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 September 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.
------------ -------------------------------------- ----------------------
000-32503 PSEG ENERGY HOLDINGS INC. 22-2983750
(A New Jersey Corporation)
80 Park Plaza-T22
Newark, New Jersey 07102-4194
973-456-3581
http://www.pseg.com
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Registrant is a wholly-owned subsidiary of Public Service Enterprise Group
Incorporated. Registrant meets the conditions set forth in General Instruction H
(1) (a) and (b) of Form 10-Q and is filing this Quarterly Report on Form 10-Q
with the reduced disclosure format authorized by General Instruction H.
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PSEG ENERGY HOLDINGS INC.
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 22
Item 6. Exhibits and Reports on Form 8-K................................. 22
Signature................................................................ 23
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PSEG ENERGY HOLDINGS INC.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2001 2000 2001 2000
------------ ---------- ---------- ----------
OPERATING REVENUES
Energy Service Revenues..................................... $ 126 $ 79 $ 329 $ 229
Electric Generation and Distribution Revenues............... 70 - 70 -
Income from Capital and Operating Leases.................... 58 47 156 122
Income from Joint Ventures and Partnerships................. 34 47 96 108
Interest and Dividend Income................................ 17 1 32 5
Net Investment Gains (Losses)............................... (8) (9) (23) 9
Gain on Withdrawal from Partnership......................... 1 - 51 -
Energy Supply Revenues...................................... - 9 - 66
Other....................................................... 12 10 23 29
------------ ---------- ---------- ----------
Total Operating Revenues................................ 310 184 734 568
------------ ---------- ---------- ----------
OPERATING EXPENSES
Operation and Maintenance................................... 130 71 329 210
Administrative and General.................................. 40 33 105 93
Electric Energy Costs....................................... 34 - 34 -
Depreciation and Amortization............................... 10 3 17 10
Cost of Energy Sales........................................ - 9 - 67
Restructuring Charge........................................ - - - 7
------------ ---------- ---------- ----------
Total Operating Expenses................................ 214 116 485 387
------------ ---------- ---------- ----------
OPERATING INCOME............................................... 96 68 249 181
OTHER INCOME................................................... (1) 1 1 3
INTEREST EXPENSE - NET......................................... (54) (31) (129) (102)
------------ ---------- ---------- ----------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE..................................... 41 38 121 82
INCOME TAXES................................................... (11) (11) (22) (23)
Minority Interests............................................. (1) - - 1
------------ ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE............................. 29 27 99 60
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..................................................... 29 27 106 60
Preferred Stock Dividend Requirements.......................... (6) (6) (17) (19)
------------ ---------- ---------- ----------
EARNINGS AVAILABLE TO PUBLIC
SERVICE ENTERPRISE GROUP INCORPORATED....................... $ 23 $ 21 $ 89 $ 41
============ ========== ========== ==========
See Notes to Consolidated Financial Statements.
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
September 30, December 31,
2001 2000
---------------- ----------------
CURRENT ASSETS
Cash and Cash Equivalents................................................... $ 40 $ 22
Accounts Receivable:
Trade, net of allowance for doubtful accounts - 2001, $11; 2000, $5....... 229 132
Other..................................................................... 23 4
Affiliated Companies...................................................... 106 64
Notes Receivable............................................................ 39 23
Assets Held for Sale........................................................ 412 48
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts. 30 27
Other Current Assets........................................................ 21 7
---------------- ----------------
Total Current Assets.................................................... 900 327
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
Real Estate................................................................. 130 103
Property, Plant and Equipment............................................... 818 69
Construction in Progress.................................................... 288 172
---------------- ----------------
Total.................................................................. 1,236 344
Accumulated Depreciation and Amortization................................... (189) (51)
---------------- ----------------
Net Property, Plant and Equipment....................................... 1,047 293
---------------- ----------------
INVESTMENTS
Capital Leases - Net........................................................ 2,811 2,253
Corporate Joint Ventures.................................................... 1,214 1,584
Partnership Interests....................................................... 626 575
Other Investments........................................................... 69 71
---------------- ----------------
Total Investments....................................................... 4,720 4,483
---------------- ----------------
OTHER ASSETS
Goodwill.................................................................... 266 56
Other Assets................................................................ 109 39
---------------- ----------------
Total Other Assets...................................................... 375 95
---------------- ----------------
TOTAL ASSETS................................................................... $ 7,042 $ 5,198
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See Notes to Consolidated Financial Statements.
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
2001 2000
----------------- -----------------
CURRENT LIABILITIES
Long-Term Debt Due Within One Year........................................ $ 362 $ 267
Short-Term Borrowings Due to Public Service Enterprise Group Incorporated. 65 -
Accounts Payable:
Trade................................................................... 98 54
Taxes................................................................... 14 5
Interest................................................................ 63 31
Other................................................................... 56 32
Affiliated Companies.................................................... 5 5
Borrowings Under Lines of Credit.......................................... 200 392
Notes Payable............................................................. 27 91
Billing in Excess of Costs and Estimated Earnings on Uncompleted Contracts 21 18
----------------- -----------------
Total Current Liabilities............................................. 911 895
----------------- -----------------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC............................................. 1,220 1,071
Other Noncurrent Liabilities.............................................. 96 28
----------------- -----------------
Total Noncurrent Liabilities.......................................... 1,316 1,099
----------------- -----------------
COMMITMENTS AND CONTINGENT LIABILITIES....................................... - -
----------------- -----------------
MINORITY INTERESTS........................................................... 112 23
----------------- -----------------
CAPITALIZATION
LONG-TERM DEBT............................................................ 2,577 1,432
----------------- -----------------
STOCKHOLDER'S EQUITY
Common Stock, Issued: 100 Shares........................................ - -
Preferred Stock......................................................... 509 509
Additional Paid-in Capital.............................................. 1,490 1,090
Retained Earnings....................................................... 438 353
Accumulated Other Comprehensive Loss.................................... (311) (203)
----------------- -----------------
Total Stockholder's Equity............................................ 2,126 1,749
----------------- -----------------
TOTAL LIABILITIES AND CAPITALIZATION......................................... $ 7,042 $ 5,198
================= =================
See Notes to Consolidated Financial Statements.
