Amendment No. 3 to
SEC File No. 70-9885
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-l
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
FirstEnergy Corp. ("FirstEnergy")
Jersey Central Power & Light Company ("JCP&L")
76 South Main Street
Akron, Ohio 44308
(Name of companies filing this statement and address of
principal executive office)
FirstEnergy Corp.
(Name of top registered holding company parent of applicant)
Leila L. Vespoli Douglas E. Davidson, Esq.
Senior Vice President Thelen Reid & Priest LLP
and General Counsel 40 West 57th Street
FirstEnergy Corp. New York, New York 10019
76 South Main Street
Akron, Ohio 44308
(Names and addresses of agents for service)
FirstEnergy, a registered public utility holding company and JCP&L, its
public utility subsidiary (together "Applicants") hereby amend JCP&L's
Application on Form U-1, docketed in Commission File No. 70-9885 (the
"Application"),(1) as follows.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
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A. JCP&L is a public utility subsidiary of FirstEnergy, a registered
public utility holding company. The principal executive offices of both JCP&L
and FirstEnergy are located in Akron, Ohio. JCP&L is an electric public utility
operating in New Jersey and accordingly furnishes electric service to over one
million customers located within 13 counties in northern, western and east
central New Jersey. Applicants hereby request authority through December 31,
2002: (1) to form a new direct or indirect wholly-owned subsidiary ("Special
Purpose Issuer") which will be a limited liability company; (2) for JCP&L to
acquire all of the common equity interests in the Special Purpose Issuer; (3)
for the Special Purpose Issuer to issue and
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(1) In Amendment Number 2 to the Application, GPU, Inc. ("GPU"), JCP&L's former
parent, became an applicant thereto. By Order dated October 29, 2001 (HCAR No.
27459) (the "Merger Order"), the Commission approved, among other things,
FirstEnergy's merger with GPU. The merger became effective on November 7, 2001,
with FirstEnergy being the surviving entity. The authorizations requested in
this docket are unaffected by the transactions authorized in the Merger Order,
except that, with the filing of this Amendment Number 3, FirstEnergy is now a
co-applicant to this Application.
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sell up to $320 million in aggregate principal amount of transition bonds from
time to time through December 31, 2002; (4) for JCP&L to enter into the
Servicing Agreement on the terms discussed below; and (5) to enable JCP&L to
enter into, or to cause the Special Purpose Issuer to enter into, certain
interest rate swaps, interest rate hedging programs, credit enhancement
arrangements and anticipatory hedges, all as more fully described below, to
reduce interest rate risks with respect to, and to facilitate the offering of,
the transition bonds. The transaction described above is commonly referred to as
a "securitization". JCP&L further requests that the Servicing Agreement be
exempted from the requirements of Section 13(b) of the Act. Additionally,
FirstEnergy requests authority, through December 31, 2002, to acquire indirectly
the Special Purpose Issuer.
B. On February 9, 1999, New Jersey enacted the Electric Discount and
Energy Competition Act, P.L. 1999, c. 23 (N.J.S.A. 48:3-49 et seq.) (the
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"Competition Act") to restructure the electric utility and natural gas
industries in New Jersey. The Competition Act required New Jersey electric
utilities, including JCP&L, to unbundle electric services into separate charges
for, among other things, customer account services (metering and billing),
distribution, transmission and generation. While the New Jersey electric
generation market has
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been open to competition since August 1, 1999, electric distribution and, at
least initially, customer account services continue to be regulated by the New
Jersey Board of Public Utilities (the "BPU" or the "Board"). Transmission
services are provided by the New Jersey electric utilities pursuant to open
access transmission tariffs filed with the Federal Energy Regulatory Commission
("FERC"). Under the Competition Act, New Jersey's electric utilities are
required to reduce rates by at least 10% by July 31, 2002, as compared to rates
in effect on April 30, 1997. The Competition Act also required utilities to
submit restructuring plans to the BPU, which included claims for each utility's
"stranded costs" -- i.e., costs relating to utility investments and power
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purchase commitments that would have been recoverable in a regulated environment
but are not expected to be recoverable as a result of the introduction of
competition in the generation market. The Competition Act expressly recognizes
the following potential sources of stranded costs: utility-owned generation;
power purchase agreements ("PPAs") with other utilities; and PPAs with
non-utility generators ("NUGs"). Utilities may recover these stranded costs from
their distribution customers through a non-bypassable market transition charge
("MTC"), subject to approval by the BPU based upon, among other things, the
Board's findings as to the utility's use of all reasonably available mitigation
measures
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and an assessment of the full market value of the subject generation assets or
PPAs. The MTC recovery is generally limited to eight years except that the BPU
may permit: (1) stranded costs associated with NUG PPAs to be recovered over the
term of each contract; (2) stranded costs related to certain generation assets
to be recovered over eleven years; and (3) the MTC recovery period to be
extended to enable the utility to achieve the mandatory rate reductions.
