Item 1. Business
General
PPL Transition Bond Company, LLC (formerly PP&L Transition Bond Company LLC) (the Company) is a Delaware limited liability company, whose sole member is PPL Electric Utilities. The Company was organized in March 1999, for the limited purposes of purchasing and owning ITP, issuing transition bonds (the Bonds), pledging its interest in ITP and other collateral to the Trustee under an Indenture between the Company and the Trustee to collateralize the Bonds, and performing activities that are necessary to accomplish these purposes. The Company's organizational documents require it to operate in a manner so that its assets would not be consolidated with the bankruptcy estate of PPL Electric Utilities in the event that PPL Electric Utilities becomes subject to a bankruptcy proceeding.
The only material business conducted by the Company has been the servicing of the ITP. During the year, the Company collected revenue from the ITP in the amount of $390 million and earned approximately $516,000 in interest from the Capital Subaccount maintained by the Trustee and from temporary investments. Principal payments of $240 million and interest payments of $143 million were made during the year on the Bonds. Of the original issuance in August 1999 of $2.42 billion of Bonds, Series 1999-1, Class A-1 through Class A-8, there remains approximately $1.92 billion of Bonds outstanding. The Company also replenished the Capital Account and the Overcollateralization Subaccounts to their required levels and incurred administrative and general expenses of approximately $1.7 million, including servicing fees of approximately $1.2 million and other administrative fees of $100,000. The specific interest rate and maturity of each class of bonds is specified in Note 3 of the Notes to Financial Statements. Each series of Bonds have been registered in the name of Cede & Company, as nominee of the Depository Trust Company. All of the Bonds were sold to a syndicate of underwriters managed by Morgan Stanley Dean Witter.
The Company used the proceeds of the issuance of the Bonds in 1999 to pay expenses of issuance and to purchase the transferred ITP from CEP Securities. PPL Electric Utilities arranged for the formation of CEP Securities as a bankruptcy remote special purpose entity for the purpose of holding ITP before the issuance of the first series of the Bonds.
The Company has no employees. Under the Servicing Agreement, PPL Electric Utilities, as Servicer, is required to manage and administer the ITP of the Company and to collect the ITC on behalf of the Company. The Servicing Agreement also requires PPL Electric Utilities, as Servicer, to file adjustment requests on each calculation date, and the Competition Act and the PUC Restructuring Order require the PUC to act upon these requests within specified time periods. These adjustment requests are based on actual ITC collections and updated assumptions by the Servicer as to projected future usage of electricity by customers, expected delinquencies and write-offs, and future payments and expenses relating to the ITP and the Bonds. The Servicer filed such adjustment requests on December 15, 2000 and December 15, 2001, with the PUC. The requests were approved and revised rates became effective on January 1, 2001 for the December 15, 2000 filing, and January 1, 2002 for the December 15, 2001 filing.
Intangible Transition Property
The ITP represents the irrevocable right of PPL Electric Utilities, or its successor or assignee, to collect a non-bypassable ITC from customers pursuant to the PUC Restructuring Order in accordance with the Competition Act. The PUC Restructuring Order authorized PPL Electric Utilities to securitize up to $2.85 billion of its stranded costs. PPL Electric Utilities, or any assignee of PPL Electric Utilities to whom ITP is sold, may issue and sell, in reliance on the PUC Restructuring Order, one or more series of the Bonds, each series in one or more classes, secured by ITP. The Company acquired the ITP and issued the Bonds in August 1999. The principal amount of the Bonds, interest, servicing fees, and funding of reserves will be recovered through ITC payable by retail consumers of electricity within PPL Electric Utilities' service territory who receive electric delivery service from PPL Electric Utilities.
Item 2.
Item 2. Properties
The Company has no physical property. Its primary asset is the ITP described above in Item 1 ("Business - Intangible Transition Property").
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Item 4 is omitted as PPL Transition Bond Company meets the conditions set forth in General Instructions (I) (1) (a) and (b) of Form 10-K.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Sales of Unregistered Securities. There is no established public trading market for the Company's equity securities. PPL Electric Utilities owns all of the Company's equity. On August 5, 1999, PPL Electric Utilities transferred $12.1 million to the Company as an initial capital contribution, which is also the total capital contribution as of December 31, 2001 and 2000. Such transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). The Company has made no other sales of unregistered securities.
