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
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
- ------------ -------------------------------------------- -------------------
001-09120 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 22-2625848
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 1171
Newark, New Jersey 07101-1171
973-430-7000
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 X No
As of July 31, 2001, Public Service Enterprise Group Incorporated had
outstanding 208,071,318 shares of its sole class of Common Stock, without par
value.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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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 17
Item 3. Qualitative and Quantitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 30
Signature 31
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, except for Per Share Data)
(Unaudited)
For the Quarter Ended For the Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- --------- ---------
OPERATING REVENUES
Electric Transmission and Distribution $ 448 $ 444 $ 812 $ 818
Generation 598 540 1,159 1,070
Gas Distribution 352 319 1,434 1,066
Trading 574 689 1,161 1,303
Other 199 167 424 385
----------- ----------- --------- ---------
Total Operating Revenues 2,171 2,159 4,990 4,642
----------- ----------- --------- ---------
OPERATING EXPENSES
Energy Costs 258 253 478 448
Gas Costs 243 237 1,030 717
Trading Costs 547 674 1,083 1,260
Operation and Maintenance 560 478 1,098 957
Depreciation and Amortization 123 86 231 176
Taxes Other Than Income Taxes 38 38 86 88
----------- ----------- --------- ---------
Total Operating Expenses 1,769 1,766 4,006 3,646
----------- ----------- --------- ---------
OPERATING INCOME 402 393 984 996
Other Income and Deductions 4 6 17 17
Interest Expense (162) (137) (326) (274)
Preferred Securities Dividend Requirements
and Premium on Redemption (20) (23) (44) (47)
----------- ----------- --------- ---------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 224 239 631 692
Income Taxes (81) (97) (234) (280)
----------- ----------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE 143 142 397 412
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 $ 143 $ 142 $ 404 $ 412
=========== =========== ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (000's) 208,701 215,394 208,512 215,886
=========== =========== ========= =========
EARNINGS PER SHARE (BASIC
AND DILUTED):
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE $ 0.68 $ 0.66 $ 1.91 $ 1.91
Extraordinary Loss on Early Retirement of Debt
(net of tax) -- -- (0.01) --
Cumulative Effect of a Change in Accounting
Principle (net of tax) -- -- 0.04 --
----------- ----------- --------- ---------
NET INCOME $ 0.68 $ 0.66 $ 1.94 $ 1.91
=========== =========== ========= =========
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.54 $ 0.54 $ 1.08 $ 1.08
=========== =========== ========= =========
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
June 30, December 31,
2001 2000
---------------- ----------------
CURRENT ASSETS
Cash and Cash Equivalents $ 425 $ 102
Restricted Cash 62 --
Accounts Receivable:
Customer Accounts Receivable 809 778
Other Accounts Receivable 466 431
Allowance for Doubtful Accounts (60) (44)
Unbilled Revenues 200 357
Fuel 418 431
Materials and Supplies, net of valuation reserves --
2001, $9; 2000, $11 169 155
Prepayments 282 31
Energy Trading Contracts 349 799
Other 52 99
---------------- ----------------
Total Current Assets 3,172 3,139
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PROPERTY, PLANT AND EQUIPMENT
Generation 3,494 2,699
Transmission and Distribution 8,595 8,479
Other 1,345 790
---------------- ----------------
Total 13,434 11,968
Accumulated Depreciation and Amortization (4,581) (4,266)
---------------- ----------------
Net Property, Plant and Equipment 8,853 7,702
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NONCURRENT ASSETS
Regulatory Assets 5,349 4,995
Long-Term Investments, net of accumulated amortization and
valuation allowances-- 2001, $26; 2000, $72 5,141 4,545
Nuclear Decommissioning Fund 723 716
Other Special Funds 147 122
Other, net of accumulated amortization-- 2001 and 2000, $19 287 307
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Total Noncurrent Assets 11,647 10,685
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TOTAL ASSETS $ 23,672 $ 21,526
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See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
June 30, December 31,
2001 2000
--------------- ----------------
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 722 $ 667
Commercial Paper and Loans 1,093 2,885
Accounts Payable 969 1,001
Energy Trading Contracts 464 730
Other 581 429
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Total Current Liabilities 3,829 5,712
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NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 3,238 3,107
Regulatory Liabilities 386 470
Nuclear Decommissioning 723 716
OPEB Costs 464 448
Cost of Removal 156 157
Other 433 415
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Total Noncurrent Liabilities 5,400 5,313
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COMMITMENTS AND CONTINGENT LIABILITIES -- --
--------------- ----------------
CAPITALIZATION
LONG-TERM DEBT 9,581 5,297
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SUBSIDIARIES' PREFERRED SECURITIES
Preferred Stock Without Mandatory Redemption 80 95
Preferred Stock With Mandatory Redemption -- 75
Guaranteed Preferred Beneficial Interest in
Subordinated Debentures 680 1,038
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Total Subsidiaries' Preferred Securities 760 1,208
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COMMON STOCKHOLDERS' EQUITY
Common Stock, issued: 231,957,608 shares 3,603 3,604
Treasury Stock, at cost: 2001 and 2000 --
23,986,290 shares (895) (895)
Retained Earnings 1,671 1,493
Accumulated Other Comprehensive Loss (277) (206)
--------------- ----------------
Total Common Stockholders' Equity 4,102 3,996
--------------- ----------------
Total Capitalization 14,443 10,501
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TOTAL LIABILITIES AND CAPITALIZATION $ 23,672 $ 21,526
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See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
For the Six Months Ended
June 30,
---------------------------------
2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 404 $ 412
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization 231 176
Amortization of Nuclear Fuel 48 45
Recovery of Electric Energy and Gas Costs-- net (111) 25
Provision for Deferred Income Taxes and ITC-- net 27 63
Investment Distributions 91 32
Equity Income from Partnerships (46) (12)
Unrealized Gains on Investments (36) (18)
Leasing Activities 35 --
Net Changes in Certain Current Assets and Liabilities:
Restricted Cash (62) --
Accounts Receivable and Unbilled Revenues 107 (76)
Prepayments (251) (241)
Accounts Payable (32) 339
Other Current Assets and Liabilities 238 (56)
Other 37 7
-------------- --------------
Net Cash Provided By Operating Activities 680 696
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment, excluding IDC
and AFDC (989) (350)
Net Change in Long-Term Investments (640) (68)
Other (174) (16)
-------------- --------------
Net Cash Used in Investing Activities (1,803) (434)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt (1,792) 395
Issuance of Long-Term Debt 4,951 300
Deferred Issuance Costs (201) --
Redemption/Purchase of Long-Term Debt (837) (777)
Redemption of Preferred Securities (448) --
Purchase of Treasury Stock -- (72)
Cash Dividends Paid on Common Stock (225) (234)
Other (2) --
-------------- --------------
Net Cash Provided By (Used In) Financing Activities 1,446 (388)
-------------- --------------
Net Change in Cash and Cash Equivalents 323 (126)
Cash and Cash Equivalents at Beginning of Period 102 259
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Cash and Cash Equivalents at End of Period $ 425 $ 133
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Income Taxes Paid $ 263 $ 323
Interest Paid $ 323 $ 234
Non-Cash Financing Activities:
Debt Assumed from Companies Acquired $ 176 $ 9
See Notes to Consolidated Financial Statements.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Organization
Public Service Enterprise Group Incorporated (PSEG) is an exempt public
utility holding company which has four principal direct wholly-owned
subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC
(Power), PSEG Energy Holdings Inc. (Energy Holdings) and PSEG Services
Corporation (Services).
Basis of Presentation
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 and Notes to
Consolidated Financial Statements (Notes) should be read in conjunction with the
Notes contained in PSEG's 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 PSEG's 2000 Annual Report on Form 10-K and
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 sheet was
derived from the audited consolidated financial statements included in PSEG's
2000 Annual Report on Form 10-K. Certain reclassifications of prior period data
have been made to conform with the current presentation.