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income......................................................................... $ 106 $ 60
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and Amortization.................................................... 14 18
Deferred Income Taxes (Other than Leases)........................................ (16) 3
Leveraged Lease Income, Adjusted for Rents Received.............................. 56 23
Investment Distributions......................................................... 72 40
Undistributed Earnings from Affiliates........................................... (60) (30)
Net Gains on Investments......................................................... (28) (9)
Proceeds from Withdrawal from Partnership........................................ 50 -
Non-Cash Portion of Restructuring Charge......................................... - 5
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable........................................................... (127) (72)
Taxes Payable.................................................................. 8 -
Accounts Payable............................................................... 55 113
Interest Payable............................................................... 24 12
Other Current Assets and Liabilities........................................... 2 (28)
Other............................................................................ 5 7
------------- -------------
Net Cash Provided by Operating Activities........................................ 161 142
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Partnerships and Joint Ventures.................................... (125) (147)
Investments in Capital Leases...................................................... (442) (459)
Acquisitions, Net of Cash Provided................................................. (532) (15)
Proceeds from Sales of Capital Leases.............................................. 1 9
Additions to Property, Plant and Equipment......................................... (120) (6)
Additions to Deferred Project Costs................................................ (23) (2)
Return of Capital from Partnerships................................................ 2 72
Other.............................................................................. (72) (14)
------------- -------------
Net Cash Used in Investing Activities............................................ (1,311) (562)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Additional Paid-in Capital........................................... 400 300
Net (Decrease) Increase in Short-Term Debt......................................... (227) 11
Net Increase (Decrease) in Short-Term Intercompany Borrowings...................... 65 (2)
Cash Dividends Paid............................................................... (20) (27)
Repayment of Long-Term Debt........................................................ (252) (154)
Proceeds from Long-Term Debt....................................................... 1,195 299
Other............................................................................. 8 6
------------- -------------
Net Cash Provided by Financing Activities........................................ 1,169 433
------------- -------------
Effect of Exchange Rates on Cash...................................................... (1) -
------------- -------------
Net Change in Cash and Cash Equivalents............................................... 18 13
Cash and Cash Equivalents at Beginning of Period...................................... 22 43
------------- -------------
Cash and Cash Equivalents at End of Period............................................ $ 40 $ 56
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash Payments (Receipts) During the Period for:
Income Tax....................................................................... $ (50) $ (112)
Interest......................................................................... $ 93 $ 44
Non-Cash Investing and Financing Activities:
Fair Value of Property, Plant and Equipment Acquired............................. $ 628 $ 1
Debt Assumed from Companies Acquired............................................. $ 221 $ 9
See Notes to Consolidated Financial Statements.
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
PSEG Energy Holdings Inc. (Energy Holdings), incorporated under the laws of
the State of New Jersey with its principal executive offices located at 80 Park
Plaza, Newark, New Jersey 07102 is a direct wholly-owned subsidiary of Public
Service Enterprise Group Incorporated (PSEG). Energy Holdings has three
principal direct wholly-owned subsidiaries; PSEG Global Inc. (Global), PSEG
Resources Inc. (Resources) and PSEG Energy Technologies Inc. (Energy
Technologies).
In the first quarter of 2001, Global increased its interest in Tanir Bavi
Power Company Private Ltd, (Tanir Bavi) an electric generation facility in India
from 49% to 74%. In the second quarter of 2001, Global increased its interest in
Empresa Distribuidora de Electricidad de Entre Rios S.A, (EDEERSA) an electric
distribution facility in Argentina from 41% to 90%. In the third quarter of
2001, Global purchased a 94% interest in Sociedad Austral de Electricidad S.A,
(SAESA) an electric distribution and transmission company in Chile. The assets,
liabilities, revenues and expenses of majority-owned subsidiaries, over which
Global exercises control and for which control is other than temporary, are
consolidated.
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in the
opinion of management, the disclosures are adequate to make the information
presented not misleading. These Consolidated Financial Statements (Statements)
and Notes to Consolidated Financial Statements (Notes) update and supplement
matters discussed in Energy Holdings 2000 Annual Report on Form 10-K and the
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and June
30, 2001 and should be read in conjuction with those Notes.
The unaudited financial information furnished reflects all adjustments
which are, in the opinion of management, necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated financial statements included in the 2000
Annual Report on Form 10-K. Certain reclassifications of prior period data have
been made to conform to the current presentation.
Note 2. Purchase Business Combinations/Asset Acquisitions
Energy Holdings has accounted for the following transactions using the
purchase method of accounting. Accordingly, the purchase price of each
transaction has been allocated based upon the estimated fair value of the assets
and the liabilities acquired as of the acquisition date, with any excess
reflected as Goodwill. The preliminary purchase price allocations for the
acquisitions are subject to adjustment when finalized.