(b) Restriction on Dividends. The Company may not make any payments, distributions or dividends to any member of the Company with respect to its membership interest in the Company except in accordance with the Indenture.
(c) Bondholders. As of December 31, 2001 the sole holder of the Bonds was Cede & Co., as nominee of the Depository Trust Company. The Bonds are not registered on any national securities exchange and are not traded on any established trading market.
Item 6.
Item 6. Selected Financial Data
Item 6 is omitted as PPL Transition Bond Company meets the conditions set forth in General Instructions (I) (1) (a) and (b) of Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
Certain statements contained in this Form 10-K 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 PPL Electric Utilities and the Company believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to have been correct. These 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. Any such forward-looking statements should be considered in conjunction with other documents of PPL Electric Utilities and the Company on file with the SEC.
New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for PPL Electric Utilities or the Company to predict all of such factors, or the extent to which any such 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 such statement is made, and neither PPL Electric Utilities nor the Company undertakes any obligation to update the information contained in such statement to reflect subsequent developments or information.
Background
The Company is a Delaware limited liability company organized in March 1999 for the limited purposes of purchasing ITP and issuing Bonds secured by the ITP. The Company is wholly-owned by PPL Electric Utilities. The Company's organizational documents require it to operate in a manner so that its assets would not be consolidated with the bankruptcy estate of PPL Electric Utilities in the event PPL Electric Utilities becomes subject to a bankruptcy proceeding.
Results of Operations
Revenues
Revenue generated from the ITP for the years ended December 31, 2001 and 2000 were approximately $390 million and $406 million. Revenues generated from the ITP were approximately $151 million for the period August 10, 1999 to December 31, 1999.
During the years ended December 31, 2001 and 2000, the Company also earned approximately $516,000 and $175,000 in interest from the Capital Subaccount maintained by the Trustee and from temporary investments. The additional interest income in 2001 reflects higher balances in the Capital Subaccount and temporary investments in 2001 compared with 2000. Interest income was approximately $349,000 in 1999.
Expenses
During the years ended December 31, 2001 and 2000, the Company incurred interest expense of approximately $145 million and $160 million. Interest expense includes interest on the bonds, and amortization of debt issuance expenses and discounts on the bonds. The decrease in interest expense was the result of the scheduled repayments on the bonds. Interest expense was approximately $65 million in 1999.
For the years ended December 31, 2001 and 2000, the Company also incurred administrative and general expenses of approximately $1.7 million and $1.8 million, including servicing fees of approximately $1.25 million and other administrative fees of $100,000 in each year. Administrative and general expenses were approximately $586,000 in 1999.
Amortization of the ITP (which is based on ITC revenues, interest accruals and other fees) was approximately $243 million, $244 million and $85 million in 2001, 2000 and 1999, respectively.
ITC Remittances and Debt Servicing
The principal amount of the Bonds, interest, fees, and funding of the Overcollateralization Subaccount are being recovered through ITC payable by retail consumers of electricity within PPL Electric Utilities' service territory who receive its electric delivery service. As part of PPL Electric Utilities' responsibility as Servicer under the Servicing Agreement, PPL Electric Utilities remitted to the Trustee approximately $402 million of ITC collections for the billing periods of December 2000 to November 2001.
All scheduled quarterly Bond principal payments, interest payments and all related expenses were made on March 26, June 25, September 25 and December 26, 2001. On March 26, 2001, scheduled principal payments of $37 million of the class A-1 Bonds were made and this series was retired. An additional $29 million in principal payments were made on the class A-2 Bonds. The following scheduled principal payments were also made on the class A-2 Bonds: $63 million on June 25, $56 million on September 25 and $30 million on December 26, 2001. After the December 26, 2001 principal payment was made on the class A-2 Bonds, this series was retired. On December 26, 2001, a scheduled principal payment of $26 million was also made on the class A-3 Bonds. The Overcollateralization Subaccount was funded by $327,000 on both March 26 and June 25, 2001, $276,000 on September 25, and $304,000 on December 26, 2001, to reach its required funding levels. Excess ITC collections and investment earnings not released to the Company, totaling approximately $17.8 million, were deposited into the Reserve Subaccount on the dates noted above.