Note 2. Accounting Matters
In July 2000, the Emerging Issues Task Force (EITF) 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent" (EITF 99-19), provided
guidance on the issue of whether a company should report revenue based on the
gross amount billed to the customer or the net amount retained. The guidance
states that this determination requires significant judgment, which depends on
the relevant facts and circumstances. Beginning in the first quarter of 2001,
based on PSEG's analysis and interpretation of EITF 99-19, PSEG reported all the
revenues and energy costs on a gross basis for the physical bilateral energy
sales and purchases and capacity sales and purchases. PSEG continues to report
swaps, futures, option premiums, firm transmission rights, transmission
congestion credits, and purchases and sales of emission credits on a net basis.
The prior year financial statements have been reclassified accordingly.
On January 1, 2001, PSEG adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended (SFAS 133), and recorded a cumulative effect of a change
in accounting principle and other comprehensive income of $9 million and ($14)
million, respectively. As of June 30, 2001, the fair value of PSEG's derivative
assets and liabilities were $32 million and $76 million, respectively, resulting
in a net $44 million liability, a negative impact to Other Comprehensive Income
(OCI) of $39 million, deferred taxes of $21 million and a minimal impact on the
income statement.
The Financial Accounting Standards Board's (FASB) Derivative Implementation
Group (DIG), has issued guidance effective July 1, 2001, regarding certain
derivative contracts and the eligibility of those contracts for the normal
purchases and sales exceptions. PSEG and its subsidiaries are currently
evaluating this guidance and cannot predict the impact on their financial
position or results of operations, however such impact could be material.
In July 2001, the FASB issued SFAS 141, "Business Combinations" (SFAS 141).
SFAS 141 was effective July 1, 2001 and requires that all business combinations
subsequent to that date be accounted for under the purchase method. PSEG and its
subsidiaries are currently evaluating this guidance and do not believe it will
have a substantial effect on their growth strategy. PSEG and its subsidiaries do
not anticipate that there will be a material impact on their financial position
or results of operations.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). Under SFAS 142, goodwill is considered a
nonamortizable asset and will be subject to an annual review for impairment and
an interim review when required by events or circumstances. SFAS 142 also
defines intangible assets, other than goodwill, that may arise in a purchase
combination. SFAS 142 is effective for all fiscal years beginning after December
15, 2001. PSEG and its subsidiaries are currently evaluating this guidance and
cannot predict the impact on its financial position or results of operations;
however, such impact could be material.
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. PSEG and
its subsidiaries are 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. Regulatory Issues
New Jersey Energy Master Plan Proceedings and Related Orders
In August 1999, following the enactment of the New Jersey Electric Discount
and Energy Competition Act, the New Jersey Board of Public Utilities (BPU)
rendered a Final Order relating to PSE&G's rate unbundling, stranded costs and
restructuring proceedings (Final Order) providing, among other things, for the
transfer to Power of all of PSE&G's electric generation facilities, plant and
equipment for $2.443 billion and all other related property, including
materials, supplies and fuel at the net book value thereof, together with
associated rights and liabilities.
Also in the Final Order, the BPU concluded that PSE&G should recover up to
$2.94 billion (net of tax) of its generation-related stranded costs through
securitization of $2.4 billion and an opportunity to recover up to $540 million
(net of tax) of its unsecuritized generation-related stranded costs on a net
present value basis. The $540 million is subject to recovery through a market
transition charge (MTC). PSE&G remits the MTC revenues to Power as part of the
Basic Generation Service (BGS) Contract as provided for by the Final Order.
In September 1999, the BPU issued its order approving PSE&G's petition
relating to the proposed securitization transaction (Finance Order) which
authorized, among other things, the imposition of a non-bypassable transition
bond charge (TBC) on PSE&G's customers; the sale of PSE&G's property right in
such charge to a bankruptcy-remote financing entity; the issuance and sale of
$2.525 billion of transition bonds by such entity as consideration for such
property right, including an estimated $125 million of transaction costs; and
the application by PSE&G of the transition bond proceeds to retire outstanding
debt and/or equity. PSE&G Transition Funding LLC (Transition Funding) issued the
transition bonds on January 31, 2001; and the TBC and an additional 2% rate
reduction became effective on February 7, 2001 in accordance with the Final
Order. The rate decrease and the TBC were funded through the MTC rate.
In October and November 1999, appeals were filed by New Jersey Business
User's Coalition, the New Jersey Ratepayer Advocate (RPA) and Co-Steel Raritan
(Co-Steel), an individual PSE&G customer, (the appellants) challenging the
validity of the Finance Order as well as the Final Order. In April 2000, the
Appellate Division of the New Jersey Superior Court unanimously rejected the
arguments made by the appellants and affirmed the Final Order and Finance Order.
In May 2000, the appellants requested the New Jersey Supreme Court to review
certain aspects of the Appellate Division decision. In July 2000, the New Jersey
Supreme Court granted the requests. In December 2000, by a vote of 4 to 1, the
New Jersey Supreme Court issued its order affirming the judgment of the
Appellate Division. The New Jersey Supreme Court's written opinion was issued on
May 18, 2001.
On March 6, 2001, Co-Steel filed a Petition of Writ of Certiorari
(Petition) with the United States Supreme Court seeking limited review of the
New Jersey Supreme Court decision, the granting of which is entirely
discretionary with the Court. Briefs in opposition to the Petition have been
filed. The outcome of this action cannot be predicted.
On January 31, 2001, $2.525 billion of transition bonds (non-recourse asset
backed securities) were issued by Transition Funding, in eight classes with
maturities ranging from 1 year to 15 years. Also on January 31, 2001, PSE&G
received payment from Power on its $2.786 billion promissory note used to
finance the transfer of PSE&G's generation business. The proceeds from these
transactions were used to pay for certain debt issuance and related costs for
securitization, retire a portion of PSE&G's outstanding short-term debt, reduce
PSE&G common equity, loan funds to PSEG and make various short-term investments.
Note 4. Regulatory Assets and Liabilities
PSEG, through its subsidiary PSE&G, deferred the following regulatory
assets and liabilities on the Consolidated Balance Sheets:
June 30, December 31,
2001 2000
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(Millions of Dollars)
Regulatory Assets:
Stranded Costs to be Recovered............................ $4,225 $4,093
SFAS 109 Income Taxes..................................... 329 285
OPEB Costs................................................ 222 232
Societal Benefits Charges (SBC)........................... 42 74
Underrecovered Gas Costs.................................. 94 --
Environmental Costs....................................... 74 74
Unamortized Loss on Reacquired Debt and Debt Expense...... 98 104
Non-Utility Generation Transition Charge (NTC)............ 26 7
Other..................................................... 239 126
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Total Regulatory Assets................................... $5,349 $4,995
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Regulatory Liabilities:
Excess Depreciation Reserve............................... $381 $444
Overrecovered Gas Costs................................... -- 26
Other..................................................... 5 --
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Total Regulatory Liabilities.............................. $386 $470
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Note 5. Commitments and Contingent Liabilities
Pending Asset Purchases
Atlantic City Electric Company (ACE), a subsidiary of Conectiv, is a
co-owner of the Salem Nuclear Generating Station (Salem) and the Peach Bottom
Atomic Power Station (Peach Bottom) with Power and Exelon Generation LLC
(Exelon). Additionally, Power and ACE are co-owners of the Hope Creek Generating
Station (Hope Creek). In 1999, Power entered into agreements with Conectiv,
Delmarva Power and Light Company (DP&L), a subsidiary of Conectiv, ACE and
Exelon pursuant to which Power would acquire all of DP&L's and ACE's interests
in Salem and Hope Creek and half of DP&L's and ACE's interest in Peach Bottom (a
total of 544 MW) for a purchase price of $15.4 million plus the net book value
of nuclear fuel at the respective closing dates. In December 2000, the DP&L
portion of the transaction (246 MW) closed. In October 2000, Power entered into
Wholesale Transaction Confirmation letter agreements with ACE under which Power
obtains 298 MW of generation capacity and output representing the portion of
ACE's interest in Salem, Hope Creek and Peach Bottom to be acquired. Under these
agreements, Power receives all revenue and pays all expenses associated with
this 298 MW of generating capacity and output through the date that the purchase
transaction closes. Power has been advised by Conectiv that the RPA, by letter
to the BPU dated October 26, 2000, has objected to and challenged the letter
agreements.