In September 2000, Global acquired a 49% interest in Tanir Bavi, a 220 MW
barge mounted, combined-cycle generating facility located in India. In January
2001, Global paid $2 million (net of cash acquired) to acquire an additional 25%
interest in the project bringing its total ownership interest to 74%. The
purchase price was allocated to Property, Plant and Equipment, Long-Term Debt
and did not impact the recorded amount of Goodwill.
In June 2001, Global exercised its option to acquire an additional 49% of
EDEERSA, bringing its total ownership of EDEERSA to 90%. The additional
ownership was purchased for $110 million. The purchase price was allocated to
Property, Plant and Equipment, Long-Term Debt and did not impact the recorded
amount of Goodwill.
In August 2001, Global purchased a 94% equity stake in SAESA and all of its
subsidiaries from Compania de Petroleos de Chile S.A. (COPEC). The SAESA group
of companies consists of four distribution companies and one transmission
company that provide electric service in the southern part of Chile.
Additionally, Global purchased from COPEC approximately 14% of Empresa Electrica
de la Frontera S.A. (Frontel) not owned by SAESA. SAESA also owns a 50% interest
in the Argentine distribution company Empresa Electrica del Rio Negro S.A. As of
September 30, 2001 Global has spent $419 million (net of cash acquired) to
acquire a 94% interest in SAESA and a 14% interest in Frontel. The purchase
price was allocated to Property, Plant and Equipment, Long-Term Debt and $213
million to Goodwill. In October 2001, Global completed a tender offer for an
additional 6% of publicly trades SAESA shares, for approximately $25 million.
Note 3. Recent Accounting Pronouncements
On January 1, 2001, Energy Holdings adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, and recorded a cumulative effect to earnings
and other comprehensive income (loss) of $9 million and $(15) million,
respectively. As of September 30, 2001, the fair value of Energy Holdings'
derivative assets and liabilities were $27 million and $56 million,
respectively. The fair values of such derivative assets and liabilities were
recorded on the consolidated balance sheet in Other Assets and Other Noncurrent
Liabilities, respectively. As of September 30, 2001, Energy Holdings recorded a
net decrease of $23 million in Partnership Interests to recognize its pro-rata
share of net derivative liabilities recorded by partnerships accounted for under
the equity method of accounting.
The Financial Accounting Standards Board (FASB) Derivative Implementation
Group (DIG) issued guidance, effective January 1, 2002, regarding the normal
purchases and normal sales exception for option-type contracts and forward
contracts in electricity. In addition, the FASB DIG issued amended guidance,
effective April 1, 2002, regarding the normal purchases and normal sales
exception to contracts that combine a forward contract and a purchased option
contract. Energy Holdings is currently evaluating this guidance in light of its
potential impacts and cannot predict the impact on its financial position of
results of operations; however, such impact could be material.
In July 2001, the FASB issued SFAS No. 141 "Business Combinations" (SFAS
141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against this new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead will be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is deemed to be impaired. The provisions of
each statement which apply to goodwill and intangible assets acquired prior to
June 30, 2001 will be adopted by Energy Holdings on January 1, 2002. Energy
Holdings expects the adoption of these accounting standards will result in
certain of its intangibles being subsumed into goodwill and will have the impact
of reducing its amortization of goodwill and intangibles commencing January 1,
2002; however, annual impairment reviews may result in future periodic
write-downs. Acquisitions made subsequent to June 30, 2001 will be accounted for
consistently with the standards prescribed by the transition rules.
Also in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under SFAS 143, the fair value of a
liability for an asset retirement obligation should be recorded in the period in
which it is incurred. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. Energy
Holdings is currently evaluating this guidance and cannot predict the impact on
its financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules
for accounting for the impairment or disposal of long-lived assets. The new
rules become effective for fiscal years beginning after December 15, 2001, with
earlier application encouraged. Energy Holdings is currently evaluating this
guidance and cannot predict the impact on its financial position or results of
operations, however, such impact could be material.
Note 4. Financial Instruments and Risk Management
Equity Securities
Resources has investments in equity securities and limited partnerships.
Resources carries its investments in equity securities at their approximate fair
value as of the reporting date. Consequently, the carrying value of these
investments is affected by changes in the fair value of the underlying
securities. Fair value is determined by adjusting the market value of the
securities for liquidity and market volatility factors, where appropriate. The
aggregate fair values of such investments which had available market prices at
September 30, 2001 and December 31, 2000 were $27 million and $115 million,
respectively. The decrease in the recorded amount of investments was primarily
due to the sales of its interests in equity securities which had a fair value of
$66 million on December 31, 2000 and a decline in the valuation of publicly
traded equity securities held within its limited partnerships. The potential
change in fair value resulting from a hypothetical 10% change in quoted market
prices of these investments amounted to $2 million and $9 million at September
30, 2001 and December 31, 2000, respectively.
In August 2001, Resources received $30 million from the sale of its
interest in an equity security within its leveraged buyout fund which had a book
value of $31 million.
Foreign Currencies
As of September 30, 2001, Global and Resources had assets located or held
in international locations of approximately $3.014 billion and $1.406 billion,
respectively.
