the principal of your transition bonds earlier
or later than you expect, which may materially reduce the value of your
investment. A rating is not a recommendation to buy, sell or hold transition
bonds. The rating may change at any time. A rating agency has the authority to
revise or withdraw its rating based solely upon its own judgment. See "RATINGS
FOR THE TRANSITION BONDS" in this prospectus.
JCP&L'S OBLIGATION TO INDEMNIFY THE ISSUER FOR A BREACH OF A REPRESENTATION OR
WARRANTY MAY NOT BE SUFFICIENT TO PROTECT YOUR INVESTMENT
If JCP&L breaches a representation or warranty in the sale agreement, it is
obligated to indemnify the issuer and the trustee for any liabilities,
obligations, claims, actions, suits or payments resulting from that breach, as
well as any reasonable costs and expenses incurred. In addition, JCP&L is
obligated to indemnify the issuer and the trustee, for itself and on behalf of
the transition bondholders, for (1) required payments of principal of and
interest on the transition bonds in accordance with their terms and (2) required
deposits of amounts with the issuer, in each case, required to have been made,
which are not made when so required as a result of a breach of a representation
or warranty. However, the amount of any indemnification paid by JCP&L may not be
sufficient for you to recover all of your loss on the transition bonds. See "THE
SALE AGREEMENT--JCP&L'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE AND
24
TO TAKE LEGAL ACTION" in this prospectus. JCP&L will not be obligated to
indemnify any party for any changes of law. In addition, JCP&L will not be
obligated to repurchase the collateral in the event of a breach of any of its
representations and warranties, and neither the trustee nor the transition
bondholders will have the right to accelerate payments on the transition bonds
as a result of a breach of any of JCP&L's representations and warranties, absent
an event of default under the indenture as described in "THE INDENTURE--WHAT
CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION BONDS" in this prospectus. If
JCP&L becomes obligated to indemnify transition bondholders, the ratings on the
transition bonds will likely be downgraded as a result of the circumstances
causing the breach and the fact that the transition bondholders will be
unsecured creditors of JCP&L with respect to any of those indemnification
amounts.
YOU MAY HAVE TO REINVEST PRINCIPAL OF YOUR TRANSITION BONDS AT A LOWER RATE OF
RETURN BECAUSE OF AN OPTIONAL REDEMPTION OF BONDS
As described more fully under "THE TRANSITION BONDS--OPTIONAL REDEMPTION OF
THE TRANSITION BONDS" in this prospectus, the issuer may redeem any series of
transition bonds on any payment date if, after giving effect to payments that
would otherwise be made on that payment date, the outstanding principal balance
of that series of transition bonds has been reduced to less than 5% of that
series' initial principal balance. In addition, the issuer may redeem a series
of transition bonds if and to the extent provided in the related prospectus
supplement. Redemption of a series of transition bonds will result in a shorter
than expected weighted average life for that series. Redemption may also
adversely affect the yield to maturity of the transition bonds redeemed. The
issuer cannot predict whether any series of transition bonds will be redeemed.
Future market conditions may require you to reinvest the proceeds of a
redemption at a lower rate than the rate you receive on the transition bonds.
RISKS ASSOCIATED WITH THE USE OF CREDIT ENHANCEMENT OR SWAP TRANSACTIONS
The issuer may enter into certain forms of credit enhancement or interest
rate swaps arrangements with respect to a series or class of floating rate
transition bonds that entail certain kinds of risks. The applicable prospectus
supplement will contain the risk factors, if any, associated with any applicable
credit enhancement or interest rate swap arrangement.
YOU MIGHT RECEIVE PRINCIPAL PAYMENTS LATER, OR IN LIMITED CIRCUMSTANCES,
EARLIER, THAN YOU EXPECTED
The amount and the rate of collection of transition bond charges that the
servicer will collect from each customer class will partially depend on actual
electricity usage and the amount of delinquencies and write-offs for that
customer class. The amount and the rate of collection of transition bond
charges, together with the transition bond charge adjustments described above,
will generally determine whether there is a delay in the scheduled repayments of
principal of the transition bonds. If the servicer collects transition bond
charges at a slower rate than expected from any customer class, it may have to
request adjustments of the transition bond charges. If those adjustments are not
timely and accurate, you may experience a delay in payments of principal and
interest or a material decrease in the value of your investment. If there is an
acceleration of any series of transition bonds before maturity, all classes
within that series will be paid pro rata. Therefore, some classes may be paid
earlier and some classes may be paid later than expected. Unless there is a
redemption or acceleration of the transition bonds before maturity, the
transition bonds will not be retired earlier than scheduled. If there is a
shortfall in the amount necessary to make principal payments that are due and
payable, including upon an acceleration following an event of default, the
trustee will distribute principal pro rata among the series and classes of
transition bonds in proportion to the amount of principal due and payable for
each series or class. If there is a shortfall in the amount necessary to make
scheduled principal payments, the trustee will distribute principal pro rata
among the series and classes in proportion to the amount scheduled to be paid
for each series or class.
25
JERSEY CENTRAL POWER & LIGHT COMPANY
JCP&L, a public utility furnishing electric service wholly within the State
of New Jersey, is a subsidiary of FirstEnergy Corp., a holding company
registered under the Public Utility Holding Company Act of 1935. JCP&L became a
subsidiary of FirstEnergy Corp. effective November 7, 2001, when GPU, Inc.
(JCP&L's former parent company) merged with FirstEnergy Corp. JCP&L provides
retail electric service within a territory located in northern, western and east
central New Jersey having a population of approximately 2.7 million. JCP&L's
principal executive offices are located at 76 South Main Street, Akron, Ohio
44308-1890, and its telephone number is (330) 384-5100.
During 2001, residential sales accounted for about 47% of JCP&L's operating
revenues from customers and 42% of kilowatt hour sales to customers; commercial
sales accounted for about 40% of JCP&L's operating revenues from customers and
41% of kilowatt hour sales to customers; industrial sales accounted for about
12% of JCP&L's operating revenues from customers and 16% of kilowatt hour sales
to customers; and sales to rural electric cooperatives, municipalities
(primarily for street and highway lighting) and others accounted for about 1% of
JCP&L's operating revenues from customers and less than 1% of kilowatt hour
sales to customers. The revenues derived from the 25 largest customers in the
aggregate accounted for approximately 9.9% of operating revenues from customers
for the year 2001. JCP&L also makes interchange and spot market sales of
electricity to other utilities.
The electric transmission facilities of JCP&L and its affiliates,
Pennsylvania Electric Company and Metropolitan Edison Company, are physically
interconnected and are operated on an integrated and coordinated basis. The
transmission facilities of the integrated system are physically interconnected
with neighboring affiliated and nonaffiliated utilities within New Jersey and in
neighboring states including Pennsylvania, Maryland, New York and Ohio. The
interconnection facilities are used for substantial capacity and energy
interchange and purchased power transactions as well as emergency assistance.
JCP&L is a member of the Pennsylvania-New Jersey-Maryland Interconnection
(referred to as "PJM") and the Mid-Atlantic Area Council, an organization
providing coordinated review of the planning by utilities in the PJM area.
Where to Find Information About JCP&L. JCP&L files annual, quarterly and
current reports and other information with the SEC under File No. 1-3141.
Reports and other information filed with the SEC are available to the public
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
and copy any of these SEC filings at the SEC's public reference room in
Washington, D.C. located at 450 Fifth Street, N.W. Please call the SEC at
1-800-SEC-0330 for further information about the operation of the public
reference room. Some of JCP&L's securities are listed on the New York Stock
Exchange, and such reports and other information can also be inspected and
copied at the offices of such exchange on the 7th Floor, 20 Broad Street, New
York, New York. For so long as any transition bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, copies of these
documents will be available for inspection by the holders of any listed
transition bonds at the office of the listing agent in Luxembourg. JCP&L also
provides information through its website at www.firstenergycorp.com.
WHERE YOU CAN FIND MORE INFORMATION
The issuer has filed with the SEC a registration statement under the
Securities Act of 1933 (referred to as the "Securities Act") with respect to the
transition bonds. This prospectus, which forms a part of the registration
statement, and any prospectus supplement describe the material terms of some
documents filed as exhibits to the registration statement. However, this
prospectus and any prospectus supplement do not contain all of the information
contained in the registration statement and its exhibits. Any statements
contained in this prospectus or any prospectus supplement concerning the
provisions of any document filed as an exhibit to the registration statement or
otherwise filed with the SEC are not necessarily complete, and in each instance
reference is made to the copy of the document so filed.
26
The SEC allows the issuer to "incorporate by reference" into this
prospectus the information the issuer files with it, which means that the issuer
can disclose important information to you by referring you to those documents.
The information incorporated by reference is an important part of this
prospectus and should be read with the same care. Information that the issuer
files later with the SEC under the Securities Exchange Act of 1934 (referred to
as the "Exchange Act") will automatically update and supersede this information.
The issuer incorporates by reference any future filings (including those made
after the initial filing of the registration statement and prior to
effectiveness) the issuer makes with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Exchange Act until all of the transition bonds described in this
prospectus are sold.
You may request a free copy of these filings by writing or telephoning the
issuer at the following address: JCP&L Transition Funding LLC, c/o GPU Service,
Inc., 76 South Main Street, Akron, Ohio 44308-1890, and its telephone number is
(330) 384-5100.
THE COMPETITION ACT
The Competition Act, which was signed into law in February 1999, provides,
among other things, for the restructuring of the electric utility industry in
New Jersey. Through the enactment of the Competition Act, the New Jersey
Legislature sought to lower energy costs and to allow New Jersey electricity
customers to choose their electric power supplier. The Competition Act
deregulated the electric power generation market in order to promote efficient
energy service to consumers and to diversify the sources of supply of
electricity in the State. The traditional retail monopoly for electric power
generation was eliminated, and competition was introduced to the electricity
generation retail market in August 1999. Customers' bills have been unbundled
into separate line items for electric distribution, transmission and generation
services, among others. In this competitive electric generation retail market,
the traditional electric utility rate regulation has been replaced by a
combination of modified regulation and some competition.
The fossil and nuclear-fueled electric generation plants formerly owned by
JCP&L, which produce electric power and current, are referred to as
"generation-related facilities". JCP&L's high voltage electric lines and related
step up and step down transformers and substations which transmit electric power
and current at higher voltages and usually over longer distances than
distribution facilities are referred to as "transmission facilities". JCP&L's
lower voltage electric lines, transformers and substations which interconnect
with the high voltage transmission lines and distribute the power and current to
the end-use customers at lower voltage levels consistent with the customers' use
are referred to as "distribution facilities".
The Competition Act requires the unbundling of electric services into
separate generation, transmission and distribution services with open retail
competition for generation services. While electric utilities will continue to
provide transmission and distribution services, the Competition Act authorizes
third party electric power suppliers licensed by the BPU to provide electric
generation services to retail customers. Under the Competition Act, third party
electric power suppliers are subject to some limited financial and other
requirements and some customer protection requirements, but are generally not
regulated by the BPU. Electric distribution and transmission services remain
regulated.
Even with the enactment of the Competition Act, the BPU continues to
regulate aspects of the electric utility industry in New Jersey with respect to
electric companies. The BPU has also established guidelines governing customer
billing and collection, metering and disclosure requirements applicable to third
party electric power suppliers participating in the new competitive retail
electric generation market in New Jersey.
RECOVERY OF STRANDED COSTS IS ALLOWED FOR JCP&L AND OTHER NEW JERSEY UTILITIES
To maintain the financial integrity of electric utilities during the
transition to a competitive retail electric generation market, the Competition
Act allows electric public utilities an opportunity to recover their stranded
27
costs. Stranded costs are (1) the amount by which the net cost of the electric
public utility's electric generating assets or electric power purchase
contracts, which traditionally would be recoverable in a regulated environment,
exceeds the market value of those assets or contracts in a competitive supply
marketplace, as determined by the BPU, and (2) the costs of buydowns or buyouts
of power purchase contracts. Stranded costs result from the necessity to lower
rates in order to compete in a competitive retail electric generation market.
JCP&L will recover stranded costs related to the newly introduced competitive
retail market in electric power generation which are non-recoverable in
competitive retail markets, as well as other reasonably incurred costs, to the
extent permitted by the BPU. These stranded costs are, in JCP&L's case,
primarily related to generation-related facilities. The Competition Act also
permits the recovery of restructuring-related costs that the BPU approves as
appropriate for recovery. As a mechanism to recover these stranded costs, the
Competition Act provides for the imposition and collection of a transition bond
charge on customers' bills. Because the transition bond charge is a usage-based
charge based on access to the utility's transmission and distribution system,
the customers will be assessed regardless of whether the customers purchase
electricity from the utility or a third party electric power supplier, except as
described under "--JCP&L AND OTHER UTILITIES MAY SECURITIZE STRANDED
COSTS--Customers Cannot Avoid Paying the Transition Bond Charge" below. Also, if
on-site generation facilities that are connected to the utility's transmission
and distribution system produce power that is delivered to off-site retail
customers in New Jersey, the transition bond charge will apply to the sale or
delivery of that power.
The Competition Act requires the BPU to review periodically any market
transition charge used to recover stranded costs. This review will ensure that
the utility imposing the charge will not collect charges that exceed its actual
stranded costs. Any periodic review of the market transition charge will not
affect the transition bond charge assessed to pay the transition bonds. See
"JCP&L'S RESTRUCTURING" in this prospectus.
JCP&L AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS
The Recovery of Stranded Costs May be Facilitated by the Issuance of
Transition Bonds. The Competition Act authorizes the BPU to issue "bondable
stranded costs rate orders", such as the BPU financing order, approving, among
other things, the issuance of transition bonds to recover bondable stranded
costs and related expenses of an electric public utility. A utility, a direct or
indirect finance subsidiary of a utility or a third-party assignee of a utility
may issue transition bonds. Under the Competition Act, proceeds of transition
bonds are required to be used to reduce the utility's stranded costs through the
retirement of its debt or equity, or both. Transition bonds are secured by and
payable from bondable transition property and may have a scheduled amortization
upon issuance of up to 15 years. The BPU financing order allows the legal final
maturity of the transition bonds issued by the issuer to extend to 17 years from
the date of issuance of the transition bonds.
The Competition Act contains a number of provisions designed to facilitate
the securitization of stranded costs and related expenses.
A Bondable Stranded Costs Rate Order is Irrevocable. Under the Competition
Act, bondable transition property is created by the issuance by the BPU of a
bondable stranded costs rate order, such as the BPU financing order. The
Competition Act provides that each bondable stranded costs rate order, including
the BPU financing order, will become irrevocable upon issuance and effectiveness
of the order. Upon the transfer of the bondable transition property to an
assignee, such as the issuer, and the receipt by the utility of consideration
for the sale of the transition bonds, the bondable stranded costs rate order,
the transition bond charge and the bondable transition property become a vested,
presently existing property right, vested ab initio in the assignee.
Under the Competition Act, neither the BPU nor any other governmental
entity has the authority, directly or indirectly, legally or equitably, to
rescind, alter, repeal, modify or amend a bondable stranded costs rate order, to
revalue, re-evaluate or revise the amount of bondable stranded costs, to
determine that the transition bond charge or the revenues required to recover
bondable stranded costs are unjust or unreasonable, or in any way to reduce or
28
impair the value of bondable transition property, nor will the amount of
revenues from the transition bond charge be subject to reduction, impairment,
postponement or termination. In addition, under the Competition Act, the State
of New Jersey pledges and agrees with the holders of the transition bonds, and
with any owner or assignee of bondable transition property, or with any
financing entity, such as the issuer, not to limit, alter or impair the bondable
transition property or the other rights vested in an electric public utility or
any assignee or pledgee of the utility or any financing entity or vested in the
holders of any transition bonds pursuant to a bondable stranded costs rate order
until the transition bonds and any interest thereon, plus the cost of any credit
enhancement, reserves, servicing fees and other expenses and any acquisition or
redemption premium, if any, are fully paid and discharged. In addition, the
State pledges and agrees in the Competition Act that it will not in any way
limit, alter, impair or reduce the value or amount of the bondable transition
property approved under a bondable stranded costs rate order except as
contemplated by the periodic adjustments to the transition bond charge
authorized by the Competition Act. The BPU financing order is a bondable
stranded costs rate order. See "--The Transition Bond Charge is Adjusted
Periodically" below. See also "RISK FACTORS--JUDICIAL, LEGISLATIVE OR REGULATORY
ACTION THAT MAY ADVERSELY AFFECT YOUR INVESTMENT" in this prospectus. A bondable
stranded costs rate order does not constitute a debt or liability of the State,
nor does it constitute a pledge of the full faith and credit of the State. The
issuance of transition bonds does not, directly, indirectly or contingently,
obligate the State to levy or pledge any form of taxation or make any
appropriation for their payment.
The Transition Bond Charge is Adjusted Periodically. The Competition Act
requires each bondable stranded costs rate order to provide for mandatory
adjustment of the transition bond charge, at least once a year, upon petition of
the electric public utility or its assignee or financing entity. The BPU
financing order permits JCP&L, as servicer, to petition the BPU for adjustments
at least annually, but not more frequently than quarterly, except that monthly
filings are permitted in the last year before the expected maturity of the
transition bonds and continuing until their legal final maturity. These
adjustments are formula-based to provide revenues sufficient to provide for the
full recovery of bondable stranded costs, including, without limitation, the
timely payment of the principal of, and interest, which, in the case of interest
on any floating rate class of any series, will be calculated at the applicable
gross fixed rate, and acquisition or redemption premium on, the transition bonds
in accordance with the expected amortization schedule. JCP&L will agree in the
servicing agreement with the issuer to file with the BPU each proposed
adjustment calculated in accordance with the formula. See "THE SERVICING
AGREEMENT" in this prospectus.
Customers Cannot Avoid Paying the Transition Bond Charge. The Competition
Act provides that the transition bond charge is "non-bypassable", which means
that the charge will be payable by all of JCP&L's customers, even if those
customers elect to purchase electricity from a third party electric power
supplier. See "SUMMARY OF TERMS--THE COLLATERAL" in this prospectus for a
description of JCP&L's customers.
The Competition Act Provides a Procedure for Perfecting a Transfer of
Bondable Transition Property and for Perfecting the Transition Bonds' Lien on
Bondable Transition Property. The Competition Act provides procedures for
assuring that the transfer of the bondable transition property from JCP&L to the
issuer will be perfected under New Jersey law and that the security interest
granted by the issuer to the trustee in the bondable transition property will be
perfected under New Jersey law. The Competition Act provides that a transfer of
bondable transition property will be perfected against any third party when:
o the BPU has issued its bondable stranded costs rate order with respect
to such bondable transition property and such order is effective;
o the agreement to transfer the bondable transition property has been
executed and delivered by the electric public utility or its assignee;
and
29
o a financing statement with respect to the transfer has been filed in
accordance with the New Jersey Uniform Commercial Code.
Perfection of the trustee's security interest in the bondable transition
property is necessary in order to establish the priority of the trustee's
security interest over claims of other parties to the bondable transition
property. The Competition Act provides that security interests in the bondable
transition property are perfected only by means of a separate filing under the
New Jersey Uniform Commercial Code. Upon perfection, a security interest under
the Uniform Commercial Code attaches to bondable transition property, whether or
not the revenues or proceeds thereof have accrued. The Competition Act provides
that priority of security interests in bondable transition property will not be
defeated or adversely affected by:
o commingling of transition bond charge collections with other funds of
the utility or its assignee; or
o the periodic adjustment of the transition bond charge under the
Competition Act.
The Competition Act Characterizes the Transfer of Bondable Transition
Property as a Sale or Other Absolute Transfer. The Competition Act provides that
a transfer by the utility or an assignee of bondable transition property will be
treated as a sale or other absolute transfer of the transferor's right, title
and interest and not as a borrowing secured by the bondable transition property
if the parties expressly state in governing documents that a transfer is to be a
sale or other absolute transfer. The characterization of the transfer as a sale
is not affected or impaired by the fact that:
o the transferor retains or acquires an equity interest of equal
priority in the bondable transition property or the fact that only a
portion of the bondable transition property is transferred;
o the transferor retains or acquires a subordinated equity interest or
other credit enhancement provisions on terms commensurate with market
practices;
o the electric public utility acts as collector or servicer of the
related transition bond charge;
o the transferor retains mere legal title to the bondable transition
property for servicing or supervising services and collections
relating to the bondable transition property; or
o the transfer is treated as a financing for federal, state or local tax
purposes or financial accounting purposes.
See "RISK FACTORS--THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" in this prospectus.
JCP&L'S RESTRUCTURING
The Stipulation and Restructuring Order. On April 14, 1999, JCP&L and a
number of other parties filed a stipulation with the BPU, detailing a proposal
for JCP&L's implementation of full customer choice under the Competition Act.
The parties to the stipulation agreed, among other things, not to oppose a
financing order to be issued by the BPU or the sale of transition bonds to
implement securitization in any judicial or regulatory forum. An alternative
joint proposal was submitted by the Division of the Ratepayer Advocate and
others in opposition to the stipulation. The BPU found the stipulation submitted
by JCP&L, subject to certain modifications, to be a reasonable framework for
resolution of the proceedings and issued its summary order, dated May 24, 1999.
The BPU issued its more detailed decision and order, dated March 7, 2001, which
is referred to as the "restructuring order".
In the restructuring order, the BPU authorized JCP&L to issue up to $420
million of transition bonds to recover up to $400 million in stranded costs plus
up to $20 million in transaction costs and related expenses of the financing. In
30
addition, the BPU authorized the imposition of a charge to recover, through a
market transition charge, federal and state taxes associated with the collection
of the transition bond charge.
JCP&L Unbundled its Electric Rates. JCP&L unbundled its retail electric
rates on August 1, 1999 into charges for distribution, transmission and
generation services, as well as market transition and societal benefits charges.
Upon issuance of transition bonds, there will also be a transition bond charge.
Residential customers receive bills showing some of these charges combined into
a single line item. Commercial and industrial customers receive bills with
separate line items for each of these charges. All customer bills will indicate
that a transition bond charge is being collected on behalf of the issuer. If a
customer chooses a third party electric power supplier for generation services,
the customer may receive separate billings for those generation services
directly from the third party electric power supplier or it may receive combined
billings for all charges, either from JCP&L or, subject to full implementation
of a prior BPU order, from the third party electric power supplier pursuant to
an agreement between JCP&L and the third party electric power supplier. If the
third party electric power supplier bills the combined charges, it must remit to
JCP&L the amount it bills to customers on behalf of JCP&L. Any third party
electric power supplier that bills the combined charges will also be required to
provide the servicer with total monthly kilowatt hour usage information for each
customer in a timely manner for the servicer to fulfill the obligations of the
servicer. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE--THE BPU
FINANCING ORDER--JCP&L May Be Required to Allow Other Entities to Provide
Metering and Billing Services" in this prospectus. While five third party
suppliers have entered into agreements with JCP&L that, among other things,
would allow such suppliers to provide billing services in JCP&L's service
territory, none of these suppliers have taken the necessary steps to, or have
expressed any interest in, actually providing such services.
JCP&L May Collect a Societal Benefits Charge. Under the Competition Act, an
electric public utility is permitted, with BPU approval, to collect a
non-bypassable societal benefits charge from its customers to recover:
o nuclear plant decommissioning costs;
o demand side management program costs;
o customer education program costs;
o certain environmental remediation costs; and
o previously approved social program costs such as the costs of programs
that assist customers unable to pay their utility bills in full and on
time.
The BPU restructuring order provided that JCP&L may impose a societal
benefits charge commencing August 1, 1999.
Reduction in JCP&L's Electric Rates. Pursuant to the BPU restructuring
order, JCP&L's rates for generating, transmitting and distributing electric
power to its customers were reduced on August 1, 1999 by 5% from rates in effect
on April 30, 1997, a portion of which reduction reflects the anticipated savings
from securitization. There were additional rate reductions of 1% on August 1,
2000 and 2% on August 1, 2001 and there will be an additional net rate reduction
of 3% on August 1, 2002, providing an overall rate reduction from rates in
effect on April 30, 1997 of 11%, regardless of the amount of reduction achieved
from securitization. JCP&L's rates will not be subject to any statutory cap
after July 31, 2003, although JCP&L's rates for delivery services will continue
to be subject to BPU jurisdiction and approval.
Third Party Electric Power Suppliers; Basic Generation Service (BGS).
Pursuant to the Competition Act and the BPU restructuring order, customers may
choose to purchase power from alternative third party electric power suppliers
31
and later return to JCP&L as their supplier of BGS. JCP&L is required to provide
BGS to its electric customers who do not choose to purchase their electricity
from third party suppliers through July 2002. For the period from August 1, 2002
to July 31, 2003, the BPU has authorized the auctioning of BGS to meet the
electric demands of customers who have not selected an alternative supplier. The
auction was successfully concluded on February 13, 2002, eliminating JCP&L's
obligation to provide for the energy requirements of BGS. Beginning August 1,
2003, the approach to be taken in procuring the energy needs for BGS has not
been determined. The BPU has recently initiated a formal proceeding to decide
how BGS will be handled after July 31, 2003. The Competition Act provides that
JCP&L will be permitted full and timely recovery from customers of all
reasonable and prudently incurred costs associated with meeting its basic
generation service requirement, including pursuant to those bids.
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
THE BPU FINANCING ORDER
JCP&L's Petition and the BPU Financing Order. On August 25, 1999, JCP&L
filed a petition with the BPU, which petition was amended on December 14, 1999
and May 29, 2001, requesting the issuance by the BPU of a bondable stranded
costs rate order under the Competition Act to allow JCP&L to recover bondable
stranded costs relating to its Oyster Creek nuclear generating station, plus
associated transaction costs and the cost of retiring equity and debt securities
of JCP&L. These costs are recoverable through the issuance of transition bonds
and the imposition of a transition bond charge. In response to the petition the
BPU issued its financing order on February 6, 2002.
The BPU Authorized JCP&L to Transfer Bondable Transition Property and to
Issue Transition Bonds. The BPU financing order authorizes the transfer of the
bondable transition property described in this prospectus and the issuance of
transition bonds in an initial total principal balance not to exceed $320
million, secured by bondable transition property. The transition bonds may have
a legal final maturity date not later than 17 years from the date of issuance.
The final structure, pricing and other terms of the transition bonds will
be subject to approval of the BPU or its designee. This approval will be
obtained prior to the issuance of the transition bonds.
The BPU Authorized JCP&L to Impose the Transition Bond Charge. Under the
BPU financing order, the BPU irrevocably authorized JCP&L to impose, meter,
charge, bill, collect and receive from customers, the non-bypassable transition
bond charge in an amount sufficient to recover the principal balance of
transition bonds in accordance with an expected amortization schedule and
interest on the transition bonds, plus an amount sufficient to provide for any
credit enhancement, to fund any reserves, and to pay acquisition or redemption
premiums, if any, servicing fees and other expenses relating to the transition
bonds.
The BPU financing order also grants JCP&L, as servicer, the authority to
make "non-routine" filings for adjustments of the transition bond charge. This
would permit filings to be made to accommodate changes in the formula specified
in the BPU financing order for the mandatory periodic adjustments which JCP&L
deems appropriate to remedy a significant and recurring variance between actual
and expected transition bond charge collections. Any such filing is required to
be made at least 90 days prior to the proposed effective date and would be
subject to BPU approval.
The transition bond charge will be a uniform non-bypassable per kilowatt
hour charge assessed against customers on their bills, regardless of customer
rate class, as part of JCP&L's regular billing. JCP&L will set the initial per
kilowatt hour transition bond charge, based upon the formula approved in the BPU
financing order. Upon each adjustment of the transition bond charge or the
issuance of an additional series of transition bonds, the adjusted transition
bond charge will be assessed in the same manner.
32
The transition bond charge will be pro-rated in the case of the first bill
after issuance of a series of transition bonds to account for any partial month
since the date of issuance. For instance, if a particular series' issuance date
is August 15, bills that include current charges for services provided before
August 15 will not be assessed the transition bond charge with respect to that
series for the period prior to and including August 15. Upon each adjustment of
the transition bond charge or issuance of additional series of transition bonds,
the adjusted transition bond charge will be assessed in the same manner.