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 (totaling 340 MW)
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.
Hazardous Waste
The New Jersey Department of Environmental Protection (NJDEP) regulations
concerning site investigation and remediation require an ecological evaluation
of potential injuries to natural resources in connection with a remedial
investigation of contaminated sites. The NJDEP is presently working with the
industry to develop procedures for implementing these regulations. These
regulations may substantially increase the costs of environmental investigations
and remediations, where necessary, particularly at sites situated on surface
water bodies. Power, PSE&G and predecessor companies owned and/or operated
certain facilities situated on surface water bodies, certain of which are
currently the subject of remedial activities. The financial impact of these
regulations on these projects is not currently estimable. PSEG does not
anticipate that the compliance with these regulations will have a material
adverse effect on its financial position, results of operations or net cash
flows.
Manufactured Gas Plant Remediation Program
PSE&G is currently working with the NJDEP under a program (Remediation
Program) to assess, investigate and, if necessary, remediate environmental
conditions at PSE&G's former manufactured gas plant sites. To date, 38 sites
have been identified. The Remediation Program is periodically reviewed and
revised by PSE&G based on regulatory requirements, experience with the
Remediation Program and available remediation technologies. The long-term costs
of the Remediation Program cannot be reasonably estimated, but experience to
date indicates that approximately $20 million per year could be incurred over a
period of about 30 years and that the overall cost could be material. The costs
for this remediation effort are recovered through the SBC.
Net of recoveries, costs incurred through June 30, 2001 for the Remediation
Program amounted to $151.6 million. In addition, at June 30, 2001, PSE&G's
estimated liability for remediation costs through 2003 aggregated $74 million.
Expenditures beyond 2003 cannot be reasonably estimated.
Passaic River Site
The United States Environmental Protection Agency (EPA) has determined that
a six mile stretch of the Passaic River in Newark, New Jersey is a "facility"
within the meaning of that term under the Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA) and that, to date, at
least thirteen corporations, including PSE&G, may be potentially liable for
performing required remedial actions to address potential environmental
pollution at the Passaic River "facility." PSE&G and certain of its predecessors
operated industrial facilities at properties within the Passaic River
"facility," comprised of four former manufactured gas plants (MGP), one
operating electric generating station and one former generating station. Costs
to clean up former MGPs are recoverable from utility customers under the SBC.
The operating electric generating station has been transferred to Power, which
is responsible for remediation of the station, if required. PSEG cannot predict
what action, if any, the EPA or any third party may take against PSE&G and/or
Power with respect to these matters, or in such event, what costs PSE&G and/or
Power may incur to address any such claims. However, such costs may be material.
New Source Review
The EPA and NJDEP issued a demand to PSE&G in March 2000 under section 114
of the Federal Clean Air Act (CAA) requiring information to assess whether
projects completed since 1978 at the Hudson and Mercer coal burning units were
implemented in accordance with applicable New Source Review regulations. As a
result of the transfer of the generating business by PSE&G to Power, the
responsibility for these environmental requirements now rests with Power. Power
completed its response to the section 114 information request in November 2000.
Based upon the information provided to the EPA, it is likely that the EPA will
seek to enforce the requirements of the New Source Review program at Hudson 2
and Mercer 1 and 2. Power is currently in discussions with the EPA and NJDEP to
resolve the matter. However, it is uncertain whether these discussions will be
successful and capital costs of compliance could be material.
The EPA indicated that it is considering enforcement action against Power
under its Prevention of Significant Deterioration (PSD) rules relating to the
construction that is currently in progress for Bergen 2, scheduled for
operations in 2002. The EPA had maintained that PSD requirements are applicable
to Bergen 2, thereby requiring Power to obtain a permit prior to the
commencement of construction. To obtain such a permit, an applicant must
demonstrate that the additional emission source will not cause significant
deterioration of the air shed in the vicinity of the plant. The time required to
obtain such a permit is estimated at 6-12 months. Power vigorously disputes that
PSD requirements are applicable to Bergen 2 and is continuing construction. The
NJDEP has informally indicated it agrees with Power's position, but has also
advised that the ultimate authority to decide PSD applicability rests with the
EPA. Discussions to resolve this matter are underway with the EPA and NJDEP. At
June 30, 2001, Power had expended approximately $179 million in the construction
of Bergen 2.
Guaranteed Obligations
Energy Holdings, PSEG Global Inc. (Global), a wholly-owned subsidiary of
Energy Holdings, 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.
Note 6. Financial Instruments and Risk Management
PSEG's operations give rise to exposure to market risks from changes in
commodity prices, interest rates, foreign currency exchange rates and securities
prices. PSEG's policy is to use derivative financial instruments for the purpose
of managing market risk consistent with its business plans and prudent business
practices.
Energy Trading and Related Contracts
Power routinely enters into exchange traded futures and options
transactions for electricity and natural gas as part of wholesale trading
operations. Generally, exchange-traded futures contracts require deposit of
margin cash, the amount of which is subject to change based on market movement
and in accordance with exchange rules. The amount of the margin deposits at June
30, 2001 and December 31, 2000 was approximately $4 million and $1 million,
respectively.
Power's energy trading and related contracts have been marked-to-market and
gains and losses from such contracts were included in earnings. Power recorded
$5 million and $6 million of unrealized gains in the quarter and six months
ended June 30, 2001, respectively and $36 million and $48 million of unrealized
gains in the quarter and six months ended June 30, 2000, respectively.
The fair value of the energy trading and related contracts that are
marked-to-market are based on management's best estimates using over-the-counter
quotations, exchange prices, volatility factors and other valuation methodology.
The estimates presented herein are not necessarily indicative of the amounts
that Power could realize in a current market exchange. The fair values as of
June 30, 2001 and December 31, 2000 and the average fair values for the periods
then ended of Power's significant financial instruments related to energy
commodities are summarized in the following table:
June 30, 2001 December 31, 2000
---------------------------------- -------------------------------------
Notional Notional Fair Average Notional Notional Fair Average
(mWh) (MMBTU) Value Fair (mWh) (MMBTU) Value Fair
Value Value
---------------------------------- -------------------------------------
(Millions) (Millions)
Futures and Options
NYMEX -- 17.0 ($3.4) ($1.0) 17.0 167.0 $6.0 ($1.0)
Physical forwards 40.3 7.0 $25.1 $14.5 50.0 10.0 $13.0 $14.0
Options -- OTC 11.0 548.8 ($7.3) $66.0 12.0 525.0 $184.0 $68.0
Swaps 40.0 518.7 $30.8 ($39.2) -- 218.0 ($138.0) $23.0
Emission Allowances -- -- $27.8 $22.9 -- -- $6.0 $9.0
Derivative Instruments and Hedging Activities
Commodity-Related Instruments
Power and PSE&G also hold and issue commodity and financial instruments
that reduce exposure to price fluctuations from factors such as weather,
environmental policies, changes in demand, changes in supply, state and Federal
regulatory policies and other events. Power's instruments, in conjunction with
owned electric generating capacity contracts, are designed to cover estimated
electric supply commitments and gas requirements for electric generation.
PSE&G's instruments, in conjunction with physical gas supply contracts, are
designed to cover estimated gas customer commitments. Power and PSE&G use
futures, forwards, swaps and options to manage and hedge price risk related to
these market exposures.
As of June 30, 2001, Power had entered into 18 million mWh of electric
physical forward contracts and 30 million MMBTU of gas futures and swaps to
hedge its forecasted BGS requirements and gas purchases requirements for
generation, with a maximum term of approximately one year, which qualified for
hedge accounting treatment under SFAS 133. These commodity and financial
instruments are marked-to-market based on management's best estimates using
over-the-counter quotations, exchange prices, volatility factors and other
valuation methodology. For the quarter ended June 30, 2001, the total negative
mark-to-market valuation of $34 million was recorded as a derivative liability
offset by negative OCI and deferred taxes of $21 million and $13 million,
respectively.