The Servicing Agreement also requires PPL Electric Utilities, as Servicer, to file adjustment requests on each calculation date, and the Competition Act and the PUC Restructuring Order require the PUC to act upon these requests within specified time periods. These adjustment requests are based on actual ITC collections and updated assumptions by the Servicer as to projected future usage of electricity by customers, expected delinquencies and write-offs, and future payments and expenses relating to the ITP and the Bonds. The Servicer filed such an adjustment request on December 15, 2001 with the PUC. The request was approved and revised rates became effective on January 1, 2002.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
None.
Report of Independent Accountants
To PPL Electric Utilities Corporation, the Sole Member
of PPL Transition Bond Company, LLC:
In our opinion, the financial statements listed in the index appearing under Item 14(a)(1) on page 11 present fairly, in all material respects, the financial position of PPL Transition Bond Company, LLC at December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000 and for the period from March 25, 1999 (date of inception) to December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 4, 2002
PPL Transition Bond Company, LLC
Notes to Financial Statements
Terms and abbreviations appearing in Notes to Financial Statements are explained in the glossary.
Nature of Operations
The financial statements include the accounts of PPL Transition Bond Company, LLC (the Company). The Company is a limited liability company established under the laws of the State of Delaware, and was formed on March 25, 1999 pursuant to a limited liability company agreement. PPL Electric Utilities is the sole member of the Company.
The Company was organized for the sole purpose of purchasing and owning ITP, issuing transition bonds (the Bonds), pledging its interest in ITP and other collateral to the Trustee under an Indenture between the Company and the Trustee to collateralize the Bonds, and performing activities that are necessary to accomplish these purposes. ITP represents the irrevocable right of PPL Electric Utilities, or its successor or assignee, to collect a non-bypassable ITC from customers pursuant to the PUC Restructuring Order in accordance with the Competition Act. The PUC Restructuring Order authorized the ITC to be sufficient to recover up to $2.85 billion aggregate principal amount of Bonds, plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, servicing fees and other expenses relating to the Bonds.
The Company's organizational documents require it to operate in a manner so that its assets would not be consolidated with the bankruptcy estate of PPL Electric Utilities in the event PPL Electric Utilities becomes subject to a bankruptcy proceeding. Both PPL Electric Utilities and the Company have treated the transfer of the ITP to the Company as a sale under applicable law. The Bonds are treated as debt obligations of the Company. The assets of the Company are not available to creditors of PPL Electric Utilities or PPL Corporation, and the ITP is legally not an asset of PPL Electric Utilities or PPL Corporation. The Company is expected to terminate its existence after final maturity of the Bonds.
The Company issued $2.42 billion of Bonds in eight different classes on August 10, 1999. See Note 3 for additional information.
Summary of Significant Accounting Policies
Management's Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions will affect the reported amount of revenues, expenses, assets, and liabilities and disclosure of contingencies. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash and Cash Equivalents do not include Restricted Funds.
Restricted Funds
Under the Indenture, the Company deposited an amount equal to 0.5% of the initial principal amount of the Series 1999-1 Bonds into the Capital Subaccount with the Trustee. This amount was contributed by PPL Electric Utilities to the Company. This account is the last account drawn in the event funds are insufficient to make scheduled allocations. If the Capital Subaccount is used, it will be replenished from ITC remittances to its original level through the periodic reconciliation process. The Indenture also provides for an Overcollateralization Subaccount. The funding level of this account is 0.5% of the initial principal amount of the Series 1999-1 Bonds, funded ratably over the life of the Bonds. Any excess amounts of ITC collections and investment earnings not released to the Company are deposited into a Reserve Subaccount. Accordingly, the Capital Subaccount, Overcollateralization Subaccount, and Reserve Subaccount are classified as "Restricted Funds" on the Balance Sheet.
Amortization of Intangible Transition Property
The ITP was recorded at the acquired cost and is being amortized over the life of the Bonds, based on ITC revenues, interest accruals and other fees. The ITP is solely the property of the Company.
