UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER
FILE NUMBER ADDRESS, AND TELEPHONE NUMBER IDENTIFICATION NO.
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000-32503 PSEG ENERGY HOLDINGS INC. 22-2983750
(A New Jersey Corporation)
80 Park Plaza-T22
Newark, New Jersey 07102-4194
973-456-3581
HTTP://WWW.PSEG.COM
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [ ] No [X]
Registrant is a wholly-owned subsidiary of Public Service Enterprise
Group Incorporated. Registrant meets the conditions set forth in
General Instruction H (1) (a) and (b) of Form 10-Q and is filing this
Quarterly Report on Form 10-Q with the reduced disclosure format
authorized by General Instruction H.
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PSEG ENERGY HOLDINGS INC.
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TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ........................................... 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 20
Item 5. Other Information .............................................. 20
Item 6. Exhibits and Reports on Form 8-K ............................... 20
Signature .............................................................. 21
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PSEG ENERGY HOLDINGS INC.
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PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- --------------
2001 2000 2001 2000
----- ----- ----- -----
OPERATING REVENUES
Income from Joint Ventures and Partnerships ............ $ 28 $ 31 $ 61 $ 61
Energy Service Revenues ................................ 105 80 203 150
Energy Supply Revenues ................................. -- 21 -- 58
Income from Capital and Operating Leases ............... 51 37 98 75
Interest and Dividend Income ........................... 9 2 14 4
Gain on Withdrawal from Partnership .................... -- -- 51 --
Net Investment Gains (Losses) .......................... (1) (12) (15) 18
Other .................................................. 7 8 12 19
----- ----- ----- -----
Total Operating Revenues ........................... 199 167 424 385
----- ----- ----- -----
OPERATING EXPENSES
Cost of Energy Sales ................................... -- 25 -- 58
Restructuring Charge ................................... -- -- -- 7
Operation and Maintenance .............................. 104 75 199 140
Depreciation and Amortization .......................... 4 3 7 6
Administrative and General ............................. 37 29 65 60
----- ----- ----- -----
Total Operating Expenses ........................... 145 132 271 271
----- ----- ----- -----
OPERATING INCOME .......................................... 54 35 153 114
OTHER INCOME .............................................. 1 -- 3 2
INTEREST EXPENSE - NET .................................... (37) (36) (75) (72)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE ................................... 18 (1) 81 44
INCOME TAXES .............................................. (1) 1 (11) (13)
Minority Interests ........................................ -- 1 -- 1
----- ----- ----- -----
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE ................................... 17 1 70 32
Extraordinary Loss on Early Retirement of Debt (net of tax) -- -- (2) --
Cumulative Effect of a Change in Accounting Principle (net of
tax) -- -- 9 --
----- ----- ----- -----
NET INCOME ................................................... 17 1 77 32
Preferred Stock Dividend Requirements......................... (5) (6) (11) (13)
----- ----- ----- -----
EARNINGS (LOSS) AVAILABLE TO PUBLIC
SERVICE ENTERPRISE GROUP INCORPORATED......................$ 12 $ (5) $ 66 $ 19
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See Notes to Consolidated Financial Statements.
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(MILLIONS OF DOLLARS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
CURRENT ASSETS
Cash and Cash Equivalents .................................................... $ 24 $ 22
Accounts Receivable:
Trade, net of allowance for doubtful accounts -- 2001, $10; 2000, $5 184 132
Other ...................................................................... 1 4
Affiliated Companies ....................................................... 53 64
Notes Receivable ............................................................. 41 23
Assets Held for Sale ......................................................... 13 48
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts .. 32 27
Other Current Assets ......................................................... 19 7
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Total Current Assets ..................................................... 367 327
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PROPERTY, PLANT AND EQUIPMENT
Real Estate .................................................................. 109 103
Property, Plant and Equipment ................................................ 341 69
Construction in Progress ..................................................... 374 172
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Total ................................................................... 824 344
Accumulated Depreciation and Amortization .................................... (104) (51)
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Net Property, Plant and Equipment ........................................ 720 293
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INVESTMENTS
Capital Leases - Net ......................................................... 2,717 2,253
Corporate Joint Ventures ..................................................... 1,555 1,584
Partnerships Interests ....................................................... 634 575
Other Investments ............................................................ 74 71
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Total Investments ........................................................ 4,980 4,483
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OTHER ASSETS .................................................................... 173 95
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TOTAL ASSETS ................................................................. $ 6,240 $ 5,198
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See Notes to Consolidated Financial Statements
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(MILLIONS OF DOLLARS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
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CURRENT LIABILITIES
Long-Term Debt Due Within One Year........................................ $ 242 $ 267
Short-Term Borrowings Due to PSEG......................................... 230 --
Accounts Payable:
Trade................................................................... 84 54
Taxes.................................................................. 15 5
Interest............................................................... 46 31
Other................................................................... 48 32
Affiliated Companies.................................................... 2 5
Borrowings Under Lines of Credit.......................................... 137 392
Notes Payable............................................................. 5 91
Billing in Excess of Costs and Estimated Earnings on Uncompleted Contracts 25 18
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Total Current Liabilities............................................. 834 895
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NONCURRENT LIABILITIES
Deferred Income Taxes and ITC............................................. 1,159 1,071
Other Noncurrent Liabilities.............................................. 63 28
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Total Noncurrent Liabilities.......................................... 1,222 1,099
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COMMITMENTS AND CONTINGENT LIABILITIES....................................... -- --
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MINORITY INTERESTS........................................................... 48 23
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CAPITALIZATION
LONG-TERM DEBT............................................................ 2,079 1,432
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STOCKHOLDER'S EQUITY
Common Stock, Issued: 100 Shares........................................ -- --
Preferred Stock......................................................... 509 509
Additional Paid-in Capital.............................................. 1,390 1,090
Retained Earnings....................................................... 415 353
Accumulated Other Comprehensive Loss.................................... (257) (203)
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Total Stockholder's Equity............................................ 2,057 1,749
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TOTAL LIABILITIES AND CAPITALIZATION......................................... $6,240 $5,198
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See Notes to Consolidated Financial Statements.