Also as of June 30, 2001, PSE&G had entered into 236 million MMBTU of gas
futures and options and 58 MMBTU of gas futures and swaps to hedge forecasted
requirements. As of June 30, 2001, the fair value of those instruments was
$(144) million with a maximum term of approximately one year. PSE&G utilizes
derivatives to hedge its gas purchasing activities which, when realized, are
recoverable through its Levelized Gas Adjustment Clause (LGAC). Accordingly, the
offset to the change in fair value of these derivatives is specified as a
regulatory asset or liability.
Interest Rate Swaps
In February 2001, Power entered into various forward-interest rate swaps,
with an aggregate notional amount of $400 million, to hedge the interest rate
risk related to the anticipated issuance of debt. On April 11, 2001, Power
issued $1.8 billion in fixed-rate Senior Notes and closed out the forward
starting interest rate swaps. The aggregate loss, net of tax, of $3.2 million
was classified as Accumulated Other Comprehensive Loss and is being amortized
and charged to interest expense over the life of the debt.
Transition Funding has entered into an interest rate swap on its sole class
of floating rate transition bonds. The notional amount of the interest rate swap
is $496.6 million. The interest rate swap is indexed to the three-month LIBOR
rate. The fair value of the interest rate swap was approximately $0.7 million as
of June 30, 2001 and was recorded as a derivative liability, with an offsetting
amount recorded as a regulatory asset on the Consolidated Balance Sheets. This
amount will vary over time as a result of changes in market conditions.
Equity Securities -- Energy Holdings
PSEG Resources Inc. (Resources), a wholly-owned subsidiary of Energy
Holdings, 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
Resources' interest in an equity security which had a book value of $30 million
on December 31, 2000 and lower 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.
Foreign Currencies -- Energy Holdings
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 OCI. As of June 30, 2001, net foreign currency devaluations
have reduced the reported amount of PSEG's total stockholder's equity by $241
million (after-tax), $168 million (after-tax) of which was caused by the
devaluation of the Brazilian Real.
Credit Risk
Credit risk relates to the risk of loss that PSEG and its subsidiaries
would incur as a result of non-performance by counterparties, pursuant to the
terms of their contractual obligations. PSEG has established credit policies
that it believes significantly minimize its exposure to credit risk. These
policies include an evaluation of potential counterparties' financial condition
(including credit rating), collateral requirements under certain circumstances
and the use of standardized agreements, which may allow for the netting of
positive and negative exposures associated with a single counterparty.
Two major California utilities, 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. On April 6, 2001, PG&E filed for reorganization
under Chapter 11 of the U.S. Bankruptcy Code.
GWF Energy LLC (GWF), Hanford and Tracy Qualifying Facilities (QF), each a
project affiliate of Global, have continued to honor their contractual
obligations to PG&E under existing QF contracts. On March 27, 2001, the
California Public Utility Commission (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 PSEG and 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.
Two affiliates of the California utilities referred to above have entered
into physical forward and swap contracts with PSEG Energy Resources and Trade
(ER&T), a subsidiary of Power, for delivery in the PJM area. These
counterparties have met their obligations to date and are still investment grade
entities. ER&T has entered into a limited number of additional contracts since
May 2001 with one of these counterparties but none with the other since December
2000. ER&T's exposure to these entities under these contracts is not material
and management does not believe that any reserve is presently necessary.
Interest Rates
PSEG is subject to the risk of fluctuating interest rates in the normal
course of business. PSEG's 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
$13 million change in annual interest costs related to short-term and floating
rate debt at PSEG and its subsidiaries.
Note 7. Income Taxes
PSEG's effective income tax rate is as follows:
Quarter Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Federal tax provision at statutory rate................... 35.0% 35.0% 35.0% 35.0%
New Jersey Corporate Business Tax, net of Federal benefit. 5.9% 5.9% 5.9% 5.9%
Other-- net............................................... (4.7)% (0.3)% (3.8)% (0.4)%
---------- ---------- ---------- ----------
Effective Income Tax Rate............................. 36.2% 40.6% 37.1% 40.5%
========== ========== ========== ==========
PSEG's effective tax rate differs from the statutory income tax rate
primarily due to the accruals at the rate of 10% of Global's foreign income due
to the incremental cost associated with the repatriation of foreign earnings.
The Internal Revenue Service has concluded the audit of PSEG's 1994-1996
Federal Income Tax Returns. It is anticipated that the result of the Revenue
Agents' Report will not have a material impact on PSEG's financial position,
statement of operations or net cash flows.
Note 8. Financial Information by Business Segments
Information related to the segments of PSEG's business is detailed below:
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Consolidated
Generation Trading T & D Resources Global Technologies Other(A) Total
---------- -------- --------- --------- -------- ------------- --------- -----------------
(Millions of Dollars)
For the Quarter Ended
June 30, 2001:
Total Operating Revenues ..... $ 598 $ 574 $ 1,311 $ 51 $ 37 $ 111 $ (511) $ 2,171
Segment Net Income (Loss) .... $ 88 $ 16 $ 31 $ 14 $ 4 $ (9) $ (1) $ 143
- ------------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
June 30, 2000:
Total Operating Revenues ..... $ 540 $ 689 $ 763 $ 26 $ 33 $ 108 -- $ 2,159
Segment Net Income (Loss) .... $ 63 $ 9 $ 78 $ 2 -- $ (6) $ (4) $ 142
======== ======== ======== ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
For the Six Months Ended
June 30, 2001:
Total Operating Revenues ..... $ 1,159 $ 1,161 $ 3,263 $ 84 $ 126 $ 213 $(1,016) $ 4,990
Income Before Extraordinary
Item and Cumulative Effect of
a Change in Accounting
Principle ................... $ 160 $ 46 $ 140 $ 17 $ 52 $ (12) $ (6) $ 397
Extraordinary Loss on
Early Retirement of Debt ..... -- -- -- -- (2) -- $ -- $ (2)
Cumulative Effect of a Change
in Accounting Principle ..... -- -- -- -- $ 9 -- -- $ 9
Segment Net Income (Loss) .... $ 160 $ 46 $ 140 $ 17 $ 59 $ (12) $ (6) $ 404
======== ======== ======== ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
For the Six Months Ended
June 30, 2000:
Total Operating Revenues ..... $ 1,070 $ 1,303 $ 1,884 $ 92 $ 71 $ 221 $ 1 $ 4,642
Segment Net Income (Loss) .... $ 173 $ 25 $ 199 $ 29 $ 4 $ (12) $ (6) $ 412
- ------------------------------------------------------------------------------------------------------------------------------------
As of June 30, 2001:
Total Assets ................. $ 4,118 $ 712 $ 13,270 $ 3,002 $ 2,850 $ 326 $ (606) $ 23,672
======== ======== ======== ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2000:
Total Assets ................. $ 3,439 $ 1,091 $ 15,267 $ 2,564 $ 2,271 $ 312 $(3,418) $ 21,526
======== ======== ======== ======== ======== ======== ======== ========
<FN>
(A) PSEG's other activities include amounts applicable to PSEG (parent
corporation), Energy Holdings (parent corporation), Enterprise Group
Development Corporation, a wholly-owned subsidiary of Energy Holdings, and
intercompany eliminations, primarily relating to intercompany transactions
between Power and PSE&G. The net losses primarily relate to financing and
certain administrative and general costs at the parent corporations.
</FN>
Geographic information for PSEG is disclosed below. The foreign investments
and operations noted below were made through Energy Holdings.
Revenues (1) Identifiable Assets (2)
------------------------------------------------------ --------------------------------
Quarter Ended Six Months Ended
June 30, June 30, June 30, December 31,
------------------------- ------------------------- ----------- -----------------
2001 2000 2001 2000 2001 2000
----------- ---------- ---------- ----------- ----------- -----------------
United States............ $2,122 $2,114 $4,890 $4,549 $19,995 $18,536
Foreign Countries........ 49 45 100 93 3,677 2,990
----------- ---------- ---------- ----------- ----------- -----------------
Total............... $2,171 $2,159 $4,990 $4,642 $23,672 $21,526
----------- ---------- ---------- ----------- ----------- -----------------
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
============= =================
<FN>
(1) Revenues are attributed to countries based on the locations of the
investments. Certain of 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 (pretax) 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 9. Comprehensive Income
Comprehensive Income, Net of Tax:
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2001 2000 2001 2000
--------- --------- -------- ---------
(Millions of Dollars)
Net income.......................................................... $143 $142 $404 $412
Foreign currency translation (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 change in Fair Value of Financial Instruments (B).... (15) -- (18) --
--------- --------- -------- ---------
Comprehensive income................................................ $92 $134 $333 $433
========= ========= ======== =========
<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.