C. The Competition Act provides for the use of securitization to
facilitate utility restructurings by empowering the BPU, at the request of a
utility, to authorize such utility, directly or indirectly, to issue transition
bonds in order to recover and/or finance a portion of its stranded costs and
assist in achieving compliance with the rate reduction requirements of the
Competition Act. Utilities must apply to the BPU for a bondable stranded costs
rate order authorizing the issuance of transition bonds and approving the amount
of the initial transition bond charge ("TBC") to be imposed on all retail
electric distribution customers.
D. Under the Competition Act, the BPU may authorize the issuance of
transition bonds if (1) the utility has taken reasonable measures to mitigate
stranded costs and has the appropriate incentives or plans to do so in the
future; (2) the utility will not otherwise be able to achieve the level of rate
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reduction deemed by the BPU to be necessary and appropriate, absent the issuance
of the transition bonds; (3) the issuance of the transition bonds will provide
tangible and quantifiable benefits for ratepayers; and (4) the structuring and
pricing of the transition bonds assure that ratepayers will pay the lowest
possible TBC consistent with market conditions and the terms of the related
bondable stranded costs rate order. In general, a utility may issue transition
bonds in an amount of up to 75% of the total amount of eligible stranded costs
attributable to its owned generation assets. However, up to the full amount of
the stranded costs attributable to any remaining generation assets may be
securitized if the utility divests a majority of its generation assets and has
established the stranded cost amount attributable to such remaining assets with
certainty.(2)
E. Further, under the Competition Act, the transition bonds may have a
scheduled amortization of up to 15 years from their issuance date with respect
to stranded costs related to utility-owned generation assets, and up to the
remaining term of a PPA with respect to stranded costs related to a buyout or
buydown of such PPA. In general, the TBC is a
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(2) While this provision may apply to stranded costs related to the Oyster Creek
Nuclear Generating Station ("Oyster Creek"), which JCP&L sold in August 2000,
the BPU has determined in the Financing Order (as defined in paragraph G below)
the principal amount of the transition bonds JCP&L may issue with respect to
Oyster Creek's stranded costs.
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separate, non-bypassable charge that will be assessed against all retail
electric distribution customers, regardless of whether they continue to purchase
electricity from the distribution utility. The TBC will be a usage-based charge
that will be sufficient to recover the principal of and interest on the
transition bonds and all other costs associated with the issuance of the
transition bonds, including costs of credit enhancements, costs of retiring
existing debt and preferred equity, costs of defeasance, servicing fees and
certain other related fees and expenses. The relationship between collections of
the TBC and the debt service and expense requirements on the transition bonds
will likely be dependent upon, among other things, the utility's ability to
forecast: (1) sales; (2) delinquencies and charge-offs; and (3) payment lags.
F. In July 1997, at the direction of the Board in anticipation of the
adoption of the Competition Act, JCP&L filed its restructuring plan with the
Board which, among other things, unbundled generation from transmission and
distribution. The restructuring plan was the subject of extensive hearings and
negotiations, which resulted in a settlement which the BPU approved with some
modifications. The Board issued a Summary Order with respect to such approval
dated May 24, 1999 ("Summary Order"), and a detailed Final Decision and Order
dated March 7, 2001 ("Final Order"). Among other things, the Board's Summary
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Order, and ultimately, its Final Order, authorize JCP&L to securitize a total of
up to $420 million of bondable stranded costs in the securitization transaction
described in paragraph G.