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................. $ 77 $ 32
Adjustments to Reconcile Net Income to Net Cash Flows from
Operating Activities:
Depreciation and Amortization........................................ 5 12
Deferred Income Taxes (Other than Leases)............................ (6) (1)
Leveraged Lease Income, Adjusted for Rents Received.................. 35 --
Investment Distributions............................................. 41 32
Undistributed Earnings from Affiliates............................... (46) (3)
Net Gains on Investments............................................. (36) (18)
Proceeds from Withdrawal from Partnership............................ 50 --
Cumulative Effect of a Change in Accounting Principle................ (9) --
Non-Cash Portion of Restructuring Charge............................. -- 5
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable............................................... (47) (87)
Taxes Payable...................................................... 9 1
Accounts Payable................................................... 34 66
Interest Payable................................................... 15 10
Other Current Assets and Liabilities............................... 13 (30)
Other................................................................ 3 6
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Net Cash Provided by Operating Activities............................ 138 25
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CASH FLOWS FROM INVESTING ACTIVITIES
(Investments in) Return of Capital from Partnerships and Joint Ventures (79) 10
Investments in Capital Leases.......................................... (392) (77)
Additions to Property, Plant and Equipment............................. (62) (5)
Acquisitions, Net of Cash Provided..................................... (112) (13)
Proceeds from Sales of Capital Leases.................................. -- 9
Other.................................................................. (87) 1
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Net Cash Used in Investing Activities................................ (732) (75)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Additional Paid-in Capital............................... 300 --
Net Decrease in Short-Term Debt........................................ (381) (109)
Net Increase (Decrease) in Short-Term Intercompany Borrowings.......... 230 (2)
Proceeds from Long-Term Debt........................................... 622 298
Repayment of Long-Term Debt........................................... (160) (154)
Cash Dividends Paid................................................... (15) (17)
Other................................................................. -- 7
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Net Cash Provided by Financing Activities............................ 596 23
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Net Change in Cash and Cash Equivalents................................... 2 (27)
Cash and Cash Equivalents at Beginning of Period.......................... 22 43
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Cash and Cash Equivalents at End of Period................................ $ 24 $ 16
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Supplemental Disclosure of Cash Flow Information:
Cash Payments During the Period for:
Income Tax......................................................... $ (32) $ (52)
Interest........................................................... $ 24 $ 39
Non-Cash Financing Activities:
Debt Assumed from Companies Acquired.............................. $ 176 $ 9
See Notes to Consolidated Financial Statements.
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
PSEG Energy Holdings Inc. (Energy Holdings), incorporated under the laws of
the State of New Jersey with its principal executive offices located at 80 Park
Plaza, Newark, New Jersey 07102 is a direct wholly-owned subsidiary of Public
Service Enterprise Group Incorporated (PSEG). Energy Holdings has three
principal direct wholly-owned subsidiaries; PSEG Global Inc. (Global), PSEG
Resources Inc. (Resources) and PSEG Energy Technologies Inc. (Energy
Technologies).
In the first quarter of 2001, Global increased its interest in an electric
generation facility in India from 49% to 74%. In the second quarter of 2001,
Global increased its interest in an electric distribution facility in Argentina
from 41% to 90%. The accounts of Global include the assets, liabilities,
revenues and expenses of majority-owned subsidiaries over which Global exercises
control and for which control is other than temporary.
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in the
opinion of management, the disclosures are adequate to make the information
presented not misleading. These Consolidated Financial Statements (Statements)
and Notes to Consolidated Financial Statements (Notes) should be read in
conjunction with Energy Holdings' Notes contained in its 2000 Annual Report on
Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31,
2001. These Notes update and supplement matters discussed in the 2000 Annual
Report on Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001.
The unaudited financial information furnished reflects all adjustments
which are, in the opinion of management, necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated financial statements included in the 2000
Annual Report on Form 10-K. Certain reclassifications of prior period data have
been made to conform with the current presentation.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, Energy Holdings adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, and recorded a cumulative effect to earnings
and other comprehensive income of $9 million and $(15) million, respectively. As
of June 30, 2001, the fair value of Energy Holdings' derivative assets and
liabilities were $30 million and $33 million, respectively. The fair values of
such derivative assets and liabilities were recorded on the consolidated balance
sheet in Other Assets and Other Noncurrent Liabilities, respectively. As of June
30, 2001, Energy Holdings recorded a net decrease of $8 million in Partnerships
Interests to recognize its pro-rata share of net derivative liabilities recorded
by partnerships accounted for under the equity method.
The Financial Accounting Standards Board (FASB) Derivative Implementation
Group (DIG) issued guidance, effective July 1, 2001, regarding certain
derivative contracts and eligibility of those contracts for the normal purchases
and normal sales exception. Energy Holdings is currently evaluating this
guidance in light of its potential impacts and cannot predict the impact on its
financial position of results of operations, however, such impact could be
material.
In July 2001 the FASB issued SFAS No. 141 "Business Combinations" (SFAS
141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against this new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
initially recorded as goodwill may be separately identified and recognized
apart from goodwill. SFAS 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is deemed to be impaired. The provisions of
each statement which apply to goodwill and intangible assets acquired prior to
June 30, 2001 will be adopted by Energy Holdings on January 1, 2002. Energy
Holdings expects the adoption of these accounting standards will result in
certain of its intangibles being subsumed into goodwill and will have the impact
of reducing its amortization of goodwill and intangibles commencing January 1,
2002; however, impairment reviews may result in future periodic write-downs.
Acquisitions made subsequent to June 30, 2001 will treat goodwill consistently
with the standards prescribed by the transition rules.
Also in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under SFAS 143, the fair value of a
liability for an asset retirement obligation should be recorded in the period in
which it is incurred. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. Energy
Holdings is currently evaluating this guidance and cannot predict the impact on
its financial position or results of operations, however, such impact could be
material.
NOTE 3. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
EQUITY SECURITIES
Resources has investments in equity securities and limited partnerships.
Resources carries its investments in equity securities at their approximate fair
value as of the reporting date. Consequently, the carrying value of these
investments is affected by changes in the fair value of the underlying
securities. Fair value is determined by adjusting the market value of the
securities for liquidity and market volatility factors, where appropriate. The
aggregate fair values of such investments which had available market prices at
June 30, 2001 and December 31, 2000 were $65 million and $115 million,
respectively. The decrease in fair value was primarily due to the sale of its
interest in an equity security which had a book value of $30 million on December
31, 2000 and a decline in the valuation of publicly traded equity securities
within its leveraged buyout funds. The potential change in fair value resulting
from a hypothetical 10% change in quoted market prices of these investments
amounted to $5 million and $9 million at June 30, 2001 and December 31, 2000,
respectively.
In August 2001, Resources received $30 million from the sale of its
interest in an equity security within its leveraged buyout fund which had a book
value of $31 million.
FOREIGN CURRENCIES
As of June 30, 2001, Global and Resources had international assets of
approximately $2.349 billion and $1.328 billion, respectively.
Resources' international investments are primarily leveraged leases of
assets located in the Netherlands, Australia, the United Kingdom, Austria,
Germany, China and New Zealand with associated revenues denominated in U.S.
dollars ($US) and therefore, not subject to foreign currency risk.