(B) Net of tax of $10 million and $12 million for the quarter and six months
ended June 30, 2001, respectively.
</FN>
For further discussion of Other Comprehensive Income, See Note 6. Financial
Instruments and Risk Management.
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 Public Service Enterprise Group Incorporated (PSEG) 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 PSEG and its subsidiaries. This discussion refers to the
Consolidated Financial Statements (Statements) and related Notes to Consolidated
Financial Statements (Notes) of PSEG and should be read in conjunction with such
Statements and Notes.
Results of Operations
Earnings (Losses)
--------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ------------ ----------- ------------
(Millions of Dollars)
Power........................................ $104 $ -- $ 206 $ --
PSE&G ....................................... 31 150 140 397
Energy Holdings.............................. 12 (5) 66 19
PSEG*........................................ (4) (3) (8) (4)
----------- ------------ ----------- ------------
Total PSEG.............................. $143 $142 $ 404 $ 412
=========== ============ =========== ============
Contribution to Earnings Per Share (Basic and Diluted)
--------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ------------ ----------- ------------
Power........................................ $0.50 $ -- $0.99 $ --
PSE&G ....................................... 0.15 0.69 0.67 1.84
Energy Holdings.............................. 0.06 (0.02) 0.31 0.09
PSEG*........................................ (0.03) (0.01) (0.03) (0.02)
----------- ------------ ----------- ------------
Total PSEG.............................. $0.68 $0.66 $1.94 $1.91
=========== ============ =========== ============
* Includes after tax effect of interest on certain financing
transactions and certain general and administrative costs.
Basic and diluted earnings per share of PSEG common stock (Common Stock)
was $0.68 for the quarter ended June 30, 2001, representing a $0.02 increase
from the comparable 2000 period. Basic and diluted earnings per share of Common
Stock were $1.94 for the six months ended June 30, 2001, representing a $0.03
increase from the comparable 2000 period.
PSE&G's and Power's combined contribution to earnings per share of Common
Stock for the quarter and six months ended June 30, 2001, decreased $0.04 or 6%
and $0.18 or 10% from the comparable 2000 periods, respectively. The decrease
for the quarter ended June 30, 2001 was primarily due to an additional 2%
electric rate reduction combined with the amortization of the stranded cost
regulatory asset beginning in February 2001. These decreases were partially
offset by higher profits from trading activities and increased sales due to
colder weather.
Energy Holdings' contribution to earnings per share of Common Stock for the
quarter and six months ended June 30, 2001 increased $0.08 and $0.22 or from the
comparable 2000 periods, respectively, primarily due to Global's gain on
withdrawal from its interest in the Eagle Point Cogeneration Partnership (Eagle
Point) in the first quarter 2001. For the quarter ended June 30, 2001, Energy
Holdings' increase was primarily due to higher leveraged lease income combined
with higher comparative income due to a reduction in the carrying value of
publicly traded securities within Resources' leveraged buyout funds in the
second quarter of 2000.
As a result of PSEG's stock repurchase program which began in September
1998, earnings per share of Common Stock for the quarter and six months ended
June 30, 2001 increased $0.02 and $0.03 from the comparable 2000 periods,
respectively. A total of 24.2 million shares were repurchased at a cost of
approximately $905 million under this program as of June 30, 2001.
Operating Revenues
Electric Transmission and Distribution
Transmission and Distribution revenues increased $4 million or 1% and
decreased $6 million or 1% for the quarter and the six months ended June 30,
2001 from the comparable periods in 2000, respectively.
Generation
Generation Revenues increased $58 million or 11% and $89 million or 8% for
the quarter and the six months ended June 30, 2001 from the comparable periods
in 2000, respectively, primarily due to increased load served under the BGS
contract with PSE&G. This increased load results from customers returning to
PSE&G from third party suppliers (TPS) as wholesale market prices have typically
exceeded fixed BGS rates. As of June 30, 2001, TPS were serving approximately
1.5% of the customer load traditionally served by PSE&G as compared to the June
30, 2000, level of 8%. Also contributing to the increase was a $17 million gain
on a sale of a fixed asset at the Kearny Generation Station and output from new
operating generation projects placed in service subsequent to the first quarter
of 2000. These increases were partially offset by a reduction of $28 million in
MTC revenues caused by an additional 2% rate reduction, which was effective on
February 7, 2001 in accordance with the BPU's Final Order and the issuance of
PSE&G's securitization bonds. Effective August 1, 2001, PSE&G implemented an
additional 2% rate reduction as required by the Final Order, bringing the total
rate decrease to 9% since August 1, 1999.
Power has contracted with PSE&G to provide the capacity and electricity
necessary for the BGS obligation through July 31, 2002. On June 29, 2001 PSE&G
and the other three BPU regulated New Jersey electric utility companies
submitted a joint filing to the BPU setting forth an auction proposal for the
provision of BGS supply beginning August 1, 2002. Power expects that it will
continue to earn a substantial portion of its revenues from these supply
contracts.
Gas Distribution
Gas Distribution revenues increased $33 million or 10% and $368 million or
35% for the quarter and the six months ended June 30, 2001 from the comparable
periods in 2000, respectively, primarily due to higher natural gas costs which
were passed along to customers. Customer rates in all classes of business have
increased in 2001 to recover a portion of the higher natural gas costs. The
commercial and industrial classes fuel recovery rates vary monthly according to
the market price of energy. The BPU also approved increases in the fuel
component of the residential class rates of 16% in November 2000 and 2% for each
month from December 2000 through July 2001. These increased revenues were offset
by higher gas distribution costs discussed below.
Trading
Trading revenues decreased $115 million or 17% and $142 million or 11% for
the quarter and six months ended June 30, 2001 from the comparable periods in
2000, respectively, due to lower trading volumes resulting from increased market
volatility. However, trading margins increased from $15 million to $27 million
and from $42 million to $78 million for the three and six month periods ended as
of June 30, 2001, as decreased revenues were more than offset by decreased
trading costs as discussed below in Trading Costs.
Other
Other revenues increased $32 million or 19% and $39 million or 10% for the
quarter and six months ended June 30, 2001 as compared to the same periods in
2000.
Other 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 investments 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, L.P. (TIE) and a note receivable taken as
consideration for the withdrawal from its interest in the 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.
Other 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 PSEG Energy Technologies Inc. (Energy
Technologies), a wholly-owned subsidiary of Energy Holdings. The reduction in
revenue at Resources was primarily due to a net decrease in the carrying value
of publicly traded equity securities in Resources' 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.
Operating Expenses
Energy Costs
Energy Costs increased $5 million or 2% and $30 million or 7% for the
quarter and the six months ended June 30, 2001 from the comparable periods in
2000, respectively, primarily due to increased load served under the BGS
obligation, higher fuel costs fossil generation resulting from higher natural
gas prices, partially offset by increased, low cost, nuclear generation as
compared to 2000.
Gas Costs
Gas Costs increased $6 million or 3% and $313 million or 44% for the
quarter and six months ended June 30, 2001 from the comparable 2000 periods,
respectively, primarily due to the increase in the gas fuel revenues, discussed
above. Due to the PSE&G's Levelized Gas Adjustment Clause, retail gas costs are
increased or decreased to offset a corresponding increase or decrease in gas
revenues with no impact on income.
Trading Costs
Trading Costs decreased $127 million or 19% and $177 million or 14% for the
quarter and six months ended June 30, 2001 from the comparable periods in 2000,
respectively, primarily due to lower trading volumes resulting from increased
market volatility.