The initial transition bond charge will be calculated on the basis of:
o the issuance of $320 million of transition bonds;
o the projected total payments required in relation to the transition
bonds during the period commencing on the date of issuance of the
transition bonds and ending [March 31], 2003; and
o the estimated amount of kilowatt hours of electricity to be delivered,
billed and collected during that period.
The periodic adjustments to the transition bond charge are designed to
ensure that transition bond charge collections are not more or less than the
amount necessary to meet all of the required payments in relation to the
transition bonds and related costs and expenses and to maintain the required
balances in each series' overcollateralization subaccount and each series'
capital subaccount. In requesting periodic adjustments, the servicer is required
to take into account updated projections of consumption levels and timing of
collections and any amounts held in the reserve subaccount.
JCP&L May Be Required to Allow Other Entities to Provide Metering and
Billing Services. Under the Competition Act, the BPU may establish specific
standards for metering, billing and other activities by third party electric
power suppliers participating in the competitive electric generation retail
market in New Jersey. In order to qualify to serve as a third party electric
power supplier, an electric supplier must maintain at least a `BBB' or the
equivalent long term unsecured credit rating from Moody's and S&P, or maintain
with the servicer a cash deposit or comparable security equal to two months'
maximum estimated collections of all charges payable to JCP&L. The BPU financing
order allows qualified third party electric power suppliers, approved by the
BPU, to bill and collect the transition bond charge on behalf of the issuer. In
doing so, third party electric power suppliers must comply with all applicable
BPU billing and collection requirements. Each third party electric power
supplier must also agree to remit the full amount of all charges it bills to
customers for the electric transmission and distribution services JCP&L or its
successor provides, together with transition bond charge payments, regardless of
whether those payments are received from the customers, within 15 days of
JCP&L's or its successor's bill for such charges. If a third party electric
power supplier fails to remit charges within a further seven days, JCP&L, as
servicer, or its successor may assume responsibility for billing or transfer
responsibility to another qualified third party electric power supplier. While a
third party electric power supplier collecting the transition bond charge may
request termination of service to delinquent customers, only JCP&L or a
successor electric public utility may disconnect or reconnect a customer's
distribution service.
The BPU May Designate a Replacement Servicer. The Competition Act provides
that in the event of a default by the electric public utility in respect of
charging, collecting and receiving revenues derived from the transition bond
charge and upon the application of the secured party, such as the trustee, or an
assignee, such as the issuer, the BPU or any court of competent jurisdiction
will by order designate a trustee or other entity to act in place of the
electric public utility to impose, meter, charge, bill, collect and receive the
transition bond charge. The BPU may, in its discretion, establish criteria for
the selection of any entity that may become a servicer of bondable transition
property upon the default or other material adverse change in the financial
condition of the electric public utility. The appointment of a successor
servicer must not result in the downgrade or withdrawal of a rating on any
outstanding transition bonds. See "RISK FACTORS--SERVICING RISKS--YOUR
INVESTMENT RELIES ON JCP&L OR A SUCCESSOR ACTING AS SERVICER OF THE BONDABLE
TRANSITION PROPERTY" in this prospectus.
33
THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS
The servicing agreement requires the servicer to seek adjustments to the
transition bond charge in order to enhance the likelihood that actual transition
bond charge collections, net of any amounts on deposit in the reserve
subaccount, are neither more nor less than the amount necessary to amortize the
transition bonds of each series in accordance with the related expected
amortization schedule, to pay interest which, in the case of interest on any
floating rate class of any series, will be calculated at the applicable gross
fixed rate, to fund or replenish the series overcollateralization subaccounts to
the level required to be on deposit in the series overcollateralization
subaccounts, to replenish any shortfalls in the series capital subaccounts, and
to pay the trustee's fee, the servicing fee and the other expenses and costs
included in bondable stranded costs. These adjustments are formula based,
incorporating actual transition bond charge collections, as well as updated
assumptions by the servicer as to projected future usage of electricity by
customers, expected delinquencies and write-offs and future expenses relating to
bondable transition property and the transition bonds, and the issuance of any
additional series of transition bonds. They are designed to achieve each of the
above goals by the payment date immediately preceding the next date on which the
transition bond charge is adjusted or the expected final payment date, as
applicable, taking into account any amounts on deposit in the reserve
subaccount. If at the time of issuance of a series, the servicer determines any
additional adjustments are required, the dates for these adjustments will be
specified in the prospectus supplement for the series.
The Schedule for Making Adjustments to the Transition Bond Charge. Under
the Competition Act, the servicer must file a request for an adjustment to the
transition bond charge with the BPU at least annually. Each proposed adjustment
will become effective on an interim basis 30 days after filing, absent a
determination of manifest error by the BPU, and will become final 60 days after
filing in the absence of a BPU order to the contrary. Under the BPU financing
order, "manifest error" means an arithmetic error evident on the face of the
filing. Under certain circumstances, adjustment filings may be made quarterly
or, during the last year before scheduled maturity and continuing until legal
final maturity, monthly.
SERVICING OF THE BONDABLE TRANSITION PROPERTY
JCP&L'S CUSTOMER CLASSES
JCP&L's customer base is divided into three principal revenue classes:
residential, commercial and industrial. The revenue class labeled "other"
consists primarily of services rendered for street and highway lighting. Several
rate classes are included within each category, differentiated by type and level
of service.
BILLED ELECTRIC REVENUE, NUMBER OF CUSTOMERS AND CONSUMPTION
The following table shows the amount of billed electric revenue per retail
customer class for the past six years and the percentage each customer class
represents of the total billed retail revenue.
34
TABLE 1
BILLED RETAIL REVENUE (IN THOUSANDS)
2001 % 2000 % 1999 %
---------- ----- ---------- ----- ---------- -----
Residential $919,206 46.9 $886,602 47.9 $924,519 45.9
Commercial 779,025 39.7 712,415 38.5 797,922 39.6
Industrial 242,894 12.4 232,933 12.6 272,055 13.5
Other 18,900 1.0 19,367 1.0 20,331 1.0
---------- ----- ---------- ----- ---------- -----
Total $1,960,025 100.0 $1,851,317 100.0 $2,014,827 100.0
1998 % 1997 % 1996 %
---------- ----- ---------- ----- ---------- -----
Residential $892,922 45.1 $905,063 44.4 $900,929 44.8
Commercial 779,878 39.4 796,755 39.1 777,363 38.6
Industrial 288,241 14.5 313,000 15.4 311,775 15.5
Other 20,671 1.0 21,544 1.1 21,239 1.1
---------- ----- ---------- ----- ---------- -----
Total $1,981,712 100.0 $2,036,362 100.0 $2,011,306 100.0
The following table shows the average number of JCP&L's retail customers in
each customer class for the past six years and the percentage each customer
class represents of the total number of retail customers.
TABLE 2
AVERAGE NUMBER OF CUSTOMERS (CUSTOMER BILLS)
2001 % 2000 % 1999 % 1998 % 1997 % 1996 %
--------- ------ --------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Residential 904,390 88.86 891,173 88.93 879,060 88.78 866,787 88.75 854,243 88.80 841,204 88.87
Commercial 109,001 10.71 106,474 10.62 106,482 10.75 105,158 10.77 103,074 10.71 100,667 10.63
Industrial 2,811 0.28 2,879 0.29 3,001 0.30 3,036 0.31 3,083 0.32 3,126 0.33
Other 1,510 0.15 1,594 0.16 1,643 0.17 1,623 0.17 1,605 0.17 1,571 0.17
--------- ------ --------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total 1,017,712 100.00 1,002,120 100.00 990,186 100.00 976,604 100.00 962,005 100.00 946,568 100.00
The following table shows the total billed retail electric consumption in
megawatt hours for the past six years for each customer class and the percentage
each customer class represents of the total retail consumption.
35
TABLE 3
BILLED ELECTRIC CONSUMPTION (MWH)
2001 % 2000 % 1999 %
---------- ------ ---------- ------ ---------- ------
Residential 8,402,726 42.37 8,087,371 42.16 7,977,703 42.05
Commercial 8,182,715 41.26 7,706,257 40.17 7,624,531 40.19
Industrial 3,165,312 15.96 3,306,953 17.24 3,288,707 17.33
Other 82,228 0.41 81,569 0.43 81,258 0.43
---------- ------ ---------- ------ ---------- ------
Total 19,832,981 100.00 19,182,150 100.00 18,972,199 100.00
1998 % 1997 % 1996 %
---------- ------ ---------- ------ ---------- ------
Residential 7,551,505 41.12 7,255,505 40.66 7,265,817 41.12
Commercial 7,258,769 39.52 6,974,503 39.08 6,829,103 38.65
Industrial 3,474,384 18.92 3,535,806 19.81 3,497,209 19.79
Other 80,874 0.44 79,370 0.45 77,843 0.44
---------- ------ ---------- ------ ---------- ------
Total 18,365,532 100.00 17,845,184 100.00 17,669,972 100.00
PERCENTAGE CONCENTRATION WITHIN JCP&L'S LARGE COMMERCIAL AND INDUSTRIAL
CUSTOMERS
For 2001, JCP&L's ten largest electric customers, many of whom are
multi-site customers, represented approximately 9.5% of JCP&L's retail kilowatt
hour sales. These customers are in the commercial and industrial customer
classes. There are no material concentrations in the residential class.
HOW JCP&L FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF ELECTRICITY USAGE
The energy forecast process incorporates analyses for each major customer
class. In each class, projections are developed using a variety of methods,
including econometric and time series analysis (regression, exponential
smoothing and Box-Jenkins). A final forecast is then developed based on
evaluation of all the results. A software package called "Forecast-Pro",
developed by Business Forecast Systems, Inc., is used extensively in the
development of forecasts for all classes.
The first step in the forecast process is to develop a set of basic
economic assumptions for the U.S. and the State of New Jersey, including
assumptions on Gross Domestic Product, industrial production, manufacturing and
non-manufacturing employment, housing starts, and personal income. Data from a
variety of sources, including Regional Financial Associates, NPA Data Services,
the Blue Chip Economic Indicators Report and the Rutgers Economic Advisory
Service, is analyzed in the process. Then, forecasts are developed for each
customer class, as described below. All forecasts assume normal weather
conditions.
The residential forecast is developed in two parts. First, a forecast of
number of customers is developed, based primarily on projections of housing
starts in the State. Then, a forecast of use per customer is developed. Methods
used include Box-Jenkins and exponential smoothing, which project use per
customer based on past trends, and regression analysis, which projects use per
customer based on explanatory variables such as personal income, electricity
price and weather.
In the commercial sector, economic and demographic variables considered in
regression models include personal income, non-manufacturing employment, the
number of residential customers and weather. Box-Jenkins and exponential
smoothing models are also reviewed.
The primary variable in the industrial sales forecast is a survey of large
industrial customers - who account for more than half of all industrial sales -
conducted each year. The survey provides information on the customers' expected
usage over the next few years. Projections of industrial production and
manufacturing employment are also considered in development of the forecast.
36
Forecast Variances. The table below compares usage in gigawatt hours for a
particular year to the related forecast prepared during the previous year. For
example, the annual 1996 variance is based on a forecast of 1996 consumption
prepared in 1995. A positive variance indicates that actual consumption exceeded
forecasted consumption. There can be no assurance that the future variance
between actual and forecasted consumption will be similar to the historical
experience set forth below.
TABLE 4
VARIANCE FOR THE AMOUNT OF ELECTRICITY CONSUMED (GWH)
2001 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------
Forecast 19,802 18,999 18,846 18,170 17,946 17,584
Actual 19,833 19,182 18,972 18,366 17,845 17,670
Variance % 0.16% 0.96% 0.67% 1.08% -0.56% 0.49%
If actual consumption of electricity is higher than the forecast, there may
be an excess of transition bond charge collections. Similarly, if actual
consumption is lower than the forecast, there may be a shortfall in transition
bond charge collections.
CREDIT POLICY; BILLING; COLLECTIONS; TERMINATION OF SERVICE
JCP&L is obligated to provide service to all customers within its service
area under New Jersey law. JCP&L relies on the information provided by the
customer, its customer information system and, for residential customers,
validation of the social security number provided by the customer to determine
whether JCP&L has previously served a customer. Certain accounts are secured
with deposits or guarantees as a precautionary measure. The amount of the
deposit reflects the estimated electricity use over a two-month period, which is
the average time period required to take collection action on past-due billings.
Since the vast majority of customers pay their bills within the allotted time,
JCP&L does not require deposits from new residential customers who provide a
valid social security number and whose credit score exceeds the threshold set by
JCP&L.
JCP&L has developed certain criteria for establishing credit. Industrial
and commercial customers may establish credit by depositing cash equal to twice
the estimated average monthly bill, by obtaining a guarantee from a satisfactory
guarantor, or by otherwise establishing credit to the satisfaction of JCP&L. In
general, residential customers may establish credit by depositing cash equal to
twice the estimated average monthly bill. Deposits may not be required if the
applicant is currently or has previously been a customer of JCP&L and has paid
all bills for service, or if the customer provides a letter confirming the
customer's creditworthiness from its previous utility.
Billing Process. JCP&L's policy is to bill its customers monthly. The
normal billing period for an individual customer ranges from 26 to 35 days for a
given month. In accordance with JCP&L's policy, bills are generally issued the
next business day after the meter readings are obtained. However, in connection
with the implementation of a new computer system in 1999 (which is discussed
below in greater detail), such policies were not always followed. Billing is on
a monthly basis now that the implementation period for the new system is over.
Accounts with potential meter reading or billing errors are reviewed and,
if necessary, corrected before mailing. Accounts with unusually high or low
usage compared to past customer history are not billed until reviewed and/or
corrected. Residential bills of $5,000 or more and general service bills of
$50,000 or more are also reviewed and, if necessary, corrected before mailing.
For residential customers, a pre-disconnection warning notice is sent when
the customer's previous month's bill is not paid at the invoicing time of the
next monthly bill. This notice is sent as a separate notification to the
customer. If payment is not received by the time of the third month's bill, a
disconnection notice is sent to the customer. A telephone contact to the
premises scheduled for disconnection is attempted anywhere from three to five
days prior to the disconnection date. The customer will face termination of
37
service on or after the scheduled date of the termination if payment is not
received. Once the service is terminated, the customer may be required to pay
the full outstanding balance or, if eligible, enter into an installment payment
plan.
For commercial and industrial customers, a disconnection notice is sent if
the payment of the previous month's invoice is not received when JCP&L invoices
the account again. This notice is sent as a separate notification to the
customer. A telephone contact to the premises that is scheduled for disconnec-
tion is attempted anywhere from three to five days prior to the disconnection
date. The customer will face termination of service on or after the scheduled
date of the termination if payment is not received. Once the service is
terminated, the customer may be required to pay the full outstanding balance or,
if eligible, enter into an installment payment plan.
JCP&L may change its credit, billing and collections and termination/
restoration of service policies and procedures from time to time. It is
expected that any such changes would be designed to enhance JCP&L's ability
to bill and collect customer charges on a timely basis.
Termination of Service for Residential Customers in the Winter. The winter
termination program is part of the New Jersey Administrative Code and prevents
discontinuance of electric service to qualified residential customers from
November 15 through March 15. The program provides for the requirement of
good-faith payments equal to budget amounts and placement on a 12-month system
budget plan. However, averages will be taken into consideration when calculating
the 12-month budget plan amount.
The regulation also provides for restoration of service for customers
eligible to participate in the program who had service shut off for non-payment
prior to November 15, if up to 25% of the outstanding balance is paid. During
the program period, service can be discontinued when the customer has made no
contact with JCP&L; however, all efforts are made to contact the customer prior
to discontinuance. The program requires that a BPU-approved fact sheet accompany
each discontinuance notice to residential customers during the program period.
The fact sheet is distributed as a bill insert since discontinuance notices are
issued on the customer's bill.
See "RISK FACTORS--SERVICING RISKS--BILLING AND COLLECTION PRACTICES MAY
REDUCE THE AMOUNT OF FUNDS AVAILABLE FOR PAYMENTS ON THE TRANSITION BONDS" in
this prospectus.
LOSS AND DELINQUENCY EXPERIENCE
The following table sets forth information relating to JCP&L's write-offs
as a percentage of total billed revenues for the past six years. Such historical
information is presented herein because JCP&L's actual experience with respect
to write-offs and delinquencies may affect the timing of transition bond charge
collections. JCP&L does not expect, but cannot assure, that the delinquency or
write-off experience with respect to transition bond charge collections will
differ substantially from the rates indicated below. However, changes in general
economic conditions and the retail electric market, including but not limited to
the introduction of third party electric power suppliers who may be permitted to
provide consolidated billing to JCP&L's customers, could mean that historical
delinquency and write-off ratios will not be indicative of future rates.
For the total electric billed revenue for the past six years for each
customer class, see table 1 "BILLED RETAIL REVENUE (IN THOUSANDS)" on page [ ]
of this prospectus.
38
TABLE 5
GROSS WRITE-OFF, NET WRITE-OFF AND NET WRITE-OFF
AS A PERCENTAGE OF BILLED RETAIL REVENUE
(in thousands)
2001 2000 1999 1998 1997 1996
------- ------- ------ ------ ------ ------
Gross Write-Off $12,650 $12,736 $7,084 $5,549 $7,011 $7,475
Net Write-Off 10,815 10,309 5,276 4,141 5,232 5,520
Net Write-Off as a %
of Billed Revenue 0.55% 0.56% 0.26% 0.21% 0.26% 0.28%
Net write-offs include amounts recovered by JCP&L from bankruptcy
proceedings and payments received after an account has been written off, either
by JCP&L or one of its external collection agencies. The increase in net
write-offs as a percentage of billed revenue beginning in 1999 resulted
primarily from problems experienced during the pre- and post-implementation of a
new customer service and billing computer system. The system implementation
caused delays in billing and also diverted resources from collection efforts. In
addition, the new system, initially, did not allow for effective processing of
overdue accounts. Through system enhancements put into place in 2000 and 2001,
as well as improved handling of overdue accounts, JCP&L expects that the level
of write-offs in 2002 will be reduced, although net write-offs are not expected
to return to pre-implementation levels for a few years.
The following table sets forth information relating to JCP&L's rate of
delinquencies, as a percentage of accounts receivable of all JCP&L customers for
the past six years.
TABLE 6
BILLED ELECTRIC RECEIVABLES AGING ANALYSIS
AS OF YEAR END
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
0-30 DAYS 81.2% 73.0% 67.9% 84.7% 89.2% 87.0%
31-60 DAYS 5.9% 6.8% 12.8% 7.3% 6.3% 7.5%
61-90 DAYS 3.4% 4.9% 7.2% 4.1% 2.1% 2.3%
91-120 DAYS 2.8% 3.5% 5.9% 2.5% 1.6% 2.0%
OVER 120 DAYS 6.7% 11.8% 6.2% 1.4% 0.8% 1.2%
Any account that has an unpaid balance at the time of the next billing is
considered to be delinquent. The delinquency data above represents only active
customer accounts as opposed to the write-off data that includes customer
accounts where service is no longer being provided. JCP&L has not tracked the
rate of delinquencies by customer class. The deterioration in the aging of
electric receivables beginning in 1999 resulted primarily from problems
experienced during the pre- and post-implementation of a new customer service
and billing computer system. This system implementation caused delays in billing
and also diverted resources from collection efforts. In addition, the new
system, initially, did not allow for effective processing of overdue accounts.
Through system enhancements and adjustments in 2000 and 2001, as well as
improved handling of overdue accounts, timeliness of collections has improved.
This trend is expected to continue in 2002, although arrearages are not expected
to return to pre-implementation levels for a few years because the residual
effects of these implementation problems continue to impact related statistics.
The following table sets forth the average days of revenue outstanding for
the past six years.
39
TABLE 7
DAYS OF REVENUE OUTSTANDING
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
AVERAGE DAYS 32.7 34.7 31.2 29.7 26.9 27.7
The increase in days of revenue outstanding beginning in 1999 resulted
primarily from problems experienced during the pre- and post- implementation of
a new customer service and billing computer system. This system implementation
caused delays in billing and also diverted resources from collection efforts.
Through system enhancements and adjustments in 2000 and 2001, as well as
improved handing of overdue accounts, timeliness of collections has improved.
This trend is expected to continue in 2002, although days of revenue
outstanding are not expected to return to pre-implementation levels for a few
years because the residual effects of these implementation problems continue to
impact related statistics.
See "RISK FACTORS--SERVICING RISKS--BILLING AND COLLECTION PRACTICES MAY
REDUCE THE AMOUNT OF FUNDS AVAILABLE FOR PAYMENTS ON THE TRANSITION BONDS" in
this prospectus.
HOW JCP&L WILL APPLY PARTIAL PAYMENTS BY ITS CUSTOMERS
The BPU financing order requires that JCP&L allocate partial payments of
electricity delivery and basic generation service charges for any period in the
following order:
o to sales taxes associated with the partial payment (which JCP&L
collects as trustee for the State of New Jersey and not for its own
account or for that of the issuer);
o pro rata to the transition bond charge and JCP&L's other charges and
taxes, where any of such charges are in arrears, based on their
proportion to JCP&L's total charges in arrears assessed for that
period; and
o pro rata to the transition bond charge and JCP&L's other charges and
taxes, where any of such charges are current charges, based on their
proportion to JCP&L's total charges assessed for that period.
Partial payments will also be allocated among different series of
transition bonds, pro rata, based on the amounts owed with respect to each
series.
JCP&L TRANSITION FUNDING LLC, THE ISSUER
JCP&L Transition Funding LLC, the issuer of the transition bonds, was
formed as a Delaware limited liability company in February 2000. JCP&L is the
sole member of the issuer. The assets of the issuer are limited to the bondable
transition property which was purchased by the issuer, the trust funds held by
the trustee, the rights of the issuer under the transaction documents, any third
party credit enhancement, the rights under any interest rate swap agreement and
any money distributed to the issuer from the collection account in accordance
with the indenture and not distributed to JCP&L. The BPU financing order and the
indenture provide that the bondable transition property, as well as the other
collateral described in the BPU financing order and the indenture, will be
pledged by the issuer to the trustee. Pursuant to the indenture, the transition
bond charge collections remitted to the trustee by the servicer must be used to
pay the principal of and interest on the transition bonds and other obligations
of the issuer specified in the indenture. As of the date of this prospectus, the
issuer has not conducted any business activities and has no operating history.
40
Audited financial statements of the issuer as of [December 31, 2001] are
included as an exhibit to this prospectus.
The Issuer's Purpose. The issuer has been created for the sole purpose of:
o purchasing and owning the bondable transition property;
o issuing one or more series of transition bonds, each of which may be
comprised of one or more classes, from time to time;
o pledging its interest in the bondable transition property and other
collateral to the trustee under the indenture in order to secure the
transition bonds; and
o performing activities that are necessary, suitable or convenient to
accomplish these purposes, including the execution of any interest
rate swap agreement or hedging arrangement incident to the issuance of
transition bonds.
The Interaction Among JCP&L and the Issuer. On the issue date for each
series, except in the event of a refunding of outstanding transition bonds,
JCP&L will sell bondable transition property to the issuer pursuant to the sale
agreement between the issuer as buyer and JCP&L as seller. JCP&L will service
the bondable transition property pursuant to a servicing agreement with the
issuer. JCP&L and any successor in the capacity of servicer are referred to as
the servicer.
The Issuer's Management. The issuer's business will be managed by five
managers, referred to as the "managers", appointed from time to time by JCP&L
or, in the event that JCP&L transfers its interest in the issuer, by the new
owner or owners. The issuer will have at all times following the initial
issuance of the transition bonds at least two independent managers who, among
other things, are not and have not been for at least five years from the date of
their appointment (except solely by virtue of their serving as, or being an
affiliate of any other entity serving as, an independent director or manager, as
applicable, of JCP&L or any bankruptcy-remote special purpose entity that is an
affiliate of JCP&L or the issuer):
o a direct or indirect legal or beneficial owner of the issuer, JCP&L or
any of their respective affiliates;
o a relative, supplier, employee, officer, director, manager, contractor
or material creditor of the issuer, JCP&L or any of their respective
affiliates; or
o a person who controls JCP&L or any of its affiliates.
The remaining managers will be employees or officers of JCP&L or any of its
affiliates.
The managers will devote the time necessary to conduct the affairs of the
issuer. The following are the managers as of the date of this prospectus:
NAME AGE POSITION WITH FIRSTENERGY CORP.
- ---- --- -------------------------------
Anthony J. Alexander 50 President and Chief Operating Officer
Mr. Alexander is currently serving as
President and Chief Operating Officer of
FirstEnergy Corp. Prior to his current
position, Mr. Alexander was President
(2000-2001) and Executive Vice President
and General Counsel (1997-2000) of
FirstEnergy Corp.
41
H. Peter Burg 55 Vice Chairman and Chief Executive Officer
Mr. Burg is currently serving as Vice
Chairman and Chief Executive Officer of
FirstEnergy Corp. Prior to his current
position, Mr. Burg was Chairman of the
Board and Chief Executive Officer
(2000-2001), President and Chief
Executive Officer (1999-2000) and
President and Chief Operating Officer
(1998-1999) of FirstEnergy Corp.
Richard H. Marsh 51 Senior Vice President and Chief Financial
Officer
Mr. Marsh is currently serving as Senior
Vice President and Chief Financial
Officer of FirstEnergy Corp. Prior to his
current position, Mr. Marsh was Vice
President and Chief Financial Officer
(1998-2001) of FirstEnergy Corp.
JCP&L, as the sole member of the issuer, will appoint two independent
managers prior to the issuance of the initial series of transition bonds.
None of the managers has been involved in any legal proceedings that are
specified in Item 401(f) of the SEC's Regulation S-K.
The Managers' Compensation and Limitation on Liabilities. The issuer has
not paid any compensation to any manager since the issuer was formed. The
managers other than the independent managers will not be compensated by the
issuer for their services on behalf of the issuer. The independent managers will
be paid quarterly fees from the revenues of the issuer and will be reimbursed
for their reasonable expenses. These expenses include, without limitation, the
reasonable compensation, expenses and disbursements of such agents,
representatives, experts and counsel as the independent managers may employ in
connection with the exercise and performance of their rights and duties under
the issuer's limited liability company agreement, the indenture, the sale
agreement and the servicing agreement. The limited liability company agreement
provides that the managers will not be personally liable under any circumstances
except for:
o liabilities arising from their own willful misconduct or gross
negligence;
o liabilities arising from the failure by any of the managers to perform
obligations expressly undertaken in the issuer's limited liability
company agreement; or
o taxes, fees or other charges, based on or measured by any fees,
commissions or compensation received by the managers in connection
with the transactions described in this prospectus.
The limited liability company agreement further provides that, to the
fullest extent permitted by law, the issuer shall indemnify the managers against
any liability incurred in connection with their services as managers for the
issuer except in the cases described above.
The Issuer is a Separate and Distinct Legal Entity. Under the issuer's
limited liability company agreement, the issuer may not file a voluntary
petition for relief under federal bankruptcy law, nor consent to the
commencement of a Chapter 11 case pursuant to an involuntary petition, without a
unanimous vote of its managers, including the independent managers. JCP&L has
agreed that it will not cause the issuer to file a voluntary petition for relief
under federal bankruptcy law. The limited liability company agreement requires
the issuer:
o to take all reasonable steps to continue its identity as a separate
legal entity;
42
o to make it apparent to third parties that it is an entity with assets
and liabilities distinct from those of JCP&L, other affiliates of
JCP&L, the managers or any other person; and
o to make it apparent to third persons that, except for federal and
state income tax purposes, it is not a division of JCP&L or any of its
affiliated entities or any other person.
The principal place of business of the issuer is c/o GPU Service, Inc., 76
South Main Street, Akron, Ohio 44308-1890, and its telephone number is (330)
384-5100.
Administration Agreement. Initially, GPU Service, Inc. will provide
administrative services for the issuer pursuant to an administration agreement
between the issuer and GPU Service, Inc. Another service company affiliate of
JCP&L may eventually act as administrator under this agreement. The issuer will
pay the administrator a cost-based fee for performing these services.