Global's international investments are primarily in companies that generate
or distribute electricity in Argentina, Brazil, Chile, China, India, Italy,
Oman, Peru, Poland, Tunisia and Venezuela. Investing in foreign countries
involves certain additional risks. Economic conditions that result in higher
comparative rates of inflation in foreign countries are likely to result in
declining values in such countries' currencies. As currencies fluctuate against
the $US, there is a corresponding change in Global's investment value in terms
of the $US. Such change is reflected as an increase or decrease in the
investment value and Other Comprehensive Income, a separate component of
Stockholder's Equity. As of June 30, 2001, net foreign currency devaluations
have reduced the reported amount of Energy Holdings' total Stockholder's Equity
by $241 million (after-tax), $168 million (after-tax) of which was caused by the
devaluation of the Brazilian Real.
INTEREST RATES
Energy Holdings is subject to the risk of fluctuating interest rates in the
normal course of business. Its policy is to manage interest rate risk through
the use of fixed rate debt, floating rate debt and interest rate swaps. As of
June 30, 2001, a hypothetical 10% change in market interest rates would result
in a $4 million change in annual interest costs related to short-term and
floating rate debt at Energy Holdings.
In March 2001, $160 million of non-recourse bank debt originally incurred
to fund a portion of the purchase price of Global's interest in Chilquinta
Energia, S.A. was refinanced. The private placement offering by Chilquinta
Energia Finance Co. LLC, a Global affiliate, of senior notes was structured in
two tranches: $60 million due 2008 at an interest rate of 6.47% and $100 million
due 2011 at an interest rate of 6.62%. An extraordinary loss of $2 million
(after-tax) was recorded in connection with the refinancing of the $160 million
non-recourse bank debt.
CALIFORNIA POWER MARKET - CREDIT RISK
The deregulation of the California power market has produced significant
unanticipated results in the past year. The California Public Utility
Commission, (CPUC) as part of deregulation, froze the rates that utilities can
charge their retail and business customers in California and prohibited the
utilities from buying power on a forward basis, while wholesale power prices
were not subjected to limits. In the past year, an increase in demand coupled
with a reduced supply of power has caused a severe imbalance in that market.
Such imbalance has led to unprecedented wholesale prices.
As a result of this situation, two major California utilities that are
subject to the retail price cap, including Pacific Gas & Electric Company
(PG&E), have significantly underrecovered from customers the costs they have
paid for power. As a consequence, these utilities have defaulted under a variety
of contractual obligations, including payment obligations by PG&E to three of
Global's joint ventures, GWF Power Systems LP, Hanford and Tracy.
Global has partnership interests in seven qualifying facilities (QFs) in
California having a combined output of 153 MW (71 MW net). Power from such
facilities is sold under long-term energy and capacity contracts to PG&E. The
contracts provide for a fixed energy payment for the first 10 years and a
capacity payment over the entire contract terms expiring between 2011 and 2021.
After the initial 10-year period, energy prices were to change to reflect PG&E's
short run avoided cost calculated using a formula based methodology approved by
the CPUC. As part of the deregulation, the seller could elect to receive energy
payments at the California Power Exchange's (PX) day-ahead zonal market clearing
price. As of July 1, 2000, partnership management made such an election for four
of the seven facilities, representing approximately 84 MW (37 MW net) until
January 19, 2001 when the CPUC deemed that the PX had ceased operating a day
ahead market. The remaining three units were never subject to PX pricing. Since
that time, the CPUC has ordered that the price to be paid for energy deliveries
by QFs electing the PX price shall be based on a cost-based transition formula.
The CPUC has conducted proceedings to determine whether the PX price was the
appropriate price for the energy component upon which to base payments to QFs
that had elected the PX based pricing option. It is possible that the CPUC could
order a payment adjustment based on a different energy price determination. A
preliminary decision by the CPUC did not find any adjustment to the PX price
appropriate. Energy Holdings believes that the PX price was the appropriate
price for energy payments but there can be no assurance that this will be the
outcome of the CPUC proceedings.
GWF, Hanford and Tracy have continued to honor their contractual
obligations to PG&E under existing QF contracts. On March 27, 2001, the CPUC
approved a plan to assure that the state's QFs are paid for future deliveries of
energy within 15 days of the receipt of an invoice. The CPUC's plan, while
immediately effective, did not address amounts due such facilities for past due
receivables related to energy delivered since November 2000. In addition to the
payment issue, the CPUC also approved a 40% increase in electric retail rates, a
portion of which was intended to help the state's utilities recover
significantly higher wholesale energy costs. However, PG&E did not consider the
portion of the rate increase available to recover its energy costs to be
sufficient and accordingly, filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code on April 6, 2001. On April 11, 2001, management at Global's
project affiliates received a letter from PG&E addressed to QF owners stating
that they intended to pay the QFs for power delivered commencing April 6, 2001
(post-petition payable). PG&E has subsequently paid, on a timely basis, the
appropriate post-petition payable amounts due to Global's project affiliates for
all energy deliveries subsequent to filing of its bankruptcy petition.
In July 2001, the US Bankruptcy Court for the Northern District of
California approved an agreement authorizing PG&E to assume GWF's, Hanford's and
Tracy's modified QF contracts. Under the terms of the agreement, GWF, Hanford
and Tracy continue to receive their contractual capacity payments plus a
five-year fixed energy price component of approximately 5.37 cents per
kilowatt-hour for five years, with the energy price reverting to PG&E's
short-run avoided cost at the end of the five-year period. This agreement is
consistent with the recent CPUC Decision No. 01-06-015. In addition, all past
due receivables under the QF contracts are now elevated to administrative
priority status. Administrative claims receive priority over payments made to
the general unsecured creditors.
As of December 31, 2000, GWF, Hanford and Tracy had combined receivables
due from PG&E, for all plants amounting to approximately $40 million. Of this
amount, approximately $8 million had been reserved as an allowance for doubtful
accounts resulting in a net receivable balance of approximately $32 million.
Global's pro-rata share of this net receivable was approximately $15 million.
As of June 30, 2001 GWF, Hanford and Tracy had combined pre-petition
receivables due from PG&E, for all plants amounting to approximately $62
million. Of this amount, approximately $25 million had been reserved as an
allowance for doubtful accounts resulting in a net receivable balance of
approximately $37 million. Global's pro-rata share of this gross receivable and
net receivable was approximately $30 million and $18 million, respectively.
Management of Energy Holdings cannot predict the timing or ultimate outcome of
future resolutions, including potential payment adjustments based on different
energy price determinations, which have been consistently asserted by PG&E.