Resources' international investments are primarily leveraged leases of
assets located in Australia, Austria, Belgium, China, Germany, the Netherlands,
the United Kingdom, and New Zealand with associated revenues denominated in U.S.
dollars ($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, Taiwan, Tunisia and Venezuela. Investing in foreign
countries involves certain additional risks. Economic conditions that result in
higher comparative rates of inflation in foreign countries are likely to result
in declining values in such countries' currencies. As currencies fluctuate
against the $US, there is a corresponding change in Global's investment value in
terms of the $US. Such change is reflected as an increase or decrease in the
investment value and Other Comprehensive Income (Loss), a separate component of
Stockholder's Equity. As of September 30, 2001, net foreign currency
devaluations have reduced the reported amount of Energy Holdings' total
Stockholder's Equity by $278 million (after-tax), of which $190 million
(after-tax) was caused by the devaluation of the Brazilian Real.
Interest Rates
Energy Holdings is subject to the risk of fluctuating interest rates in the
normal course of business. Its policy is to manage interest rate risk through
the use of fixed rate debt, floating rate debt, interest rate swaps and interest
rate lock agreements. As of September 30, 2001, a hypothetical 10% change in
market interest rates would result in a $3 million change in annual interest
costs related to short-term and floating rate debt at Energy Holdings.
In March 2001, $160 million of non-recourse bank debt originally incurred
to fund a portion of the purchase price of Global's interest in Chilquinta
Energia, S.A. was refinanced. The private placement offering by Chilquinta
Energia Finance Co. LLC, a Global affiliate, of senior notes was structured in
two tranches: $60 million due 2008 at an interest rate of 6.47% and $100 million
due 2011 at an interest rate of 6.62%. An extraordinary loss of $2 million
(after-tax) was recorded in connection with the refinancing of the $160 million
non-recourse bank debt.
California Power Market
Recent events in the California energy markets affected Pacific Gas &
Electric Company (PG&E), one of the state's largest utilities, and starting on
February 1, 2001 resulted in PG&E's failure to pay the full amount due for
energy delivered by three of Global's project affiliates: GWF Power Systems,
L.P. (GWF), Hanford L.P. (Hanford) and Thermal Energy Development Partnership,
L.P. (Tracy), in late 2000 and early 2001. On March 27, 2001, the California
Public Utilities Commission (CPUC) approved a substantial increase in electric
retail rates and directed the state's electric utilities, including PG&E, to
make payment to suppliers for current energy deliveries. On April 6, 2001, PG&E
filed for protection under Chapter 11 of the U.S. Bankruptcy Code asserting that
such rate increase was insufficient to meet its obligations under energy
purchase agreements. Amounts due to Global's project affiliates from PG&E at the
time of its bankruptcy filing (pre-petition payables) remain outstanding.
However, PG&E has subsequently paid, on a timely basis, the appropriate amounts
due to Global's project affiliates for power deliveries commencing April 6, 2001
(post-petition payables) in compliance with the CPUC order. On June 13, 2001,
the CPUC issued an order declaring as reasonable and prudent any amendment to a
power purchase agreement with eligible qualifying facilities that conformed the
energy price to a certain fixed-price for a five-year term. In July 2001, GWF,
Hanford and Tracy entered into an agreement with PG&E (Agreement) and amendments
to their power purchase agreements with PG&E that contained the CPUC approved
pricing for a term of five years commencing July 16, 2001. In addition, PG&E
agreed to assume GWF's, Hanford's and Tracy's power purchase agreements and
elevate the outstanding pre-petition payables to administrative priority status.
The Agreement provides that the pre-petition payables and interest thereon will
be paid pursuant to PG&E's plan of reorganization. The Bankruptcy Court
subsequently approved the Agreement, the amendments to the power purchase
agreements and the assumption of the contracts.
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.
As of September 30, 2001, GWF, Hanford and Tracy still had combined
pre-petition receivables due from PG&E for all plants amounting to approximately
$62 million. Global's pro-rata share of this receivable was $30 million. During
the third quarter of 2001, GWF, Hanford and Tracy reversed the $25 million
allowance for doubtful acccounts which increased operating income by $14 million
(of which Global's share was $7 million) with the remaining amount recorded as a
reserve for certain unresolved matters. As of September 30, 2001, GWF, Hanford
and Tracy maintained a reserve of $11 million (of which Global's share is $5
million) to reflect the amount of potential counterclaims alleged by PG&E. The
amounts received and the timeliness of payment are subject to legal, regulatory,
and legislative developments and Energy Holdings cannot predict the final
resolution.
Note 5. Income Taxes
Energy Holdings' effective tax rate was 20% and 29% for nine months ended
September 30, 2001 and 2000, respectively. Energy Holdings' effective tax rate
differs from the statutory federal income tax rate of 35% primarily due to the
imposition of state taxes and the fact that Global accounts for most of its
foreign investments using the equity method of accounting. Under such accounting
method, Global reflects in revenues its pro rata share of the investment's net
income. Under this accounting method, the foreign income taxes are embedded in
revenues thereby distorting the effective tax rate downward. For the nine months
ended September 30, 2001, Energy Holdings realized income from foreign projects
that were consolidated and foreign income tax reflected to include such
consolidated projects was $2 million.
The Internal Revenue Service has concluded the audit of Energy Holdings'
1994-1996 Federal Income Tax Returns. It is anticipated that the result of the
Revenue Agent's Report will not have a material impact on Energy Holdings'
financial position, statement of operations or net cash flows.