USE OF PROCEEDS
As required by the Competition Act, the issuer will use the net proceeds of
the issuance of the transition bonds to purchase the bondable transition
property from JCP&L. JCP&L will use the proceeds it receives from the issuer
principally to reduce stranded costs through the retirement of debt or equity or
both, including transactions completed before the date of the sale of the
transition bonds, and also to pay related expenses.
THE TRANSITION BONDS
The transition bonds will be issued under and secured by the indenture
between the issuer and the trustee substantially in the form filed as an exhibit
to the registration statement of which this prospectus forms a part. The terms
of each series of transition bonds will be provided in the indenture and the
related supplemental indenture. The following summary describes some general
terms and provisions of the transition bonds. The particular terms of the
transition bonds of any series offered by any prospectus supplement will be
described in the prospectus supplement.
GENERAL TERMS OF THE TRANSITION BONDS
The transition bonds may be issued in one or more series, each made up of
one or more classes. The terms of a series may differ from the terms of another
series, and the terms of a class may differ from the terms of another class of
the same series. The terms of each series will be specified in the related
prospectus supplement and supplemental indenture.
The indenture requires, as a condition to the issuance of each series of
transition bonds, that such issuance will not result in any rating agency
reducing or withdrawing its then current rating of any outstanding series or
class of transition bonds.
The Issuer's Transition Bonds Will be Maintained in Book-Entry Format. The
related prospectus supplement will set forth the procedure for the manner of the
issuance of the transition bonds of each series. Generally, each series of
transition bonds will initially be represented by one or more transition bonds
registered in the name of Cede & Co., as the nominee of The Depository Trust
Company (referred to as "DTC"). The transition bonds will be available for
purchase in initial denominations specified in the related prospectus supplement
that will be not less than $1,000, with an exception for one transition bond in
each class that may have a smaller denomination. Unless and until definitive
transition bonds are issued under the limited circumstances described in this
prospectus, no beneficial owner of transition bonds will be entitled to receive
a physical bond representing a transition bond. All references in this
prospectus to actions by transition bondholders or holders of transition bonds
will refer to actions taken by DTC upon instructions from DTC participants. In
addition, all references in this prospectus to payments, notices, reports and
statements to transition bondholders or holders of transition bonds will refer
to payments, notices, reports and statements to DTC or Cede & Co. as the
registered holder of each series of transition bonds, unless certificated
43
transition bonds have been issued to beneficial owners of interests in the
transition bonds, as discussed in "--CERTIFICATED TRANSITION BONDS" below. DTC
or Cede & Co. will receive these payments, notices, reports and statements for
distribution to the beneficial owners of the transition bonds in accordance with
DTC's procedures with respect thereto. See "--TRANSITION BONDS WILL BE ISSUED IN
BOOK-ENTRY FORM" and "--CERTIFICATED TRANSITION BONDS" below.
PAYMENTS OF INTEREST ON AND PRINCIPAL OF THE TRANSITION BONDS
Interest will accrue on the outstanding principal balance of transition
bonds of a series or class at the interest rate specified in or determined in
the manner specified in the related prospectus supplement. Interest will be
payable to the transition bondholders of a series or class on each payment date,
commencing on the first payment date specified in the related prospectus
supplement. On any payment date with respect to any series, the issuer will make
principal payments on that series only until the outstanding principal balance
thereof has been reduced to the principal balance specified for that payment
date in the expected amortization schedule for that series on that payment date,
but only to the extent funds are available for that series as described in this
prospectus. Accordingly, principal of any series or class of transition bonds
may be paid later than reflected in the expected amortization schedule therefor,
but generally not earlier, except in a case of any applicable optional
redemption or acceleration. See "RISK FACTORS--OTHER RISKS ASSOCIATED WITH AN
INVESTMENT IN THE TRANSITION BONDS" and "--SERVICING RISKS" in this prospectus.
The indenture provides that failure to pay the entire outstanding principal
balance of the transition bonds of any series or class by the applicable
expected final payment date will not result in an event of default under the
indenture; however, a default will occur if the entire outstanding principal
balance is not paid on or before the applicable legal final maturity date of
that series or class, as applicable.
On each payment date, the amount required to be paid as principal of the
transition bonds, from transition bond charge collections allocable to all
series, all series capital subaccounts, all series overcollateralization
subaccounts and the reserve subaccount will equal:
o the outstanding principal balance of any transition bonds of any class
or series if such payment date is on or after the expected final
payment date of that class or series; plus
o the outstanding principal balance of any transition bonds of any class
or series called for redemption; plus
o the outstanding principal balance of any transition bonds of any class
or series upon an acceleration following an event of default as
specified in the indenture; plus
o the principal amount scheduled to be paid on the transition bonds of
each class or series on that payment date.
The entire outstanding principal balance of a series of transition bonds
will be due and payable if:
o an event of default as specified in the indenture occurs and is
continuing; and
o the trustee or the holders of a majority in principal amount of the
transition bonds of all series then outstanding, voting as a group,
have declared the transition bonds to be immediately due and payable.
See "THE INDENTURE--WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION
BONDS" and "WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION
BONDS" in this prospectus.
44
OPTIONAL REDEMPTION OF THE TRANSITION BONDS
The issuer may redeem all of the outstanding transition bonds of a series,
at its option, only if, on any payment date, the outstanding principal balance
of the transition bonds of that particular series (after giving effect to
payments scheduled to be made on that payment date) is less than 5% of the
initial principal balance of the transition bonds of that series. Unless
otherwise specified in a prospectus supplement, there will be no other optional
redemption for a series.
Redemption provisions, if any, for any series will be specified in the
related prospectus supplement, including the premiums, if any, payable upon
redemption. Unless the context requires otherwise, all references in this
prospectus to principal of the transition bonds of a series insofar as it
relates to redemption includes any premium that might be payable thereon if
transition bonds of the series are redeemed, as described in the related
prospectus supplement. Notice of redemption of any series of transition bonds
will be given by the trustee to each registered holder of a transition bond by
first-class mail, postage prepaid, mailed not less than five days nor more than
45 days prior to the date of redemption or in another manner or at another time
as may be specified in the related prospectus supplement. The redemption price
will, in each case, include accrued interest to the date of redemption. Notice
of redemption may be conditioned upon the deposit of moneys with the trustee
before the redemption date and this notice will be of no effect unless these
moneys are so deposited. All transition bonds called for redemption will cease
to bear interest on the specified redemption date, provided the redemption price
is on deposit with the trustee at that time, and will no longer be considered
"outstanding" under the indenture. The transition bondholders will have no
further rights with respect thereto, except to receive payment of the redemption
price thereof and unpaid interest accrued to the date fixed for redemption from
the trustee. For so long as any transition bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, notice of redemption
also will be given by publication in a daily newspaper in Luxembourg, expected
to be the Luxemburger Wort, not less than 10 days prior to the date of
redemption.
FLOATING RATE TRANSITION BONDS
In connection with the issuance of any class of floating rate transition
bonds, the issuer may enter into or arrange for one or more interest rate swap
transactions. The related prospectus supplement will include a description of:
o the material terms of any interest rate swap transaction;
o the identity of any interest rate swap counterparty;
o any payments due to be paid by or to the issuer or the trustee under
any interest rate swap transaction;
o scheduled deposits in and withdrawals from any class subaccount of the
collection account with respect to any interest rate swap transaction;
o the formula for calculating the floating rate of interest of any
floating interest rate class; and
o the rights of transition bondholders with respect to any interest rate
swap transaction, including any right of termination of or amendment
to the interest rate swap agreement.
Under the indenture, the issuer is obligated to perform all of its
obligations pursuant to any interest rate swap agreement to which it is a party.
45
CREDIT ENHANCEMENT FOR THE TRANSITION BONDS
Credit enhancement with respect to the transition bonds of any series will
be provided principally by adjustments to the transition bond charge and amounts
on deposit in the reserve subaccount for all series, the related series
overcollateralization subaccount and the related series capital subaccount. In
addition, for any series of transition bonds or one or more classes thereof,
additional credit enhancement may be provided. The amounts and types of
additional credit enhancement, if any, and the provider of any additional credit
enhancement with respect to any series of transition bonds or one or more
classes thereof, will be described in the related prospectus supplement.
Additional credit enhancement may be in the form of:
o an additional reserve subaccount;
o subordination of one series for the benefit of another;
o additional overcollateralization;
o a financial guaranty insurance policy;
o a letter of credit;
o a credit or liquidity facility;
o a repurchase obligation;
o a third party payment or other support;
o a cash deposit or other credit enhancement; or
o any combination of the foregoing, as may be set forth in the related
prospectus supplement.
If specified in the related prospectus supplement, credit enhancement for a
series of transition bonds may cover one or more other series of transition
bonds. See "RISK FACTORS--TRANSITION BONDHOLDERS MAY EXPERIENCE PAYMENT DELAYS
OR LOSSES AS A RESULT OF THE LIMITED SOURCES OF PAYMENT FOR THE TRANSITION BONDS
AND LIMITED CREDIT ENHANCEMENT" in this prospectus.
TRANSITION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM
Unless otherwise specified in the related prospectus supplement, all
classes of transition bonds will initially be represented by one or more bonds
registered in the name of DTC, or another securities depository. The transition
bonds will be available to investors only in the form of book-entry transition
bonds. Transition bondholders may also hold transition bonds through Clearstream
Banking, Luxembourg, S.A., referred to as "Clearstream Banking", (formerly known
as CEDEL, societe anonyme), or Euroclear in Europe, if they are participants in
one of those systems or indirectly through participants.
The Role of Cede & Co., Clearstream Banking and Euroclear. DTC will hold
the global bond or bonds representing the transition bonds. Clearstream Banking
and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Clearstream Banking's and Euroclear's
names on the books of their respective depositories. Citibank, N.A. is
depository for Clearstream Banking and Morgan Guaranty Trust Company of New York
is depository for Euroclear. These depositories will, in turn, hold these
positions in customers' securities accounts in the depositories' names on the
books of DTC. Citibank, N.A. will act as depository for Clearstream Banking and
Morgan Guaranty Trust Company of New York will act as depository for Euroclear.
46
The Function of DTC. DTC is a limited purpose trust company organized under
the laws of the State of New York, and is a member of the Federal Reserve
System. DTC is a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and to facilitate the clearance and settlement of securities transactions
between participants through electronic book-entries, thereby eliminating the
need for physical movement of bonds. Direct participants of DTC include
securities brokers and dealers, banks, trust companies, clearing corporations
and some other organizations. DTC is owned by a number of its direct
participants and by the New York Stock Exchange, Inc., the Nasdaq-Amex Market
Group and the National Association of Securities Dealers, Inc. Access to DTC's
system is also available to indirect participants.
The Function of Clearstream Banking. Clearstream Banking is incorporated
under the laws of Luxembourg. Clearstream Banking holds securities for its
customers and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream Banking provides various services, including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream Banking also deals with
domestic securities markets in over 30 countries through established depository
and custodial relationships. Clearstream Banking has established an electronic
bridge with Morgan Guaranty Trust Company of New York as the Operator of the
Euroclear system in Brussels to facilitate settlement of trades between
Clearstream Banking and MGT/EOC. Clearstream Banking currently accepts over
110,000 securities issues on its books.
Clearstream Banking customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations and may include any underwriters, agents or dealers
with respect to a series of transition bonds offered hereby. Clearstream
Banking's U.S. customers are limited to securities brokers and dealers and
banks.
The Function of Euroclear. Euroclear was created in 1968 to hold securities
for Euroclear participants and to clear and settle transactions between
Euroclear participants through simultaneous electronic book-entry delivery
against payment. By performing these functions, Euroclear eliminated the need
for physical movement of securities and also eliminated any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 30 currencies, including Euros and U.S. dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
arrangements with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described below. The Euroclear
System is operated by Euroclear Operator under contract with the Euroclear
Clearance System S.C., a Belgian cooperative corporation, referred to as the
"Cooperative". All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear participants. Euroclear participants
include central banks, commercial banks, securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As a Federal
Reserve System member, it is regulated and examined by the Board of Governors of
the Federal Reserve System and the New York State Banking Department, as well as
the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law which are
referred to in this prospectus as the "Terms and Conditions". The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific securities to specific securities
47
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear participants and has no record of or relationship
with persons holding through Euroclear participants.
The Rules for Transfers Among DTC, Clearstream Banking or Euroclear
Participants. Transfers between participants will occur in accordance with DTC
rules. Transfers between Clearstream Banking customers and Euroclear
participants will occur in accordance with their respective rules and operating
procedures. Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Clearstream Banking customers or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its depository. Cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in this system in accordance with its rules and
procedures and within its established deadlines, in European time. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its depository to take action
to effect final settlement on its behalf by delivering or receiving transition
bonds in DTC, and making or receiving payments in accordance with normal
procedures for same-day funds settlement applicable to DTC. Clearstream Banking
customers and Euroclear participants may not deliver instructions directly to
the depositories.
DTC Will be the Holder of the Issuer's Transition Bonds. Unless and until
definitive transition bonds are issued, it is anticipated that the only "holder"
of transition bonds of any series will be DTC. Transition bondholders will only
be permitted to exercise their rights as transition bondholders indirectly
through participants and DTC. All references herein to actions by transition
bondholders thus refer to actions taken by DTC upon instructions from its
participants. In addition, all references herein to payments, notices, reports
and statements to transition bondholders refer to payments, notices, reports and
statements to DTC, as the registered holder of the transition bonds, for
payments or delivery to the beneficial owners of the transition bonds in
accordance with DTC procedures.
Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while any book-entry transition bonds of a series
are outstanding, under DTC's rules, DTC is required to make book-entry transfers
among participants on whose behalf it acts with respect to the book-entry
transition bonds. In addition, DTC is required to receive and transmit payments
of principal of, and interest on, the book-entry transition bonds. Participants
with whom transition bondholders have accounts with respect to book-entry
transition bonds are similarly required to make book-entry transfers and receive
and transmit these payments on behalf of their respective transition
bondholders. Accordingly, although transition bondholders will not possess
physical bonds, DTC's rules provide a mechanism by which transition bondholders
will receive payments and will be able to transfer their interests.
DTC can only act on behalf of participants, who, in turn, act on behalf of
indirect participants and some banks. Thus, the ability of holders of beneficial
interests in the transition bonds to pledge transition bonds to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of these transition bonds, may be limited due to the lack of definitive
transition bonds.
DTC has advised the trustee that it will take any action permitted to be
taken by a transition bondholder under the indenture only at the direction of
one or more participants to whose account with DTC the transition bonds are
credited.
How Transition Bond Payments will be Credited by Clearstream Banking and
Euroclear. Payments with respect to transition bonds held through Clearstream
Banking or Euroclear will be credited to the cash accounts of Clearstream
Banking customers or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by its depository. These
payments will be subject to tax reporting in accordance with relevant United
States tax laws and regulations. See "MATERIAL U.S. FEDERAL INCOME TAX MATTERS
FOR THE TRANSITION BONDHOLDERS" in this prospectus. Clearstream Banking or the
Euroclear Operator, as the case may be, will take any other action permitted to
48
be taken by a transition bondholder under the indenture on behalf of a
Clearstream Banking customer or Euroclear participant only in accordance with
its relevant rules and procedures and subject to its depository's ability to
effect these actions on its behalf through DTC.
DTC, Clearstream Banking and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of transition bonds among
participants of DTC, Clearstream Banking and Euroclear. However, they are under
no obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
CERTIFICATED TRANSITION BONDS
The Circumstances That Will Result in the Issuance of Certificated
Transition Bonds. Unless otherwise specified in the related prospectus
supplement, each class of transition bonds will be issued in fully registered,
certificated form to beneficial owners of transition bonds or intermediaries,
rather than to DTC, only if:
o the issuer advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to that class of transition bonds and the
issuer is unable to locate a qualified successor;
o the issuer, at its option, elects to terminate the book-entry system
through DTC; or
o after the occurrence of an event of default as specified in the
indenture, beneficial owners of transition bonds representing at least
a majority of the outstanding principal balance of the transition
bonds of all series advise the trustee through DTC in writing that the
continuation of a book-entry system through DTC, or a successor
thereto, is no longer in the transition bondholders' best interest.
The Delivery of Certificated Transition Bonds. Upon the occurrence of any
event described in the immediately preceding paragraph, DTC will be required to
notify the trustee and all affected beneficial owners of transition bonds
through participants of the availability of certificated transition bonds. Upon
surrender by DTC of the certificated bonds representing the applicable
transition bonds and receipt of instructions for re-registration, the trustee
will authenticate and deliver certificated transition bonds to the beneficial
owners. Any certificated transition bonds listed on the Luxembourg Stock
Exchange will be made available to the beneficial owners of such transition
bonds through the office of the transfer agent in Luxembourg. Thereafter, the
trustee will recognize the holders of these certificated transition bonds as
transition bondholders under the indenture.
The Payment Mechanism for Certificated Transition Bonds. Payments of
principal of, and interest on, certificated transition bonds will be made by the
trustee, as paying agent, in accordance with the procedures set forth in the
indenture. These payments will be made directly to holders of certificated
transition bonds in whose names the certificated transition bonds were
registered at the close of business 15 days prior to the payment date, unless
otherwise specified in a prospectus supplement. These payments will be made by
check mailed to the address of the holder as it appears on the register
maintained by the trustee. The final payment on any transition bond, however,
will be made only upon presentation and surrender of the transition bond at the
office or agency specified in the notice of final payment to transition
bondholders.
The Transfer or Exchange of Certificated Transition Bonds. Certificated
transition bonds will be transferable and exchangeable at the offices of the
transfer agent and registrar, which will initially be the trustee. No service
charge will be imposed for any registration of transfer or exchange, but the
transfer agent and registrar may require payment of a sum sufficient to cover
any tax or other governmental charge imposed in connection therewith.
49
Final Payments on Transition Bonds. The final payment on any transition
bond will be made only upon presentation and surrender of the transition bond at
the office or agency specified in the notice of final payment to transition
bondholders. The final payment of any transition bond listed on the Luxembourg
Stock Exchange may also be made upon presentation and surrender of the
transition bond at the office of the paying agent in Luxembourg as specified in
the notice of final distribution. A notice of such final distribution will be
published in a daily newspaper in Luxembourg, which is expected to be the
Luxemburger Wort, not later than the fifth day of the month of such final
distribution. Certificated transition bonds listed on the Luxembourg Stock
Exchange will also be transferable and exchangeable at the offices of the
transfer agent in Luxembourg. With respect to any transfer of these listed
certificated transition bonds, the new certificated transition bonds registered
in the names specified by the transferee and the original transferor will be
available at the offices of the transfer agent in Luxembourg.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS
The rate of principal payments, the amount of each interest payment and the
actual final payment date for each series or class of transition bonds will be
dependent on the rate and timing of receipt of transition bond charge
collections and the effectiveness of credit enhancement. Accelerated receipts of
transition bond charge collections will not, however, result in payment of
principal of the transition bonds earlier than the related expected final
payment dates. This is because receipts in excess of the amounts necessary to
amortize the transition bonds in accordance with the applicable expected
amortization schedule, to pay interest on the transition bonds, to pay related
costs and expenses and to fund or replenish the capital and
overcollateralization subaccounts for each series, will be allocated to the
reserve subaccount. However, delayed receipts of transition bond charge
collections may result in principal payments on the transition bonds occurring
more slowly than as reflected in the expected amortization schedule or later
than the related expected final payment dates. Redemption of any class or series
of transition bonds and acceleration of the legal final maturity date after an
event of default will result in payment of principal earlier than the related
expected final payment dates.
The Effect of Transition Bond Charge Collections on the Timing of
Transition Bond Payments. The actual payments on each payment date for each
series or class of transition bonds and the weighted average life thereof will
be affected primarily by the rate and the timing of receipt of transition bond
charge collections. Amounts available in the reserve subaccount, the series
overcollateralization subaccount and the series capital subaccount will also
affect the weighted average life of that series of transition bonds. The
transition bond charge will be calculated based on estimates of energy use by
customers and estimates of delinquencies and write-offs. However, the aggregate
amount of transition bond charge collections and the rate of principal
amortization of the transition bonds will depend, in part, on actual electricity
usage by customers and the rate of delinquencies and write-offs. The transition
bond charge will be adjusted from time to time based in part on the actual rate
of transition bond charge collections compared to the estimated transition bond
charge collections. However, there can be no assurance that the servicer will be
able to forecast accurately actual electricity usage and the rate of collections
or implement adjustments to the transition bond charge that will cause
transition bond charge collections to be received at any particular rate.
A payment on a date that is later than the expected final payment date will
result in a longer weighted average life. In addition, if scheduled payments on
the transition bonds are received later than the applicable expected payment
date, this will result in a longer weighted average life of the transition
bonds.
See "RISK FACTORS--SERVICING RISKS" and "THE BPU FINANCING ORDER AND THE
TRANSITION BOND CHARGE--THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in
this prospectus.
50
THE SALE AGREEMENT
The following summary describes material terms and provisions of the sale
agreement pursuant to which JCP&L will sell and the issuer will purchase
bondable transition property. The sale agreement may be amended by the parties
thereto, with the consent of the trustee, provided notice of the substance of
the amendment is provided by the issuer to each rating agency. The form of the
sale agreement has been filed as an exhibit to the registration statement of
which this prospectus forms a part.
JCP&L'S SALE AND ASSIGNMENT OF THE BONDABLE TRANSITION PROPERTY TO THE ISSUER
For convenience of usage in this prospectus, there are numerous references
to the holding and transfer of bondable transition property by JCP&L and others.
However, pursuant to New Jersey State law and the BPU financing order, bondable
transition property arises, and constitutes a vested, presently existing
property right, upon (i) the transfer to an assignee and (ii) receipt of
consideration therefor.
Pursuant to the sale agreement, JCP&L will:
(1) assign and transfer to the issuer, without recourse, except as
provided in the sale agreement, all right, title and interest of JCP&L
in and to the bondable transition property which represents the
irrevocable right to charge, collect and receive, and be paid from
collections of, the transition bond charges in the amount necessary to
provide for the full recovery of JCP&L's bondable stranded costs with
respect to the related series of transition bonds; and
(2) agree that JCP&L's representations, warranties, covenants and
obligations under the sale agreement, including JCP&L's
indemnification obligations, inure to the benefit of the issuer and
the trustee for the benefit of the transition bondholders.
The assignments and transfers of the bondable transition property by JCP&L
to the issuer are expressly stated to be absolute transfers. Pursuant to the
Competition Act, these assignments and transfers will be treated as absolute
transfers of all of JCP&L's right, title and interest, as in a sale or other
absolute transfer of the bondable transition property. JCP&L agrees that, after
giving effect to its assignment, it will have no rights in the bondable
transition property.
In addition, JCP&L may from time to time offer to sell on a subsequent
transfer date additional bondable transition property to the issuer, subject to
the satisfaction of the conditions specified in the sale agreement and the
indenture. Each subsequent sale will be financed through the issuance of an
additional series of transition bonds. If this offer is accepted by the issuer,
the subsequent sale will be effective on a subsequent transfer date.
In accordance with the Competition Act, after the issuance of the BPU
financing order and upon the execution and delivery of the sale agreement and
the related bill of sale and the proper filing of a financing statement under
the Uniform Commercial Code with respect to the sale and absolute transfer of
the bondable transition property and any additional bondable transition
property, the sale and absolute transfer will be perfected as against all third
persons, including judicial lien creditors. The sale agreement provides that in
the event that the sale and absolute transfer of the bondable transition
property is determined by a court not to be a sale and absolute transfer as
contemplated by the Competition Act, then the sale and absolute transfer shall
be treated as a pledge of the bondable transition property and JCP&L shall be
deemed to have granted a security interest to the issuer in the bondable
transition property, which security interest will secure a payment obligation of
JCP&L in an amount equal to the purchase price for the bondable transition
property.