NOTE 4. INCOME TAXES
Energy Holdings' effective tax rate was 18% and 29% for six months ended
June 30, 2001 and 2000, respectively. Energy Holdings' effective tax rate
differs from the statutory federal income tax rate of 35.0% primarily due to the
imposition of state taxes and the accruals at the rate of 10% of Global's
foreign income due to the incremental cost associated with the repatriation of
foreign earnings. For the six months ended June 30, 2001, Energy Holdings
realized income from foreign projects that were not consolidated and accordingly
there is no foreign income tax reflected in income tax expense related to these
non-consolidated projects.
The Internal Revenue Service has concluded the audit of Energy Holdings'
1994-1996 Federal Income Tax Returns. It is anticipated that the result of the
Revenue Agent's Report will not have a material impact on Energy Holdings'
financial position, statement of operations or net cash flows.
NOTE 5. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
Information related to the segments of Energy Holdings' business is
detailed below:
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ENERGY CONSOLIDATED
GLOBAL RESOURCES TECHNOLOGIES OTHER (A) TOTAL
--------- --------- ------------ --------- ------------
(MILLIONS OF DOLLARS)
FOR THE QUARTER ENDED
JUNE 30, 2001:
Total Operating Revenues............. $ 37 $ 51 $ 111 $ -- $ 199
Segment Earnings (Loss) Available to
PSEG................................. $ 4 $ 14 $ (9) $ 3 $ 12
- -----------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
JUNE 30, 2000:
Total Operating Revenues............. $ 33 $ 26 $ 108 $ -- $ 167
Segment Earnings (Loss) Available to
PSEG................................. $ -- $ 2 $ (6) $ (1) $ (5)
- -----------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2001:
Total Operating Revenues............. $ 126 $ 84 $ 213 $ 1 $ 424
Extraordinary Loss on
Early Retirement of Debt........... $ (2) $ -- $ -- $ -- $ (2)
Cumulative Effect of a Change in
Accounting Principle............... $ 9 $ -- $ -- $ -- $ 9
Segment Earnings (Loss) Available to
PSEG................................. $ 59 $ 17 $ (12) $ 2 $ 66
- -----------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2000:
Total Operating Revenues............. $ 71 $ 92 $ 221 $ 1 $ 385
Segment Earnings (Loss) Available to
PSEG................................. $ 4 $ 29 $ (12) $ (2) $ 19
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AS OF JUNE 30, 2001:
Total Assets......................... $2,850 $ 3,002 $ 326 $ 62 $6,240
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AS OF DECEMBER 31, 2000:
Total Assets......................... $2,271 $ 2,564 $ 312 $ 51 $5,198
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(A) Other activities include amounts applicable to Energy Holdings (parent
corporation), Enterprise Group Development Corporation, PSEG Capital
Corporation and intercompany eliminations.
Geographic information for Energy Holdings is disclosed below.
REVENUES (1) IDENTIFIABLE ASSETS (2)
--------------------------------------------------- --------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31,
----------------------- ---------------------- --------- ------------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- --------- ---------
(MILLIONS OF DOLLARS)
United States............ $ 150 $ 122 $ 324 $ 292 $ 2,563 $ 2,208
Foreign Countries........ 49 45 100 93 3,677 2,990
-------- -------- -------- -------- --------- ---------
Total............... $ 199 $ 167 $ 424 $ 385 $ 6,240 $ 5,198
-------- -------- -------- -------- --------- ---------
Identifiable investments in foreign countries include:
Netherlands................................................................. $ 846 $ 815
Argentina .................................................................. 722 470
Chile and Peru (3).......................................................... 538 520
Brazil (4).................................................................. 277 295
India (5) .................................................................. 256 51
Tunisia (6) ................................................................ 189 155
Other....................................................................... 849 684
--------- ---------
Total.......................................................................... $ 3,677 $ 2,990
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<FN>
(1) Revenues are attributed to countries based on the locations of the
investments. Global's revenue includes its share of the net income from
joint ventures recorded under the equity method of accounting.
(2) Total assets are net of foreign currency translation adjustment of $(268)
million (pre-tax) as of June 30, 2001 and $(225) million (pre-tax) as of
December 31, 2000.
(3) Amount is net of foreign currency translation adjustment of $(66) million
(pre-tax) as of June 30, 2001 and $(44) million (pre-tax) as of December
31, 2000.
(4) Amount is net of foreign currency translation adjustment of $(186) million
(pre-tax) as of June 30, 2001 and $(167) million (pre-tax) as of December
31, 2000.
(5) Amount is net of foreign currency translation adjustment of $(2) million
(pre-tax) as of June 30, 2001 and $(2) million (pre-tax) as of December 31,
2000.
(6) Amount is net of foreign currency translation adjustment of $(2) million
(pre-tax) as of June 30, 2001 and $(1) million (pre-tax) as of December 31,
2000.
</FN>
NOTE 6. COMPREHENSIVE INCOME
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
2001 2000 2001 2000
---------- -------- -------- --------
(MILLIONS OF DOLLARS)
Net Income........................................................... $ 17 $ 1 $ 77 $ 32
Foreign currency translation adjustments (A)......................... (36) (8) (38) 21
Cumulative effect of a change in accounting principle (net of tax of
$14 and minority interest of $12).................................... -- -- (15) --
Current period declines in fair value of derivative instruments-net.. -- -- (1) --
---------- -------- -------- -------
Comprehensive income................................................. $(19) $(7) $ 23 $ 53
========== ======== ======== ========
<FN>
(A) Net of tax of $4 million and $1 million for the quarters ended June 30,
2001 and 2000, respectively, and $4 million and $(2) million for the six
months ended June 30, 2001 and 2000, respectively.
</FN>
NOTE 7. COMMITMENTS AND CONTINGENCIES
Energy Holdings, Global and/or PSEG have guaranteed certain obligations of
Global's affiliates, including the successful completion, performance or other
obligations related to certain of the projects in an aggregate amount of
approximately $286 million as of June 30, 2001. A substantial portion of such
guarantees is eliminated upon successful completion, performance and/or
refinancing of construction debt with non-recourse project debt. A subscription
agreement for PSEG to purchase Global's capital stock secures $3 million of such
obligations.
In March 2001, Global reached agreement to purchase a 94% equity stake in
Sociedad Austral de Electricidad S.A. (SAESA) and all of its subsidiaries from
Compania de Petroleos de Chile S.A. (COPEC). Additionally, Global reached
agreement to purchase from COPEC approximately 14% of Empresa Electrica de la
Frontera S.A. (Frontel) not owned by SAESA. Global's purchase price for this
acquisition will total approximately $460 million and is scheduled to close in
the third quarter of 2001.
In March 2001, Global, through its affiliate Dhofar Power Company S.A.O.C.