Note 6. Financial Information by Business Segments
Information related to the segments of Energy Holdings' business is
detailed below:
--------------------------------------------------------------------------------------------------------------
Energy Consolidated
Global Resources Technologies Other (A) Total
-------------------------- -------------------------- ---------------
(Millions of Dollars)
For the Quarter Ended September 30,
2001:
Total Operating Revenues............. $ 125 $ 50 $ 135 $ - $ 310
Segment Earnings (Loss) Available to
PSEG................................. $ 18 $ 9 $ (3) $ (1) $ 23
--------------------------------------------------------------------------------------------------------------
For the Quarter Ended September 30,
2000:
Total Operating Revenues............. $ 48 $ 40 $ 96 $ - $ 184
Segment Earnings (Loss) Available to
PSEG................................. $ 16 $ 7 $ - $ (2) $ 21
--------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 2001:
Total Operating Revenues............. $ 251 $ 134 $ 348 $ 1 $ 734
Extraordinary Loss on
Early Retirement of Debt........... $ (2) $ - $ - $ - $ (2)
Cumulative Effect of a Change in
Accounting Principle............... $ 9 $ - $ - $ - $ 9
Segment Earnings (Loss) Available to
PSEG................................. $ 77 $ 27 $ (15) $ - $ 89
--------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 2000:
Total Operating Revenues............. $ 119 $ 131 $ 317 $ 1 $ 568
Segment Earnings (Loss) Available to
PSEG................................. $ 21 $ 36 $ (12) $ (4) $ 41
--------------------------------------------------------------------------------------------------------------
As of September 30, 2001:
Total Assets......................... $ 3,541 $ 3,109 $ 326 $ 66 $ 7,042
--------------------------------------------------------------------------------------------------------------
As of December 31, 2000:
Total Assets......................... $ 2,271 $ 2,564 $ 312 $ 51 $ 5,198
--------------------------------------------------------------------------------------------------------------
(A) Other includes amounts applicable to Energy Holdings (parent corporation),
Enterprise Group Development Corporation, PSEG Capital Corporation and
intercompany eliminations.
Geographic information for Energy Holdings is disclosed below.
Revenues (1) Identifiable Assets (2)
-------------------------------------------------- -----------------------------------
Quarter Ended Nine Months Ended
September 30, September 30, September 30, December 31,
---------------------- ------------------------ ----------------- ----------------
2001 2000 2001 2000 2001 2000
---------- -------- ----------- --------- ----------------- ----------------
(Millions of Dollars)
United States......... $ 187 $ 137 $ 511 $ 428 $ 2,622 $ 2,208
Foreign Countries..... 123 47 223 140 4,420 2,990
---------- -------- ---------- --------- ---------------- ---------------
Total............ $ 310 $ 184 $ 734 $ 568 $ 7,042 $ 5,198
---------- -------- ---------- --------- ---------------- ---------------
Identifiable investments in foreign countries include:
Chile and Peru (3).......................................................... $ 1,163 $ 520
Netherlands................................................................. 890 815
Argentina .................................................................. 743 470
Brazil (4).................................................................. 248 295
India (5) .................................................................. 247 51
Tunisia (6) ................................................................ 227 155
Other....................................................................... 902 684
---------------- ----------------
Total................................................................... $ 4,420 $ 2,990
================ ================
(1) Revenues are attributed to countries based on the locations of the
investments. Global's revenue includes its share of the net income from
joint ventures recorded under the equity method of accounting.
(2) Total identifiable assets are net of foreign currency translation
adjustment of $(310) million (pre-tax) as of September 30, 2001 and $(225)
million (pre-tax) as of December 31, 2000.
(3) Amount is net of foreign currency translation adjustment of $(79) million
(pre-tax) as of September 30, 2001 and $(44) million (pre-tax) as of
December 31, 2000.
(4) Amount is net of foreign currency translation adjustment of $(212) million
(pre-tax) as of September 30, 2001 and $(167) million (pre-tax) as of
December 31, 2000.
(5) Amount is net of foreign currency translation adjustment of $(4) million
(pre-tax) as of September 30, 2001 and $(2) million (pre-tax) as of
December 31, 2000.
(6) Amount is net of foreign currency translation adjustment of $(4) million
(pre-tax) as of September 30, 2001 and $(1) million (pre-tax) as of
December 31, 2000.
Note 7. Comprehensive Income
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- ---------- --------- ---------
(Millions of Dollars)
Net Income...................................................... $ 29 $ 27 $ 106 $ 60
Foreign currency translation adjustments (A).................... (37) (8) (75) 12
Cumulative effect of a change in accounting principle (net of
tax of $14 and minority interest of $12)........................ -- -- (15) --
Current period declines in fair value of derivative
instruments-net................................................. (18) -- (19) --
-------- ---------- --------- ---------
Comprehensive income............................................ $ (26) $ 19 $ (3) $ 72
======== ========== ========= =========
(A) Net of tax of $4 million and $1 million for the quarters ended September
30, 2001 and 2000, respectively, and $8 million and $(1) million for the
nine months ended September 30, 2001 and 2000, respectively.
Note 8. Commitments and Contingencies
Energy Holdings, Global and/or PSEG have guaranteed certain obligations of
Global's affiliates, including the successful completion, performance or other
obligations related to certain of the projects in an aggregate amount of
approximately $238 million as of September 30, 2001. A substantial portion of
such guarantees is cancelled upon successful completion, performance and/or
refinancing of construction debt with non-recourse project debt. A subscription
agreement for PSEG to purchase Global's capital stock secures $3 million of such
obligations.