Operations and Maintenance
Operations and Maintenance expense increased $82 million or 17% and $141
million or 15% for the quarter and six months ended June 30, 2001 primarily due
to planned generation outage work in the first quarter of 2001 and a greater
proportion of expenditures used for Operations and Maintenance rather than
capital project work in the second quarter of 2001 than in the comparable 2000
period and higher expenses relating to projects going into operation subsequent
to the first quarter of 2000 for Power and lower capital project work for the
quarter and six months ended June 30, 2001 as compared to the same periods in
2000 for PSE&G.
Depreciation and Amortization
Depreciation and Amortization expense increased $37 million or 43% and $55
million or 31% for the quarter and six months ended June 30, 2001 from the
comparable 2000 periods, respectively. The increase was primarily due to $43
million and $65 million of amortization of the regulatory asset recorded for
PSE&G's stranded costs for the quarter and six months ended June 30, 2001. These
increases were partially offset by a change in the accrual for the anticipated
cost of removal of Power's generating stations.
Interest Expense
Interest Expense increased $25 million or 18% and $52 million or 19% for
the quarter and six months ended June 30, 2001 from the comparable 2000 periods,
respectively, primarily due to increased long-term debt to finance various
projects.
Preferred Securities Dividend Requirements
Preferred Securities Dividend Requirements decreased $3 million or 13% and
$3 million or 6% for the quarter and six months ended June 30, 2001 due to the
redemption of PSE&G preferred securities. For further detail, see External
Financings - PSE&G.
Income Taxes
Income taxes decreased $16 million or 16% and $46 million or 16% for the
quarter and six months ended June 30, 2001 from the comparable 2000 periods,
respectively. The decrease of income taxes is due to lower pre-tax income and a
lower effective tax rate at Energy Holdings due to a greater proportion of its
earnings coming from foreign operations, which are accrued at the rate of 10%
due to the incremental cost associated with the repatriation of foreign
earnings.
Liquidity and Capital Resources
PSEG
PSEG is a holding company and, as such, has no operations of its own. The
following discussion of PSEG's liquidity and capital resources is on a
consolidated basis, noting the uses and contributions of PSEG's three direct
operating subsidiaries: PSE&G, Power and Energy Holdings.
Dividend payments on Common Stock were $0.54 per share per quarter and
totaled approximately $112 million and $116 million for the quarters ended June
30, 2001 and 2000, respectively. Dividend payments on Common Stock totaled
approximately $225 million and $234 million for the six month periods ended June
30, 2001 and 2000, respectively.
Although PSEG presently believes it will have adequate earnings and cash
flow in the future from its subsidiaries to maintain its Common Stock dividend
at the current level, earnings and cash flows required to support the dividend
will become more volatile as PSEG's business changes from one that is
principally regulated to one that is principally competitive. Future dividends
declared will necessarily be dependent upon PSEG's future earnings, cash flows,
financial requirements, alternate investment opportunities and other factors.
PSE&G
On January 31, 2001, $2.525 billion of transition bonds (non-recourse asset
backed securities) were issued by PSE&G Transition Funding LLC, a
bankruptcy-remote, wholly-owned subsidiary of PSE&G. PSE&G also received payment
from Power on its $2.786 billion Promissory Note used to finance the transfer of
PSE&G's generation business to Power. The proceeds from these transactions were
used to pay for certain debt issuance and related costs for securitization,
redeem a portion of PSE&G's outstanding short-term debt, reduce PSE&G common
equity by $2.265 billion, loan funds to PSEG of $1.084 billion and make various
short-term investments. These funds are expected to be used for further debt
and/or equity reductions in 2001 including payment of maturing and certain
redeemable securities. 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 PSE&G's financial
condition, results of operations and net cash flows.
Cash generated from PSE&G's transmission and distribution business is
expected to provide the majority of the funds for PSE&G's business needs. Since
1986, PSE&G has made regular cash payments to PSEG in the form of dividends on
outstanding shares of PSE&G's common stock. PSE&G paid common stock dividends of
$112 million and $334 million to PSEG for the six months ended June 30, 2001 and
2000, respectively.
Power
In 2000, Power financed the transfer of the generation business from PSE&G
through the issuance of a $2.786 billion promissory note. On January 31, 2001,
through $1.2 billion of equity infusions and $1.62 billion of loans from PSEG,
Power repaid this note to PSE&G. In April 2001, Power issued $1.8 billion of its
Senior Notes in a private placement, the proceeds of which were used primarily
to replace its interim financing from PSEG. It is expected that Power's future
capital needs will be funded with cash generated from operations and may be
supplemented with external financings, equity infusions from PSEG and other
project financing alternatives as dictated by Power's growth strategy. 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 Power's financial condition, results of operations and
net cash flows.
Energy Holdings
It is intended that Global and Resources will 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 significant 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 Corporation (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.
Capital Requirements
PSE&G
PSE&G has substantial commitments as part of its ongoing construction
programs. These programs are continuously reviewed and periodically revised as a
result of changes in economic conditions, revised load forecasts, business
strategies, site changes, cost escalations under construction contracts,
requirements of regulatory authorities and laws, the timing of and amount of
electric and gas transmission and/or distribution rate changes and the ability
of PSE&G to raise necessary capital.
Construction expenditures are related to improvements in PSE&G's
transmission and distribution system, gas system and common facilities. For the
six month periods ended June 30, 2001 and 2000, respectively, PSE&G had net
plant additions of $172 million and $230 million, excluding Allowance for Funds
Used During Construction (AFDC). This decrease is a result of a greater
proportion of expenditures being applied to Operations and Maintenance expense
projects as discussed above.
Power
Construction expenditures were related to acquisitions by Power and
improvements in Power's existing power plants. Power had net plant additions for
the six months ended June 30, 2001 and 2000, respectively, of $741 million and
$177 million, excluding capitalized interest. The expenditures were for
developing the 1,150 MW Lawrenceburg site and the 850 MW Waterford site and
adding capacity to its Bergen, Linden, Burlington, and Kearny stations. Power's
growth strategy is designed to increase its operating generating portfolio to
20,000 MW by 2005. Changes in environmental regulations and unexpected impacts
of existing regulations could impact both Power's construction and growth
strategy as well as its capital expenditure amounts. For further information,
including New Source Review requirements under the Federal Clean Air Act (CAA),
see Note. 5. Commitments and Contingent Liabilities.
Energy Holdings
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 Texas
Independent Energy (TIE). Factors affecting actual expenditures and investments
include availability of capital and suitable investment opportunities, market
volatility and economic trends.
As of June 30, 2001, Global 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 a lump
sum in February 2002 and $79 million will be paid over the next 12 years.
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
Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA), bringing its
total ownership 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 power, district heating and transportation
utility in Austria.
For a discussion of Global's pending investments, see Note 5. Commitments
and Contingent Liabilities of Notes.
External Financings
PSEG
At June 30, 2001, PSEG had a committed $150 million revolving credit
facility which will expire in December 2002. At June 30, 2001, there was $150
million of borrowings under this revolving credit facility. In 1999, PSEG
entered into an uncommitted line of credit with a bank with no stated limit. At
June 30, 2000, PSEG had $224 million outstanding under this line of credit.
PSEG has an $850 million commercial paper program to provide funds for
general corporate purposes. On June 30, 2001, PSEG had commercial paper of $521
million outstanding under this program.
To provide liquidity for its commercial paper program, PSEG has a $570
million revolving credit facility expiring in March 2002 and a $280 million
revolving credit facility expiring in March 2005. These agreements are with
groups of banks and provide for borrowings with maturities of up to one year. As
of June 30, 2001 there were no borrowings outstanding under these facilities.
On June 15, 2001, $300 million of Extendible Notes, Series C, matured.