G. On August 25, 1999, JCP&L filed a petition with the BPU seeking a
bondable stranded costs rate order to authorize securitization of that portion
of the stranded costs attributable to Oyster Creek equal to JCP&L's
then-projected net investment in the plant at September 1, 2000, net of deferred
income taxes attributable to the plant. Such amounts will be collected from
JCP&L's ratepayers via the TBC once JCP&L has securitized such amounts.(3) On
February 6, 2002, the BPU issued a bondable stranded costs rate order (the
"Financing Order") which authorizes the Special Purpose Issuer's issuance of up
to $320 million of transition bonds representing approximately $307.4 million of
the Oyster Creek net investment (gross plant, less accumulated depreciation and
accumulated deferred income taxes) and an estimated $12.6 million of transaction
costs, including related fees and expenses of issuance and sale of the
transition bonds, and to refinance or retire JCP&L's debt and preferred
equity.(4) As discussed above, the Final Order had initially
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(3) On August 8, 2000, JCP&L sold Oyster Creek to AmerGen Energy Company LLC for
$10 million.
(4) The BPU has also authorized JCP&L to defer certain costs on its books and
may authorize JCP&L to securitize the resulting deferred balances, if any, to
the extent permitted by the Competition Act. JCP&L is not seeking Commission
authority for securitization financing of such balances now, but will request
such authority if and when JCP&L files a separate petition with the BPU with
respect thereto.
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authorized the securitization of up to $420 million of bondable stranded costs.
The Financing Order formally approved the detailed terms and conditions of the
securitization transaction, but decreased the amount of recoverable bondable
stranded costs to be securitized, based on JCP&L's determination of its current
Oyster Creek net investment.
H. The TBC will remain in effect until all principal, interest and other
costs on the related transition bonds are paid in full, and will be adjusted at
least annually, in accordance with the Competition Act, to insure full payment
of debt service and expenses. Under the Competition Act, neither the BPU nor any
other governmental entity may rescind, alter, repeal, modify or amend a bondable
stranded costs rate order, and the State may not limit, alter or impair any
bondable transition property(5) or associated rights. The transition bonds
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(5) Under the Competition Act, Bondable Transition Property ("BTP"), the
statutory and regulatory right to collect the TBC, is defined as "the property
consisting of the irrevocable right to charge, collect and receive, and be paid
from collections of, transition bond charges in the amount necessary to provide
for the full recovery of bondable stranded costs which are determined to be
recoverable in a bondable stranded costs rate order . . . ." N.J.S.A. 48:3-51.
8
will not constitute a debt or liability of the State or of JCP&L, but only of
the Special Purpose Issuer.
I. The BTP and the related TBC revenue stream are isolated from any credit
risk associated with the utility because the utility will have transferred them
to the Special Purpose Issuer, which will be structured to be a "bankruptcy
remote" assignee. The Special Purpose Issuer, which is a Delaware limited
liability company, will issue transition bonds secured by the BTP and the TBC
revenue stream. The securitization will be structured so that the transfer of
the interest in the BTP will be treated as an absolute transfer of all of
JCP&L's right, title and interest in the BTP as in a true sale, and not as a
pledge or other financing, for purposes other than for Federal and State income
and franchise tax purposes and for certain financial reporting purposes. The
transfer of the BTP to the Special Purpose Issuer will have no effect on JCP&L's
debt to equity ratio.
J. As the TBC is imposed upon and collected from ratepayers, such amounts
will be used to pay principal and interest on the transition bonds, as well as
fees and expenses related to the securitization transaction.
K. The securitization structure outlined above will enhance the
creditworthiness of the transition bonds because the underlying securitized
assets (the BTP and its associated TBC
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revenue stream) are isolated from the risks associated with the assets of JCP&L,
once transferred to the Special Purpose Issuer. Moreover, as discussed above,
the State under the Competition Act may not reduce the value of the BTP or TBC
until the transition bonds are fully discharged, and the BPU's bondable stranded
costs rate order is irrevocable under the Competition Act. These aspects of the
securitization transaction will enable the transition bonds to obtain a higher
credit rating than the existing debt instruments of JCP&L. JCP&L understands
that all other utility securitization bonds have received the highest possible
credit rating from the principal rating agencies and, accordingly, believes that
it is reasonable to expect that its transition bonds will receive such credit
rating, although JCP&L has received no such assurances from any of such rating
agencies.
L. Pursuant to a "Sale Agreement", JCP&L will transfer the interest in the
BTP created by the irrevocable bondable stranded costs rate order to the Special
Purpose Issuer in exchange for the net proceeds from the sale of the transition
bonds. Such transfer will be treated as a true sale, and not as a secured
financing, for bankruptcy purposes. The Special Purpose Issuer initially will be
capitalized (in an amount equal to at least 0.5% of the total principal amount
of the transition
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bonds) through a direct capital contribution by JCP&L.(6) The Special Purpose
Issuer will deposit the capital contribution amount into a "Capital Subaccount."