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JCP&L'S REPRESENTATIONS AND WARRANTIES
In the sale agreement, JCP&L will make the following representations and
warranties:
1. all information provided by JCP&L to the issuer with respect to the
bondable transition property is correct in all material respects;
2. the assignments and transfers contemplated by the sale agreement
constitute absolute transfers of the initial bondable transition property or the
additional bondable transition property, as the case may be, from JCP&L to the
issuer, JCP&L will have no right, title or interest in the bondable transition
property and the beneficial interest in and title to the assigned and
transferred bondable transition property would not be part of the estate of
JCP&L as debtor in the event of the filing of a bankruptcy petition by or
against JCP&L under any bankruptcy law;
3. (a) JCP&L is the sole owner of the bondable transition property being
transferred and assigned to the issuer pursuant to the sale agreement on the
initial transfer date or the subsequent transfer date, as applicable;
(b) upon the execution and delivery of the sale agreement and the
related bill of sale, the bondable transition property will be validly assigned
and transferred to the issuer free and clear of all liens other than liens
created by the issuer pursuant to the indenture; and
(c) all filings (including filings with the New Jersey Secretary of
State or the Delaware Secretary of State under the New Jersey Uniform Commercial
Code or the Delaware Secretary of State, respective) necessary in any
jurisdiction to give the issuer a valid perfected ownership interest in the
transferred bondable transition property free and clear of all liens of JCP&L or
its affiliates or anyone else claiming through JCP&L or its affiliates, other
than the issuer or the trustee, have been made;
4. the BPU financing order has been issued by the BPU in accordance with
the Competition Act; the BPU financing order and the process by which it was
issued comply with all applicable laws, rules and regulations; and the BPU
financing order is in full force and effect, is final, and is not subject to
appeal;
5. as of the date of issuance of any series of transition bonds, the
transition bonds will be entitled to the protections provided by the Competition
Act and, in accordance with the Competition Act, the provisions of the BPU
financing order relating to the bondable transition property and the transition
bond charge will not be revocable by the BPU and each issuance advice letter
delivered by the issuer or JCP&L to the BPU pursuant to the BPU financing order
will be irrevocable, final and uncontestable;
6. (a) under the Competition Act, the State of New Jersey may not limit,
alter or impair the bondable transition property or other rights vested in
JCP&L, the issuer or the trustee for the benefit of the transition bondholders
pursuant to the BPU financing order until the transition bonds are fully paid
and discharged, or in any way limit, alter, impair or reduce the value or amount
of the bondable transition property, as approved pursuant to the BPU financing
order; and
(b) under the contract clauses of the Constitutions of the State of New
Jersey and the United States, the State of New Jersey could not take any action
that substantially impairs the rights of the transition bondholders unless such
action is a reasonable exercise of the State of New Jersey's sovereign powers
and of a character reasonable and appropriate to further a significant and
legitimate public purpose, and, under the Takings Clauses of the New Jersey and
United States Constitutions, the State of New Jersey could not repeal or amend
the Competition Act or take any other action in contravention of its pledge and
agreement, in the event such action constitutes a permanent appropriation of the
property interest of transition bondholders in the bondable transition property
and deprives the transition bondholders of their reasonable expectations arising
from their investments in transition bonds, unless just compensation, as
52
determined by a court of competent jurisdiction, is provided to the transition
bondholders;
7. there is no order by any court providing for the revocation, alteration,
limitation or other impairment of the Competition Act, the BPU financing order,
the bondable transition property or the transition bond charge or any rights
arising under any of them or which seeks to enjoin the performance of any
obligations under the BPU financing order;
8. no other approval, authorization, consent, order or other action of, or
filing with, any court, federal or state regulatory body, administrative agency
or other governmental instrumentality is required in connection with the
creation, assignment or transfer of the bondable transition property, except
those that have been obtained or made;
9. except as disclosed by JCP&L in writing, there are no proceedings or
investigations pending, or to JCP&L's best knowledge, threatened, before any
court, federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over JCP&L or the issuer or
their respective properties challenging the Competition Act, the BPU financing
order or the restructuring order (insofar as the restructuring order relates to
the sale, assignment or transfer of the bondable transition property and the
sale of the transition bonds);
10. the assumptions used in calculating the transition bond charge in the
issuance advice letter delivered by the issuer or JCP&L to the BPU pursuant to
the BPU financing order are reasonable and made in good faith;
11. (a) the bondable transition property constitutes a presently existing
property right;
(b) the bondable transition property includes, without limitation:
(1) the irrevocable right to charge, collect and receive, and be
paid from collections of, the transition bond charge in the amounts
necessary to provide for the full recovery of the bondable stranded
costs determined to be recoverable in the BPU financing order;
(2) all rights of JCP&L under the BPU financing order;
(3) the rights to obtain periodic adjustments of the transition
bond charge pursuant to the Competition Act; and
(4) all revenues, collections, payments, money and proceeds
arising under, or with respect to, all of the foregoing;
(c) bondable transition property is not subject to any lien created by
a previous indenture; and
(d) the BPU financing order, including the right to collect the
transition bond charge, is irrevocable by the BPU;
12. JCP&L is a corporation duly organized and in good standing under the
laws of the State of New Jersey, with corporate power and authority to own its
properties and conduct its business as currently owned and conducted;
13. JCP&L has the corporate power and authority to execute and deliver the
sale agreement and to carry out its terms; JCP&L has full corporate power and
authority to own the bondable transition property and to assign and transfer the
53
initial and additional bondable transition property; and JCP&L has duly
authorized by all necessary corporate action such assignment and transfer to the
issuer pursuant to the sale agreement;
14. each of the sale agreement and the bill of sale for the bondable
transition property pursuant to the sale agreement, constitutes a legal, valid
and binding obligation of JCP&L, enforceable against it in accordance with its
terms, subject to bankruptcy, receivership, insolvency, fraudulent transfer,
reorganization, moratorium or other similar laws affecting creditors' rights
generally from time to time in effect and to general principles of equity;
15. the execution and delivery by JCP&L of each of the sale agreement and
the bill of sale for the bondable transition property pursuant to the sale
agreement, the performance by JCP&L of the transactions contemplated thereby or
the fulfillment by JCP&L of the terms thereof have been duly authorized by all
necessary corporate action and do not conflict with, result in any breach of any
of the terms and provisions of, or constitute (with or without notice or lapse
of time) a default under, the Restated Certificate of Incorporation or By-Laws
of JCP&L or any indenture, agreement or other instrument to which JCP&L is a
party or by which it is bound; or result in the creation or imposition of any
lien upon any of its properties pursuant to the terms of any such indenture,
agreement or other instrument except as contemplated by the sale agreement, the
bill of sale for the bondable transition property pursuant to the sale
agreement, the servicing agreement, the indenture, the administration agreement
between the issuer and GPU Service, Inc., or its successor, the issuer's limited
liability company agreement, and any amendments thereto, the certificate of
formation and any amendments thereto, that was filed with the Secretary of State
of the State of Delaware to establish the issuer or any interest rate swap
agreement (which are collectively referred to as the "basic documents"); or
violate any law or any order, rule or regulation applicable to JCP&L of any
court or of any federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over its properties;
16. except for the filing of financing statements and continuation
statements under the New Jersey or Delaware Uniform Commercial Code, no
approval, authorization, consent, order or other action of, or filing with, any
court, federal or state regulatory body, administrative agency or other
governmental instrumentality is required in connection with the execution and
delivery of the sale agreement by each of the parties to the sale agreement, the
performance by such parties of the transactions contemplated by such agreement
or the fulfillment by such parties of the terms of such agreement, except those
that have been obtained or made;
17. except as disclosed in writing by JCP&L, there are no proceedings or
investigations pending or, to JCP&L's best knowledge, threatened, before any
court, federal or state regulatory body, administrative agency or other
governmental instrumentality:
(a) asserting the invalidity of any of the basic documents or the
transition bonds;
(b) seeking to prevent the issuance of transition bonds or the
consummation of the transactions contemplated by the basic documents;
(c) seeking any determination or ruling that could reasonably be
expected to materially and adversely affect the performance by JCP&L or the
issuer of their respective obligations under, or the validity or enforceability
of, the basic documents or the transition bonds; or
(d) challenging JCP&L's treatment of the transition bonds as debt of
JCP&L for federal and state income tax purposes;
18. after giving effect to the assignment and transfer of the bondable
transition property to the issuer, JCP&L:
54
(a) will be solvent and expects to remain solvent;
(b) will be adequately capitalized to conduct its business and affairs
considering its size and the nature of its business and intended purposes;
(c) will not be engaged, nor does it expect to engage, in a business
for which its remaining property represents an unreasonably small portion of its
capital;
(d) believes that it will be able to pay its debts as they become due
and that this belief is reasonable; and
(e) will be able to pay its debts as they mature and does not intend to
incur, and does not believe that it will incur, indebtedness that it will not be
able to repay at its maturity; and
19. JCP&L is duly qualified to do business as a foreign corporation in good
standing, and has obtained all necessary licenses and approvals, in all
jurisdictions in which the ownership or lease of its property or the conduct of
its business requires such qualifications, licenses or approvals (except where
the failure to so qualify or to obtain such licenses or approvals would not be
reasonably likely to have a material adverse effect on it).
JCP&L agrees that the issuer will have the right to assign the right to
enforce these representations and warranties to the trustee for the benefit of
the transition bondholders. These representations and warranties will survive
the pledge of the bondable transition property by the issuer to the trustee
pursuant to the indenture. JCP&L represents, warrants and agrees that these
representations and warranties will be true and correct on and as of each date
on which bondable transition property is sold by JCP&L to the issuer as if made
by it on that date.
JCP&L'S COVENANTS
In the sale agreement, JCP&L makes the following covenants and agrees that
these covenants inure to the benefit of the issuer and the trustee for the
benefit of the transition bondholders:
1. so long as any of the transition bonds are outstanding, JCP&L shall keep
in full force and effect its corporate existence and remain in good standing
under the laws of the State of New Jersey, and shall obtain and preserve its
qualification to do business in each jurisdiction in which such qualification is
necessary to protect the validity and enforceability of the sale agreement and
each other instrument or agreement to which JCP&L is a party necessary to the
proper administration of the sale agreement and the transactions contemplated
thereby;
2. except for the transfers and assignments pursuant to the sale agreement,
JCP&L shall not sell, pledge, assign or transfer to any other person, or grant,
create, incur, assume or suffer to exist any lien on, any of the bondable
transition property, whether now existing or hereafter created, or any interest
therein;
3. JCP&L shall not at any time assert any lien against or with respect to
any bondable transition property, and shall defend the right, title and interest
of the issuer, and upon pledge by the issuer to the trustee, the trustee for the
benefit of the transition bondholders, in, to and under the bondable transition
property, whether now existing or hereafter created, against all claims of third
parties claiming through or under JCP&L;
4. in the event that JCP&L is no longer acting as the servicer, if JCP&L
receives collections in respect of the transition bond charge or the proceeds
thereof, JCP&L agrees to pay the servicer, on behalf of the issuer, all payments
received by JCP&L in respect thereof as soon as practicable after receipt
55
thereof by JCP&L, but in no event later than two business days after such
receipt;
5. JCP&L shall notify the issuer and the trustee promptly after becoming
aware of any lien on any bondable transition property other than any lien
arising under the sale agreement or the indenture;
6. JCP&L agrees to comply with its organizational or governing documents
and all laws, treaties, rules, regulations and determinations of any
governmental instrumentality applicable to JCP&L, except to the extent that
failure to so comply would not adversely affect the interests of the issuer or
the trustee in the bondable transition property or under any of the basic
documents or JCP&L's performance of its obligations under the sale agreement or
under any of the other basic documents to which it is a party;
7. (a) so long as any of the transition bonds are outstanding, JCP&L
shall treat the transition bonds as debt of JCP&L for federal and state income
tax purposes; and
(b) so long as any of the transition bonds are outstanding, JCP&L
shall:
(1) clearly disclose in its financial statements that it is not
the owner of the bondable transition property and that the assets of
the issuer are not available to pay creditors of JCP&L or any of its
other affiliates;
(2) clearly disclose the effects of all transactions between
JCP&L and the issuer in accordance with generally accepted accounting
principles; and
(3) not own or purchase any transition bonds;
8. JCP&L agrees that upon the assignment and transfer by JCP&L of the
bondable transition property to the issuer pursuant to the sale agreement:
(a) to the fullest extent permitted by law, including applicable BPU
orders and regulations, the issuer shall have all of the rights originally held
by JCP&L with respect to the bondable transition property (other than the rights
of an electric public utility set forth in the Competition Act), including the
right to collect any amounts payable by any customer or third party electric
power supplier in respect of such bondable transition property, notwithstanding
any objection or direction to the contrary by JCP&L; and
(b) any such payment to the issuer by any customer or third party
electric power supplier in respect of the transition bond charge shall discharge
such customer's or such third party electric power supplier's obligations in
respect of such bondable transition property to the extent of such payment,
notwithstanding any objection or direction to the contrary by JCP&L;
9. so long as any of the transition bonds are outstanding:
(a) JCP&L shall not make any statement or reference in respect of
bondable transition property that is inconsistent with the ownership thereof by
the issuer, other than for financial accounting, state or federal regulatory or
tax purposes; and
(b) JCP&L shall not take any action in respect of the bondable
transition property except solely in its capacity as the servicer thereof
pursuant to the servicing agreement or as otherwise contemplated by the basic
documents; provided, however, that JCP&L, not in its capacity as servicer, shall
take such actions as are required to satisfy the requirements of paragraph 13
below;
56
10. JCP&L shall deliver to the issuer and the trustee, promptly after
having obtained knowledge thereof, written notice in a certificate, signed by
authorized officers of JCP&L, of the occurrence of any event which requires or
which, with the giving of notice or the passage of time or both, would require
JCP&L to make any indemnification payment pursuant to the sale agreement;
11. JCP&L shall execute and file such filings and cause to be executed and
filed such filings and take all such actions, all in such manner and in such
places as may be required by law fully to preserve, maintain and protect the
interests of the issuer and its permitted assigns in the bondable transition
property, including all filings required under the Delaware Uniform Commercial
Code and the New Jersey Uniform Commercial Code relating to the transfer of the
ownership of the bondable transition property from JCP&L to the issuer and the
pledge of the bondable transition property by JCP&L to the trustee;
12. JCP&L shall deliver to the issuer file-stamped copies of, or filing
receipts for, any document filed as provided above, as soon as available
following such filing;
13. JCP&L agrees to take legal or administrative actions, including
defending against or instituting and pursuing legal actions and appearing or
testifying at hearings or similar proceedings (the costs of any such actions to
be reimbursed from transition bond charge collections as described under "THE
INDENTURE--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" in this
prospectus), as may be reasonably necessary:
(a) to protect the issuer and the trustee for the benefit of the
transition bondholders from claims, state actions or other actions or
proceedings of third parties which, if successfully pursued, would result in a
breach of any representation, warranty or covenant set forth in the sale
agreement; or
(b) to block or overturn any attempts to cause a repeal of, modification
of or supplement to the Competition Act or the BPU financing order or the rights
of holders of bondable transition property by legislative enactment or
constitutional amendment that would be adverse to the holders of bondable
transition property; and
14. so long as any of the transition bonds are outstanding, JCP&L shall,
and shall cause each of its subsidiaries to, pay all material taxes, assessments
and governmental charges imposed upon it or any of its properties or assets or
with respect to any of its franchises, business, income or property before any
penalty accrues thereon if the failure to pay any such taxes, assessments and
governmental charges would, after any applicable grace periods, notices or other
similar requirements, result in a lien on the bondable transition property;
provided that no such tax need be paid if JCP&L or any of its subsidiaries is
contesting the same in good faith by appropriate proceedings promptly instituted
and diligently conducted and if JCP&L or that subsidiary has established
appropriate reserves as shall be required in conformity with generally accepted
accounting principles.
JCP&L agrees that the issuer will have the right to further assign its
right to enforce these covenants listed above directly against JCP&L to the
trustee for the benefit of the transition bondholders.
JCP&L'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE AND TO TAKE LEGAL
ACTION
Under the sale agreement, JCP&L is obligated to indemnify the issuer, any
swap counterparty and the trustee for the benefit of the transition bondholders
and related parties specified in the sale agreement, against:
1. any and all taxes, other than any taxes imposed on transition
bondholders solely as a result of their ownership of transition bonds, that may
at any time be imposed on or asserted against any of those persons under
existing law as of the date of issuance of the transition bonds as a result of
the assignment and transfer of the bondable transition property by JCP&L to the
issuer, or the acquisition or holding of bondable transition property by the
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issuer, or the issuance and sale by the issuer of the transition bonds,
including any sales, general corporation, personal property, privilege,
franchise or license taxes not recovered by the issuer through the transition
bond charge, or through the market transition charge, but excluding any taxes
imposed as a result of a failure of that person to properly withhold or remit
taxes imposed with respect to payments on any transition bond; and
2. (a) any and all amounts of principal of and interest on the transition
bonds not paid when due or when scheduled to be paid in accordance with their
terms and the amount of any deposits to the issuer required to have been made in
accordance with the terms of the basic documents or the BPU financing order
which are not made when so required, in either case as a result of JCP&L's
breach of any of its representations, warranties or covenants contained in the
sale agreement; and
(b) any and all liabilities, obligations, claims, actions, suits or
payments of any kind whatsoever that may be imposed on or asserted against any
of those persons (other than any liabilities, obligations or claims for, or
payments of, principal or interest on the transition bonds) together with any
reasonable costs and expenses incurred by that person, as a result of JCP&L's
breach of any of its representations, warranties or covenants contained in the
sale agreement.
These indemnification obligations will rank equally in right to payment
with other general unsecured obligations of JCP&L. The indemnities described
above will survive the termination of the sale agreement and include reasonable
fees and expenses of investigation and litigation, including reasonable
attorneys' fees and expenses. The above representations and warranties are made
under existing law as in effect as of the date of issuance of any series of
transition bonds. JCP&L will not indemnify any party for any changes of law
after the issuance of any series of transition bonds.
JCP&L's Obligation to Undertake Legal Action. The sale agreement requires
JCP&L, in its capacity as seller and not in its capacity as the servicer, to
take legal or administrative actions as may be reasonably necessary to protect
the rights of the holders of the bondable transition property and the trustee
for the benefit of the transition bondholders. See "-- JCP&L'S COVENANTS" above.
JCP&L will not be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its obligations under the sale agreement,
and that in its opinion may involve it in any expense or liability. However,
this provision is subject to JCP&L's covenant to fully preserve, maintain and
protect the interests of the issuer, the trustee and the transition bondholders
in the bondable transition property.
SUCCESSORS TO JCP&L
The sale agreement provides that any person:
o into which JCP&L may be merged or consolidated and which succeeds to
all or substantially all of the electric distribution business of
JCP&L;
o which results from the division of JCP&L into two or more entities and
which succeeds to all or substantially all of the electric
distribution business of JCP&L;
o which may result from any merger or consolidation to which JCP&L shall
be a party and which succeeds to all or substantially all of the
electric distribution business of JCP&L;
o which may succeed to the properties and assets of JCP&L substantially
as a whole and which succeeds to all or substantially all of the
electric distribution business of JCP&L; or
o which may otherwise succeed to all or substantially all of the
electric distribution business of JCP&L
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will be the successor to JCP&L.
The sale agreement further requires that:
o immediately after giving effect to any transaction referred to above,
no representation, warranty or covenant made in the sale agreement
will have been breached and no servicer default, and no event that,
after notice or lapse of time, or both, would become a servicer
default will have occurred and be continuing;
o the successor to JCP&L must execute an agreement of assumption to
perform every obligation of JCP&L under the sale agreement;
o the rating agencies will have received prior written notice of the
transaction; and
o officers' certificates and opinions of counsel specified in the sale
agreement will have been delivered to the issuer and the trustee.
THE SERVICING AGREEMENT
The following summary describes material terms and provisions of the
servicing agreement pursuant to which the servicer is undertaking to service
bondable transition property. The form of the servicing agreement has been filed
as an exhibit to the registration statement of which this prospectus forms a
part.
JCP&L'S SERVICING PROCEDURES
The servicer, as agent for the issuer, will manage, service, administer and
make collections in respect of the transition bond charge. The servicer's duties
will include:
1. obtaining meter reads, calculating and billing the transition bond
charge and collecting the transition bond charges from customers and third party
electric power suppliers, as applicable;
2. responding to inquiries by customers, third party electric power
suppliers, the BPU, or any federal, local or other state governmental authority
with respect to the transition bond charge;
3. delivering bills or arranging for delivery of bills, accounting for
transition bond charge collections, investigating and resolving delinquencies,
processing and depositing collections, making periodic remittances and
furnishing periodic reports to the issuer, the trustee and the rating agencies;
4. selling, as agent for the issuer, defaulted or written-off accounts in
accordance with the servicer's usual and customary practices for accounts of its
own electric service customers; and
5. taking action in connection with adjustments to the transition bond
charge as described below.
The servicer is required to notify the issuer, the trustee and the rating
agencies in writing of any laws or BPU regulations promulgated after the
execution of the servicing agreement that have a material adverse effect on the
servicer's ability to perform its duties under the servicing agreement.
The servicer will remit to the trustee transition bond charge collections
based on its estimated system-wide write-off percentage and the average number
of days outstanding of bills. Each year, the servicer will reconcile remittances
of estimated payments arising from billed transition bond charges with the
trustee to more accurately reflect the amount of billed transition bond charges
that should have been remitted, based on the actual system-wide write-off
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percentage. To the extent the remittances of estimated payments arising from the
transition bond charge exceed the amounts that should have been remitted based
on actual system-wide write-offs, the servicer will be entitled to withhold the
excess amount from any subsequent remittance to the trustee, or, alternatively
the servicer may require the trustee to pay the servicer the amount of any over
payment from the general subaccount. To the extent the remittances of estimated
payments arising from the transition bond charges are less than the actual
payments arising from the transition bond charges, the servicer will remit the
amount of the shortfall to the trustee within two business days, or, if monthly
remittances are permitted, as described below, on the next remittance date.
Although the servicer will remit estimated payments arising from the transition
bond charge to the trustee, the servicer is not obligated to make any payments
on the transition bonds.
In the event that the servicer makes changes to its current computerized
customer information system which would allow the servicer to track actual
transition bond charge collections and/or otherwise monitor payment and
collection activity more efficiently or accurately than is being done today, the
servicing agreement will allow the servicer to substitute actual remittance
procedures for the estimated remittance procedures described above and otherwise
modify the remittance procedures described above as may be appropriate in the
interests of efficiency, accuracy, cost and/or system capabilities. However, the
servicer will not be allowed to make any modification or substitution that will
materially and adversely affect the transition bondholders. The servicer must
also give notice to the rating agencies of any such computer system changes no
later than 60 business days after the date on which all customer accounts are
billed on the new system.
The BPU financing order requires that JCP&L, as servicer, remit estimated
transition bond charges collections to the trustee within two business day of
the deemed receipt of such estimated collections. The servicing agreement
provides for monthly remittances under certain conditions as discussed below,
but such monthly remittances would only be permitted with further BPU
authorization. If such BPU authorization is obtained and if the servicer has
provided certain opinions acceptable in form and substance to the rating
agencies, and for so long as:
1. JCP&L or any successor to JCP&L's electric distribution business remains
the servicer;
2. no servicer default has occurred and is continuing; and
3. (a) JCP&L, or any successor servicer referred to in this paragraph,
maintains a short-term rating of `A-1' or better by S&P, `P-1' or better by
Moody's, and `F-1' or better by Fitch; or
(b) any additional conditions or limitations imposed by the rating
agencies are complied with, and each rating agency has notified the servicer,
the issuer and the trustee that the monthly remittance will not result in a
reduction or withdrawal of the then current rating of any outstanding class of
transition bonds,
the servicer will remit to the trustee, on the [ ] day of each calendar month,
or if such [ ] day is not a business day, the next business day, referred to as
a "monthly remittance date", for each preceding billing month, an amount equal
to the amount of transition bond charge collections estimated to have been
received during the preceding calendar month, based on the average number of
days outstanding of bills then in effect.
If the servicer has not satisfied the conditions specified above, the
servicer will remit estimated payments arising from the transition bond charge
to the trustee within two business days after receipt in the manner described
above.
A business day is any day other than a Saturday or Sunday or a day on which
banking institutions in New York, New York or, with respect to any transition
bonds listed on the Luxembourg Stock Exchange, in Luxembourg, are required or
authorized by law or executive order to close.
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Upon five business days' prior written notice to the rating agencies, the
servicing agreement may be amended with the consent of the trustee, but without
the consent of the transition bondholders:
o to cure any ambiguity;
o to correct or supplement any provision in the servicing agreement;
o to add any provisions to or change in any manner or eliminate any of
the provisions of the servicing agreement; or
o to modify in any manner the rights of the transition bondholders;
provided that the action will not, as certified in a certificate of an officer
of the servicer delivered to the issuer and to the trustee and the managers,
adversely affect in any material respect the interest of any holder of
transition bonds then outstanding.
The servicing agreement may also be amended by the servicer and the issuer
with prior written notice to the rating agencies and with the consent of the
trustee and the transition bondholders evidencing at least a majority in
principal amount of the then outstanding transition bonds of all series, voting
together as a single class, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the servicing
agreement or of modifying in any manner the rights of the transition
bondholders. However, no amendment adopted in this manner may increase or
decrease, or accelerate or delay the timing of, collection of transition bond
charges, or reduce the percentage of transition bondholders required to consent
to amendments. No amendment of the provisions of the servicing agreement
relating to the servicer's remittance and transition bond charge adjustment
obligations will be permitted absent confirmation from the rating agencies that
such amendment will not result in a reduction or withdrawal of the then existing
rating of the transition bonds by the rating agencies (except that with regard
to Moody's it will be sufficient to provide ten days' prior notice of the
amendment). The issuer may also amend the servicing procedures provided in the
servicing agreement solely to address changes to the servicer's method of
calculating payments of transition bond charges received as a result of changes
to the servicer's current computerized information system, if the amendment does
not have a material adverse effect on the holders of transition bonds then
outstanding, with prior written notice to the trustee and the rating agencies,
but without the consent of the trustee, any rating agency or any transition
bondholder. These changes may include changes that would replace remittances
calculated by estimation procedures with remittances of transition bond charge
collections actually received.
THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS
Among other things, the servicing agreement requires the servicer to file
adjustment requests at least annually. The servicer is permitted under the BPU
financing order to file adjustment requests more often than annually but not
more frequently than quarterly, except that monthly filings are permitted in the
last year before expected maturity of the transition bonds and continuing until
their legal final maturity. In addition, the BPU financing order grants JCP&L,
as servicer, the authority to make "non-routine" filings for adjustment, under
certain circumstances. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND
CHARGE--THE BPU FINANCING ORDER" in this prospectus. These adjustment requests
are based on actual transition bond charge collections and updated assumptions
by the servicer as to projected future usage of electricity by customers,
expected delinquencies and write-offs, future payments and expenses relating to
bondable transition property and the transition bonds and any amounts on deposit
in the reserve subaccount. The servicer agrees to calculate these adjustments to
result in the calculations specified in "THE BPU FINANCING ORDER AND THE
TRANSITION BOND CHARGE--THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in
this prospectus.
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The servicer will file adjustment requests 30 days in advance of the date
on which the servicer requests the adjustment to be effective. The adjustment
request will become effective on an interim basis 30 days after filing, absent a
determination of manifest error by the BPU, and will become final 60 days after
filing in the absence of a BPU order to the contrary.
JCP&L'S TRANSITION BOND CHARGE COLLECTIONS
The servicer is required to remit all transition bond charge collections
from whatever source, based on the estimated collections, to the trustee for
deposit pursuant to the indenture on each remittance date. Until transition bond
charge collections are remitted to the collection account, the servicer will not
segregate them from its general funds. See "RISK FACTORS--THE RISKS ASSOCIATED
WITH POTENTIAL BANKRUPTCY PROCEEDINGS" in this prospectus.
JCP&L'S COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE OF OTHER PARTIES
The issuer agrees to pay the servicer a servicing fee set forth in any
applicable prospectus supplement. The servicing fee, together with any portion
of the servicing fee that remains unpaid from prior periods, will be paid solely
to the extent funds are available therefor as described under "THE
INDENTURE--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" in this
prospectus. The servicing fee will be paid prior to the payment of or provision
for any amounts in respect of interest on and principal of the transition bonds.
In the servicing agreement, the servicer releases the issuer and the trustee
from any and all claims whatsoever relating to bondable transition property or
the servicer's servicing activities with respect thereto (other than with
respect to the servicing fees).
JCP&L'S DUTIES AS SERVICER
In the servicing agreement, the servicer has agreed, among other things,
that, in servicing bondable transition property:
1. except where the failure to comply with any of the following would not
have a material adverse effect on the issuer's or the trustee's respective
interests in bondable transition property:
(a) it will manage, service, administer and make collections in respect
of bondable transition property with reasonable care and in material compliance
with applicable law and regulations, using the same degree of care and diligence
that the servicer exercises with respect to billing and collection activities
that the servicer conducts for itself and others;
(b) it will follow standards, policies and procedures that are customary
in the electric power distribution industry;
(c) it will use all reasonable efforts, consistent with its customary
servicing procedures, to enforce and maintain the rights of the issuer and the
trustee in respect of the bondable transition property; and
(d) it will calculate the transition bond charge in compliance with the
Competition Act, the BPU financing order and any applicable tariffs;
2. it will keep on file, in accordance with customary procedures, all
documents related to the bondable transition property and will maintain accurate
and complete accounts pertaining to the bondable transition property; and
3. it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of the bondable
transition property as they become due.
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JCP&L'S REPRESENTATIONS AND WARRANTIES AS SERVICER
In the servicing agreement, the servicer will make representations and
warranties as of the date it sells or otherwise transfers bondable transition
property to the issuer to the effect, among other things, that:
1. the servicer is a corporation duly organized and in good standing under
the laws of the state of its incorporation, with the corporate power and
authority to own its properties and conduct its business as its properties are
currently owned and its business is presently conducted and to execute, deliver
and carry out the terms of the servicing agreement, and has the power, authority
and legal right to service the bondable transition property;
2. the servicer is duly qualified to do business as a foreign corporation
in good standing in all jurisdictions in which it is required to do so, except
where the failure to do so would not be reasonably likely to have a material
adverse effect on it or on the transactions contemplated by the servicing
agreement;
3. the servicer has the corporate power to execute and deliver the
servicing agreement and to carry out its terms and the servicer's execution,
delivery and performance of the servicing agreement have been authorized by all
necessary corporate action;
4. the servicing agreement constitutes a legal, valid and binding
obligation of the servicer, enforceable against the servicer in accordance with
its terms, subject to customary exceptions relating to bankruptcy and other laws
affecting creditors' rights generally and equitable principles;
5. the consummation of the transactions contemplated by the servicing
agreement does not conflict with the servicer's articles of incorporation or
by-laws or any material agreement by which the servicer is bound, nor result in
any lien upon the servicer's properties or violate any law or regulation
applicable to the servicer or its properties;
6. except for filings with the BPU for adjusting the transition bond charge
filings under the New Jersey and Delaware Uniform Commercial Codes and the
approval of the SEC under the Public Utility Holding Company Act of 1935, no
governmental actions or filings are required for the servicer to execute,
deliver and perform its obligations under the servicing agreement, except those
which have been taken or made;
7. each report or certificate delivered in connection with a transition
bond charge adjustment request to the BPU will be true and correct, or, if based
on predictions and assumptions, will be based on predictions and assumptions
that are reasonably based on historical performance or facts known to the
servicer on the date such report or certificate is delivered; and
8. no proceeding or investigation is pending or, to the servicer's best
knowledge, threatened, before any court or other governmental authority having
jurisdiction over the servicer or its properties:
(a) seeking to prevent the issuance of the transition bonds or the
consummation of any of the transactions contemplated by the basic documents;
(b) except as disclosed by the servicer to the issuer (or as disclosed
in filings with the SEC made by the servicer), seeking any determination or
ruling that might materially and adversely affect the performance by the
servicer of its obligations under, or the enforceability against the servicer
of, the servicing agreement; or
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(c) relating to the servicer and which might adversely affect the
federal or state income tax attributes of the transition bonds.
JCP&L, AS SERVICER, WILL INDEMNIFY THE ISSUER AND OTHER RELATED ENTITIES
Under the servicing agreement, the servicer agrees to indemnify the issuer
and the trustee, for itself and on behalf of the transition bondholders, and
related parties specified in the servicing agreement, against any liabilities of
any kind that may be incurred by or asserted against any of those persons as a
result of:
1. the servicer's willful misconduct, bad faith or gross negligence in the
performance of its duties under the servicing agreement or the servicer's
reckless disregard of its duties under the servicing agreement;
2. the servicer's breach of any of its representations or warranties under
the servicing agreement; and
3. litigation and related expenses relating to its above-stated
indemnifications as servicer.