(DPCO), signed a 20-year concession with the government of Oman to privatize the
electric system of Salalah. Total project cost is estimated at $277 million.
Global's equity investment, including contingencies, is expected to be
approximately $82 million.
In May 2001, GWF Energy LLC (GWF Energy), a 50/50 joint venture between
Global and Harbinger GWF LLC, entered into a 10-year power purchase agreement
(PPA) with the California Department of Water Resources to provide 340 MW of
electric capacity to California from three new peaker plants that GWF Energy
expects to build and operate in California. Global's equity investment in these
plants, including contingencies, is not expected to exceed $100 million.
In July 2001, Global won the bid to purchase up to a 100% interest in
Empresa de Electricidad de los Andes S.A. (Electroandes) with a bid of
approximately $227 million. The closing for this acquisition is scheduled in the
fourth quarter of 2001.
Energy Holdings, its subsidiaries and equity method investees are involved
in various legal actions arising in the normal course of business. Energy
Holdings does not expect there will be a material adverse effect on its
financial statements as a result of these proceedings, though no assurances can
be given.
NOTE 8. RELATED-PARTY TRANSACTIONS
PSEG Services Corporation (Services) provides and bills administrative
services to Energy Holdings and its subsidiaries on a monthly basis. Energy
Holdings' and its subsidiaries' costs related to such services amounted to
approximately $8 million and $17 million for the quarter and six months ended
June 30, 2001, respectively. As of June 30, 2001, Energy Holdings' and its
subsidiaries' intercompany payable related to these costs was approximately $3
million.
================================================================================
PSEG ENERGY HOLDINGS INC.
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following are the significant changes in or additions to information
reported in the Energy Holdings' 2000 Annual Report on Form 10-K and Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001 affecting the
consolidated financial condition and the results of operations of Energy
Holdings and its subsidiaries. This discussion refers to the Statements and
related Notes of Energy Holdings and should be read in conjunction with such
Statements and Notes.
RESULTS OF OPERATIONS
ENERGY HOLDINGS -- REVENUES
Revenues increased $32 million or 19% and $39 million or 10% for the
quarter and six months ended June 30, 2001 from the comparable periods in 2000,
respectively.
Revenues for the quarter ended June 30, 2001 were favorably impacted by
increased revenues of $25 million at Resources of which $14 million was due to
higher leveraged lease income from continued investment in such financing
transactions. In addition, Resources recorded no change in the carrying value of
publicly traded equity securities in its leveraged buyout funds for the quarter
ended June 30, 2001 as compared to a reduction of $13 million recorded in the
comparable period in 2000. Global's revenues increased $4 million primarily due
to an increase of $9 million in Interest Income associated with its loans to
Texas Independent Energy (TIE) and a note receivable taken as consideration for
the withdrawal from its interest in the Eagle Point Cogeneration Partnership
(Eagle Point). The increase in Interest Income of $9 million was partially
offset by reduced Income from Joint Ventures and Partnerships primarily due to
the withdrawal from Eagle Point in January 2001.
Revenues for the six months ended June 30, 2001 were favorably impacted by
increased revenues of $55 million at Global of which $5l million was related to
the gain on the withdrawal from Eagle Point. The increase of $55 million was
partially offset by lower revenues of $8 million realized by Resources and $8
million realized by Energy Technologies. The reduction in revenue at Resources
was primarily due to a net decrease in the carrying value of publicly traded
equity securities in its leveraged buyout funds. The reduction of revenues at
Energy Technologies was primarily due to the exit from the electric and gas
commodity business, partially offset by increased revenues from the expansion of
its mechanical contracting businesses.
ENERGY HOLDINGS -- OPERATING EXPENSES
Operating expenses increased $13 million or 10% for the quarter ended June
30, 2001 and remained flat for the six months ended June 30, 2001 from the
comparable periods in 2000. The increase for the quarter ended June 30, 2001 was
primarily due to higher operating expenses experienced at Energy Technologies
from cost overruns of mechanical contracts predominately in one operating
location. Energy Technologies also experienced an increase in outside services
due to the integration of its mechanical contracting business. In addition,
Global's operating expenses increased for the quarter ended June 30, 2001 due to
increased outside services as Global continues to grow its business.
Operating expenses for the six months ended June 30, 2001 increased at
Global from the comparable period in 2000, primarily related to increased
outside services as Global continues to grow its business. This increase was
largely offset by decreased operating expenses at Energy Technologies. Although
recurring operating expenses at Energy Technologies increased slightly (for the
reasons noted above), operating expenses for the six months ended June 30, 2000
included a non-recurring, restructuring charge of $7 million at Energy
Technologies, related to the write-off of computer hardware and software,
employee severance costs and deferred transportation costs. There was no
restructuring charge recorded by Energy Technologies in the six months ended
June 30, 2001.
ENERGY HOLDINGS-INTEREST EXPENSE - NET AND PREFERRED STOCK DIVIDEND REQUIREMENTS
Interest Expense - Net and Preferred Stock Dividend Requirements remained
flat for the quarter ended June 30, 2001 and increased $1 million or 1% for the
six months ended June 30, 2001 from the comparable periods in 2000.
At June 30, 2001 and December 31, 2000, Energy Holdings had total debt
outstanding of $2.693 billion and $2.182 billion, respectively, of which $612
million and $354 million, respectively, is non-recourse to Energy Holdings. The
increase of $511 million in outstanding debt for the six months ended June 30,
2001 was primarily related to intercompany borrowings from PSEG and drawdowns of
Energy Holdings' revolving credit facilities used to fund the continued growth
of Global and Resources. In addition, the non-recourse debt increased due to the
consolidation of the investment in Tanir Bavi Power Company Ltd. (Tanir Bavi)
and Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA) and the
continued drawdown of the loan facility and working capital facility agreement
by Elecktocieplownia Chorzow ELCHO Sp. z.o.o. (ELCHO) and Carthage Power Company
(Carthage). Interest expense incurred by projects under construction is
capitalized.
ENERGY HOLDINGS -- EARNINGS BEFORE INTEREST AND TAXES (EBIT) CONTRIBUTION
The results of operations for each of Energy Holdings' business segments
are explained below with reference to the EBIT contribution. Energy Holdings
borrows on the basis of a combined credit profile to finance the activities of
its subsidiaries. As such, the capital structure of each of the businesses is
managed by Energy Holdings. Debt at each subsidiary is evidenced by demand notes
with Energy Holdings and PSEG Capital.