M. The actual amount of the TBC will be sized to provide for collection of
an amount beyond that needed to pay expected costs and debt service on the
transition bonds (the "Overcollateralization Amount"). The Overcollateralization
Amount, which will be collected ratably over the expected term of the transition
bonds, will enhance the creditworthiness of the transition bonds and will be
deposited into a subaccount (the "Overcollateralization Subaccount").
N. JCP&L, as the servicer of the TBC revenue stream, will remit monthly
(or more frequently) all amounts collected in respect of the TBC to a collection
account maintained by the indenture trustee for the benefit of the holders of
the transition bonds (the "Collection Account"). The Special Purpose Issuer will
periodically pay out of the Collection Account, among other amounts authorized
by the BPU, trustee fees, servicing fees, administrative fees, operating
expenses, accrued but unpaid interest on all classes of the transition bonds,
and principal (to the extent scheduled) on transition bonds. Any remaining
balance in the Collection Account will be used to restore the Capital
Subaccount, fund and replenish the
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(6) JCP&L will not charge interest on this capital contribution.
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Overcollateralization Subaccount (to the required scheduled level), and then
be added to reserves (the "Reserve Subaccount").(7)
O. Applicants request authority for the Special Purpose Issuer to issue up
to $320 million aggregate principal amount of transition bonds.(8) That amount
will include the approximately $307.4 million(9) representing the portion of the
stranded costs attributable to Oyster Creek that is equal to JCP&L's actual net
investment in the plant, net of deferred income taxes attributable to the plant,
and will also include up to $12.6 million of transaction costs. The BPU approved
JCP&L's securitization of these amounts in the Summary Order, and ultimately in
the Final Order, subject to issuance of a subsequent bondable stranded costs
rate order in response to the petition currently pending before the BPU.
The Special Purpose Issuer may issue transition bonds in one or more
series, and each such series may be issued in one or more classes. Different
series may have different maturities and interest rates and each series may have
classes
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(7) JCP&L may add other reserve accounts, in addition to those described in this
Application, to obtain the highest possible credit rating for the transition
bonds.
(8) Any debt security issued by the Special Purpose Issuer will be investment
grade.
(9) JCP&L has represented in filings made with the BPU that such net investment
in Oyster Creek is approximately $307.4 million.
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with such maturities, interest rates, fixed or variable, and other terms as the
Special Purpose Issuer shall determine from time to time in the future. The
aggregate average interest cost of the transition bonds will not exceed the
applicable U.S. mid-market swap benchmark, as quoted, among other places, on
Telerate page 19901, plus 300 basis points.(10) The TBC for each series will be
structured to provide for the recovery of the principal amount of the related
transition bonds and the related interest, fees and expenses. There will be a
date on which each of the transition bonds is expected to be repaid and a legal
final maturity date by which the transition bonds must be repaid. Neither the
expected final maturity nor the legal final maturity will be later than 15 years
and 17 years, respectively, from the date of issuance of the related transition
bonds. The expected final maturity date must be earlier than the legal final
maturity date to meet rating agency requirements because the TBC is calculated
by taking into account projections of such variables as the anticipated level of
charge-offs, delinquencies, and usage, which may differ from the amounts
actually experienced.
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(10) The swap rate used as a benchmark is the fixed rate of interest that could
be exchanged for a floating rate of interest (based on LIBOR) over a specified
term. As an example, if a particular transition bond tranche had a ten-year
average life, that tranche would be priced based on, but would not exceed 300
basis points greater than, the mid-point between current bid and asked 10 year
swap rates at the time of pricing.