JCP&L, AS SERVICER, WILL PROVIDE STATEMENTS TO THE ISSUER AND TO THE TRUSTEE
For each payment date, the servicer will provide to the issuer and the
trustee a statement indicating, with respect to the bondable transition
property, among other things:
1. the amount to be paid to transition bondholders of each series and class
in respect of principal;
2. the amount to be paid to transition bondholders of each series and class
in respect of interest;
3. the projected outstanding principal balance of all transition bonds and
the projected outstanding principal balance of the transition bonds of each
series and class as of that payment date;
4. the amount on deposit in the overcollateralization subaccount and the
required overcollateralization level as of that payment date;
5. the amount on deposit in the capital subaccount as of that payment date;
6. the amount, if any, on deposit in the reserve subaccount as of that
payment date; and
7. the amount of any other transfers and payments to be made on such
payment date or in accordance with the indenture.
On the basis of this information, the trustee will furnish to the
transition bondholders on each payment date the report described under "THE
INDENTURE--REPORTS TO TRANSITION BONDHOLDERS." For so long as any transition
bonds are listed on the Luxembourg Stock Exchange and the rules of that exchange
so require, notice that such report is available with the listing agent in
Luxembourg also will be published in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort.
On or before each remittance date, but not less frequently than monthly,
the servicer will furnish to the issuer and the trustee a statement setting
forth the aggregate amount remitted or to be remitted by the servicer to the
trustee for deposit on that remittance date pursuant to the indenture. In
addition, under the servicing agreement the servicer is required to give written
notice to the issuer, the trustee and each rating agency, promptly after having
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obtained knowledge thereof, but in no event less than five business days
thereafter, of any event which, with the giving of notice or the passage of time
or both, would become a servicer default under the servicing agreement. For so
long as any transition bonds are listed on the Luxembourg Stock Exchange and the
rules of that exchange so require, notice that this notice is available with the
listing agent in Luxembourg also will be published in a daily newspaper in
Luxembourg, which is expected to be the Luxemburger Wort.
JCP&L WILL PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING AGREEMENT
An independent certified public accounting firm will furnish to the issuer,
the trustee and the rating agencies, on or before [ ] of each year, a statement
as to compliance by the servicer during the preceding calendar year, or the
relevant portion thereof, with procedures relating to the servicing of bondable
transition property. This report, which is referred to as the "annual
accountant's report", will state that the firm has performed the procedures in
connection with the servicer's compliance with the servicing obligations of the
servicing agreement, identifying the results of these procedures and including
any exceptions noted. The accounting firm providing the report will be
independent of the servicer within the meaning of the Code of Professional
Ethics of the American Institute of Certified Public Accountants. The servicing
agreement will also provide for delivery to the issuer and the trustee, on or
before [ ] of each year, a certificate signed by an officer of the servicer.
This certificate will state that the servicer has fulfilled its obligations
under the servicing agreement for the preceding calendar year, or the relevant
portion thereof, or, if there has been a default in the fulfillment of any
relevant obligation, describing each default. The servicer will give the issuer,
each rating agency, and the trustee notice of any servicer default under the
servicing agreement, which notice also will be given by publication in a daily
newspaper in Luxembourg, which is expected to be the Luxemburger Wort, so long
as any transition bonds are listed on the Luxembourg Stock Exchange and the
rules of that exchange so require.
MATTERS REGARDING JCP&L AS SERVICER
Pursuant to the servicing agreement and the BPU financing order, JCP&L may
assign any or all of its rights and obligations under the servicing agreement to
any successor upon the satisfaction of certain conditions specified in the
servicing agreement. Under the servicing agreement, any person that succeeds to
the major part of the electric distribution business of the servicer and that
assumes the obligations of the servicer will be the successor of the servicer
under the servicing agreement. The servicing agreement further requires that:
1. immediately after giving effect to the transaction referred to in this
paragraph, no representation or warranty made by the servicer in the servicing
agreement will have been breached and no servicer default, and no event which,
after notice or lapse of time, or both, would become a servicer default, will
have occurred and be continuing;
2. officers' certificates and opinions of counsel will have been delivered
to the issuer, the trustee and the rating agencies; and
3. prior written notice will have been received by the rating agencies, and
the then current ratings on any of the transition bonds will not be withdrawn or
downgraded.
Subject to the foregoing provisions, JCP&L may not resign from the
obligations and duties imposed on it as servicer. However, JCP&L may resign as
servicer upon a determination, communicated to the issuer, the trustee and each
rating agency and evidenced by an opinion of counsel, to the effect that the
performance of JCP&L's duties under the servicing agreement is no longer legal.
This resignation will not become effective until a successor servicer has
assumed the duties of JCP&L under the servicing agreement.
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Until the transition bonds have been paid in full and all related
obligations have been satisfied, JCP&L is obligated by the Competition Act to
provide electricity through its transmission and distribution system to its
customers and, as servicer, will have the right to meter, charge, bill, collect
and receive the transition bond charge from its customers for the account of the
issuer and the trustee. However, under the Competition Act, if JCP&L defaults in
respect of metering, charging, collecting and receiving revenues derived from
the transition bond charge, the trustee or the issuer may apply to the BPU or
any court of competent jurisdiction for an order designating a trustee or other
entity to act in place of JCP&L as the servicer for obtaining meter reads and
the charging, collecting and receiving of the transition bond charge for the
account of the issuer and the trustee. Under the Competition Act, the BPU or the
court is required to issue the order. The BPU may, at its discretion, establish
criteria for the selection of any entity that may become a successor servicer
upon default or other adverse material change in the financial condition of
JCP&L.
Except as expressly provided in the servicing agreement, the servicer will
not be liable to the issuer or the trustee for any action taken or not taken
pursuant to the servicing agreement or for errors in judgment. However, the
servicer will be liable to the extent this liability is imposed by reason of the
servicer's willful misconduct, bad faith or gross negligence or by reason of
reckless disregard of its duties under the servicing agreement.
EVENTS CONSTITUTING A DEFAULT BY JCP&L IN ITS ROLE AS SERVICER
Servicer defaults will include, among other things:
1. any failure by the servicer to remit to the trustee, on behalf of the
issuer, any required remittance that continues unremedied for a period of five
business days after written notice of such failure is received by the servicer
from the issuer or the trustee;
2. any failure by the servicer to perform in any material respect any other
covenant or agreement in the servicing agreement or any other basic document to
which it is a party, which failure materially and adversely affects the bondable
transition property or the rights of the transition bondholders and which
continues unremedied for 60 days after notice of this failure has been given to
the servicer by the issuer, the trustee or the holders of not less than 25% of
the total outstanding principal balance of the transition bonds of all series
and classes, acting together as a single class, or after discovery of this
failure by an officer of the servicer, as the case may be;
3. any representation or warranty made by the servicer in the servicing
agreement proves to have been incorrect when made, which has a material adverse
effect on any of the transition bondholders or the issuer and which continues
unremedied for 60 days after notice of this failure has been given to the
servicer by the issuer, the trustee or the holders of not less than 25% of the
total outstanding principal balance of the transition bonds of all series and
classes, acting together as a single class, or after discovery of this failure
by an officer of the servicer, as the case may be; or
4. an event of bankruptcy, insolvency, appointment of a receiver,
readjustment of debt, marshaling of assets and liabilities, or similar
proceedings with respect to the servicer or an action by the servicer indicating
its insolvency or inability to pay its debts as they come due, as specified in
the servicing agreement.
The trustee, with the consent of the holders of not less than a majority of
the total outstanding principal balance of the transition bonds of all series
and classes, voting together as a single class, may waive any default by the
servicer, except a default in making any required remittances to the trustee.
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THE TRUSTEE'S RIGHTS IF JCP&L DEFAULTS AS SERVICER
As long as a servicer default remains unremedied, the trustee, with the
consent of the holders of not less than a majority of the principal balance of
the outstanding transition bonds of all series and classes, voting together as a
single class, may terminate all the rights and obligations of the servicer under
the servicing agreement. However, the servicer's indemnification obligation and
obligation to continue performing its functions as servicer until a successor
servicer is appointed may not be terminated. Under the servicing agreement, the
trustee, with the consent of the holders of not less than a majority of the
principal balance of the outstanding transition bonds of all series and classes,
voting together as a single class, may appoint a successor servicer. The trustee
may make arrangements for compensation to be paid to any successor servicer.
Only a successor servicer that is an electric public utility may bring an action
against a customer for nonpayment of the transition bond charge, or terminate
service for failure to pay the transition bond charge.
Upon a servicer default based upon the commencement of a case by or against
the servicer under the federal bankruptcy law or similar laws, the trustee and
the issuer may be prevented from effecting a transfer of servicing. Upon a
servicer default because of a failure to make required remittances, the issuer
or the trustee will have the right to apply to the BPU for an order of
sequestration and payment of revenues arising from the bondable transition
property. However, federal bankruptcy law may prevent the trustee and issuer
from applying to the BPU for such an order and/or the BPU from issuing or
enforcing this order. See "RISK FACTORS--THE RISKS ASSOCIATED WITH POTENTIAL
BANKRUPTCY PROCEEDINGS" in this prospectus.
THE OBLIGATIONS OF A SERVICER THAT SUCCEEDS JCP&L
In accordance with the BPU financing order and the servicing agreement, if
a third party succeeds to the role of the servicer, the predecessor servicer
will cooperate with the issuer, the trustee and the successor servicer in
terminating the predecessor servicer's rights and responsibilities under the
servicing agreement. This procedure includes the transfer to the successor
servicer of all related documentation and cash. The predecessor servicer will be
liable for all reasonable costs and expenses incurred in transferring servicing
responsibilities. A successor servicer may not resign unless it is prohibited
from serving by law. The predecessor servicer is obligated, on an ongoing basis,
to cooperate with the successor servicer and provide whatever information is,
and take whatever actions are, reasonably necessary to assist the successor
servicer in performing its obligations under the servicing agreement.
THE INDENTURE
The following summary describes the material terms and provisions of the
indenture pursuant to which transition bonds will be issued. The form of the
indenture, including the form of the supplemental indenture, has been filed as
an exhibit to the registration statement of which this prospectus forms a part.
THE SECURITY FOR THE TRANSITION BONDS
To secure the payment of principal of and premium, if any, and interest on,
and any other amounts owing in respect of, the transition bonds pursuant to the
indenture, the issuer will grant to the trustee for the benefit of the
transition bondholders a security interest in all of the issuer's right, title
and interest in and to the following collateral:
1. the bondable transition property sold by JCP&L to the issuer pursuant to
the sale agreement and all proceeds thereof;
2. the sale agreement;
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3. all bills of sale delivered by JCP&L pursuant to the sale agreement;
4. the servicing agreement;
5. the administration agreement;
6. the collection account, each subaccount therein and all amounts on
deposit therein from time to time;
7. any other property of whatever kind owned from time to time by the
issuer (including rights under any interest rate swap agreement, its general
intangibles, accounts, chattel paper and contract rights), other than:
(a) cash released to the swap counterparty from any subaccount in
accordance with the indenture and any interest rate swap agreement;
(b) cash or other property released to the issuer from the capital
subaccount in accordance with the indenture, which other property is not
expected to be substantial; and
(c) proceeds from the sale of the transition bonds used to pay: (i) the
costs of issuance of the transition bonds, and any upfront transaction costs and
capital reduction costs as permitted under the BPU financing order; and (ii) the
purchase price of the bondable transition property pursuant to the sale
agreement;
8. all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing; and
9. all payments on or under and all proceeds of every kind and nature
whatsoever in respect of any or all of the foregoing.
See "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below.
TRANSITION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES
Transition bonds may be issued under the indenture from time to time in
series, to finance the purchase by the issuer of bondable transition property.
Any series of transition bonds may include one or more classes, which differ,
among other things, as to interest rate and amortization of principal. The terms
of all transition bonds of the same series will be identical, unless a series
includes more than one class, in which case the terms of all transition bonds of
the same class will be identical. The particular terms of the transition bonds
of any series and class will be set forth in the related supplemental indenture.
The terms of any series and any classes thereof will not be subject to prior
review by, or consent of, the transition bondholders of any previously issued
series. See "RISK FACTORS--OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE
TRANSITION BONDS," "THE TRANSITION BONDS" and "JCP&L'S RESTRUCTURING" in this
prospectus.
The principal source of repayment for all series of transition bonds will
be the transition bond charges collected by the servicer. Upon the issuance of
additional series of transition bonds, the transition bond charge will increase
by an amount designed to accommodate the payment requirements of the additional
series. The issuance will not be permitted if it would result in the downgrading
or withdrawal of any then current rating by a rating agency on any outstanding
transition bonds.
Under the indenture, the trustee will authenticate and deliver an
additional series of transition bonds only upon receipt by the trustee of, among
other things, a certificate of the issuer that no event of default has occurred
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and is continuing, an opinion of counsel to the issuer to the effect that the
requirements under the indenture for the issuance, authentication and delivery
of additional series of transition bonds have been satisfied and evidence from
each rating agency that the issuance of any additional series of transition
bonds will not result in the downgrading or withdrawal of any then current
rating by a rating agency on any outstanding transition bonds.
Opinion of Independent Certified Public Accountants Required for Each
Series or Class. In addition, in connection with the issuance of each new
series, the trustee will have to receive a certificate or opinion of an
independent certified public accounting firm of recognized national reputation.
This certificate will be based on the assumptions used in calculating the
initial transition bond charge with respect to the transferred bondable
transition property or, if applicable, the most recent revised transition bond
charge with respect to the transferred bondable transition property. The
certificate will state to the effect that, after giving effect to the issuance
of the new series and the application of the proceeds therefrom, and taking into
account any amounts on deposit in the reserve subaccount, the transition bond
charge will be sufficient:
o to pay all costs, fees and other operating expenses of the issuer;
o to pay interest on each series of transition bonds when due;
o to pay principal of each series of transition bonds in accordance with
the expected amortization schedule for each series;
o to fund the overcollateralization subaccount to the aggregate required
overcollateralization level; and
o to pay amounts due by the issuer under any interest rate swap
agreement;
as of each payment date.
If the issuance is a refunding issuance, the amount of money necessary to
pay premiums, if any, and the outstanding principal amount of and interest on
the transition bonds being refunded will be deposited into a separate account
with the trustee.
THE COLLECTION ACCOUNT FOR THE TRANSITION BONDS
Under the indenture, the trustee will establish the collection account,
with the trustee or at another eligible institution as described below. Funds
received from transition bond charge collections, any indemnity amount, as
described below, any amounts paid by any swap counterparty under any interest
rate swap agreement and any providers of credit enhancement will be deposited
into the collection account. The collection account will be divided into the
following subaccounts, which need not be separate bank accounts:
o the general subaccount;
o the overcollateralization subaccount for each series;
o one or more series or class subaccounts;
o the capital subaccount for each series;
o if required by the indenture, one or more defeasance subaccounts; and
o the reserve subaccount.
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All amounts in the collection account not allocated to any other subaccount
will be allocated to the general subaccount. Unless the context indicates
otherwise, references to the collection account include all of the subaccounts
contained therein. All money deposited from time to time in the collection
account, all deposits therein pursuant to the indenture, and all investments
made in eligible investments will be held by the trustee in the collection
account as part of the collateral.
For so long as any of the transition bonds are listed on the Luxembourg
Stock Exchange, and to the extent the rules of that exchange so require, the
issuer will have a listing agent, a paying agent and a transfer agent in
Luxembourg.
The following institutions are eligible institutions for the establishment of
the collection account:
(1) the corporate trust department of the trustee; or
(2) a depositary institution organized under the laws of the United States
of America or any state or any domestic branch of a foreign bank,
which:
(a) has either:
(i) a long-term unsecured debt rating of `AAA' by S&P and Fitch
and `Aaa' by Moody's; or
(ii) a certificate of deposit rating of `A-1+' by S&P and `P-1'
by Moody's, or any other long-term, short-term or
certificate of deposit rating acceptable to the rating
agencies; and
(b) whose deposits are insured by the Federal Deposit Insurance
Corporation.
Appropriate Investments for Funds in the Collection Account. All funds in
the collection account shall be invested in any of the following eligible
investments:
(1) direct obligations of, and obligations fully and unconditionally
guaranteed as to the timely payment by, the United States of America;
(2) demand deposits, time deposits, certificates of deposit of depository
institutions or trust companies specified in the indenture;
(3) commercial paper having, at the time of investment, a rating in the
highest rating category from each rating agency;
(4) demand deposits, time deposits and certificates of deposit which are
fully insured by the Federal Deposit Insurance Corporation;
(5) money market funds which have the highest rating from each rating
agency, including funds for which the trustee or any of its affiliates
is investment manager or advisor;
(6) banker's acceptances issued by any depository institution or trust
company as specified in the indenture;
(7) repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America or
agencies or instrumentalities thereof, entered into with depository
institutions or trust companies, in each case as specified in the
indenture;
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(8) repurchase obligations with respect to any security or whole loan, as
provided and with the ratings specified in the indenture; or
(9) any other investment permitted by each rating agency.
All eligible investments may not:
o be sold, liquidated or otherwise disposed of at a loss, prior to the
maturity thereof; or
o mature later than the business day prior to the next payment date,
except for any funds in the collection account in excess of the amount
needed to make all required and scheduled payments and deposits on the
next payment date, which may mature at any time before the second
following payment date.
In the case of a defeasance, the issuer will deposit cash or U.S.
Government Obligations in the defeasance subaccount. U.S. Government Obligations
are direct obligations, or certificates representing an ownership interest in
those obligations, of the United States of America, including any agency or
instrumentality thereof, for the payment of which the full faith and credit of
the United States of America is pledged and which are not callable at the
issuer's option. No money held in the collection account may be invested, and no
investment held in the collection account may be sold, unless the security
interest in the collection account will continue to be perfected in the
investment or the proceeds of the sale.
Remittances to the Collection Account. On each remittance date, the
servicer will remit to the trustee for deposit in the collection account (1) the
estimated transition bond charge collections based upon the average number of
days outstanding of bills and (2) any indemnity amounts to the trustee under the
indenture. An indemnity amount is any amount paid by JCP&L to the trustee, for
the trustee itself or on behalf of the transition bondholders, in respect of
indemnification obligations pursuant to the indenture, the sale agreement or the
servicing agreement. See "THE INDENTURE", "THE SALE AGREEMENT" and "THE
SERVICING AGREEMENT" in this prospectus.
Collection Account. Transition bond charges and any indemnity amounts will
be deposited in the collection account. On the business day preceding each
payment date, the trustee will allocate amounts in the collection account as
described under "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below.
General Subaccount. Transition bond charge collections and any indemnity
amounts remitted to the collection account will be deposited into the general
subaccount. On each payment date, the trustee will allocate amounts in the
collection account to the general subaccount described under "--HOW FUNDS IN THE
COLLECTION ACCOUNT WILL BE ALLOCATED" below.
Series Subaccount. Upon the issuance of each series of transition bonds, a
series subaccount will be established for that series. On each payment date, the
trustee will allocate funds, to the extent available following payment of the
expenses of the trustee and servicer and certain other fees and expenses, from
amounts on deposit in the general subaccount to each series subaccount in an
amount sufficient to pay:
(1) current and past due interest payable on each class of that series on
that payment date, including interest on past due interest (or, to the
extent provided in any prospectus supplement, any amount required to
be allocated to a class subaccount with respect to any floating rate
class);
(2) the principal of each class of that series payable as a result of an
acceleration following the occurrence of an event of default, the
principal of each class of that series if that payment date is the
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legal final maturity date of that series, or the principal of each
class of that series if that payment date is a redemption date for
that series; and
(3) principal scheduled to be paid on each class of that series on that
payment date according to the expected amortization schedule,
excluding amounts provided for in item (2) above.
Except as specified in any prospectus supplement with respect to any
deposits to any class subaccount, on each payment date, allocations will be made
to each series subaccount and the trustee will withdraw funds from the series
subaccount to make payments on the related series of transition bonds. See
"--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below.
Class Subaccount. If specified in the related prospectus supplement, upon
the issuance of a specified class of floating rate transition bonds, a class
subaccount will be established with respect to that class. On or before each
payment date, a fixed amount specified in the related prospectus supplement will
be allocated to that class subaccount from the related series subaccount and
payments to and from any swap counterparty pursuant to the related interest rate
swap agreement will be made from or allocated to, as applicable, that class
subaccount as described in the related prospectus supplement. On or before each
payment date, amounts on deposit in the class subaccount will be applied to make
payments with respect to the related class, as specified in the related
prospectus supplement.
Capital Subaccount. Upon the issuance of each series of transition bonds,
JCP&L will make a capital contribution to the issuer from JCP&L's general funds
in an amount equal to the required capitalization amount. The issuer will
transfer this amount to the trustee for deposit into the capital subaccount for
such series, which will be invested in eligible investments. The trustee will
draw on amounts in the capital subaccount for such series to the extent that,
after allocating funds to such series as described in "--HOW FUNDS IN THE
COLLECTION ACCOUNT WILL BE ALLOCATED" below, amounts on deposit in the general
subaccount, the series subaccount for such series, the reserve subaccount and
the overcollateralization subaccount for such series are insufficient to make
scheduled principal and interest distributions and payments of fees and expenses
specified in items (1) through (7) of that section. Upon the retirement of any
series of outstanding transition bonds, the amounts on deposit in the capital
subaccount for such series in excess of the sum of the aggregate required
capitalization amount for all remaining series will be released to the issuer,
free of the lien of the indenture. The issuer is not contractually obligated to
pay over to JCP&L any amounts released to the issuer from the capital subaccount
upon retirement of any series of transition bonds.
Overcollateralization Subaccount. Transition bond charge collections to the
extent available as described in "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" below will be allocated to the overcollateralization subaccount for
any series on each payment date. Each prospectus supplement will specify the
required overcollateralization level for that series on each payment date. The
overcollateralization level for any series will be funded over the life of the
transition bonds of that series and in the aggregate will equal the amount
stated in the related prospectus supplement for that series, which is referred
to as the "required overcollateralization level" for that series.
Amounts in the overcollateralization subaccount for each series will be
invested in eligible investments. On each payment date, the trustee will draw on
the overcollateralization subaccount for any series to the extent that, after
allocating funds to such series as described in "--HOW FUNDS IN THE COLLECTION
ACCOUNT WILL BE ALLOCATED" below, amounts on deposit in the general subaccount,
the series subaccount, and the reserve subaccount are insufficient to make
scheduled principal and interest distributions and payment of fees and expenses
specified in items (1) through (7) of that section. Upon retirement of any
series of outstanding transition bonds, the amounts on deposit in the
overcollateralization subaccount for such series in excess of the sum of the
aggregate required overcollateralization levels for all remaining series will be
released to the issuer, free of the lien of the indenture. The issuer is not
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contractually obligated to pay over to JCP&L any amounts released to the issuer
from the overcollateralization subaccount upon retirement of any series of
transition bonds.
Reserve Subaccount. Transition bond charge collections available on any
payment date that are not necessary to pay the amounts specified in items (1)
through (11) in "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below
will be allocated to the reserve subaccount. Amounts in the reserve subaccount
will be invested in eligible investments. On each payment date, the trustee will
draw on the reserve subaccount, if any, to the extent that, after allocating
funds as described in "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED"
below, amounts on deposit in the general subaccount and the series subaccounts
are insufficient to make scheduled principal and interest distributions and
payments of fees and expenses specified in items (1) through (7), (9) and (10)
of that section.
Defeasance Subaccount. In the event funds are remitted to the trustee in
connection with the exercise of the legal defeasance option or the covenant
defeasance option, the issuer will establish a defeasance subaccount for each
series. If this occurs, funds set aside for future payment of the transition
bonds will be deposited into the applicable defeasance subaccount. All amounts
in a defeasance subaccount will be applied by the trustee to the payment to the
holders of the affected transition bonds. These amounts will include all sums
due for principal, premium, if any, and interest. These amounts will be applied
in accordance with the provisions of the transition bonds and the indenture. See
"--THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS" below.
HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED
Amounts remitted from the servicer to the trustee, and all investment
earnings on the subaccounts in the collection account other than the capital
subaccount, will be deposited into the general subaccount of the collection
account. On each payment date, the trustee will pay or allocate all amounts in
the general subaccount in the following priority, or on any other date specified
in any prospectus supplement with respect to any class subaccount:
(1) payment of all amounts owed to the trustee and all amounts owed to the
independent managers of the issuer;
(2) payment of the servicing fees and all unpaid servicing fees from prior
periods, if these fees have not been withheld by the servicer from
transition bond charge collections for that purpose;
(3) payment of the administration fee to GPU Service, Inc. or its
successor pursuant to the administration agreement between the issuer
and the administrator in an amount not to exceed the administrator's
actual costs;
(4) so long as no event of default has occurred and is continuing or would
be caused by this payment, the payment of operating expenses of the
issuer, excluding items (1), (2) and (3) above (up to an annual
aggregate of $[ ] for all series);
(5) payment of interest as follows:
o first, unpaid interest on any series from prior periods,
including payment of any amount payable to any swap counterparty
on any interest rate swap agreement, including interest on past
due interest; and
o then, payment of the current interest then due on the transition
bonds of each series, including payment of any amount payable to
the swap counterparty on any interest rate swap agreement;
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(6) payment of the principal then legally required to be paid on the
transition bonds of any series as follows:
o the unpaid principal balance of any series if such payment date
is on or after the legal final maturity date of that series; plus
o the unpaid principal balance of any transition bonds called for
redemption; plus
o the unpaid principal balance of any series due upon an
acceleration following an event of default;
(7) payment of the principal then scheduled to be paid on the transition
bonds of any series according to the expected amortization schedule,
other than principal paid under item (6) above;
(8) payment of any remaining unpaid operating expenses and indemnity
amounts then owed by the issuer;
(9) replenishment of each series capital subaccount, pro rata, up to the
aggregate required capitalization amount for each series;
(10) allocation of any required amount necessary to cause the amount in
each series overcollateralization subaccount up to the aggregate
required overcollateralization level for each series as of that
payment date;
(11) payment of any termination or breakage amounts payable under any
interest rate swap agreement relating to any floating rate transition
bonds;
(12) so long as no event of default has occurred and is continuing, release
to the issuer of an amount equal to investment earnings since the
preceding payment date (or, in the case of the first payment date,
since the issuance date) on amounts in each series capital subaccount;
and
(13) allocation of the remainder, if any, to the reserve subaccount.
Following repayment of all outstanding series of transition bonds, the
balance, if any, remaining in the general subaccount will be released to the
issuer, free of the lien of the indenture.
Amounts credited to any class subaccount will be paid from that subaccount
as specified in the related prospectus supplement. Overdue and unpaid amounts
due to a swap counterparty will be paid from that class subaccount on the same
priority as any overdue and unpaid interest due to the holders of the related
class of floating rate transition bonds.
If on any payment date funds in the general subaccount are insufficient to
make the allocations contemplated by items (1) through (7), (9) and (10) above,
the trustee will draw from amounts on deposit in the following subaccounts in
the following order up to the amount of the shortfall:
o from the reserve subaccount, for allocations described in items (1)
through (7), (9) and (10);
o from the overcollateralization subaccount, for allocations described
in items (1) through (7); and
o from the capital subaccount, for allocations described in items (1)
through (7).
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If the amount in the reserve subaccount is insufficient to cover the
shortfalls for all outstanding series, the trustee will allocate funds in the
reserve subaccount pro rata, as follows, unless otherwise provided in the
prospectus supplement. If there is a shortfall in the amounts necessary to make
interest payments, the trustee will distribute interest pro rata to each series
and class of transition bonds based on the interest then due on that series or
class. If there is a shortfall in the amount necessary to make principal
payments that are due and payable, including upon an acceleration following an
event of default, the trustee will distribute principal pro rata among the
series and classes of transition bonds in proportion to the amount of principal
due and payable for each series or class. If there is a shortfall in the amount
necessary to make scheduled principal payments, the trustee will distribute
principal pro rata among the series and classes in proportion to the amount
scheduled to be paid for each series or class.