In March 2001, Global, through Dhofar Power Company (DPCO), signed a
20-year concession with the government of Oman to privatize the electric system
of Salalah. A consortium led by Global and several major Omani investment groups
owns DPCO. The project will enhance the existing network of generation,
transmission and delivery assets and is expected to add 195 MW of new generating
capacity. The project achieved financial closure in August 2001 and commenced
construction in September 2001. The project is expected to achieve commercial
operation by March 2003. 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
with the California Department of Water Resources to provide 340 MW of electric
capacity to California from three new natural gas-fired peaker plants that GWF
Energy expects to build and operate in California. Total project cost is
estimated at $310 million. The first plant, a 90 MW facility, was completed and
began operation in August 2001. Global's permanent equity investment in these
plants, including contingencies, is not expected to exceed $100 million after
completion of project financing, expected to occur in 2002.
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. Global's closing for this acquisition is scheduled
for the fourth quarter of 2001 and may be dependent upon resolution of certain
matters regarding applicable tax rates. Electroandes is the sixth largest
electric generator in Peru with a 6% market share. Electroandes' main assets
include four hydroelectric facilities with a combined installed capacity of 183
MW and 460 miles of transmission lines located in the Central Andean region
(northeast of Lima). In addition, Electroandes has the exclusive rights to
develop a 100 MW expansion of an existing station and a 150 MW greenfield
hydroelectric facility. In 2000, Electroandes generated 1,150 gigawatts of
electrical energy, of which 97% was sold through power purchase agreements to
mining companies in the region.
In August 2001, Global purchased a 94% equity stake in SAESA and all of its
subsidiaries from COPEC. The SAESA group of companies consists of four
distribution companies and one transmission company that provide electric
service in the southern part of Chile. Additionally, Global purchased from
COPEC, approximately 14% of Frontel not owned by SAESA. SAESA also owns a 50%
interest in the Argentine distribution company Empresa Electrica del Rio Negro
S.A. Collectively, the companies serve more than 615,000 customers. The purchase
approximated $460 million, including a tender offer for 6% of publicly traded
SAESA shares in October 2001.
In August 2001, Global entered into an agreement to sell its interests in
several joint ventures in Argentina to a subsidiary of the AES Corporation (AES)
for $376 million. The transaction will involve the transfer of Global's 30%
interest in three Argentine distribution companies, Empresa Distribuidora de
Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur S.A. (EDES) and
Empresa Distribuidora La Plata S.A. (EDELAP), a 19% share in the 650 MW Central
Termica San Nicolas power plant (CTSN), and a 33% interest in the 830 MW Parana
power plant (Parana) nearing the completion of construction. Payment terms for
the transaction include a 10% down payment with the remainder of the purchase
price payable under a promissory note to be issued by a subsidiary of AES to
Global and collateralized by AES subsidiary's interest in the assets. The assets
pending sale are classified as Assets Held For Sale. Consummation of the
transaction is subject to the parties obtaining certain lender and regulatory
approvals and is expected to occur in early 2002.
As of September 30, 2001, Global's investments in the Texas Independent
Energy (TIE) partnership include $161 million of loans that earn interest at an
annual rate of 12%. Of the $161 million currently outstanding, $83 million is
scheduled to be repaid in full in February 2002 and $78 million will be repaid
over the next 12 years.
Energy Holdings, its subsidiaries and equity method investees are involved
in various legal actions arising in the normal course of business. Energy
Holdings does not expect there will be material adverse effect on its financial
statements as a result of these proceedings, although no assurances can be
given.
Note 9. Related-Party Transactions
PSEG Services Corporation (Services) provides and bills administrative
services to Energy Holdings and its subsidiaries on a monthly basis. Energy
Holdings' and its subsidiaries' costs related to such services amounted to
approximately $7 million and $24 million for the quarter and nine months ended
September 30, 2001, respectively. As of September 30, 2001, Energy Holdings' and
its subsidiaries' related party payables related to these costs was
approximately $2 million.
For the nine months ended September 30, 2001, PSEG invested $400 million of
additional equity in Energy Holdings, the proceeds of which were used to fund
additional investments at Global.
================================================================================
PSEG ENERGY HOLDINGS INC.
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following are the significant changes in or additions to information
reported in the Energy Holdings' 2000 Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001
affecting the consolidated financial condition and the results of operations of
Energy Holdings and its subsidiaries. This discussion refers to the Statements
and related Notes of Energy Holdings and should be read in conjunction with such
Statements and Notes.
Results of Operations
Energy Holdings' Earnings Available to PSEG for the quarter and nine months
ended September 30, 2001 increased $2 million or 10% and $48 million or 117%,
respectively, from the comparable periods in 2000. Earnings Available to PSEG
increased for both periods primarily due to earnings from Global's recent
acquisitions and Interest Income recorded on certain notes receivable and loans,
and Resources' higher leveraged lease income, partially offset by increased
Interest Expense, lower earnings from Global's investment in Rio Grande Energia
(RGE) and lower earnings at Energy Technologies. Earnings Available to PSEG for
the nine months ended September 30, 2001 were also impacted by the gain on
Global's withdrawal from its interest in the Eagle Point Cogeneration
Partnership (Eagle Point), partially offset by a net decrease in the carrying
value of publicly traded equity securities within certain leveraged buyout funds
at Resources.