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Applicants also seek authority for the Special Purpose Issuer to enter
into transactions to convert all or a portion of any transition bonds bearing
interest at a floating rate ("Floating Rate Transition Bonds") to fixed rate
obligations of the Special Purpose Issuer using interest rate swaps or other
derivative products designed for such purposes. The Special Purpose Issuer will
enter into one or more interest rate swaps, or one or more derivative
instruments, such as interest rate caps, interest rate floors and interest rate
collars (collectively, "Derivative Transactions"), with one or more
counterparties whose senior debt ratings, or the senior debt ratings of the
parent companies of the counterparties, as published by Standard and Poor's
Ratings Group, are equal to or greater than BBB, or an equivalent rating from
Moody's Investors Service, Inc. or Fitch, Inc. ("Authorized Counterparties"),
from time to time through December 31, 2002. The notional amount of the swaps
and the expected average life of the swaps will not exceed that of the
underlying Floating Rate Transition Bonds. For instance, in connection with
Floating Rate Transition Bonds, the Special Purpose Issuer would enter into an
interest rate swap with a swap counterparty whereby it would receive the same
floating rate interest payment from the counterparty as it pays to the
transition bondholders. In return, the Special Purpose Issuer would agree to
make payments to the counterparty based
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upon the principal amount of such transition bonds at an agreed upon fixed
interest rate. The net effect of such a transaction would be to convert the
Floating Rate Transition Bonds to fixed rate obligations. The term of the
interest rate swap would match the maturity of the Floating Rate Transition
Bonds and the swap notional amount would at all times equal the outstanding
principal amount of such bonds. Swaps or other derivative transactions would be
entered into only with Authorized Counterparties. Any swap agreement will also
include customary provisions related to indemnification by JCP&L or the Special
Purpose Issuer for breakage costs and other losses under certain circumstances
related to the savings.
In addition, Applicants request authorization for JCP&L, through December
31, 2002, to enter into interest rate hedging transactions to fix or cap
interest rates on the transition bonds in advance of their actual pricing (the
"Anticipatory Hedges"), subject to certain limitations and restrictions. The
Anticipatory Hedges would be entered into after the BPU authorizes the issuance
of the transition bonds, but prior to the pricing of the bonds, to lock in an
interest rate or limit Applicants' exposure to the risk of any adverse interest
rate fluctuation. Such Anticipatory Hedges would only be entered into with
Authorized Counterparties. The Anticipatory Hedges would be utilized to fix
and/or limit the
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interest rate risk associated with the transition bonds through (i) a forward
sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury
obligations and/or a forward swap (each a "Forward Sale"), (ii) the purchase of
put options on U.S. Treasury obligations (a "Put Options Purchase"), (iii) a Put
Options Purchase in combination with the sale of call options on U.S. Treasury
obligations (a "Zero Cost Collar"), (iv) transactions involving the purchase or
sale, including short sales, of U.S. Treasury obligations, or (v) some
combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or
other derivative or cash transactions, including, but not limited to structured
notes, caps and collars, appropriate for the Anticipatory Hedges.
Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades")
with brokers through the opening of futures and/or options positions traded on
the Chicago Board of Trade ("CBOT"), the opening of over-the-counter positions
with one or more counterparties ("Off-Exchange Trades"), or a combination of
On-Exchange Trades and Off-Exchange Trades. JCP&L will determine the optimal
structure of any Anticipatory Hedge transaction at the time of execution. JCP&L
may decide to lock in interest rates and/or limit its exposure to interest rate
increases. All open positions under Anticipatory Hedges will be closed on or
prior to the date of the issuance of the transition
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bonds. JCP&L will not, at any time, take possession or make delivery of the
underlying U.S. Treasury Securities.
JCP&L represents that it will comply with Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133", and with other standards relating to accounting for
derivative transactions as are adopted and implemented by the Financial
Accounting Standards Board.(11) JCP&L also represents that each Anticipatory
Hedge will qualify for hedge accounting treatment under generally accepted
accounting principles.
P. Pursuant to a Servicing Agreement between JCP&L and the Special Purpose
Issuer, JCP&L will act as a servicer of the TBC revenue stream. In this
capacity, JCP&L will, among other things: (1) bill customers and make
collections on behalf of the Special Purpose Issuer and (2) file with the BPU
for periodic adjustments to the TBC to achieve a level which allows for payment
of all debt service and full recovery of amounts authorized by the Board to be
collected through the TBC in
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(11) The proposed terms and conditions of Anticipatory Hedges are substantially
the same as the Commission has approved in other cases. See New Century
Energies, Inc., et al., Holding Co. Act Release No. 27000 (April 7, 1999); and
SCANA Corporation., et al., Holding Co. Act Release No. 27137 (February 14,
2000).
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accordance with the expected amortization schedule for each series and class of
transition bonds. JCP&L may, subject to certain conditions, subcontract with
other companies to carry out some of its servicing responsibilities. It is
expected that the Servicing Agreement will remain in effect until the legal
final maturity of the transition bonds, which, as discussed above in paragraph O
of this Item 1, will not exceed 17 years.