For the purpose of allocations among classes within a series prior to an
acceleration, pro rata has the following meaning, unless otherwise provided in
the related prospectus supplement. With respect to a payment of interest, pro
rata means the proportion that the aggregate amount of interest payable to each
class, including, for any floating rate class, the gross fixed amount for that
class, bears to the aggregate amount of interest payable to all classes within
that series, in each case, immediately before that payment date. With respect to
a payment of principal, pro rata means the proportion that the aggregate
outstanding principal amount of that class scheduled to be paid on that payment
date bears to the aggregate outstanding principal amount of all classes of that
series scheduled to be paid on that payment date.
Upon an acceleration of the maturity of the transition bonds, the aggregate
amount of principal of and interest accrued on each series of transition bonds
will be payable without priority of interest over principal or principal over
interest and without regard to series or class, in the proportion that this
aggregate amount of principal of and accrued interest on that series bears to
the aggregate amount of principal of and accrued interest on all transition
bonds.
If the maturity of the transition bonds is accelerated and the collateral
held under the indenture is liquidated in accordance with the indenture and if
any interest rate swap agreement so requires, the proceeds of such liquidation
allocated to the related class of floating rate transition bonds will be
deposited in the related class subaccount and allocated between and paid to the
holders of the related floating rate class of transition bonds, on the one hand,
and the related swap counterparty, on the other hand, based on the aggregate
amount of principal and interest due and payable on that class of transition
bonds and the aggregate amount payable to the related swap counterparty in
accordance with such interest swap agreement.
REPORTS TO TRANSITION BONDHOLDERS
With respect to each series of transition bonds, on or prior to each
payment date, the trustee will deliver a statement prepared by the trustee to
each transition bondholder of that series. This statement will include, to the
extent applicable, the following information, as well as any other information
so specified in the related supplemental indenture, as to the transition bonds
of that series with respect to that payment date or the period since the
previous payment date:
o the amount to be paid to transition bondholders of that series and
class in respect of principal;
o the amount to be paid to transition bondholders of that series and
class in respect of interest;
o the projected outstanding principal balance of all transition bonds
and the projected outstanding principal balance of the transition
bonds for that series and class as of that payment date;
o with respect to that series, the amount on deposit in the
overcollateralization subaccount and the required
overcollateralization level as of that payment date;
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o with respect to that series, the amount on deposit in the capital
subaccount as of that payment date;
o the amount, if any, on deposit in the reserve subaccount as of that
payment date;
o the amount to be paid to any swap counterparty;
o the amount paid to the trustee since the preceding payment date;
o the amount paid to the servicer since the preceding payment date; and
o any other transfers and payments made pursuant to the indenture.
If any of the transition bonds are listed on the Luxembourg Stock Exchange
and the rules of that exchange so require, notice that such report is available
with the listing agent in Luxembourg will be given to holders of such transition
bonds by publication in a daily newspaper in Luxembourg, which is expected to be
the Luxemburger Wort.
THE ISSUER AND THE TRUSTEE MAY MODIFY THE INDENTURE; THE ISSUER MUST ENFORCE THE
SALE AGREEMENT, THE SERVICING AGREEMENT AND ANY INTEREST RATE SWAP AGREEMENT
Modifications That Do Not Require Consent of Transition Bondholders.
Without the consent of any of the holders of the outstanding transition bonds or
the counterparty to any swap transaction but with prior notice to the rating
agencies, the issuer and the trustee may execute a supplemental indenture for
any of the following purposes:
o to correct or amplify the description of the collateral, or better to
confirm to the trustee the collateral, or to subject to the lien of
the indenture additional property;
o to evidence the succession, in compliance with the indenture, of
another person to the issuer, and the assumption by the successor of
the covenants of the issuer in the indenture and in the transition
bonds;
o to add to the covenants of the issuer, for the benefit of the holders
of the transition bonds, or to surrender any right or power conferred
upon the issuer in the indenture;
o to assign or pledge any property to or with the trustee;
o to cure any ambiguity, to correct or supplement any inconsistent
provision of the indenture or any supplemental indenture or to make
any other provisions with respect to matters arising under the
indenture or in any supplemental indenture; but:
o this action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
transition bondholder or any swap counterparty; and
o the then current ratings on any outstanding transition bonds
shall not be withdrawn or downgraded;
o to provide for a successor trustee and to facilitate the
administration of the trusts under the indenture by more than one
trustee, pursuant to the indenture;
o to modify the indenture to effect the qualification of the indenture
under the Trust Indenture Act of 1939, as amended ("Trust Indenture
Act") or any similar federal statute hereafter enacted and to add to
the indenture any other provisions as may be expressly required by the
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Trust Indenture Act;
o to set forth the terms of any series that has not theretofore been
authorized by a supplemental indenture, provided that the then current
ratings on any outstanding transition bonds have not been withdrawn or
downgraded;
o to provide for any interest rate swap transactions with respect to any
floating rate series or class of transition bonds or any series or
class with specified credit enhancement; but such action shall not, as
evidenced by an opinion of counsel, adversely affect in any material
respect the interests of any transition bondholder or other swap
counterparty; or
o to authorize the appointment of any listing agent, transfer agent or
paying agent or additional registrar for any class of transition bonds
required or advisable in connection with the listing of any class of
transition bonds on the Luxembourg Stock Exchange or any other stock
exchange, and otherwise to amend the indenture to incorporate any
changes requested or required by any governmental authority, stock
exchange authority, listing agent, transfer agent or paying agent or
additional registrar for any class of transition bonds in connection
with that listing.
Modifications That Require the Approval of the Transition Bondholders. The
issuer and the trustee also may, with prior notice to the rating agencies and
with the consent of the holders of not less than a majority of the total
outstanding principal balance of the transition bonds of all series or classes
to be affected thereby, voting together as a single class, execute a
supplemental indenture to add any provisions to, or change in any manner or
eliminate any of the provisions of, the indenture or modify in any manner the
rights of the transition bondholders under the indenture. However, such a
supplemental indenture may not, without the consent of the holder of each
outstanding transition bond of each series or class affected thereby and each
swap counterparty, if any, affected thereby:
o change the date of payment of any scheduled payment of principal of or
premium, if any, or interest on any transition bond, or reduce the
principal balance thereof, the interest rate specified thereon or the
redemption price or the premium, if any, with respect thereto, change
the provisions of any interest rate swap agreement relating to the
amount, calculation or timing of payments, change the provisions of
the indenture and the applicable supplemental indenture relating to
the application of collections on, or the proceeds of the sale of, the
collateral to payment of principal of or premium, if any, or interest
on the transition bonds, or change the currency in which any
transition bond or any interest thereon is payable;
o impair the right to institute suit for the enforcement of the
provisions of the indenture regarding payment;
o reduce the percentage of the total principal balance of the
outstanding transition bonds, or of a series or class thereof, the
consent of the holders of which is required for any supplemental
indenture, or the consent of the holders of which is required for any
waiver of compliance with specified provisions of the indenture or of
defaults and their consequences;
o reduce the percentage of the total principal balance of the
outstanding transition bonds required to direct the trustee to direct
the issuer to liquidate or preserve the collateral;
o modify the section of the indenture relating to the consent of
transition bondholders with respect to supplemental indentures, except
to increase any percentage specified therein or to provide that those
provisions of the indenture or the basic documents specified in the
indenture cannot be modified or waived without the consent of each
outstanding transition bondholder affected thereby;
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o reduce the percentage of the total principal balance of the
outstanding transition bonds, or of a series or class thereof, the
consent of the holders of which is required for any amendments to the
sale agreement, the administration agreement, the servicing agreement
or any interest rate swap agreement entered into in connection with
any series or class of transition bonds;
o modify the indenture to affect the amount of any payment of interest,
principal or premium, if any, payable on any transition bond on any
payment date, modify the method of calculating interest on any
floating rate transition bond, or change the redemption dates,
expected amortization schedules or series legal final maturity dates
or class legal final maturity dates of any transition bonds;
o with respect to any series, decrease the required capitalization
amount, the overcollateralization amount or the required
overcollateralization level with respect to any payment date;
o modify the indenture regarding the voting of transition bonds held by
the issuer, JCP&L, an affiliate of either of them or any obligor on
the transition bonds;
o decrease the percentage of the total principal balance of the
outstanding transition bonds required to amend the sections of the
indenture which specify the applicable percentage of the total
outstanding principal balance of the transition bonds necessary to
amend the indenture or other related agreements specified therein; or
o permit the creation of any lien ranking prior to or on a parity with
the lien of the indenture with respect to any of the collateral for
the transition bonds or, except as otherwise contemplated in the
indenture, terminate the lien of the indenture on any property or
deprive the holder of any transition bond of the security of the
indenture.
Promptly following the execution of any amendment to the indenture or
supplemental indenture requiring the consent of any transition bondholders, the
trustee will furnish written notice of the substance of such amendment to each
transition bondholder. For so long as any of the transition bonds are listed on
the Luxembourg Stock Exchange and the rules of that exchange so require, this
notice will be published in a daily newspaper in Luxembourg, which is expected
to be the Luxemburger Wort.
Enforcement of the Sale Agreement, Servicing Agreement and Any Interest
Rate Swap Agreement. The indenture will provide that the issuer will take all
lawful actions to enforce the issuer's rights under the sale agreement, the
servicing agreement and any interest rate swap agreement. The indenture will
also provide that the issuer will take all lawful actions to compel or secure
the performance and observance by JCP&L, the servicer and any swap counterparty
of each of their respective obligations to the issuer under the sale agreement,
the servicing agreement and any interest rate swap agreement. So long as no
event of default occurs and is continuing, except as otherwise directed by the
trustee under the circumstances described in the indenture or any supplemental
indenture, as described in any prospectus supplement, the issuer may exercise
any and all rights, remedies, powers and privileges lawfully available to the
issuer under or in connection with the sale agreement, the servicing agreement
and any interest rate swap agreement. However, if the issuer and the servicer
propose to amend, modify, waive, supplement, terminate or surrender, or agree to
any material amendment, modification, supplement, termination, waiver or
surrender of, the process for adjusting the transition bond charge, the issuer
must notify the trustee and the trustee must notify transition bondholders of
this proposal. In addition, the trustee may consent to this proposal only with
the consent of the holders of not less than a majority of the total principal
balance of the outstanding transition bonds of all series or classes materially
and adversely affected thereby, voting together as a single class, and only if
consent to this proposal will not result in a reduction or withdrawal of the
then current rating of any outstanding transition bonds.
If an event of default occurs and is continuing, the trustee may, and at
the direction of (1) the holders of not less than a majority of the total
principal balance of the outstanding transition bonds of all series or classes,
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voting together as a single class, with respect to the sale agreement and the
servicing agreement, and (2) the holders of that percentage of the total
principal balance of the outstanding transition bonds of the related class
specified in the related prospectus supplement, or voting together in a single
class, with respect to any interest rate swap agreement, shall, exercise all
rights, remedies, powers, privileges and claims of the issuer against JCP&L, the
servicer or any swap counterparty under or in connection with the sale
agreement, the servicing agreement and any interest rate swap agreement, and any
right of the issuer to take this action shall be suspended. In the event of a
foreclosure, there is likely to be a limited market, if any, for the bondable
transition property, and, therefore, foreclosure may not be a realistic or
practical remedy.
Modifications to the Sale Agreement, the Servicing Agreement and any
Interest Rate Swap Agreement. With the consent of the trustee, the sale
agreement, the servicing agreement and any interest rate swap agreement may be
amended at any time and from time to time, without the consent of the transition
bondholders or the counterparty to any interest rate swap agreement. However,
such an amendment may not adversely affect the interest of any transition
bondholder or the counterparty to any interest rate swap agreement in any
material respect without the consent of the holders of not less than a majority
of the total principal balance of the outstanding transition bonds of all series
or classes materially and adversely affected thereby, voting together as a
single class and each counterparty to an interest rate swap agreement materially
or adversely affected thereby.
Also, an interest rate swap agreement may be amended with the consent of
the trustee, as directed by the holders of the related floating rate class to
the extent described in the related prospectus supplement, and the related swap
counterparty, so long as the rating agency condition is satisfied. However, this
amendment may not adversely affect in any material respect the interest of any
other series or class of transition bondholders or the counterparty to any swap
transactions without the consent of the holders of 66 2/3% of the total
outstanding principal balance of the transition bonds of each other series or
class and each counterparty to any swap transaction materially and adversely
affected thereby.
Notification of the Rating Agencies, the Trustee and the Transition
Bondholders of any Modification. If the issuer, JCP&L or the servicer:
o proposes to amend, modify, waive, supplement, terminate or surrender,
or agree to any other amendment, modification, waiver, supplement,
termination or surrender of, the terms of the sale agreement, the
servicing agreement or any interest rate swap agreement; or
o waives timely performance or observance under the sale agreement, the
servicing agreement or any interest rate swap agreement;
in each case in a way which would materially and adversely affect the interests
of transition bondholders or the counterparty to any interest rate swap
agreement, the issuer must first notify the rating agencies of the proposed
amendment. Upon receiving notification from the rating agencies regarding
whether such amendment would affect the then current ratings on all outstanding
transition bonds, the issuer must thereafter notify the trustee and the trustee
must notify the transition bondholders and any swap counterparty of the proposed
amendment and whether the then current ratings on the transition bonds have been
affected. With respect to any proposed action related to the sale agreement or
the servicing agreement, the trustee will consent to the proposed amendment,
modification, supplement or waiver only with the consent of the holders of not
less than a majority of the total principal balance of the outstanding
transition bonds of all series or classes materially and adversely affected
thereby, voting together as a single class, and only if such action will not
result in a reduction or withdrawal of the then current rating of any
outstanding transition bonds. With respect to any proposed action related to any
interest rate swap agreement, the trustee will consent to this proposed action
subject to and in accordance with any requirements described in the related
prospectus supplement. For so long as any of the transition bonds are listed on
the Luxembourg Stock Exchange and the rules of that exchange so require, notice
of this proposed action will be published in a daily newspaper in Luxembourg,
which is expected to be the Luxemburger Wort, promptly following its
effectiveness.
79
Termination of an Interest Rate Swap Agreement. Upon the occurrence of any
event that permits the issuer to terminate any interest rate swap agreement, the
issuer may terminate that agreement only if so directed by holders representing
that percentage of the aggregate outstanding principal amount of the related
class and series of transition bonds specified in the related prospectus
supplement, and if so directed, the issuer must terminate that agreement.
WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION BONDS
An "event of default" is defined in the indenture as:
o a default for five business days in the payment of any interest on any
transition bond;
o a default in the payment of the principal of any transition bond of
any series on the legal final maturity date for that series or, if
applicable, any class on the legal final maturity date for that class;
o a default in the payment of the redemption price for any transition
bond on the redemption date therefor;
o a default in the observance or performance of any covenant or
agreement of the issuer made in the indenture (other than those
specifically dealt with in the first three items above) or any
material representation or warranty of the issuer made in the
indenture or in any certificate or other writing delivered in
connection with the indenture proving to have been incorrect in any
material respect as of the time when made, and the continuation of
that default for a period of 30 days after the earlier of the date (a)
notice is given to the issuer by the trustee; (b) notice is given to
the issuer and the trustee by the holders of not less than 25% of the
total principal balance of the outstanding transition bonds of any
series or class, specifying such default or incorrect representation
or warranty; or (c) the issuer has knowledge of the default;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the issuer; and
o violation by the State of New Jersey of its pledge and agreement with
respect to the Competition Act and the transition bonds.
If an event of default occurs and is continuing, other than a default
involving the State of New Jersey's pledge and agreement as discussed above, the
trustee or holders of not less than a majority of the total principal balance of
the outstanding transition bonds of all series, voting together as a single
class, may declare the principal of all series of the transition bonds to be
immediately due and payable. This declaration of acceleration may, under the
circumstances specified in the indenture, be rescinded by the holders of not
less than a majority of the total principal balance of the outstanding
transition bonds of all series, voting together as a single class.
Remedies Available to the Trustee Following an Event of Default. In
addition to acceleration of the transition bonds, the trustee may exercise one
or more of the following remedies upon an event of default:
o the trustee may institute proceedings in its own name and as trustee
of an express trust for the collection of all amounts then payable on
the transition bonds or under the indenture with respect to the
transition bonds, whether by declaration or otherwise, enforce any
judgment obtained, and collect from the issuer and any other obligor
upon the transition bonds moneys adjudged due;
o the trustee may institute proceedings from time to time for the
complete or partial foreclosure of the indenture with respect to the
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collateral;
o the trustee may exercise any remedies of a secured party under the New
Jersey Uniform Commercial Code or the Competition Act or any other
applicable law and take any other appropriate action to protect and
enforce the rights and remedies of the trustee and the holders of the
transition bonds of that series;
o the trustee may sell the collateral or any portion thereof or rights
or interest therein, at one or more public or private sales called and
conducted in any manner permitted by law;
o the trustee may exercise all rights, remedies, powers, privileges and
claims of the issuer against JCP&L or the servicer under or in
connection with the sale agreement or the servicing agreement; and
o the trustee may institute or participate in proceedings reasonably
necessary to compel performance of or to enforce the pledge and
agreement of the State of New Jersey under the Competition Act and
collect any monetary damages incurred by the holders of the transition
bonds or the trustee.
The final remedy described above is the only remedy that the trustee may
exercise upon an event of default caused solely by a violation by the State of
New Jersey of its pledge and agreement with respect to the Competition Act and
the transition bonds.
When the Trustee Can Sell the Collateral. If the transition bonds of all
series have been declared to be due and payable following an event of default,
the trustee may, in its discretion, either:
o sell the collateral; or
o elect to have the issuer maintain possession of the collateral and
continue to apply distributions on the collateral as if there had been
no declaration of acceleration.
The trustee is prohibited from selling the collateral following an event of
default other than a default in the payment of any principal, a default for five
business days or more in the payment of any interest on any transition bond of
any series or a default in the payment of the redemption price for any
transition bond on the redemption date therefor unless:
o the holders of 100% of the total principal balance of the outstanding
transition bonds of all series consent to this sale; or
o the proceeds of this sale are sufficient to pay in full the principal
of and premium, if any, and accrued interest on all outstanding
transition bonds; or
o the trustee determines that funds provided by the collateral would not
be sufficient on an ongoing basis to make all payments on the
transition bonds of all series as these payments would have become due
if the transition bonds had not been declared due and payable, and the
trustee obtains the consent of the holders of not less than 66 2/3% of
the total principal balance of the outstanding transition bonds of all
series.
Right of Transition Bondholders to Direct Proceedings. Subject to the
provisions for indemnification and the limitations contained in the indenture,
and except as may be described in any prospectus supplement regarding any
floating rate class of transition bonds, the holders of not less than a majority
of the total principal balance of the outstanding transition bonds of all
series, voting together as a single class, will have the right to direct the
time, method and place of conducting any proceeding or any remedy available to
81
the trustee or exercising any trust or power conferred on the trustee; provided
that, among other things:
o this direction shall not conflict with any rule of law or with the
indenture;
o subject to the provisions specified in the indenture, any direction to
the trustee to sell or liquidate the collateral shall be by the
holders of 100% of the total principal balance of the outstanding
transition bonds of all series; and
o the trustee may take any other action deemed proper by the trustee
that is not inconsistent with this direction.
In case an event of default occurs and is continuing, the trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the direction of any of the holders of transition bonds of any series if it
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with this
request. The trustee does not need to take any action pursuant to the direction
of the transition bondholders if it determines that this action might materially
and adversely affect the rights of any transition bondholder not consenting to
this action.
Waiver of Default. Except as may be described in any prospectus supplement
regarding any floating rate class of transition bonds, the holders of not less
than a majority of the total principal balance of the outstanding transition
bonds of all series, voting together as a single class, may, in those cases
specified in the indenture, waive any default with respect thereto. However,
these holders may not waive a default in the payment of principal of or premium,
if any, or interest on any of the transition bonds or a default in respect of a
covenant or provision of the indenture that cannot be modified without the
waiver or consent of the holders of all of the outstanding transition bonds of
all affected series and classes.
No transition bondholder will have the right to institute any proceeding,
judicial or otherwise, to avail itself of any remedies provided in the
Competition Act or to avail itself of the right to foreclose on the bondable
transition property or otherwise enforce the lien on the bondable transition
property, with respect to the indenture, unless:
o the holder previously has given to the trustee written notice of a
continuing event of default;
o the holders of not less than 25% of the total principal balance of the
outstanding transition bonds of all series have made written request
of the trustee to institute the proceeding in its own name as trustee;
o the holder or holders have offered the trustee security or indemnity
reasonably satisfactory to the trustee against the liabilities to be
incurred in complying with the request;
o the trustee for 60 days after its receipt of the notice, request and
offer of indemnity has failed to institute the proceeding; and
o no direction inconsistent with this written request has been given to
the trustee during the 60-day period referred to above by the holders
of not less than a majority of the total principal balance of the
outstanding transition bonds of all series.
However, each holder of transition bonds also has the unconditional right
to institute suit for the enforcement of payment of interest and principal due
on such holder's transition bonds.
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COVENANTS OF THE ISSUER
The issuer will keep in effect its existence as a limited liability company
under Delaware law, provided that the issuer may consolidate with or merge into
another entity or sell substantially all of its assets to another entity and
dissolve if:
o the entity formed by or surviving the consolidation or merger or to
whom substantially all of its assets are sold is organized and
existing under the laws of the United States or any state thereof and
expressly assumes by a supplemental indenture the due and punctual
payment of the principal of and premium, if any, and interest on all
transition bonds and the performance of the issuer's obligations under
the indenture;
o the entity expressly assumes all obligations and succeeds to all
rights of the issuer under the sale agreement, the servicing
agreement, the administration agreement and any interest rate swap
agreement pursuant to an assignment and assumption agreement executed
and delivered to the trustee;
o no default or event of default under the indenture has occurred and is
continuing immediately after giving effect to the consolidation,
merger or sale;
o there has not been a reduction or withdrawal of the then current
rating of any outstanding class or series of transition bonds;
o the issuer has received an opinion of counsel to the effect that this
consolidation, merger or sale would have no material adverse tax
consequence to the issuer or any transition bondholder, the
consolidation, merger or sale complies with the indenture and all
conditions precedent in the indenture relating to the consolidation,
merger or sale and will result in the trustee maintaining a continuing
valid first priority security interest in the collateral;
o none of the bondable transition property, the BPU financing order or
JCP&L's, the servicer's or the issuer's rights under the Competition
Act or the BPU financing order are impaired thereby; and
o any action that is necessary to maintain the lien and security
interest created by the indenture has been taken.
Additional Covenants of the Issuer. The issuer will take any action
necessary or advisable to, among other things, maintain and preserve the lien
and security interest, and priority thereof, of the indenture. The issuer will
not permit the validity of the indenture to be impaired, the lien to be amended,
subordinated, terminated or discharged, or any person to be released from any
covenants or obligations, except as expressly permitted by the indenture. The
issuer will also not permit any lien, charge, claim, security interest, mortgage
or other encumbrance, other than the lien and security interest created by the
indenture, to be created on or extend to or otherwise arise upon or burden the
collateral or any part thereof or any interest therein or the proceeds thereof.
Finally, the issuer will not permit the lien of the indenture not to constitute
a continuing valid first priority security interest in the collateral.
The issuer may not, among other things:
o except as expressly permitted by the indenture, the sale agreement,
the servicing agreement or any other basic document, sell, transfer,
exchange or dispose of any of the collateral unless directed to do so
by the trustee in accordance with the indenture; or
o claim any credit on, or make any deduction from the principal or
premium, if any, or interest payable in respect of, the transition
bonds, other than amounts properly withheld under the Internal Revenue
83
Code, or assert any claim against any present or former transition
bondholder because of the payment of taxes levied or assessed upon the
issuer or any part of the collateral.
The issuer may not engage in any business other than purchasing and owning
the bondable transition property, issuing transition bonds from time to time,
pledging its interest in the collateral to the trustee to secure the transition
bonds, and performing activities that are necessary, suitable or convenient to
accomplish the foregoing.
The Issuer May Not Engage in Any Other Financial Transactions. The issuer
may not issue, incur, assume or guarantee any indebtedness except for the
transition bonds and any obligations under any credit enhancement or interest
rate swap agreement for any series of transition bonds. Also, the issuer may not
guarantee or otherwise become contingently liable in connection with the
obligations, stocks or dividends of, or own, purchase, repurchase or acquire, or
agree contingently to acquire any stock, obligations, assets or securities of,
or any other interest in, or make any capital contribution to, any other person,
other than the eligible investments. The issuer may not make any loan or advance
or credit to any person. The issuer will not make any expenditure for capital
assets or lease any capital asset other than bondable transition property
purchased from the seller pursuant to, and in accordance with, the sale
agreement. The issuer may not make any payments, distributions or dividends to
any member of the issuer in respect of its membership interest in the issuer,
other than any amount released to the issuer by the trustee in accordance with
the indenture or otherwise not subject to the lien of the indenture and except
as otherwise provided in the indenture.
The servicer will deliver to the trustee, annually, the report of the
independent certified public accounting firm, as well as compliance certificates
and monthly reports regarding distributions and other statements, required by
the servicing agreement. See "THE SERVICING AGREEMENT" in this prospectus.
ACCESS TO THE LIST OF HOLDERS OF THE TRANSITION BONDS
Any three or more transition bondholders may, by written request to the
trustee, obtain access to the list of all transition bondholders maintained by
the trustee for the purpose of communicating with other transition bondholders
with respect to their rights under the indenture or the transition bonds. The
trustee may elect not to afford a requesting transition bondholder access to the
list of transition bondholders if the trustee agrees to mail the desired
communication or proxy, on behalf and at the expense of the requesting
transition bondholder, to all transition bondholders.
THE ISSUER MUST FILE AN ANNUAL COMPLIANCE STATEMENT
The issuer will be required to file annually with the trustee a written
statement as to the fulfillment of its obligations under the indenture. In
addition, the issuer will furnish to the trustee an opinion of counsel
concerning filings made by the issuer on an annual basis and before the
effectiveness of any amendment to the sale agreement or the servicing agreement.
THE TRUSTEE MUST PROVIDE A REPORT TO ALL TRANSITION BONDHOLDERS
As required by the Trust Indenture Act, the trustee will be required to
mail each year to all transition bondholders a report stating, among other
items:
o the trustee's eligibility and qualification to continue as the trustee
under the indenture;
o any amounts advanced by it under the indenture;
o the amount, interest rate and maturity date of specific indebtedness
owing by the issuer to the trustee in the trustee's individual
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capacity;
o the property and funds physically held by the trustee;
o any additional issue of a series of transition bonds not previously
reported; and
o any action taken by it that materially affects the transition bonds of
any series and that has not been previously reported.
For so long as any of the transition bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, the trustee will
publish or will cause to be published following the preparation of this annual
report in a daily newspaper in Luxembourg, expected to be the Luxemburger Wort,
a notice to the effect that the information set forth in the preceding paragraph
will be available for review at the main office of the listing agent in
Luxembourg.
WHAT WILL TRIGGER SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the transition bonds of
any series upon the delivery to the trustee of funds sufficient for the payment
in full of all amounts owed under the transition bonds of that series. In
addition, the issuer must deliver to the trustee the officer's certificate and
opinion of counsel specified in the indenture. The deposited funds will be
segregated and held apart solely for paying the transition bonds of that series,
and the transition bonds of that series will not be entitled to any amounts on
deposit in the collection account other than amounts on deposit in the
defeasance subaccount for the transition bonds of that series.
THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
The issuer may, at any time, by defeasing the transition bonds, terminate:
o all of its obligations under the indenture with respect to the
transition bonds of any series; or
o its obligations to comply with some of the covenants in the indenture,
including all of the covenants described under "--COVENANTS OF THE
ISSUER" above.
The legal defeasance option is the right of the issuer to terminate at any
time its obligations under the indenture with respect to the transition bonds of
any series. The covenant defeasance option is the right of the issuer at any
time to terminate its obligations to comply with the covenants in the indenture.