EARNINGS BEFORE INTEREST AND TAXES CONTRIBUTION
-----------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
(MILLIONS OF DOLLARS)
EBIT:
Global .................... $ 22 $ 23 $ 100 $ 49
Resources ................. 48 22 77 85
Energy Technologies ....... (12) (8) (17) (16)
Other ..................... (3) (2) (4) (2)
----- ----- ----- -----
TOTAL EBIT ..................... $ 55 $ 35 $ 156 $ 116
===== ===== ===== =====
GLOBAL
Global develops, acquires, owns and operates electric generation and
distribution facilities and engages in power production and distribution,
including wholesale and retail sales of electricity, in selected domestic and
international markets. Global has ownership interests in 29 operating generation
projects totaling 4,374 MW (1,639 MW net of other partners' interests) located
in the United States, Argentina, China, India, Poland and Venezuela. Global has
ownership interests in 17 projects totaling 3,824 MW (1,884 MW net) in
construction or advanced development that are located in the United States,
Argentina, China, India, Italy, Oman, Poland, Tunisia and Venezuela.
Until the fourth quarter of 2000, Global's investments consisted of
minority ownership positions in projects and joint ventures. Other than fees
collected for providing operations and maintenance services, Global's revenues
represented its pro-rata ownership share of net income generated by project
affiliates which is accounted for by the equity method of accounting. The
expenses in the table below are those required to develop projects and general
and administrative expenses required to operate the business as a whole. In the
fourth quarter of 2000, Global increased its interest in an electric generation
facility under construction in Tunisia from 35% to 60% and completed project
financing for a 90% economic interest in a power plant in Poland.
In the first quarter of 2001, Global increased its interest in an electric
generation facility in India from 49% to 74%. In the second quarter of 2001,
Global increased its interest in an electric distribution facility in Argentina
from 41% to 90%. The accounts of Global include the assets, liabilities,
revenues and expenses of majority-owned subsidiaries over which Global exercises
control and for which control is other than temporary.
SUMMARY RESULTS - GLOBAL
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2001 2000 2001 2000
------- ------ ------- -------
(MILLIONS OF DOLLARS)
EBIT:
Revenues....................... $ 37 $ 33 $ 126 $ 71
Expenses....................... 14 11 27 23
------- ------- ------- -------
Operating Income............... 23 22 99 48
Other Income................... (1) 1 1 1
------- ------- ------- -------
EBIT........................... $ 22 $ 23 $ 100 $ 49
======= ======= ======= =======
Global's EBIT contribution decreased $1 million or 4% and increased $51
million or 104% for the quarter and six months ended June 30, 2001 from the
comparable periods in 2000, respectively.
The Global EBIT contribution decrease for the quarter ended June 30, 2001
was primarily due to a $1 million litigation settlement associated with the 1998
sale of its interest in two cogeneration facilities. Global's revenues increased
by $4 million and were largely offset by an increase of $3 million in operating
expenses incurred as Global continues to grow its business. The increase of $4
million in Global's revenues was primarily due to an increase of $9 million in
Interest Income recorded on the loans to TIE and the note receivable taken as
consideration for the withdrawal from its interest in Eagle Point. Revenues also
benefited from the acquisition of EDEERSA in December 2000 and improved
performances of most of the facilities in the Latin America region, and the
commencement of operations of Tanir Bavi and PPN Power Generating Company
Limited (PPN) in the second quarter of 2001. These increases were partially
offset by lower revenues attributable to the withdrawal from Eagle Point in
January 2001, the adverse effect of exchange rate changes in the Brazilian Real,
reduced management and consulting revenues in North America and Latin America
and start-up costs at ELCHO.
The Global EBIT contribution increase for the six months ended June 30,
2001 resulted from increased revenues of $55 million, of which $51 million was
related to the gain on withdrawal from Eagle Point and $14 million related to
increased Interest Income recorded on the loans to TIE and the note receivable
taken as consideration for the withdrawal from Eagle Point. Revenues also
benefited from the acquisition of EDEERSA in December 2000 and improved
performances of most of the facilities in the Latin America region, the
commencement of operations of Tanir Bavi and PPN in the second quarter of 2001
and favorable energy pricing in the California power market. These increases
were partially offset by lower revenues attributable to the withdrawal from
Eagle Point in January 2001, the adverse effect of exchange rate changes in the
Brazilian Real, reduced management and consulting revenues in North America,
Latin America and Asia Pacific and start-up costs at ELCHO.
RESOURCES
Resources earns its leveraged lease revenues (recorded as Income from
Capital and Operating Leases) primarily from rental payments and tax benefits
associated with such transactions. As a passive investor in limited partnership
project financing transactions, Resources recognizes revenue from its pro-rata
share of the income generated by these investments. As an owner of beneficial
interests in two leveraged buyout funds, Resources recognizes revenue as the
share prices of public companies in the leveraged buyout funds fluctuate. In
addition, revenue is recognized as companies in the fund distribute dividend
income through the fund to the investors and as the fund liquidates its
holdings.
SUMMARY RESULTS - RESOURCES
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
(MILLIONS OF DOLLARS)
Revenues........................... $ 51 $ 26 $ 84 $ 92
Expenses........................... 3 4 7 7
------- ------- ------- -------
Operating Income and EBIT.......... $ 48 $ 22 $ 77 $ 85
======= ======= ======= =======
Resources' EBIT contribution increased $26 million or 118% and decreased $8
million or 9% for the quarter and six months ended June 30, 2001 from the
comparable periods in 2000, respectively.
The Resources' EBIT contribution increase for the quarter ended June 30,
2001 was primarily due to improved revenues of $14 million from higher leveraged
lease income from continued investment by Resources in such financing
transactions. In addition, Resources recorded no change in the carrying value of
publicly traded securities within its leveraged buyout funds for the quarter
ended June 30, 2001 as compared to a reduction of $13 million recorded in the
comparable period in 2000.
The Resources' EBIT contribution decrease for the six months ended June 30,
2001 was primarily due to lower Net Investment Gains (Losses) of $33 million, of
which $28 million resulted from a net decrease in the carrying value of publicly
traded equity securities within certain leveraged buyout funds. This decrease
was partially offset by an increase of $23 million due to higher leveraged lease
income from continued investment by Resources in such financing transactions.
ENERGY TECHNOLOGIES
Energy Technologies earns its revenues from providing energy-related
engineering, consulting and mechanical contracting services to and constructing,
operating and maintaining heating, ventilating and air conditioning (HVAC)
systems for industrial and commercial customers in the Northeastern and Middle
Atlantic United States.