Q. JCP&L will receive a servicing fee for its servicing activities and
reimbursement for certain of its expenses in the manner set forth in the
Servicing Agreement. JCP&L's servicing fee will be set at an amount equal to a
fixed percentage of the initial principal amount of the transition bonds,
designed to collect approximately $400,000 annually. This fee may not reflect
JCP&L's actual costs of providing the related services and therefore may not
meet the "at cost" requirements of Section 13(b) of the Act and Rules 90 and 91
thereunder. Thus, JCP&L is seeking an exemption from these requirements. The
rating agencies will require that the servicing fee be set at a level comparable
to one negotiated at arms-length and which would thus be reasonable and
sufficient for a third party performing similar services. To do otherwise would
most likely lower the credit rating of the transition bonds. This "arms-length"
fee assures that the Special Purpose Issuer would be able to operate
independently and thus
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strengthens the position that it is a "bankruptcy remote"(12) entity.
JCP&L is the most logical and cost-effective choice for servicer for a
number of reasons. JCP&L is already performing many of the servicer's tasks in
its capacity as the local distribution utility, such as metering and billing,
and, thus, the servicing fee JCP&L collects will be substantially lower than the
fee any other entity would charge. Having JCP&L act as servicer is therefore
beneficial to ratepayers because, ultimately, it is the ratepayers who will pay
the servicing fee through the TBC.
R. Any successor to JCP&L pursuant to any merger, consolidation,
bankruptcy, reorganization or other insolvency proceeding will be required to
assume JCP&L's obligations under the Sale Agreement and the Servicing Agreement
and under the Competition Act.
S. Personnel employed by GPU Service, Inc., or other system service
company, ("GPUS") will provide ministerial services on an as-needed basis to the
Special Purpose Issuer pursuant to an administration agreement ("AA") to be
entered into between the Special Purpose Issuer and GPUS. The services to be
provided will consist primarily of internal administrative
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(12) A "bankruptcy remote" entity would not be impacted by a bankruptcy of JCP&L
and is, therefore, expected to have a credit rating different from (and, indeed,
higher than) that of JCP&L.
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matters relating to the Special Purpose Issuer such as providing notices
required under its transition bond documentation, maintaining its books and
records and maintaining authority to do business in appropriate jurisdictions.
Under the AA, the Special Purpose Issuer will reimburse GPUS for the cost of the
services provided, computed in accordance with Rules 90 and 91 under the Act, as
well as other applicable rules and regulations. As described above, JCP&L will
be retained under the Servicing Agreement to collect and manage the BTP and
associated TBC revenues and to make appropriate filings with the BPU.
T. JCP&L will use the net proceeds from the sale of the transition bonds
to reduce eligible stranded costs through the retirement of debt or equity, or
both, as permitted by the Competition Act. JCP&L's unbundled rates that have
been implemented in connection with its restructuring filing provide for the
savings from the transition bonds to be passed through to customers. In
accordance with the Competition Act and the Final Order, the application of the
proceeds from the sale of the transition bonds will not substantially alter
JCP&L's
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capital structure, as assessed by the Board.(13) Exhibit G hereto provides pro
forma capitalization tables at March 31, 2002 for both JCP&L and FirstEnergy,
which take into account the use of proceeds of the transition bonds. The tables
demonstrate that both JCP&L's and FirstEnergy's common stock equity to total
capitalization ratio will remain above 30% after the securitization.
U. The specific steps to be taken by JCP&L to reduce its capitalization
will depend, in large part, on the date on which the proceeds from the sale of
transition bonds become available, the then prevailing market conditions, and
the circumstances at that time.
V. Rule 53 Analysis.
The proposed transactions are also subject to the requirements of Rule 54.
Rule 54 provides that in determining whether to approve an application by a
registered holding company which does not relate to any exempt wholesale
generator
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(13) The issuance of the entire $320 million of transition bonds, as well as the
impact of other pro forma adjustments, will decrease JCP&L's common equity ratio
from 69.4% as of March 31, 2002, to approximately 67.4% on a "per books" basis.