PSE&G
Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds
against previous additions and improvements and/or retired Mortgage Bonds
provided that its ratio of earnings to fixed charges calculated in accordance
with its Mortgage is at least 2:1. At June 30, 2001, PSE&G's Mortgage coverage
ratio was 3:1. As of June 30, 2001, the Mortgage would permit up to $1 billion
aggregate principal amount of new Mortgage Bonds to be issued against previous
additions and improvements. In addition to the refinancing of existing long-term
debt authorized by the BPU in the Final Order, PSE&G will need to obtain BPU
authorization to issue any incremental debt financing necessary for its capital
program. The BPU has authorized PSE&G to issue up to $1 billion of long-term
debt on the basis of previously matured, redeemed or purchased debt through
December 31, 2001, of which $590 million has been issued.
PSE&G has several uncommitted lines of credit with banks. On June 30, 2001,
PSE&G had $55 million of short-term debt outstanding, borrowed against these
lines of credit.
In June 2001, PSE&G redeemed all of its $208 million of 8.625% Series A
Cumulative Quarterly Income Preferred Securities.
In March 2001, PSE&G reduced the maximum size of its commercial paper
program from $1.5 billion to $900 million. To provide liquidity for this
program, PSE&G maintains $900 million in revolving credit facilities, each of
which expire in June 2002. As of June 30, 2001, there were no borrowings
outstanding under these facilities.
In March 2001, PSE&G redeemed all of its $150 million of 9.375% Series A
cumulative income preferred securities, all of its $75 million of 5.97%
preferred stock, $15 million of its 6.75% preferred stock and $52 million of its
floating rate notes due December 7, 2002. On June 7, 2001, PSE&G redeemed the
remaining $248 million outstanding of floating rate notes due December 7, 2002.
As discussed previously, on January 31, 2001, transition bonds
(non-recourse asset backed securities) in the amount of $2.525 billion were
issued by Transition Funding, in eight classes with maturities ranging from 1
year to 15 years.
Power
In April 2001, Power, in a private placement, issued $500 million of 6.875%
Senior Notes due 2006, $800 million of 7.75% Senior Notes due 2011 and $500
million of 8.625% Senior Notes due 2031. The net proceeds from the sale of the
Senior Notes were used primarily for the repayment of loans from PSEG, which
were provided to finance Power's purchase of PSE&G's generation business. Power
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. Each series of
Senior Notes received investment grade ratings from Moody's Investors Service,
Fitch, Inc. and Standard & Poor's Rating Services.
Power has various lines of credit extended by banks to support the issuance
of letters of credit. As of June 30, 2001, letters of credit were issued in the
amount of approximately $90 million.
Energy Holdings
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. On June 30, 2001, Energy Holdings had an
outstanding balance of $137 million under its existing 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.
Regulatory Restrictions
Capital resources and investment requirements may be affected by the
outcome of the proceedings being conducted by the 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 PSE&G. 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 Final Order requiring PSE&G to transfer its generation assets to
Power, the BPU noted that, due to significant changes in the industry and, in
particular, PSEG's corporate structure as a result of the Final Order,
modifications to or relief from the Focused Audit might be warranted. PSE&G has
notified the BPU of its intention to make a filing to modify the terms of the
Focused Audit. PSE&G believes that the Focused Audit restrictions have
effectively been superceded by the Final Order. PSE&G therefore expects
modifications to be made, although no assurances can be given, and that the 20%
notification requirement and the present requirement for PSEG 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.
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. PSEG
believes that this would not have a material adverse effect on its financial
condition, results of operations and net cash flows.
Accounting Matters
For a discussion of EITF 99-19, SFAS 133 and related DIG issues, SFAS 141,
SFAS 142 and SFAS 143, see Note 2. Accounting Matters, and Note 6. Financial
Instruments and Risk Management.
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 16% of PSEG's consolidated assets and the revenues
related to those foreign assets contributed approximately 2% to consolidated
revenues for the six months ended June 30, 2001. For discussion of foreign
currency risk, see Note 6. Financial Instruments and Risk Management.
As of June 30, 2001, approximately $1.589 billion or 25% of Energy
Holdings' assets were 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 $1US 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 foreign currency risk, see Note 6.
Financial Instruments and Risk Management of 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. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used herein, the words
"will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential", variations of such words and similar expressions
are intended to identify forward-looking statements. PSEG and its subsidiaries
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following review of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by PSEG and its
subsidiaries prior to the effective date of the Private Securities Litigation
Reform Act of 1995.
In addition to any assumptions and other factors referred to specifically
in connection with such 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: deregulation
and the unbundling of energy supplies and services and the establishment of a
competitive energy marketplace for products and services; managing rapidly
changing wholesale energy trading operations in conjunction with electricity and
gas production, transmission and distribution systems; managing foreign
investments and electric generation and distribution operations in locations
outside of the traditional utility service territory; political and foreign
currency risks; an increasingly competitive energy marketplace; sales retention
and growth potential in a mature PSE&G service territory; ability to complete
development or acquisition of current and future investments; partner and
counterparty risk; exposure to market price fluctuations and volatility of fuel
and power supply, power output, marketable securities, among others; ability to
obtain adequate and timely rate relief, cost recovery, and other necessary
regulatory approvals; Federal, state and foreign regulatory actions; regulatory
oversight with respect to utility and non-utility affiliate relations and
activities; operating restrictions, increased cost and construction delays
attributable to environmental regulations; nuclear decommissioning and the
availability of storage facilities for spent nuclear fuel; licensing and
regulatory approval necessary for nuclear and other operating stations; the
ability to economically and safely operate nuclear facilities in accordance with
regulatory requirements; environmental concerns; and market risk and debt and
equity market concerns associated with these issues.
ITEM 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
The market risk inherent in PSEG's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in commodity
prices, pollution credits, equity security prices, interest rates and foreign
currency exchange rates as discussed below. PSEG's policy is to use derivatives
to manage risk consistent with its business plans and prudent practices. PSEG
has a Risk Management Committee comprised of executive officers which utilizes
an independent risk oversight function to ensure compliance with corporate
policies and prudent risk management practices.
PSEG is exposed to credit losses in the event of non-performance or
non-payment by counterparties. PSEG also has a credit management process which
is used to assess, monitor and mitigate counterparty exposure for PSEG and its
subsidiaries. In the event of non-performance or non-payment by a major
counterparty, there may be a material adverse impact on PSEG's and its
subsidiaries' financial condition, results of operations or net cash flows. For
discussion of interest rates, commodity-related instruments, equity securities,
credit risks and foreign currency risks, see Note 6. Financial Instruments and
Risk Management.
Commodity-Related Instruments
The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
supply and demand and state and Federal regulatory policies. To reduce price
risk caused by market fluctuations, PSEG's subsidiaries enter into derivative
contracts, including forwards, futures, swaps and options with approved
counterparties, to hedge anticipated demand. These contracts, in conjunction
with owned electric generating capacity and physical gas supply contracts, are
designed to cover estimated electric and gas customer commitments.
PSEG uses a value-at-risk model to assess the market risk of its commodity
business. This model includes fixed price sales commitments, owned generation,
native load requirements, physical and financial contracts. Value-at-risk
represents the potential gains or losses for instruments or portfolios due to
changes in market factors, for a specified time period and confidence level.
PSEG estimates value-at-risk across its commodity business using a model with
historical volatilities and correlations.
The measured value-at-risk using a variance/co-variance model with a 95%
confidence level over a one-week time horizon at June 30, 2001 was approximately
$7 million, compared to the December 31, 2000 level of $19 million. PSEG's
calculated value-at-risk represents an estimate of the potential change in the
value of its portfolio of physical and financial derivative instruments. These
estimates, however, are not necessarily indicative of actual results, which may
differ due to the fact that actual market rate fluctuations may differ from
forecasted fluctuations and due to the fact that the portfolio of hedging
instruments may change over the holding period.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain information reported under Item 3 of Part I of PSEG's 2000 Annual
Report on Form 10-K or Quarterly Report on Form 10-Q for the quarter ended March
31, 2001 is updated below:
Form 10-K, page 3. See Page 18 for information on proceedings before the
BPU in the matter of the PSE&G's filings with the BPU regarding its auction
proposal for BGS supply, Docket No. EX01050303.
Form 10-K, page 12. See Page 18 for information on proceedings before the
BPU in the matter of the PSE&G's filings with the BPU to transfer its gas
contracts, Docket No. GR00080564.