SUMMARY RESULTS - ENERGY TECHNOLOGIES
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
(MILLIONS OF DOLLARS)
Revenues .......................... $ 111 $ 108 $ 213 $ 221
Expenses .......................... 125 116 232 237
------- ------ ------ -------
Operating Income .................. (14) (8) (19) (16)
Other Income ...................... 2 -- 2 --
------- ------- ------- -------
EBIT .............................. $ (12) $ (8) $ (17) $ (16)
======= ======= ======= =======
Energy Technologies' EBIT contribution decreased $4 million or 50% and $1
million or 6% for the quarter and six months ended June 30, 2001 from the
comparable periods in 2000, respectively. The Energy Technologies EBIT
contribution decrease for the quarter ended June 30, 2001 resulted primarily
from cost overruns of mechanical contracts predominately in one operating
location. Energy Technologies also experienced an increase in outside services
due to the integration of its mechanical contracting business.
LIQUIDITY AND CAPITAL RESOURCES
It is intended that Global and Resources will continue to provide the
earnings and cash flow for Energy Holdings' long-term growth. Resources'
investments are designed to produce immediate cash flow and earnings that enable
Global and Energy Technologies to focus on longer investment horizons. During
the next five years, Energy Holdings will need material amounts of capital to
fund its planned growth. In addition to cash generated from operations, Energy
Holdings' growth will be funded through external financings and equity infusions
from PSEG.
Over the next several years, Energy Holdings, certain of its project
affiliates and PSEG Capital will be required to refinance maturing debt, incur
additional debt and provide equity to fund investment activity. Any inability to
obtain required additional external capital or to extend or replace maturing
debt and/or existing agreements at current levels and reasonable interest rates
may affect Energy Holdings' financial condition, results of operations and net
cash flows.
REGULATORY RESTRICTIONS
Capital resources and investment requirements may be affected by the
outcome of the proceedings being conducted by the New Jersey Board of Public
Utilities (BPU) pursuant to its Energy Master Plan and the New Jersey Electric
Discount and Energy Competition Act (Energy Competition Act) and the
requirements of the 1992 Focused Audit conducted by the BPU, of the impact of
PSEG's non-utility businesses, including Energy Holdings, on Public Service
Electric and Gas Company (PSE&G), an Energy Holdings' affiliate. As a result of
the Focused Audit, the BPU approved a plan which, among other things, provides
that:
(1) PSEG will not permit Energy Holdings' investments to exceed 20% of PSEG's
consolidated assets without prior notice to the BPU;
(2) The PSE&G Board of Directors will provide an annual certification that the
business and financing plans of Energy Holdings will not adversely affect
PSE&G;
(3) PSEG will (a) limit debt supported by the minimum net worth maintenance
agreement between PSEG and PSEG Capital to $650 million and (b) make a
good-faith effort to eliminate such support over a six to ten year period
from May 1993; and
(4) Energy Holdings will pay PSE&G an affiliation fee of up to $2 million a
year.
In its Order requiring PSE&G to transfer its generation assets to PSEG
Power LLC, a wholly-owned subsidiary of PSEG (Final Order), the BPU noted that,
due to significant changes in the industry and, in particular, PSEG's corporate
structure as a result of the Order, modifications to or relief from the Focused
Audit order might be warranted. PSE&G has notified the BPU of its intention to
make a filing to modify the terms of the Focused Audit. Energy Holdings believes
that the Focused Audit restrictions have effectively been superceded by the
Final Order. Energy Holdings therefore expects modifications to be made,
although no assurances can be given, and that the 20% notification requirement
and the present requirement to eliminate credit supported debt to PSEG Capital
will not adversely affect its financial condition, results of operations and net
cash flows. Regulatory oversight by the BPU to assure that there is no harm to
utility ratepayers from Energy Holdings' share of PSEG's non-utility investments
is expected to continue. Energy Holdings' assets were approximately 26% of
PSEG's consolidated assets at June 30, 2001. Energy Holdings believes that if
still required, it is capable of eliminating PSEG support of PSEG Capital debt
within the time period set forth in the Focused Audit.
In addition, if PSEG were no longer to be exempt under the Public Utility
Holding Company Act of 1935 (PUHCA), PSEG and its subsidiaries would be subject
to additional regulation by the SEC with respect to financing and investing
activities, including the amount and type of non-utility investments. Energy
Holdings believes that this would not have a material adverse effect on its
financial condition, results of operations and net cash flows.
CAPITAL REQUIREMENTS
Energy Holdings plans to continue the growth of Global and Resources.
Energy Holdings will assess the growth prospects and opportunities for Energy
Technologies' business before committing substantial amounts of additional
capital. For the six months ended June 30, 2001, Energy Holdings' subsidiaries
made net investments totaling approximately $732 million. These net investments
included leveraged lease investments of $392 million by Resources and net
investments of $337 million by Global, primarily related to incremental
investments in certain existing generation and distribution projects including
those in operation and currently under construction and loans to TIE. Factors
affecting actual expenditures and investments include availability of capital
and suitable investment opportunities, market volatility and local economic
trends.
In the second quarter of 2001, PSEG invested $300 million of additional
equity in Energy Holdings, the proceeds of which were used to fund additional
investments at Global and Resources.
In June 2001, Global exercised its option to acquire an additional 49% of
EDEERSA, bringing its total ownership of EDEERSA to 90%. The acquisition of the
additional ownership was purchased for approximately $110 million.
During the six months ended June 30, 2001, Resources invested $392 million
in three leveraged lease financing transactions of three electric power stations
in the United States and an electric distribution network operated by an
electric power, district heating and transportation utility in Austria.
As of June 30, 2001, Global's investments in the TIE partnership include
$162 million of loans that earn interest at an annual rate of 12%. Of the $162
million currently outstanding, $83 million is scheduled to be repaid in full in
February 2002 and $79 million will be paid over the next 12 years.
For a discussion of Global's pending investments, see Note 7. Commitments
and Contingent Liabilities of Notes.
EXTERNAL FINANCINGS
On June 30, 2001, Energy Holdings had two separate senior revolving credit
facilities with a syndicate of banks; a $495 million five-year revolving credit
and letter of credit facility and a $200 million 364-day revolving credit
facility. The five-year facility also permits up to $250 million of letters of
credit to be issued. The 364-day facility and the five-year facility mature in
May 2002 and May 2004, respectively. At June 30, 2001, Energy Holdings had $137
million outstanding under its revolving credit facilities.
In June 2001, Moody's Investors Service, Inc. upgraded Energy Holdings'
unsecured debt ratings to Baa3 from Ba1. The rating outlook is stable. Energy
Holdings now has investment grade ratings from all major rating agencies.
In July 2001 Energy Holdings received the proceeds from a private placement
of $550 million of 8.50% Senior Notes due 2011. The net proceeds were used for
the repayment of short-term debt outstanding from intercompany loans and
borrowings under Energy Holdings' revolving credit facilities. The remaining
proceeds were used for general corporate purposes. Energy Holdings plans to file
a registration statement with the SEC relating to an exchange offer for, or the
resale of, these Senior Notes later in 2001.