The issuer may exercise the legal defeasance option with respect to any series
of transition bonds notwithstanding its prior exercise of the covenant
defeasance option with respect to that series. If the issuer exercises the legal
defeasance option with respect to any series, that series will be entitled to
payment only from the funds or other obligations set aside under the indenture
for payment thereof on the expected final payment date or redemption date
therefor as described below. That series will not be subject to payment through
redemption or acceleration prior to the expected final payment date or
redemption date, as applicable. If the issuer exercises the covenant defeasance
option with respect to any series, the final payment of the transition bonds of
that series may not be accelerated because of an event of default relating to a
default in the observance or performance of any covenant or agreement of the
issuer made in the indenture.
The issuer may exercise the legal defeasance option or the covenant
defeasance option with respect to any series of transition bonds only if:
(1) the issuer irrevocably deposits or causes to be deposited in trust
with the trustee cash or U.S. Government Obligations for the payment
of principal of and premium, if any, and interest on that series to
85
the expected final payment date or redemption date therefor, as
applicable, such deposit to be made in the defeasance subaccount for
that series;
(2) the issuer delivers to the trustee a certificate from an independent
certified public accounting firm of recognized national reputation
expressing its opinion that the payments of principal of and interest
on the U.S. Government Obligations when due and without reinvestment
plus any cash deposited in the defeasance subaccount will provide cash
at times and in sufficient amounts to pay in respect of the transition
bonds of that series:
(a) principal in accordance with the expected amortization schedule
therefor, and/or if that series is to be redeemed, the redemption
price on the redemption date therefor; and
(b) interest when due;
(3) in the case of the legal defeasance option, 95 days pass after the
deposit is made and during the 95-day period no default by the issuer
relating to events of bankruptcy, insolvency, receivership or
liquidation of the issuer occurs and is continuing at the end of the
period;
(4) no default by the issuer has occurred and is continuing on the day of
this deposit and after giving effect thereto;
(5) in the case of the legal defeasance option, the issuer delivers to the
trustee an opinion of counsel stating that:
(a) the issuer has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the date of execution of the indenture, there has been a
change in the applicable federal income tax law;
in either case confirming that the holders of the transition bonds of
that series will not recognize income, gain or loss for federal income
tax purposes as a result of the exercise of the legal defeasance
option and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case
if the legal defeasance had not occurred;
(6) in the case of the covenant defeasance option, the issuer delivers to
the trustee an opinion of counsel to the effect that the holders of
the transition bonds of that series will not recognize income, gain or
loss for federal income tax purposes as a result of the exercise of
the covenant defeasance option and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if the covenant defeasance had not occurred;
and
(7) the issuer delivers to the trustee a certificate of an authorized
officer of the issuer and an opinion of counsel, each stating that all
conditions precedent to the satisfaction and discharge of the
transition bonds of that series have been complied with as required by
the indenture.
Unless otherwise specified in a supplemental indenture, there will be no
other conditions to the exercise by the issuer of its legal defeasance option or
its covenant defeasance option.
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THE TRUSTEE
The Bank of New York will be the initial trustee under the indenture. The
trustee may resign at any time upon 30 days notice by so notifying the issuer.
The holders of not less than a majority of the total principal balance of the
outstanding transition bonds of all series, voting together as a single class,
may remove the trustee by so notifying the trustee and may appoint a successor
trustee. The issuer will remove the trustee if the trustee ceases to be eligible
to continue in this capacity under the indenture, the trustee becomes insolvent,
a receiver or other public officer takes charge of the trustee or its property
or the trustee becomes incapable of acting. If the trustee resigns or is removed
or a vacancy exists in the office of trustee for any reason, the issuer will be
obligated promptly to appoint a successor trustee eligible under the indenture.
No resignation or removal of the trustee will become effective until acceptance
of the appointment by a successor trustee.
The trustee must at all times satisfy the requirements of the Trust
Indenture Act and the Investment Company Act of 1940. The trustee must also have
a combined capital and surplus of at least $50 million and a long term debt
rating of at least `BBB'- by S&P and Fitch and at least `Baa3' by Moody's. If
the trustee consolidates with, merges or converts into, or transfers all or
substantially all of its corporate trust business or assets to, another entity,
the resulting, surviving or transferee entity will without any further action be
the successor trustee.
GOVERNING LAW
The Indenture will be governed by the laws of the State of New Jersey.
HOW A BANKRUPTCY OF JCP&L OR THE SERVICER
MAY AFFECT YOUR INVESTMENT
Sale or Financing. JCP&L will represent and warrant in the sale agreement
that the sale and absolute transfer of the bondable transition property in
accordance with the sale agreement constitutes a valid sale and absolute
transfer by JCP&L to the issuer of the bondable transition property. JCP&L will
also represent and warrant in the sale agreement, and it is a condition of
closing for the sale and absolute transfer of bondable transition property, that
the appropriate actions will be taken under the Competition Act and the New
Jersey and Delaware Uniform Commercial Codes, including the filing a financing
statement, to perfect this sale and absolute transfer. The Competition Act
provides that a transfer of bondable transition property by an electric public
utility to an assignee which the parties have in the governing documentation
expressly stated to be a sale or other absolute transfer, in a transaction
approved in a financing order, shall be treated as an absolute transfer of all
the transferor's right, title and interest, as in a sale or other absolute
transfer, and not as a pledge or other financing, of the relevant bondable
transition property. The Competition Act also provides that the characterization
of a transfer as a sale or other absolute transfer shall not be affected or
impaired in any manner by treatment of the transfer as a financing for federal,
state or local tax purposes or financial accounting purposes. JCP&L and the
issuer will treat the transaction as a sale under applicable law, although for
financial accounting and federal and state tax purposes the transaction will be
treated as a financing and not a sale. See "THE COMPETITION ACT--JCP&L AND OTHER
UTILITIES MAY SECURITIZE STRANDED COSTS" in this prospectus. In the event of a
bankruptcy of JCP&L, a party in interest in the bankruptcy might take the
position that the sale and absolute transfer of the bondable transition property
to the issuer was a financing transaction and not a "sale or other absolute
transfer." The party in interest might argue that the treatment of the
transaction for financial accounting and tax purposes as a financing and not a
sale lends weight to the position that the transaction should be treated as a
financing and not a sale. However, as noted above, the Competition Act
specifically provides for the treatment of the transaction as a sale as a matter
of state law and that this treatment is not affected by treatment of the
transfer as a financing for federal, state or local tax purposes or financial
accounting purposes. In a recent bankruptcy court case involving LTV Steel
Company, the debtor obtained an interim emergency motion to use collections from
accounts and inventory that it had sold on the grounds that the sales were in
fact disguised financings. The circumstances under which the LTV Steel Company
ruling would be followed by other courts are not certain. If a court were to
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adopt reasoning similar to that of the court in the LTV Steel case or were
otherwise to characterize the transaction as a financing, the issuer would be
treated as a secured creditor of JCP&L in the bankruptcy proceedings. Although,
as noted below, the issuer would in that case have a security interest in the
bondable transition property, it would not likely be entitled to access to the
transition bond charge collections during the bankruptcy. As a result, repayment
on the transition bonds could be significantly delayed and a plan of
reorganization in the bankruptcy might permanently modify the amount and timing
of payments to the issuer of transition bond charge collections and therefore
the amount and timing of funds available to the issuer to pay transition
bondholders. Even if a court did not ultimately characterize the transaction as
a financing transaction, the mere commencement of a bankruptcy by JCP&L and the
attendant possible uncertainty surrounding the treatment of the transaction
could result in delays in payments on the transition bonds.
In order to mitigate the impact of the possible recharacterization of a
sale of bondable transition property as a financing transaction, financing
statements will be filed with the Delaware Secretary of State and the New Jersey
Secretary of State in accordance with the Delaware Uniform Commercial Code and
the New Jersey Uniform Commercial Code, respectively, and the Competition Act so
that if the transfer is thereafter held to constitute a financing transaction
and not a sale or other absolute transfer, the financing statement will
constitute a filing with respect to a security interest. The sale agreement
provides that in the event that the sale and absolute transfer of the bondable
transition property is determined by a court not to be a sale and absolute
transfer as contemplated by the Competition Act, then the sale and absolute
transfer shall be treated as a pledge of the bondable transition property and
JCP&L shall be deemed to have granted a security interest to the issuer in the
bondable transition property, and to have incurred an obligation secured by this
security interest in an amount equal to the purchase price for the bondable
transition property. The sale agreement requires that financing statements with
respect to the bondable transition property under the New Jersey Uniform
Commercial Code be filed in the appropriate offices in New Jersey. As a result
of these filings, in the event of the bankruptcy of JCP&L, the issuer would be a
secured creditor of the bankrupt entity and entitled to recover against the
security, which is the collateral (except as described in "--Status of Bondable
Transition Property as Current Property" below). None of this, however,
mitigates the risk of payment delays and other adverse effects caused by a
bankruptcy of JCP&L. Further, if, for any reason, a financing statement is not
filed in accordance with the New Jersey Uniform Commercial Code and the
Competition Act or the issuer fails to otherwise perfect its interest in the
bondable transition property, and the transfer is thereafter deemed not to
constitute a sale or other absolute transfer, the issuer would be an unsecured
creditor of the bankrupt entity. In that event, the issuer's sole source of
payment for the transition bonds would be whatever it recovered on its unsecured
claim in the JCP&L bankruptcy case, which could differ materially from the
amount and timing of transition bond charge collections that were intended to
fund payments on the transition bonds.
Consolidation of the Issuer and JCP&L in Bankruptcy. If JCP&L were to
become a debtor in a bankruptcy case, a party in interest in the bankruptcy may
attempt to substantively consolidate the assets and liabilities of the issuer
and JCP&L. JCP&L and the issuer have taken steps to attempt to minimize this
risk (as discussed in "JCP&L TRANSITION FUNDING LLC, THE ISSUER" in this
prospectus). However, no assurance can be given that if JCP&L or an affiliate of
JCP&L other than the issuer were to become a debtor in a bankruptcy case, a
court would not order that the assets and liabilities of the issuer be
consolidated with those of the bankrupt entity. If the assets and liabilities
were ordered consolidated, the claims of the transition bondholders against the
issuer would be treated as secured claims against the consolidated entities and
would share in the bankrupt estate with claims of other creditors of the
consolidated entities. Payment of those claims would be subject to substantial
delay and to adjustment in timing and amount under a plan of reorganization in
the bankruptcy case.
Claims in Bankruptcy; Challenge to Indemnity Claims. If JCP&L were to
become a debtor in a bankruptcy case, claims including indemnity claims, by the
issuer against the bankrupt entity under the sale agreement and the other basic
documents, would be unsecured claims and would be subject to being discharged in
the bankruptcy case. In addition, a party in interest in the bankruptcy may
request that the bankruptcy court estimate any contingent claims of the issuer
against the bankrupt entity. That party may then take the position that these
claims should be estimated at zero or at a low amount because the contingency
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giving rise to these claims is unlikely to occur. If JCP&L were to become a
debtor in a bankruptcy case and the indemnity provisions of the sale agreement
were triggered, a party in interest in the bankruptcy might challenge the
enforceability of the indemnity provisions. If a court were to hold that the
indemnity provisions were unenforceable, the issuer would be left with a claim
for actual damages against the bankrupt entity based on breach of contract
principles. The actual amount of these damages would be subject to estimation
and/or calculation by the court.
No assurances can be given as to the result of any of the above-described
actions or claims. Furthermore, no assurance can be given as to what percentage
of their claims, if any, unsecured creditors would receive in any bankruptcy
proceeding involving JCP&L.
Status of Bondable Transition Property as Current Property. JCP&L has
represented in the sale agreement, and the Competition Act provides, that the
bondable transition property constitutes a vested, presently existing property
right upon transfer to an assignee for consideration and that it thereafter
exists continuously for all purposes. Nevertheless, no assurance can be given
that, in the event of a bankruptcy of JCP&L or an affiliate of JCP&L other than
the issuer, a party in interest in the bankruptcy proceeding would not attempt
to take the position that the bondable transition property comes into existence
only as customers use electricity. Bondable transition property is the right to
charge, collect and receive the transition bond charge (and not simply the right
to receive revenues arising from the collection of the transition bond charge).
Therefore, JCP&L and the issuer believe that the bondable transition property
will constitute a presently existing right at the time the transition bonds are
issued. Nonetheless, if a court were to adopt the position that the property
comes into existence only as customers use electricity, no assurance can be
given that a security interest in favor of the transition bondholders would
attach to transition bond charge collections in respect of electricity consumed
after the commencement of the bankruptcy case. If it were determined that the
bondable transition property had not been sold to the issuer, and the security
interest in favor of the transition bondholders did not attach to transition
bond charge collections in respect of electricity consumed after the
commencement of the bankruptcy case, then the issuer would be an unsecured
creditor of the bankrupt entity. If so, there would be delays or reductions in
payments on the transition bonds. Whether or not a court determined that the
bondable transition property had been sold to the issuer, no assurances can be
given that a court would not rule that any transition bond charge relating to
electricity consumed after the commencement of the bankruptcy cannot be
transferred to the issuer or the trustee.
In addition, in the event of a bankruptcy of JCP&L, a party in interest in
the bankruptcy could assert that the issuer should pay a portion of JCP&L's
costs associated with the generation, transmission or distribution of the
electricity, consumption of which gave rise to the transition bond charge
collections used to make payments on the transition bonds.
Regardless of whether JCP&L is the debtor in a bankruptcy case, if a court
were to accept the argument that the bondable transition property comes into
existence only as customers use electricity, a tax or government lien or other
nonconsensual lien on property of the bankrupt entity arising before the
bondable transition property came into existence could have priority over the
issuer's interest in the bondable transition property. Adjustments to the
transition bond charge may be available to mitigate this exposure, although
there may be delays in implementing these adjustments.
Enforcement of Rights by Trustee. Upon an event of default under the
indenture, the Competition Act permits the trustee to enforce the security
interest in the bondable transition property in accordance with the terms of the
indenture. In this capacity, the trustee is permitted to request the BPU to
order the sequestration and payment to transition bondholders of all revenues
arising with respect to the bondable transition property. The Competition Act
provides that this order will remain in full force and effect notwithstanding
bankruptcy, reorganization or other insolvency proceedings with respect to JCP&L
or its assignee. There can be no assurance, however, that the trustee would be
permitted to seek such an order or that the BPU would issue this order after a
bankruptcy of JCP&L in light of the automatic stay provisions of Section 362 of
the United States Bankruptcy Code or, alternatively, that a bankruptcy court
would lift the automatic stay to permit this action by the BPU. In that event,
the trustee may under the indenture seek an order from the bankruptcy court
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lifting the automatic stay with respect to this action by the BPU, and an order
requiring an accounting and segregation of the revenues arising from the
bondable transition property. There can be no assurance that a court would grant
either order.
Bankruptcy of Servicer. The servicer is entitled to commingle transition
bond charge collections with its own funds until each remittance date. The
Competition Act provides that the relative priority of a lien created under the
Competition Act is not defeated or adversely affected by the commingling of
transition bond charge collections arising with respect to the bondable
transition property with funds of JCP&L. However, in the event of a bankruptcy
of the servicer, a party in interest in the bankruptcy might assert, and a court
might rule, that transition bond charge collections commingled by the servicer
with its own funds and held by the servicer as of the date of bankruptcy were
property of the servicer as of that date and are therefore property of the
servicer's bankruptcy estate, rather than property of the issuer. If the court
so rules, then the court would likely rule that the trustee has only a general
unsecured claim against the servicer for the amount of commingled transition
bond charge collections held as of that date and could not recover the
commingled transition bond charge collections held as of the date of bankruptcy.
However the court rules on the ownership of the commingled transition bond
charge collections, the automatic stay arising upon the bankruptcy of the
servicer could delay the trustee from receiving the commingled transition bond
charge collections held by the servicer as of the date of the bankruptcy until
the court grants relief from the stay. A court ruling on any request for relief
from the stay could be delayed pending the court's resolution of whether the
commingled transition bond charge collections are property of the issuer or of
the servicer, including resolution of any tracing of proceeds issues.
The servicing agreement provides that the trustee, as assignee of the
issuer, together with the other persons specified therein, may vote to appoint a
successor servicer that satisfies any conditions imposed by any rating agency.
The servicing agreement also provides that the trustee, together with the other
persons specified therein, may petition the BPU or a court of competent
jurisdiction to appoint a successor servicer that meets these conditions.
However, the automatic stay might delay a successor servicer's replacement of
the servicer. Even if a successor servicer may be appointed and may replace the
servicer, a successor servicer may be difficult to obtain and may not be capable
of performing all of the duties that JCP&L as servicer was capable of
performing.
MATERIAL U.S. FEDERAL INCOME TAX MATTERS FOR THE
TRANSITION BONDHOLDERS
GENERAL
The following is a summary of material U.S. federal income tax consequences
relevant to the purchase, ownership and disposition of the transition bonds and
applicable to initial purchasers of transition bonds who acquire and hold the
transition bonds as capital assets within the meaning of section 1221 of the
Internal Revenue Code of 1986, as amended ("Code"). It is intended as a summary
of only certain of the more generally applicable U.S. federal income tax
consequences relating to the purchase, ownership and disposition of the
transition bonds. It does not address tax consequences to holders who may be
subject to special tax treatment, including, but not limited to, dealers in
securities, financial institutions, tax-exempt entities, insurance companies,
holders who hold the transition bonds as part of a "hedging", "integrated", or
"constructive sale" transaction or as a straddle, or holders whose functional
currency is not the U.S. dollar. It does not purport to furnish information in
the level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's tax adviser. This summary
also does not address the consequences to holders of the transition bonds under
state, local or foreign tax laws. However, certain State of New Jersey tax
aspects relating to the transition bonds are discussed below, in the section
captioned "MATERIAL STATE OF NEW JERSEY TAX MATTERS FOR THE TRANSITION
BONDHOLDERS". This summary is based upon current provisions of the Code,
Treasury Regulations issued thereunder, current administrative rulings, judicial
decisions and other applicable authorities in effect as of the date hereof, all
of which are subject to change. Legislative, judicial or administrative changes
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may occur, perhaps with retroactive effect, which could affect the accuracy of
the statements and conclusions set forth herein as well as the tax consequences
to holders of the transition bonds.
ALL PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS
WELL AS THE EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
JCP&L has received a ruling from the Internal Revenue Service (referred to
as the "IRS") to the effect that the transition bonds will be treated as
obligations of JCP&L for U.S. federal income tax purposes. Based in part on that
ruling and on representations made by JCP&L and its affiliates that no election
will be made to the contrary, and that JCP&L at all relevant times will be the
sole member of the issuer, Carter Ledyard & Milburn, special U.S. federal income
tax counsel to JCP&L and the issuer, referred to as "special U.S. federal income
tax counsel", will render its opinion that the issuer will not be subject to
U.S. federal income tax as an entity separate from JCP&L, and that the
transition bonds will be treated as debt obligations of JCP&L for U.S. federal
income tax purposes.
The following summary of material U.S. federal income tax consequences
relevant to the purchase, ownership and disposition of the transition bonds is
based on the advice of special U.S. federal income tax counsel, and assumes
that, in conformity with the opinion referred to above, the transition bonds
will constitute debt obligations of JCP&L for U.S. federal income tax purposes.
For purposes of the discussion below, a U.S. Holder means a beneficial
owner of a transition bond that is a U.S. Person, and a Non-U.S. Holder means a
beneficial owner of a transition bond that is not a U.S. Person.
For these purposes, a U.S. Person means:
(1) an individual who is a citizen or resident of the United States for
U.S. federal income tax purposes;
(2) a corporation, partnership or other entity (treated as a corporation
or a partnership for U.S. federal income tax purposes) created or
organized in or under the laws of the United States, or any state or
the District of Columbia (other than a partnership that is not treated
as a U.S. Person under any applicable Treasury Regulations);
(3) an estate the net income of which is subject to U.S. federal income
taxation regardless of its source; or
(4) a trust, if (i) a court within the United States is able to exercise
primary supervision over the administration of such trust and one or
more U.S. persons have the authority to control all substantial
decisions of such trust or (ii) the trust was in existence on or
before August 20, 1996, was treated as a U.S. Person under the law in
effect on such date and elected in accordance with applicable Treasury
Regulations to continue to be treated as a U.S. Person.
TAXATION OF U.S. HOLDERS
Payment of Interest. Subject to the discussion below under the caption
"Special Considerations Relating to Floating Rate Transition Bonds", stated
interest on the transition bonds will be taxable to a U.S. Holder as ordinary
interest income at the time it is paid or accrued in accordance with the
holder's method of accounting for tax purposes.
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Original Issue Discount. This discussion assumes that the transition bonds
will not be considered to be issued with original issue discount (referred to as
"OID"). OID is generally defined as any excess of the stated redemption price at
maturity over the issue price which is greater than a de minimus amount (0.25%
of a bond's stated redemption price at maturity multiplied by the bond's
weighted average maturity), all within the meaning of the Code and the Treasury
Regulations promulgated thereunder (referred to as "OID Regulations"). If the
transition bonds are issued with OID, U.S. Holders generally will be subject to
the special tax accounting rules for OID obligations provided under the OID
Regulations. U.S. Holders of transition bonds issued with OID should be aware
that they generally must include OID in income for U.S. federal income tax
purposes as it accrues economically, in advance of the receipt of cash
attributable to that income. As stated above, U.S. Holders must include all
interest payments, other than payments of OID, in gross income under their
normal method of tax accounting. If any series or class of transition bonds is
issued with OID, prospective holders will be so informed in the related
prospectus supplement.
Sale, Exchange or Redemption of Transition Bonds. Upon the sale, exchange,
redemption or other taxable disposition of transition bonds, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized
(other than amounts attributable to, and taxable as, accrued stated interest)
and the U.S. Holder's adjusted tax basis in the transition bonds. A U.S.
Holder's adjusted tax basis in the transition bonds generally will equal the
cost thereof, reduced by any payments of principal on the transition bonds. Any
such gain or loss will be a capital gain or loss and will be a long-term capital
gain or loss if the transition bonds have been held for more than one year.
Long-term capital gains of non-corporate taxpayers are generally subject to
lower rates of U.S. federal income taxation than ordinary income. The
deductibility of capital losses is subject to limitations. If a U.S. Holder
sells a transition bond between interest payment dates, a portion of the amount
received will reflect interest that has accrued on the transition bond but that
has not yet been paid by the sale date. To the extent that amount has not
already been included in the U.S. Holder's income, it will be treated as
ordinary interest income and not as sale proceeds.
Special Considerations Relating to Floating Rate Transition Bonds. Although
the proper U.S. federal income tax treatment of floating rate transition bonds
is not free from doubt, JCP&L and the issuer intend to treat any floating rate
transition bonds as "variable rate debt instruments" for U.S. federal income tax
purposes. Each purchaser of floating rate transition bonds, by virtue of their
purchase of such transition bonds, will agree to treat them as variable rate
debt instruments for such purposes. Based on such treatment, interest on
floating rate transition bonds will be includable in a U.S. Holder's income in
the manner described above under the caption "Payment of Interest".
As described more fully in the prospectus supplement for any class of
floating rate transition bonds, the termination of the interest rate swap
agreement for those bonds under the circumstances specified in the prospectus
supplement could cause those bonds to become fixed rate bonds calling for
interest payments based on the gross fixed rate for such bonds as specified in
the prospectus supplement. In addition, if a termination payment were to be made
by the interest rate swap counterparty, the termination payment may be credited
to the subaccount established for that class of bonds and distributed to the
holders of those bonds. If such a termination of the swap agreement were to
occur, JCP&L and the issuer would treat it as a "change in circumstances" within
the meaning of applicable Treasury Regulations, which would be treated, for
purposes of computing taxable income on that class of transition bonds, as
though the class of transition bonds had been retired and reissued. Any
termination payment passed through to the transition bondholders would reduce
the adjusted issue price of the transition bonds, which could in turn create OID
with respect to the bonds deemed to have been reissued. See the discussion above
under the caption "Original Issue Discount."
Notwithstanding the intent of JCP&L and the issuer, and the agreement of
each purchaser of floating rate transition bonds, to treat such transition bonds
as variable rate debt instruments, there can be no assurance that the IRS will
not disagree with such treatment and assert an alternative characterization of
such bonds, or that a court will not uphold such an alternative
characterization. For example, the IRS could assert that the floating rate
transition bonds are in fact investment units made up of two components. The
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first component would be a fixed rate debt instrument having a principal balance
that would at all times equal the principal balance of the floating rate
transition bonds and an interest rate equal to the gross fixed rate for such
transition bonds. The second component would be an undivided interest in the
interest rate swap agreement with the swap counterparty. If this alternative
characterization of an investment in floating rate transition bonds were to
prevail, then the U.S. federal income tax consequences of owning and disposing
of a floating rate transition bond could differ materially from those described
above.
Under this alternative characterization, a holder of a floating rate
transition bond would include in income the gross fixed rate of interest on the
floating rate transition bond in accordance with the holder's regular method of
tax accounting. As the tax owner of an undivided interest in the swap agreement
related to that class of bonds, the holder would account for net income and/or
net expense with respect to the swap agreement. In the case of a floating rate
transition bond, a holder would be treated as though it had made quarterly
periodic payments based on the gross fixed rate to the swap counterparty and as
though the holder had received quarterly periodic payments based on the floating
rate paid by the swap counterparty. For any taxable year, a holder of a floating
rate transition bond would include in, or deduct from, gross income the holder's
net swap income or expense for the year, based on all periodic payments
recognized and attributable to the year.
Periodic payments made on any quarterly payment date would be allocated
ratably among the days in the quarter, and a holder of a floating rate
transition bond would include or deduct the holder's share of the net periodic
payments allocated to the year. Thus, if for a taxable year the sum of periodic
payments considered to have been made by a holder for the year were to exceed
the periodic payments considered to have been received by the holder for the
year, the holder would have net swap expense for the year.
Generally, such net swap expense would be deductible for the year as an
ordinary deduction. If, however, a holder of a floating rate transition bond
were an individual, any net swap expense for any year would be treated as a
miscellaneous itemized deduction. In computing taxable income, an individual is
allowed to deduct miscellaneous itemized deductions only to the extent the sum
of such deductions exceeds two percent of the individual's adjusted gross
income. Further, an individual is not allowed a deduction for miscellaneous
itemized deductions in computing alternative minimum taxable income. Thus, for
any period for which the gross fixed rate on the floating rate transition bonds
exceeded the floating rate payments made to the issuer by the swap counterparty
under the swap agreement, an individual would include in income interest at the
gross fixed rate payable, but could be precluded from deducting all or a part of
the net swap expense for the period due to the limitations imposed on
miscellaneous itemized deductions.
If the underlying swap agreement terminated and a payment were made by the
swap counterparty as a result of the termination, the receipt of such payment by
a holder would be treated as capital gain. Moreover, if a holder's interest in a
floating rate transition bond were to be sold, the holder would be treated as
having made or as having received a termination payment with respect to the
holder's interest in the swap agreement. The holder would recognize gain or loss
in the year of termination of the holder's interest in the swap agreement,
determined by reference to the amount of the termination payment made or
received and the holder's basis, if any, in the swap agreement.
Other alternative characterizations of an investment in floating rate bonds
may be possible, such as the characterization of such bonds as contingent
payment debt instruments. Investors should consult their tax advisers concerning
the tax implications of an investment in floating rate transition bonds.
Information Reporting and Backup Withholding. In general, information
reporting will apply to payments of principal of, and interest on, and to the
proceeds from the sale of, transition bonds to U.S. Holders, other than certain
exempt recipients (such as corporations). Moreover, a "backup" withholding tax
may apply to those payments if the U.S. Holder (1) fails to provide a taxpayer
identification number (referred to as a "TIN"), (2) furnishes an incorrect TIN,
(3) is notified by the IRS that it has failed to properly report payments of
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interest and dividends, or (4) under certain circumstances, fails to certify,
under penalties of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding. If the backup
withholding tax applies, it will be imposed at a rate equal to the fourth lowest
income tax rate applicable to individuals, which under current law is 30% for
2002 and 2003, 29% for 2004 and 2005, and 28% for 2006 and thereafter. Any
amounts withheld under the backup withholding rules generally will be allowed as
a refund or credit against a U.S. Holder's U.S. federal income tax liability,
provided the required information is furnished to the IRS.