New Matter. See Page 19 for information on proceedings before the BPU in
the matter of the PSE&G's filings with the BPU for increased gas base rates and
revised gas property depreciation rates, Docket Nos. GR01050328 and GR01050297.
ITEM 5. OTHER INFORMATION
Certain information reported under PSEG's 2000 Annual Report on Form 10-K
and Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 is
updated below. References are to the related pages on the Form 10-K as printed
and distributed.
Electric Operation and Supply
Form 10-K, page 3. PSE&G has contracted with Power to provide the capacity
and electricity necessary for the BGS obligation through July 31, 2002. On June
29, 2001 PSE&G and the other three BPU regulated New Jersey electric utility
companies submitted a joint filing to the BPU setting forth an auction proposal
for the provision of BGS supply beginning August 1, 2002. In addition, each
company also filed specific contingency plans and accounting information.
Gas Contract Transfer
Form 10-K, page 12. On March 16, 2001, the New Jersey Ratepayer Advocate
(RPA) filed a motion to dismiss this case. The motion is pending before the
Administrative Law Judge. At a hearing held on April 16, 2001, PSE&G presented a
Stipulation of Settlement. PSE&G is negotiating to have additional parties
execute the Stipulation. The final hearing was conducted on June 22, 2001. A
settlement meeting was conducted with the BPU on July 24, 2001. PSE&G is
drafting a proposed settlement agreement. The initial brief and reply briefs are
scheduled to be filed on August 15, 2001 and September 4, 2001, respectively.
FERC RTO Orders
Form 10-K, page 14. The Federal Energy Regulatory Commission (FERC), in a
series of orders issued on July 11 and 12 called for the creation of four large
regional transmission organizations (RTOs) to facilitate competitive regional
markets in the U.S. FERC rejected several smaller RTO proposals and directed
transmission owners and independent system operators (ISOs) to combine into much
larger RTOs, dramatically altering their proposed geographic size and
configuration.
In the Northeast region, FERC conditionally approved the Pennsylvania-New
Jersey-Maryland (PJM) RTO proposal (subject to several modifications and
compliance filings) and rejected the New York ISO and ISO-New England RTO
proposals. FERC directed that the three existing ISOs for PJM, New York and New
England, as well as the systems involved in PJM West, form a single Northeast
RTO, based on the "PJM platform". FERC directed that the parties in the region
engage in mediation (with FERC oversight) to prepare a proposal and timetable
for the merger of the ISOs into a single RTO. At the end of the 45-day mediation
period, the Administrative Law Judge assigned to the matter will submit a report
to the Commission.
In the Southeast region, FERC rejected a separate RTO proposal made by the
Southern Companies and another submitted jointly by Entergy and the Southwest
Power Pool. FERC directed that a single Southeast RTO be created, using the Grid
South platform. As in the Northeast, FERC directed the Southeast parties to
engage in mediation under the supervision of an Administrative Law Judge.
Wholesale and retail customers, as well as lower-cost generation should
benefit from having better access to a larger regional market. While impacts on
all PSEG affiliates are uncertain because specific business rule changes will
not be known for some time, the elimination of seams issues and the creation of
a single wholesale market in the Northeast is generally expected to have a
positive impact on the PSEG companies. The goal of the mediation process is to
develop a business plan and milestones for the creation and implementation of
the single northeast RTO.
Gas Base Rate Filings
New Matter. On May 4, 2001, PSE&G filed a petition with the BPU for
authority to revise its gas property depreciation rates (Depreciation Case). In
this filing, PSE&G requested authority to implement its proposed depreciation
rates simultaneous for book purposes and ratemaking purposes when the BPU
implements new tariffs designed to recover the additional annual revenues
resulting from the gas base rate case discusses below. On May 25, 2001, PSE&G
filed a petition with the BPU requesting an increase in gas base rates of $171
million for gas delivery service (Gas Base Rate Case). The requested increase
would result in an overall gas revenue increase of 7.06% to reflect current
costs. Present gas rates will remain in effect pending approval by the BPU.
PSE&G believes that the current gas base rates, in effect since November 1991,
do not reasonably reflect capital investments and other costs required to
maintain the gas utility infrastructure. The BPU has consolidated the
Depreciation Case and the Gas Base Rate Case.
Construction and Development
New Matter. In June 2001, Fossil's Kearny Unit #12 (175 MW) in Kearny, New
Jersey, began commercial operation for one half of the capacity. The unit was
fully operational in August 2001.
Form 10-K, page 24. 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, the plant is expected to begin operating in combined-cycle.
Global owns a 74% interest in Tanir Bavi.
Form 10-K, page 24. In June 2001, the Fushi Hydropower Plant began
commercial operation of a hydropower plant located along the Rongjiang River in
China. Global owns an indirect 35% interest in the Fushi Hydropower plant.
Form 10-K, page 24. 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.
Form 10-K, page 44. PSEG Power New York Inc., an indirect subsidiary of
Power, is in the process of obtaining permits and approvals to authorize the
development of the Bethlehem Energy Center, a 750 MW combined-cycle power plant
that will use natural gas as its primary fuel and low-sulfur distillate oil as a
secondary fuel. The Bethlehem Energy Center will be located on the site of the
400 MW Albany Steam Station, (which was acquired from Niagara Mohawk Power
Corporation in May 2000) and will replace that facility. PSEG Power New York
Inc. filed an application for a water permit in March 2001, an application for
an air permit in May 2001 and an application for a Certificate of Environmental
Compatibility and Public Need in July 2001. Under its Purchase Agreement with
Niagara Mohawk, Power will be obligated to pay Niagara Mohawk $9 million if it
redevelops the Albany Station.
License Renewals
New Matter. Exelon, co-owner and operator of Peach Bottom Atomic Power
Station (Peach Bottom), has informed PSEG that on July 3, 2001 an application
was submitted to the Nuclear Regulatory Commission to renew the operating
licenses for Peach Bottom Units 2 and 3. If approved, the current licenses would
be extended by 20 years, to 2033 and 2034 for Units 2 and 3, respectively. NRC
review of the application is expected to take approximately two years.
Form 10-K, page 18. The New Jersey Department of Environmental Protection
(NJDEP) issued a final New Jersey Pollutant Discharge Elimination System permit
(Permit) for PSEG Nuclear LLC's (Nuclear), a subsidiary of Power, Salem
Generating Station (Salem) on June 29, 2001, with an effective date of August 1,
2001, allowing for the continued operation of Salem with its existing cooling
water system. This Permit renews Salem's variance from applicable thermal water
quality standards under Section 316(a) of the federal Clean Water Act (CWA),
determines that the existing intake structure represents best technology
available under Section 316(b) of the CWA, requires that Nuclear continue to
implement the wetlands restoration and fish ladder programs established under
the 1994 permit and imposes requirements for additional analyses of data and
studies to determine if other intake technologies are available for application
at Salem that are biologically effective. The Permit also requires Nuclear to
install up to two additional fish ladders in New Jersey and fund an escrow
account in the amount of $500,000 for the construction of artificial reefs by
NJDEP. The Permit's expiration date is July 31, 2006.
Nuclear also reached an agreement settlement with the Delaware Department
of Natural Resources and Environmental Control (DNREC) providing that Nuclear
will fund additional habitat restoration and enhancement activities as well as
fisheries monitoring and that PSEG and DNREC will work cooperatively on the
finalization of regulatory approvals required for Salem and the implementation
of the Permit. PSEG must also obtain a renewal of the Delaware River Basin
Commission's Docket for the Salem. As part of this agreement, PSEG was required
to deposit approximately $5.8 million into an escrow account to be used for
future costs related to this settlement.
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
-------------- --------
10a(23) Employment Agreement with Robert E. Busch dated
April 24, 2001
10a(24) Employment Agreement with Thomas M. O'Flynn dated
April 18, 2001
12 Computation of Ratios of Earnings to Fixed Charges
(B) Reports on Form 8-K
None.
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.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
(Registrant)
By: PATRICIA A. RADO
---------------------------------------------
Patricia A. Rado
Vice President and Controller
(Principal Accounting Officer)
Date: August 8, 2001