FOREIGN OPERATIONS
As of June 30, 2001, Global and Resources had approximately $2.349 billion
and $1.328 billion, respectively, of international assets. As of June 30, 2001,
foreign assets represented 59% of Energy Holdings' consolidated assets and the
revenues related to those foreign assets contributed 24% to consolidated
revenues for the six months ended June 30, 2001.
As of June 30, 2001, approximately $1.589 billion or 25% of Energy
Holdings' assets are invested in Latin America, specifically in Brazil,
Argentina, Chile, Peru and Venezuela. The Argentine economy has been in a state
of recession for approximately three years. Continued deficit spending in the 23
Argentine provinces coupled with low growth and high unemployment have caused
much speculation in the ability of the country to service and refinance $130
billion of debt over the next several years. The Argentine situation has
contributed to downward pressure on the Brazilian and Chilean currencies. The
Brazilian Real has devalued approximately 18% since year-end 2000 from 1.951 to
$1US to 2.311 to $1US as of June 30, 2001 and the Chilean Peso has devalued
approximately 10% since year-end 2000 from 573.9 to $1US to 631.9 to $1US as of
June 30, 2001. The Argentine currency remains pegged at 1 peso to 1 $US though
there has been much speculation as to whether or not the peg will hold. Recent
actions by the current Argentine administration provide for a more favorable
exchange rate for exporters, which has continued to fuel the speculation that
the currency peg may not hold. In addition, the Argentine administration cut
spending to balance its budget by year-end 2001 to improve financial stability
in the region.
In Argentina, the electricity law provides for a pass-through of
devaluation to the end user customer. Customers' bills are first computed in the
$US and converted into the peso for billing. This implies that a devaluation
will not impact the level of $US revenues an electric distribution company
receives. Energy Holdings' faces exposure as a result of secondary impacts of a
devaluation on the overall economy, which could follow many different scenarios.
In addition, Energy Holdings' share of $US operating company debt is
approximately $256 million. This is of concern because such debt becomes more
costly to service with a devaluation, and the immediate impact of the
devaluation must be recorded through the income statement as the $US debt is
revalued into the local currency. Additionally, upon devaluation, Global's
operating companies in the region may be exposed to increased collection risk.
The Brazilian distribution company in which Global has a 32% interest,
entered into a $190 million $US denominated loan, of which Global's share is $62
million. The functional currency of the distribution company is the Brazilian
Real. Therefore, its debt is subject to exchange rate risk as the Brazilian Real
fluctuates with the $US. Changes in the exchange rate cause the loan amount, as
reported in the functional currency, to be marked upward or downward, with an
offset to the income statement.
In Chile, the operating performance of Energy Holdings' assets is
offsetting the impact of the weakening currency in relation to the $US.
Energy Holdings cannot predict if and when currencies will fluctuate
against the $US or changes in economic situations in the operating companies in
which it invests. However, the impact of these changes could cause material
adverse effects to Energy Holdings' financial condition, results of operations
or net cash flows. For further discussion of Global's foreign currency risk, see
Note 3. Financial Instruments and Risk Management of the Notes.
ACCOUNTING MATTERS
For a discussion of SFAS 133 and related DIG issues, and SFAS 141, SFAS 142
and SFAS 143, see Note 2. Recent Accounting Pronouncements of the Notes.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. These
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used in this report, the
words "will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential" and variations of such words and similar expressions
are intended to identify forward-looking statements. Energy Holdings undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
In addition to any assumptions and other factors referred to specifically
in connection with forward-looking statements, factors that could cause actual
results to differ materially from those contemplated in any forward-looking
statements include, among others, the following, some of which relate to Energy
Holdings indirectly as a result of their potential impact upon PSEG or PSE&G:
o deregulation and the unbundling of energy supplies and services and the
establishment of a competitive energy marketplace for products and
services;
o managing rapidly changing wholesale energy trading operations in
conjunction with electricity and gas production, transmission and
distribution systems;
o managing foreign investments and electric generation and distribution
operations in locations outside of the traditional utility service
territory;
o political and foreign currency risks;
o sales retention and growth potential in a mature PSE&G service territory;
o ability to complete development or acquisition of current and future
investments;
o partner and counterparty risk;
o exposure to market price fluctuations and volatility of fuel and power
supply, power output and marketable securities, among others;
o ability to obtain adequate and timely rate relief, cost recovery, and other
necessary regulatory approvals;
o federal, state and foreign regulatory actions;
o regulatory oversight with respect to utility and non-utility affiliate
relations and activities;
o operating restrictions, increased costs and construction delays
attributable to environmental regulations;
o nuclear decommissioning and the availability of reprocessing and storage
facilities for spent nuclear fuel;
o licensing and regulatory approvals necessary for nuclear and other
operating stations;
o the ability to economically and safely operate nuclear facilities in which
PSEG has an interest in accordance with regulatory requirements;
o environmental concerns; and
o market risk and debt and equity market concerns associated with these
issues.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no updates to information reported under Item 3 of Part I of
Energy Holdings' 2000 Annual Report on Form 10-K.
ITEM 5. OTHER INFORMATION
Certain information reported under Energy Holdings' 2000 Annual Report on
Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
is updated below.
CONSTRUCTION AND DEVELOPMENT
FORM 10-K, PAGES 4 AND 9. In June 2001, Tanir Bavi began simple cycle
operation of 170 MW of its planned 220 MW combined-cycle plant located in India.
In the third quarter of 2001, the plant is expected to begin operating in
combined-cycle. Global owns a 74% interest in Tanir Bavi.
FORM 10-K, PAGES 4, 6 AND 7. In June 2001, the Fushi Hydropower Plant began
commercial operation of all units of the Hydropower Plant located along the
Rongjiang River in China. Global owns an indirect 35% interest in the Fushi
Hydropower plant.
FORM 10-K, PAGES 4 AND 7. In July 2001, the first 500 MW phase of
Odessa-Ector Power Partner, L.P. (OEP) 1,000 MW gas-fired combined-cycle
electric generation facility in Odessa, Texas commenced commercial operation.
The plant is expected to reach full commercial operation in the third quarter of
2001. OEP is wholly-owned by TIE, a 50/50 joint venture of Global and Panda
Energy International, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) A listing of exhibits being filed with this document is as follows:
EXHIBIT NUMBER DOCUMENT
12 Computation of Ratios of Earnings to Fixed Charges
(B) Reports on Form 8-K:
NONE
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PSEG ENERGY HOLDINGS INC.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSEG ENERGY HOLDINGS INC.
(Registrant)
By: DEREK DIRISIO
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Derek DiRisio
Vice President and Controller
(Principal Accounting Officer)
Date: August 8, 2001