Amortization of Debt Issuance Costs and Discount on Debt
The costs associated with the issuance of the Bonds have been capitalized and are being amortized over the life of the Bonds, utilizing the effective interest method.
Income Taxes
The Company is a limited liability company and has elected to be disregarded as a separate entity for federal and state income tax purposes. The Company's taxable income or loss is included in the consolidated federal and state income tax returns of its member. The Statement of Operations and Changes in Member's Equity reflects the Company's pro rata allocation of its member's consolidated income taxes in accordance with its member's tax sharing policy.
Reclassification
Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform to the current presentation.
Long-Term Debt and Source of Repayment
In August 1999, the Company issued $2.42 billion of Series 1999-1 Bonds. The Bonds consist of eight classes. The Company used the proceeds from the Bonds to purchase ITP from CEP Securities. PPL Electric Utilities arranged for the formation of CEP Securities to provide flexibility to issue multiple tranches of transition bonds at different dates. The Bonds are collateralized by the ITP and the amounts in the subaccounts maintained by the Trustee under the Indenture (as described below).
Scheduled maturities and interest rates for the Bonds at December 31, 2001 are:
The carrying value of the long-term debt approximates fair market value as of December 31, 2001. The current maturities stated above are based on the expected final payment dates rather than the final maturity dates.
The source of repayment for the Bonds is the ITC. The Servicer collects this non-bypassable charge from PPL Electric Utilities' retail consumers of electricity. The Servicer deposits ITC monthly collections into a General Subaccount maintained by the Trustee under the Indenture. The monthly ITC collections from the billing periods of December 2000 through November 2001 were $402 million in aggregate. The monthly ITC collections from the billing periods of December 1999 through November 2000 were $393 million in aggregate. Each quarter, such monies are used to make principal and interest payments on the Bonds, and to pay fees, costs and charges specified in the Indenture. The Trustee made all scheduled payments in 2001 and 2000. The Indenture also includes a Reserve Subaccount that is maintained for the purpose of retaining any excess amount of ITC collections and investment earnings not released to the Company. For the years ended December 31, 2001 and 2000, the Company deposited approximately $17.8 million and $1.3 million to the Reserve Subaccount. The Indenture also provides for an Overcollateralization Subaccount. The funding level of this account is 0.5% of the initial principal amount of the Series 1999-1 Bonds, funded ratably over the life of the Bonds. For the years ended December 31, 2001 and 2000, the Company deposited approximately $1.2 million and $1.6 million to the Overcollateralization Subaccount. Additionally, an amount equal to 0.5% of the initial principal amount of the Bonds was deposited into the Capital Subaccount under the Indenture on the date of issuance. If amounts available in the General, Reserve, and Overcollateralization Subaccounts are not sufficient on any payment date to make scheduled payments, the Trustee will draw on amounts in the Capital Subaccount in excess of $100,000. Any remaining amounts collateralizing the Bonds will be released to the Company upon final payment on the Bonds.
At December 31, 2001, the following balances were reflected in the Subaccounts maintained by the Trustee:
Significant Agreements and Related Party Transactions
Under the Servicing Agreement, PPL Electric Utilities, as Servicer, is required to manage and administer the ITP of the Company and to collect the ITC on behalf of the Company. The Company pays an annual servicing fee of $1.25 million to PPL Electric Utilities, and other administrative fees of $100,000. At December 31, 2001 and 2000, the Balance Sheet included receivables from PPL Electric Utilities of approximately $72 million and $82 million for ITC collections.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 10 is omitted as PPL Transition Bond Company meets the conditions set forth in General Instructions (I) (1) (a) and (b) of Form 10-K.
Item 11. Executive Compensation
Item 11 is omitted as PPL Transition Bond Company meets the conditions set forth in General Instructions (I) (1) (a) and (b) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 12 is omitted as PPL Transition Bond Company meets the conditions set forth in General Instructions (I) (1) (a) and (b) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
Item 13 is omitted as PPL Transition Bond Company meets the conditions set forth in General Instructions (I) (1) (a) and (b) of Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Financial Statements - included in response to Item 8.