Energy Holdings -- Revenues
Revenues increased $126 million or 68% and $166 million or 29% for the
quarter and nine months ended September 30, 2001, respectively, from the
comparable periods in 2000.
Revenues for the quarter ended September 30, 2001 increased $77 million at
Global, primarily attributable to the $70 million of Electric Generation and
Distribution revenues recorded in connection with the acquisitions of ELCHO in
the third quarter of 2000, EDEERSA in the second quarter of 2001, SAESA in the
third quarter of 2001, and the commencement of operations at Tanir Bavi in the
second quarter of 2001. In addition, revenues benefited from the increase of $17
million in Interest Income recorded in connection with the promissory note
pending Global's sale of its interest in three Argentine distribution companies,
EDEN, EDES and EDELAP, and the CTSN and Parana power plants, to a subsidiary of
AES, the loans to TIE, and the note received as consideration for the withdrawal
from its interest in Eagle Point. Increased earnings from other projects also
benefited the increase in revenues for the quarter ended September 30, 2001.
These increases were partially offset by lower revenues of $9 million due to a
reduction in earnings at RGE, an electric distribution company in Brazil,
primarily related to the adverse effect of exchange rate changes in the
Brazilian Real and the continued economic slowdown in Brazil and $7 million from
lower revenues from Global's withdrawal from its interest in Eagle Point in
January 2001.
Revenues for the quarter ended September 30, 2001 increased $10 million at
Resources primarily due to higher leveraged lease income from continued
investment in such financing transactions.
Revenues for the quarter ended September 30, 2001 increased $39 million at
Energy Technologies primarily due to increased sales in its mechanical
contracting business.
Revenues for the nine months ended September 30, 2001 increased $132
million at Global primarily attributable to the $70 million of Electric
Generation and Distribution revenues recorded in connection with the
acquisitions of ELCHO in the third quarter of 2000, EDEERSA in the second
quarter of 2001, SAESA in the third quarter of 2001, and the commencement of
operations at Tanir Bavi in the second quarter of 2001. A net increase in
revenues of $33 million was realized from the gain on the withdrawal from its
interest in Eagle Point partially offset by lower equity in earnings related to
the withdrawal from its interest in Eagle Point in January 2001. In addition,
revenues benefited from an increase of $30 million in Interest Income recorded
in connection with the note received as consideration for the withdrawal from
its interest in Eagle Point, the loans to TIE, and the promissory note pending
the sale of EDEN, EDES, EDELAP, CTSN and Parana to a subsidiary of AES. Revenues
increased an additional $10 million from increased earnings at Chilquinta and
Luz del Sur. Increased earnings from other projects also benefited the increase
in revenues for the nine months ended September 30, 2001. These increases were
partially offset by lower revenues of $21 million due to a reduction in earnings
at RGE primarily related to the adverse effect of exchange rate changes in the
Brazilian Real and the continued economic slowdown in Brazil.
Revenues for the nine months ended September 30, 2001 increased $3 million
at Resources primarily due to improved revenues of $35 million from higher
leveraged lease income from continued investment by Resources in such financing
transactions and increased limited partnership income. These increases were
partially offset by lower Net Investment Gains (Losses) of $32 million, of which
$28 million resulted from a net decrease in the carrying value of publicly
traded equity securities within certain leveraged buyout funds.
Revenues for the nine months ended September 30, 2001 increased $31 million
at Energy Technologies due to increased sales in its mechanical contracting
business.
Energy Holdings -- Operating Expenses
Operating expenses increased $98 million or 84% and $98 million or 25% for
the quarter and nine months ended September 30, 2001, respectively, from the
comparable periods in 2000.
Operating expenses for the quarter ended September 30, 2001 increased by
$57 million at Global, primarily attributable to the operating results
consolidated in connection with the acquisitions of SAESA, ELCHO and EDEERSA,
and the commencement of operations at Tanir Bavi. Energy Technologies' operating
expenses increased by $42 million due to an increase in the volume and cost of
mechanical contract sales.
Operating expenses for the nine months ended September 30, 2001 increased
by $61 million at Global, primarily attributable to the consolidated operating
results from the acquisitions of SAESA, ELCHO, and EDEERSA and the commencement
of operations at Tanir Bavi. Energy Technologies' operating expenses increased
by $37 million due to an increase in the volume and cost of mechanical contract
sales, cost overruns of mechanical contracts and the increased cost of outside
services due to the continued integration of its mechanical contracting
business. These increased costs at Energy Technologies were partially offset by
a reduction in restructuring charges.
Energy Holdings -- Net Interest Expense and Preferred Stock Dividend
Requirements
Net Interest Expense and Preferred Stock Dividend Requirements increased
$23 million or 62% and $25 million or 21% for the quarter and nine months ended
September 30, 2001, respectively, from the comparable periods in 2000.
As of September 30, 2001 and December 31, 2000, Energy Holdings had total
debt outstanding of $3.231 billion and $2.182 billion, respectively, of which
$681 million and $354 million, respectively, was non-recourse to Energy
Holdings. The increase of $1.049 billion in outstanding debt for the nine months
ended September 30, 2001 was primarily related to the sale of $400 million of
8.625% Senior Notes due 2008 in February 2001 and $550 million of 8.5% Senior
Notes due 2011 in July 2001. The net proceeds were used for the repayment of
short-term debt outstanding from intercompany loans from PSEG and borrowings
under revolving credit facilities and to fund the growth of Global and
Resources. Borrowings under the revolving credit facilities and intercompany
loans from PSEG were used to fund the growth of Global and Resources. In
addition, the non-recourse debt increased due to the acquisitions of SAESA,
Tanir Bavi and EDEERSA and the continued drawdown of the loan facility and
working capital facility agreements by these consolidated projects and ELCHO and
Carthage Power Company (Carthage) located in Rades, Tunisia. Interest expense
incurred by projects under construction is capitalized.