Exhibit G contains projected pro forma capitalization tables for both
FirstEnergy and JCP&L, both including and excluding the effect of the transition
bonds, as at March 31, 2002. These tables demonstrate that the transition bond
issuance, as well as the impact of other pro forma adjustments, will decrease
FirstEnergy's common equity ratio from 32.2% to 32.1%. In the
application/declaration FirstEnergy filed in connection with the Merger Order,
FirstEnergy represented that its pro forma combined common equity ration, as of
June 30, 2001, was 28.39%.
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("EWG") or "foreign utility company" ("FUCO"), the Commission shall not consider
the effect of the capitalization or earnings of any subsidiary which is an EWG
or a FUCO upon the registered holding company if paragraphs (a), (b) and (c) of
Rule 53 are satisfied.
FirstEnergy currently meets all of the conditions of Rule 53(a), except
for clause (1). In the Merger Order, the Commission, among other things,
approved FirstEnergy's merger with GPU and authorized FirstEnergy to invest in
EWGs and FUCOs so that FirstEnergy's "aggregate investment," as defined in Rule
53(a)(1), in EWGs and FUCOs does not exceed $5 billion, which amount is above
the level which would be permitted by clause (1) of Rule 53(a) if such amount
were to be currently calculated. The Merger Order also specifies that this $5
billion amount may include amounts invested in EWGs and FUCOs by FirstEnergy and
GPU at the time of the Merger Order ("Current Investments") and amounts relating
to possible transfers to EWGs of certain generating facilities owned by certain
of FirstEnergy's operating utilities ("GenCo Investments"). FirstEnergy has made
the commitment that through June 30, 2003, its aggregate investment in EWGs and
FUCOs other than the Current Investments and GenCo Investments will not exceed
$1.5 billion. The Commission has reserved jurisdiction over investments that
exceed such amount.
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As of March 31, 2002, and on the same basis as set forth in the Merger
Order, FirstEnergy's aggregate investment in EWGs and FUCOs was approximately
$2.05 billion,(14) an amount significantly below the $5 billion amount
authorized in the Merger Order.(15)
In any event, even taking into account the capitalization of and earnings
from EWGs and FUCOs in which FirstEnergy currently has an interest, there would
be no basis for the Commission to withhold approval of the transactions proposed
herein. With respect to capitalization, since the date of the Merger Order,
there has been no adverse impact on FirstEnergy's consolidated capitalization
resulting from FirstEnergy's investments in EWGs and FUCOs. Additionally, the
proposed transactions will not have any material impact on FirstEnergy's
capitalization. Further, since the date of the Merger Order, and, after taking
into account the effects of the Merger, there has been no material change in
FirstEnergy's level of earnings from EWGs and FUCOs.
FirstEnergy satisfies all of the other conditions of paragraphs (a) and
(b) of Rule 53. With respect to Rule
--------------------
(14) This $2.05 billion amount represents Current Investments only. As of March
31, 2002, FirstEnergy had no GenCo Investments.
(15) In May 2002, FirstEnergy sold a 79.9% interest in Midlands Electricity plc.
In addition, in December 2001, FirstEnergy disposed of its ownership of GPU
GasNet Pty Ltd through an initial public offering in Australia. These costs
represent a substantial portion of the GPU-related FUCO investments.
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53(a)(2), FirstEnergy maintains books and records in conformity with, and
otherwise adheres to, the requirements thereof. With respect to Rule 53(a)(3),
no more than 2% of the employees of FirstEnergy's domestic public utility
companies render services, at any one time, directly or indirectly, to EWGs or
FUCOs in which FirstEnergy directly or indirectly holds an interest. With
respect to Rule 53(a)(4), FirstEnergy will continue to provide a copy of each
application and certificate relating to EWGs and FUCOs and relevant portions of
its Form U5S to each regulator referred to therein, and will otherwise comply
with the requirements thereof concerning the furnishing of information. With
respect to Rule 53(b), none of the circumstances enumerated in subparagraphs
(1), (2) and (3) thereunder have occurred. Finally, Rule 53(c) by its terms is
inapplicable since the proposed transaction does not involve the issue or sale
of a security to finance the acquisition of an EWG or FUCO.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
------------------------------
The estimated fees, commissions and expenses expected to be incurred in
connection with the proposed transactions are as follows:
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Registration Fee $ 29,440
Printing and Engraving Expenses 375,000
Trustees' 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
Underwriter's Fee 1,648,000
Marketing Fees 75,000
Original Issue Discount 150,000
SPE Set Up Fees 25,000
Servicing Set Up Costs 50,000
Finance Advisory Fee 300,000
Miscellaneous Fees and Expenses 650,060
----------
Total $6,100,000
The Commission has approved at least two other securitization transactions
with similar fees and expenses. See Central and Southwest Corp., HCAR No. 27168
---------------------------
(Apr. 20, 2000); West Penn Power Co., HCAR No. 27091 (Oct. 19, 1999).