TAXATION OF NON-U.S. HOLDERS
Withholding Taxation on Interest. Payments of interest income on the
transition bonds received by a Non-U.S. Holder that does not hold its transition
bonds in connection with the conduct of a trade or business in the United States
will not be subject to United States federal income or withholding tax, provided
that:
(1) such Non-U.S. Holder:
(a) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of JCP&L entitled
to vote; and
(b) is not a controlled foreign corporation that is related to JCP&L
through stock ownership; and
(2) the issuer or the paying agent:
(a) receives from such Non-U.S. Holder a withholding certificate
permitting the payment to be treated as made to a foreign
beneficial owner under Treasury Regulations issued under section
1441 of the Code;
(b) receives a withholding certificate and a withholding statement
from a person claiming to be a foreign partnership certifying
that it holds the transition bonds on behalf of beneficial owners
who are Non-U.S. Persons, and such foreign partnership has
attached thereto a copy of a withholding certificate from each
such beneficial owner permitting the payment to be treated as
made to a foreign beneficial owner in accordance with the
Treasury Regulations issued under section 1441 of the Code;
(c) receives a withholding certificate from a person representing
itself to be a withholding foreign partnership or trust and that
it is receiving the payment on behalf of its partners,
beneficiaries or owners;
(d) receives a withholding certificate and a withholding statement
from a person representing itself to be a "qualified
intermediary" certifying that it has assumed primary withholding
responsibility under the Treasury Regulations issued under
section 1441 of the Code and that it has received from each
beneficial owner of the transition bonds on behalf of whom it is
acting a withholding certificate certifying that such beneficial
owner is a Non-U.S. Person; or
(e) receives a statement, under penalties of perjury, from an
authorized representative of a U.S. bank, securities clearing
organization or other financial institution that holds the
transitions bonds (referred to as a "Financial Institution"),
stating that the Financial Institution has received from each
beneficial owner of the bonds for whom it is acting a withholding
certificate described in the Treasury Regulations issued under
section 1441 of the Code, or that it has received a similar
statement from another Financial Institution acting on behalf of
such foreign beneficial owner.
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In general, it will not be necessary for a Non-U.S. Holder to obtain or
furnish a United States taxpayer identification number to the issuer or its
paying agent in order to claim any of the foregoing exemptions from United
States withholding tax on payments of interest.
Interest payments made to a Non-U.S. Holder will be subject to a United
States withholding tax of 30%, except where the conditions described above have
been satisfied or where an applicable tax treaty provides for the reduction or
elimination of the withholding tax. However, provided that the issuer or its
paying agent receives an appropriate certification form containing a taxpayer
identification number, a Non-U.S. Holder generally will not be subject to
withholding on payments of interest and will be taxable in the same manner as a
United States corporation or resident with respect to interest income from the
transition bonds if the interest income is effectively connected with the
Non-U.S. Holder's conduct of a trade or business in the United States.
Effectively connected income received by a Non-U.S. Holder that is a corporation
may in some circumstances be subject to an additional "branch profits tax" at a
30% rate or, if applicable, a lower rate provided by a treaty.
Capital Gains Tax Issues. A Non-U.S. Holder generally will not be subject
to U.S. federal income or withholding tax on gain realized on the sale, exchange
or redemption of transition bonds, unless:
(a) the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more during the taxable year and the gain is from United
States sources; or
(b) the gain is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States and certain other conditions
are met.
Information Reporting and Backup Withholding. Information reporting and
backup withholding of U.S. federal income tax at the applicable backup
withholding tax rate on payments made in respect of the transition bonds to
Non-U.S. Holders will apply to certain Non-U.S. Holders if the issuer or its
paying agent does not receive the required withholding certificate with respect
to such Non-U.S. Holder. However, compliance with the conditions described in
the second preceding subsection would establish an exemption from these
reporting and withholding requirements, provided neither the issuer nor its
paying agent has actual knowledge that the beneficial owner of the transition
bonds is a U.S. Person.
The payment of the proceeds from the sale of a transition bond through the
U.S. office of a broker will be subject to information reporting and possible
backup tax withholding. To avoid these requirements, a Non-U.S. Holder must
certify that it is not a U.S. Person under penalties of perjury or otherwise
establish an exemption in accordance with applicable Treasury Regulations. The
payment of the proceeds of the sale of a transition bond to or through the
foreign office of a broker generally will not be subject to information
reporting or backup withholding tax. However, in the case of the payment of the
proceeds from the sale of a transition bond through the foreign office of a
broker that is (i) a U.S. Person, (ii) a controlled foreign corporation or (iii)
a person that is not a U.S. Person but 50% or more of whose gross income from
all sources for a specified period is derived from activities that are
effectively connected with the conduct of a trade or business in the United
States or (iv) a foreign partnership with certain connections to the United
States, information reporting will apply to such payment unless the broker has a
withholding certificate in its files certifying that the owner of the payment is
not a U.S. Person and the broker has no actual knowledge to the contrary.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder would be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax, provided the required information is furnished
to the IRS.
95
MATERIAL STATE OF NEW JERSEY TAX MATTERS
FOR THE TRANSITION BONDHOLDERS
In the opinion of Thelen Reid & Priest LLP, special New Jersey tax counsel
to JCP&L and the issuer, interest from transition bonds received by a person who
is not otherwise subject to corporate or personal income tax in the State of New
Jersey will not be subject to these taxes. Neither the State of New Jersey nor
any of its political subdivisions presently impose intangible personal property
taxes and therefore New Jersey residents will not be subject to these taxes.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 (referred to as
"ERISA") and/or section 4975 of the Code impose certain requirements on employee
benefit plans and certain other plans and arrangements, including individual
retirement accounts and annuities, Keogh plans, and certain collective
investment funds or insurance company general or separate accounts in which such
plans or arrangements are invested, that are subject to ERISA and/or the Code
(collectively, "Plans"), and on persons who are fiduciaries with respect to the
investment of assets treated as "plan assets" of a Plan. Governmental plans and
some church plans are not subject to the fiduciary responsibility provisions of
ERISA or the provisions of section 4975 of the Code, but may be subject to
substantially similar rules under state or other federal law.
In contemplating an investment of a portion of Plan assets in transition
bonds, the Plan fiduciary responsible for making such investment should
carefully consider, taking into account the facts and circumstances of the Plan,
the "RISK FACTORS" discussed in this prospectus and whether such investment is
consistent with its fiduciary responsibilities, including, but not limited to:
(a) whether the fiduciary has the authority to make the investment under the
appropriate governing plan instrument; (b) whether the investment constitutes a
direct or indirect non-exempt prohibited transaction with a party in interest
(see "--PROHIBITED TRANSACTIONS ISSUES" below); (c) whether the investment is
made solely in the interest of participants and beneficiaries of the Plan; (d)
the Plan's funding objectives; (e) the tax effects of the investment; and (f)
whether under the general fiduciary standards of investment prudence and
diversification such investment is appropriate for the Plan, taking into account
the overall investment policy of the Plan, the composition of the Plan's
investment portfolio and the Plan's need for sufficient liquidity to pay
benefits when due in the event that there is no ready market for transition
bonds at such time.
PROHIBITED TRANSACTIONS ISSUES
ERISA and section 4975 of the Code generally prohibit certain transactions
involving the assets of a Plan and persons who have certain specified
relationships to the Plan (referred to as "parties in interest" under ERISA and
"disqualified persons" under the Code, collectively "parties in interest"),
unless a statutory or administrative exemption is applicable to the transaction.
The acquisition or holding of transition bonds by a Plan could be a prohibited
transaction if the issuer, JCP&L or any of its affiliates are parties in
interest with respect to the Plan. However, such prohibited transaction may be
treated as exempt under ERISA and the Code if transition bonds were acquired
pursuant to and in accordance with one or more "class exemptions" issued by the
Department of Labor (referred to as the "DOL"). Potentially applicable
prohibited transaction class exemptions (referred to as "PTCEs"), include the
following:
1. PTCE 84-14, which exempts specific transactions effected on behalf of a
Plan by a "qualified professional asset manager";
2. PTCE 90-1, which exempts specific transactions involving insurance
company pooled separate accounts;
3. PTCE 91-38, which exempts specific transactions involving bank
collective investment funds;
96
4. PTCE 95-60, which exempts specific transactions involving insurance
company general accounts; and
5. PTCE 96-23, which exempts specific transactions effected on behalf of a
Plan by specific "in-house" asset managers.
It should be noted, however, there can be no assurance that any of these
class exemptions will be available with respect to any transaction involving the
transition bonds. In addition, even if the conditions specified in one or more
of the foregoing exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions. If the purchase of transition bonds were to be a
non-exempt prohibited transaction, the purchase might have to be rescinded and
an excise tax or other liabilities may apply.
In this regard, any potential investor that is an insurance company
investing assets of its general account should consider the United States
Supreme Court's decision in John Hancock Mut. Life Ins. Co. v. Harris Trust and
Sav. Bank, 510 U.S. 86 (1993), which holds that in certain circumstances an
insurance company's general account may be deemed to include assets of the Plan
investing in the general account, such as through the Plan's purchase of an
annuity contract. Such insurance company could, therefore, be treated as a party
in interest with respect to the Plan by virtue of this investment. Moreover, it
should be noted that the Small Business Job Protection Act of 1996 added a new
section 401(c) to ERISA relating to the status of the assets of insurance
company general accounts under ERISA and section 4975 of the Code. Pursuant to
section 401(c), the DOL has issued Regulation section 2550.401c-1 with respect
to insurance policies issued on or before December 31, 1998 that are supported
by an insurer's general account. These regulations provide guidance on which
assets held by an insurer constitute "plan assets" for purposes of the fiduciary
responsibility and prohibited transaction provisions of ERISA and section 4975
of the Code.
PRIOR TO MAKING AN INVESTMENT IN THE TRANSITION BONDS OF ANY SERIES, A PLAN
INVESTOR AND EACH FIDUCIARY CAUSING THE TRANSITION BONDS TO BE PURCHASED WITH
PLAN ASSETS OF A PLAN THAT IS SUBJECT TO THE PROHIBITED TRANSACTION RULES OF
ERISA OR SECTION 4975 OF THE CODE (OR, IN THE CASE OF A GOVERNMENTAL OR CHURCH
PLAN, ANY SUBSTANTIALLY SIMILAR FEDERAL, STATE OR LOCAL LAW), INCLUDING WITHOUT
LIMITATION AN INSURANCE COMPANY GENERAL ACCOUNT, MUST DETERMINE WHETHER, AND
SHALL BE DEEMED TO HAVE REPRESENTED AND WARRANTED BY ITS PURCHASE OF TRANSITION
BONDS THAT, THE USE OF PLAN ASSETS TO PURCHASE AND HOLD THE TRANSITION BONDS
DOES NOT AND WILL NOT CONSTITUTE OR RESULT IN A NON-EXEMPT PROHIBITED
TRANSACTION IN VIOLATION OF SECTION 406 OR 407 OF ERISA OR SECTION 4975 OF THE
CODE (OR, IN THE CASE OF A GOVERNMENTAL PLAN OR CHURCH PLAN, ANY SUBSTANTIALLY
SIMILAR FEDERAL, STATE OR LOCAL LAW).
PLAN ASSET ISSUES
The "plan asset" regulations issued by the DOL state that if a Plan makes
an "equity" investment in a corporation, partnership, trust or other specified
entities, the underlying assets and properties of the entity will be deemed for
purposes of ERISA and section 4975 of the Code to be assets of the investing
Plan unless certain exceptions set forth in the regulations apply. Although
there is little statutory or regulatory guidance on this subject, and there can
be no assurances in this regard, it appears that the transition bonds should not
be treated as equity interests for purposes of these regulations.
The sale of transition bonds to a Plan shall not be deemed a representation
by JCP&L, the issuer or the underwriters that such investment meets all relevant
legal requirements with respect to Plans generally or any particular Plan. Due
to the complexity of these rules and the penalties that may be imposed upon
persons involved in non-exempt prohibited transactions, IT IS PARTICULARLY
IMPORTANT THAT PLAN FIDUCIARIES OR OTHER PERSONS CONSIDERING PURCHASING THE
97
TRANSITION BONDS ON BEHALF OF OR WITH "PLAN ASSETS" OF ANY PLAN CONSULT WITH
THEIR OWN LEGAL COUNSEL REGARDING THE POTENTIAL CONSEQUENCES THEREOF UNDER THE
PROVISIONS OF ERISA AND THE CODE DISCUSSED ABOVE.
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS
The transition bonds of each series may be sold to or through the
underwriters by a negotiated firm commitment underwriting and public reoffering
by the underwriters. The transition bonds may also be sold to or through any
other underwriting arrangement as may be specified in the related prospectus
supplement or may be offered or placed either directly or through agents. The
issuer and the trustee intend that transition bonds will be offered through
various methods from time to time. The issuer also intends that offerings may be
made concurrently through more than one of these methods or that an offering of
a particular series of transition bonds may be made through a combination of
these methods.
The distribution of transition bonds may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to the
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
The transition bonds may be offered through one or more different methods,
including offerings through underwriters. It is not anticipated that any of the
transition bonds will be listed on any securities exchange. There can be no
assurance that a secondary market for any series of transition bonds will
develop or, if one does develop, that it will continue.
Compensation to Underwriters. In connection with the sale of the transition
bonds, underwriters or agents may receive compensation in the form of discounts,
concessions or commissions. Underwriters may sell transition bonds to particular
dealers at prices less a concession. Underwriters may allow, and these dealers
may reallow, a concession to other dealers. Underwriters, dealers and agents
that participate in the distribution of the transition bonds of a series may be
deemed to be underwriters. Any discounts or commissions received by the
underwriters from the issuer and any profit on the resale of the transition
bonds by them may be deemed to be underwriting discounts and commissions under
the Securities Act. These underwriters or agents will be identified, and any
compensation received from the issuer will be described, in the related
prospectus supplement.
Other Distribution Issues. Under agreements which may be entered into by
JCP&L, the issuer and the trustee, underwriters and agents who participate in
the distribution of the transition bonds may be entitled to indemnification by
JCP&L and the issuer against liabilities specified therein, including under the
Securities Act.
RATINGS FOR THE TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the
transition bonds that each series or class be rated investment grade, that is,
in one of the four highest rating categories, by each of S&P, Moody's and Fitch.
The required amount of credit enhancement for any series of transition bonds
will be set forth in the applicable prospectus supplement.
Limitations of Security Ratings. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating agency. No person is obligated to maintain the
rating on any transition bonds, and, accordingly, there can be no assurance that
the ratings assigned to any series or class of transition bonds upon initial
issuance will not be lowered or withdrawn by a rating agency at any time
thereafter. If a rating of any series or class of transition bonds is revised or
withdrawn, the liquidity of this class of transition bonds may be adversely
affected. In general, ratings address credit risk and do not represent any
assessment of any particular rate of principal payments on the transition bonds
98
other than the payment in full of each series or class of transition bonds by
the applicable legal final maturity date for such series or class.
For so long as any of the transition bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, the issuer will notify
the Luxembourg Stock Exchange if any rating assigned to any class of transition
bonds listed on the Luxembourg Stock Exchange is reduced or withdrawn and will
cause such notice to be published in a daily newspaper published in Luxembourg,
which is expected to be the Luxemburger Wort.
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS
Some legal matters relating to the issuer, JCP&L and the issuance of the
transition bonds will be passed upon for the issuer by Thelen Reid & Priest LLP,
Morristown, New Jersey and New York, New York and for the underwriters by
Pillsbury Winthrop LLP, New York, New York. Pillsbury Winthrop LLP acts from
time to time as counsel for FirstEnergy Corp. and its affiliates in certain
matters. Some legal matters relating to the federal tax consequences of the
issuance of the transition bonds will be passed upon for the issuer by Carter
Ledyard & Milburn, New York, New York. Some legal matters relating to State of
New Jersey tax consequences of the issuance of the transition bonds will be
passed upon for the issuer by Thelen Reid & Priest LLP, Morristown, New Jersey.
Some legal matters relating to the issuer will be passed upon for the issuer by
Richards, Layton & Finger, P.A., Wilmington, Delaware.
99
INDEX TO FINANCIAL STATEMENTS OF JCP&L TRANSITION FUNDING LLC
PAGE
----
Report of Independent Accountants......................................... F-
Balance Sheet............................................................. F-
Notes to Financial Statements............................................. F-
F-1
GLOSSARY OF TERMS USED IN THE ATTACHED
PROSPECTUS AND PROSPECTUS SUPPLEMENT
Term Defined on Page
- ---- ---------------
Annual accountant's report..................................................
Approved replacement counterparty...........................................
Basic documents.............................................................
Bondable stranded costs.....................................................
Bondable transition property................................................
BPU.........................................................................
BPU financing order.........................................................
Change in circumstances.....................................................
Class subaccount............................................................
Clearstream Banking.........................................................
Code........................................................................
Competition Act.............................................................
Cooperative.................................................................
Customer....................................................................
Distribution facilities.....................................................
DOL.........................................................................
DTC.........................................................................
ERISA.......................................................................
Event of default............................................................
Exchange Act................................................................
Expected amortization schedule..............................................
Financial Institution.......................................................
Fitch.......................................................................
Floating rate...............................................................
Floating rate class.........................................................
Floating rate spread........................................................
Generation-related facilities...............................................
Gross fixed amount..........................................................
Gross fixed rate............................................................
IRS.........................................................................
ISIN........................................................................
Issuance advice letter......................................................
Issuer......................................................................
JCP&L.......................................................................
LIBOR.......................................................................
Listing agent...............................................................
LLC Agreement...............................................................
Managers....................................................................
Manifest error..............................................................
Monthly remittance date.....................................................
Moody's.....................................................................
A-1
Net swap payment............................................................
Net swap receipt............................................................
Non-bypassable..............................................................
OID.........................................................................
OID regulations.............................................................
Parties in interest.........................................................
Payment date................................................................
PJM.........................................................................
Plans.......................................................................
PTCEs.......................................................................
Qualified replacement counterparty..........................................
Rating agencies.............................................................
Record date.................................................................
Required overcollateralization level........................................
Restructuring order.........................................................
S&P.........................................................................
Satisfaction of the rating agency condition.................................
Satisfactory arrangements to maintain or restore the ratings................
SEC.........................................................................
Securities Act..............................................................
Special U.S. federal income tax counsel.....................................
Swap agent..................................................................
Swap counterparty downgrade event...........................................
Swap counterparty minimum ratings...........................................
Swap events of default......................................................
Telerate page...............................................................
Termination events..........................................................
Terms and Conditions........................................................
TIN.........................................................................
Transmission facilities.....................................................
Trust Indenture Act.........................................................
Variable rate debt instruments..............................................
A-2
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Where to Find Information in These Documents
Introduction
The Series 2002-A Transition Bonds
Risk Factors Relating to Series 2002-A Floating Rate Transition Bonds
Credit Enhancement
Description of Bondable Transition Property
The Transition Bond Charge
Information Regarding Jersey Central Power & Light Company
Underwriting the Series 2002-A Transition Bonds
Ratings for the Series 2002-A Transition Bonds
Listing and General Information Related to Floating Rate Classes
Income Tax Matters
PROSPECTUS
Important Notice About Information Presented in this Prospectus
Forward-Looking Statements
Summary of Terms
Reports to Transition Bondholders
Risk Factors
Jersey Central Power & Light Company
Where You Can Find More Information
The Competition Act
JCP&L's Restructuring
The BPU Financing Order and the Transition Bond Charge
Servicing of the Bondable Transition Property
JCP&L Transition Funding LLC, the Issuer
Use of Proceeds
The Transition Bonds
Weighted Average Life and Yield Considerations for the Transition Bonds
The Sale Agreement
The Servicing Agreement
The Indenture
How a Bankruptcy of JCP&L or the Servicer May Affect Your Investment
Material U.S. Federal Income Tax Matters for the Transition Bondholders
Material State of New Jersey Tax Matters for the Transition Bondholders
ERISA Considerations
Plan of Distribution for the Transition Bonds
Ratings for the Transition Bonds
Various Legal Matters Relating to the Transition Bonds
A-3
Through and including (the 90th day after the date of this prospectus
supplement and the accompanying prospectus), all dealers effecting transactions
in these securities, whether or not participating this offering, may be required
to deliver a prospectus supplement and the accompanying prospectus. This is in
addition to a dealer's obligation to deliver a prospectus supplement and the
accompanying prospectus when acting as an underwriter and when offering an
unsold allotment or subscription.
$
JCP&L TRANSITION FUNDING LLC
ISSUER OF THE TRANSITION BONDS
JERSEY CENTRAL POWER &
LIGHT COMPANY
SELLER AND SERVICER
Series 2002-A Transition Bonds
$ Class [ ]
$ Class [ ]
$ Class [ ]
PROSPECTUS SUPPLEMENT
GOLDMAN SACHS & CO.
MORGAN STANLEY
SALOMON SMITH BARNEY
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the transition bonds being offered hereunder
other than underwriting discounts and commissions:
Registration Fee...................................... $ 29,440
Printing and Engraving Expenses....................... 375,000
Trustee's Fees and Expenses........................... 60,000
Legal Fees and Expenses............................... 2,000,000
Blue Sky Fees and Expenses............................ 7,500
Accountants' Fees and Expenses........................ 275,000
Rating Agency Fees.................................... 455,000
Miscellaneous Fees and Expenses....................... 2,898,060
----------
Total................................................. $6,100,000
----------
ITEM 15. INDEMNIFICATION OF MEMBERS AND MANAGERS.
Section 18-108 of the Delaware Limited Liability Company Act provides that,
subject to specified standards and restrictions, if any, as are set forth in the
limited liability company agreement, a limited liability company shall have the
power to indemnify and hold harmless any member or manager or other person from
and against any and all claims and demands whatsoever.
The limited liability company agreement (the "LLC Agreement") of JCP&L
Transition Funding LLC provides that, to the fullest extent permitted by law,
JCP&L Transition Funding LLC shall indemnify its members and managers against
any liability incurred in connection with any proceeding in which any member or
manager may be involved as a party or otherwise by reason of the fact that the
member or manager is or was serving in its capacity as a member or manager,
unless this liability is based on or arises in connection with the member's or
manager's own willful misconduct or gross negligence, the failure to perform the
obligations set forth in the LLC Agreement, or taxes, fees or other charges on,
based on or measured by any fees, commissions or compensation received by the
member or manager in connection with any of the transactions contemplated by the
LLC Agreement and related agreements.
II-1
ITEM 16. EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --- -----------
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Formation of JCP&L Transition Funding LLC.
3.2.A Limited Liability Company Agreement of JCP&L Transition Funding LLC.
3.2.B Form of Amended and Restated Limited Liability Company Agreement of
JCP&L Transition Funding LLC.
4.1.A Form of Indenture.
4.1.B Form of Series Supplement, including form of Transition Bonds.
5.1.A Opinion of Thelen Reid & Priest LLP, relating to legality of the
Transition Bonds.
5.1.B Opinion of Richards, Layton & Finger, P.A. with respect to State of
Delaware matters.
8.1.A Opinion of Carter Ledyard & Milburn with respect to material Federal
income tax matters.
8.1.B Opinion of Thelen Reid & Priest LLP with respect to material State of
New Jersey tax matters.
10.1.A Form of Sale Agreement.
10.1.B Form of Servicing Agreement.
10.1.C Form of Administration Agreement.
10.1.D Financing Order of the BPU dated February 6, 2002.
23.1.A Consent of Thelen Reid & Priest LLP (included in its opinion filed as
Exhibit 5.1).
23.1.B Consent of Richards, Layton & Finger, P.A. (included in its opinion
filed as Exhibit 5.2).
23.1.C Consent of Carter Ledyard & Milburn (included in its opinion filed as
Exhibit 8.1).
23.1.D Consent of Thelen Reid & Priest LLP (included in its opinion filed as
Exhibit 8.2).
23.1.E Consent of Arthur Andersen LLP*
25 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Trustee under the Indenture.
99 Restructuring Order of the BPU dated March 7, 2001.
99 Internal Revenue Service Private Letter Ruling, as amended, pertaining
to Transition Bonds.
* To be filed by amendment
** To be filed by Form 8-K
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
a. (1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act, (ii) to reflect in the prospectus any facts or
events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement
(notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of the
Securities Act, if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" Table in the effective registration statement);
and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change in this information in the
registration statement; provided, however, that (a)(1)(i) and
(a)(1)(ii) will not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed pursuant to Section 13 or
Section 15(d) of the Exchange Act, that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each relevant post-effective amendment shall be
II-2
deemed to be a new registration statement relating to the
securities offered therein, and the offering of these securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
b. That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Exchange Act, (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) with respect to the Registrant that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of these securities at that time
shall be deemed to be the initial bona fide offering thereof.
c. That insofar as indemnification for liabilities arising under the
Securities Act, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described under Item 15 above, or otherwise, the Registrant has been
advised that in the opinion of the SEC this indemnification is against
public policy as expressed in the Act and is, theretofore,
unenforceable. In the event that a claim for indemnification against
these liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer of controlling person
of the registrant in the successful defense of any action, suit or
proceeding) is asserted by the director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether this indemnification by it is
against public policy as expressed in the Securities Act, and will be
governed by the final adjudication of this issue.
d. That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act, shall be
deemed to be part of this registration statement as of the time it was
declared effective.
e. That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of these
securities at that time shall be deemed to be the initial bona fide
offering thereof.
f. The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act, in
accordance with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Trust Indenture Act.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and that the security rating requirement of
Form S-3 will be met by the time of sale, and has duly caused this amendment to
its registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the of City of Akron, State of Ohio.
JCP&L Transition Funding LLC
By: /s/ Earl T. Carey
-------------------------------
Earl T. Carey
President
Date: March 19, 2002
Pursuant to the requirements of the Securities Act of 1933, this amendment to
its registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/Earl T. Carey /s/ Richard H. Marsh
- ----------------------- ----------------------------------
Earl T. Carey Richard H. Marsh
President Senior Vice President and Manager
(Princial Executive Officer) (Principal Financial Officer)
/s/Harvey L. Wagner /s/ H. Peter Burg
- ----------------------- ---------------------------------
Harvey L. Wagner H. Peter Burg
Vice President and Controller Manager
(Principal Accounting Officer)
/s/Anthony J. Alexander
- -------------------------
Anthony J. Alexander
Manager
Date: March 19, 2002
II-4
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --- -----------
1.1 Form of Underwriting Agreement.**
3.1 Limited Liability Company Agreement of JCP&L Transition Funding LLC.
3.2.A Certificate of Formation of JCP&L Transition Funding LLC.
3.2.B Form of Amended and Restated Limited Liability Company Agreement of
JCP&L Transition Funding LLC.
4.1.A Form of Indenture.
4.1.B Form of Series Supplement including form of Transition Bonds.
5.1.A Opinion of Thelen Reid & Priest LLP, relating to legality of the
Transition Bonds.
5.1.B Opinion of Richards, Layton & Finger, P.A. with respect to State of
Delaware matters.
8.1.A Opinion of Carter Ledyard & Milburn with respect to material Federal
income tax matters.
8.1.B Opinion of Thelen Reid & Priest LLP with respect to material State of
New Jersey tax matters.
10.1.A Form of Sale Agreement.
10.1.B Form of Servicing Agreement.
10.1.C Form of Administration Agreement
10.1.D Financing Order of the BPU issued February 6, 2002.
23.1.A Consent of Thelen Reid & Priest LLP (included in its opinion filed as
Exhibit 5.1).
23.1.B Consent of Richards, Layton & Finger, P.A. (included in its opinion
filed as Exhibit 5.2).
23.1.C Consent of Carter Ledyard & Milburn (included in its opinion filed as
Exhibit 8.1).
23.1.D Consent of Thelen Reid & Priest LLP (included in its opinion filed as
Exhibit 8.2).
23.1.E Consent of Arthur Andersen LLP*
25 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Trustee under the Indenture.
99 Restructuring Order of the BPU issued March 7, 2001.
99 Internal Revenue Service Private Letter Ruling, as amended, pertaining
to Transition Bonds.
* To be filed by amendment
** To be filed by Form 8-K
II-5