-------------------
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
-------------------------------
The proposed transactions are subject to Sections 6(a), 7, 9, 10, 12(f)
and 13(b) of the Act and Rules 54, 90 and 91 thereunder.
ITEM 4. REGULATORY APPROVALS.
--------------------
No Federal or State commission, other than your Commission and the BPU,
has jurisdiction with respect to the proposed transactions.
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ITEM 5. PROCEDURE.
---------
Applicants request that the Commission issue an order with respect to the
transactions proposed herein at the earliest practicable date, but in no event
no later than February 22, 2002. It is further requested that: (i) there not be
a recommended decision by an Administrative Law Judge or other responsible
officer of the Commission, (ii) the Office of Public Utility Regulation be
permitted to assist in the preparation of the Commission's decision and (iii)
there be no waiting period between the issuance of the Commission's order and
the date on which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits
A-1 - Certificate of Formation of Special Purpose Issuer
-- incorporated by reference to Exhibit 3.1,
Registration No. 333-31250.
A-2 - Limited Liability Company Agreement of Special
Purpose Issuer -- incorporated by reference to
Exhibit 3.2.A, Registration No. 333-31250.
A-3 - Form of Amended and Restated Limited Liability
Company Agreement of Special Purpose Issuer --
incorporated by reference to Exhibit 3.2.B,
Registration No. 333-31250.
A-4 - Forms of Transition Bonds -- incorporated by
reference to Exhibit 4.1.B, Registration No.
333-31250.
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A-5 - Form of Indenture -- incorporated by reference to
Exhibit 4.1.A, Registration No. 333-31250.
B-1 - Form of Sale Agreement -- incorporated by
reference to Exhibit 10.1.A, Registration No.
333-31250.
B-2 - Form of Servicing Agreement -- incorporated by
reference to Exhibit 10.2.B, Registration No.
333-31250.
B-3 - Form of Administration Agreement with GPUS --
incorporated by reference to Exhibit 10.3.C,
Registration No. 333-31250.
C - Not Applicable.
D-1 - Petition of JCP&L to the BPU seeking authority to
issue the transition bonds ("BPU Petition") --
previously filed.
D-2 - Amendment No. 1 to BPU Petition -- previously
filed.
D-3 - Amendment No. 2 to BPU Petition -- previously
filed.
D-4 - Order of the BPU authorizing the transition bonds
-- incorporated by reference to Exhibit 10.4.D,
Registration No. 333-31250.
E - Not Applicable.
F-1 - Opinion of Thelen Reid & Priest LLP.
F-2 - Opinion of Gary D. Benz, Esq.
G - Actual and pro forma capitalization tables reflecting
the sale of the Transition Bonds.
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(b) Financial Statements
1 - JCP&L Consolidated Balance Sheets, actual and pro
forma, as at March 31, 2002, and consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the twelve
months ended March 31, 2002; pro forma journal
entries.
2 - FirstEnergy Consolidated Balance Sheets, actual
and pro forma, as at March 31, 2002, and
consolidated Statements of Income, actual and pro
forma, and Statement of Retained Earnings, for the
twelve months ended March 31, 2002; pro forma
journal entries.
3 - None.
4 - None, except as disclosed in the notes to the
Financial Statements.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
---------------------------------------
(a) As such, the issuance of an order by your Commission with respect to
the proposed transactions is not a major Federal action significantly affecting
the quality of the human environment.
(b) No Federal agency has prepared or is preparing an environmental impact
statement with respect to the proposed Transactions which are the subject
hereof.
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SIGNATURE
---------
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF
1935, THE UNDERSIGNED COMPANIES HAVE DULY CAUSED THIS STATEMENT TO BE SIGNED ON
THEIR BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
FIRSTENERGY CORP.
JERSEY CENTRAL POWER & LIGHT COMPANY
By: /s/Harvey L. Wagner
--------------------------------
Harvey L. Wagner
Vice President and Controller
Date: June 5, 2002
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