Energy Holdings -- Earnings Before Interest and Taxes (EBIT) Contribution
The results of operations for each of Energy Holdings' business segments
are explained below with reference to the EBIT contribution. Energy Holdings
borrows on the basis of a combined credit profile to finance the activities of
its subsidiaries. As such, the capital structure of each of the businesses is
managed by Energy Holdings. Debt at each subsidiary is evidenced by demand notes
with Energy Holdings and PSEG Capital.
Earnings Before Interest and Taxes Contribution
--------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Millions of Dollars)
EBIT:
Global............................................ $ 52 $ 36 $ 152 $ 85
Resources......................................... 46 35 122 120
Energy Technologies............................... (2) 1 (19) (15)
Other............................................. (1) (3) (5) (6)
----------- ----------- ----------- -----------
Total EBIT.................................... $ 95 $ 69 $ 250 $ 184
=========== =========== =========== ===========
Global
Global develops, acquires, owns and operates electric generation and
distribution facilities and engages in power production and distribution,
including wholesale and retail sales of electricity, in selected domestic and
international markets. Global has ownership interests in 30 operating generation
projects totaling 4,964 MW (1,935 MW net of other partners' interests) located
in the United States, Argentina, China, India, Poland and Venezuela. Global has
ownership interests in 15 projects totaling 3,210 MW (1,577 MW net) in
construction or advanced development that are located in the United States,
Argentina, China, India, Italy, Oman, Poland, Taiwan, Tunisia and Venezuela. For
a discussion of the pending sale of certain projects located in Argentina, see
Note 8. Commitments and Contingencies of Notes.
Until the fourth quarter of 2000, Global's investments consisted of
minority ownership positions in projects and joint ventures. Other than fees
collected for providing operations and maintenance services, Global's revenues
represented its pro-rata ownership share of net income generated by project
affiliates which is accounted for by the equity method of accounting. The
expenses in the table below were those required to develop projects and general
and administrative expenses required to operate the business as a whole. In the
fourth quarter of 2000, Global increased its interest in Carthage Power Company,
an electric generation facility under construction in Rades, Tunisia from 35% to
60% and completed project financing for a 90% economic interest in ELCHO, a
power plant in Poland.
In the first quarter of 2001, Global increased its interest in Tanir Bavi,
an electric generation facility in India from 49% to 74%. In the second quarter
of 2001, Global increased its interest in EDEERSA, an electric distribution
facility in Argentina from 41% to 90%. In the third quarter of 2001, Global
purchased a 94% interest in SAESA, a group of companies consisting of four
distribution companies and one transmission company that provide electric
service in Chile and a distribution company in Argentina. The accounts of Global
include the assets, liabilities, revenues and expenses of majority-owned
subsidiaries over which Global exercises control and for which control is other
than temporary.
Summary Results - Global
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Millions of Dollars)
EBIT:
Revenues...................................... $ 125 $ 48 $ 251 $ 119
Expenses...................................... 71 14 98 37
----------- ----------- ----------- -----------
Operating Income.............................. 54 34 153 82
Other Income.................................. (2) 2 (1) 3
----------- ----------- ----------- -----------
EBIT.......................................... $ 52 $ 36 $ 152 $ 85
=========== =========== =========== ===========
Global's EBIT contribution increased $16 million or 44% and increased $67
million or 79% for the quarter and nine months ended September 30, 2001 from the
comparable periods in 2000, respectively.
The Global EBIT contribution increase for the quarter ended September 30,
2001 was primarily attributable to a net $16 million increase in EBIT resulting
from the earnings related to the acquisitions of ELCHO in the third quarter of
2000, EDEERSA in the second quarter of 2001, SAESA in the third quarter of 2001,
and the commencement of operations at Tanir Bavi in the second quarter of 2001.
In addition, EBIT benefited from an increase of $17 million in Interest Income
recorded in connection with the promissory note pending Global's sale of its
interest in three Argentine distribution companies, EDEN, EDES and EDELAP, and
the CTSN and Parana power plants to a subsidiary of AES, the loans to TIE, and
the note received as consideration for the withdrawal from its interest in Eagle
Point. EBIT from other projects also benefited the increase in EBIT for the
quarter ended September 30, 2001. These increases were partially offset by lower
revenues of $9 million due to a reduction in earnings at RGE primarily related
to the adverse effect of exchange rate changes in the Brazilian Real and the
continued economic slowdown in Brazil and $7 million from lower revenues from
Global's withdrawal from its interest in Eagle Point in January 2001.
The Global EBIT contribution increase for the nine months ended September
30, 2001 was primarily attributable to a net $33 million increase in EBIT
realized from the gain on the withdrawal from its interest in Eagle Point,
partially offset by lower equity in earnings related to the withdrawal from its
interest in Eagle Point in January 2001. A net $21 million increase in EBIT was
realized from the earnings related to the acquisitions of ELCHO in the third
quarter of 2000, EDEERSA in the second quarter of 2001, SAESA in the third
quarter of 2001, and the commencement of operations at Tanir Bavi in the second
quarter of 2001. In addition, EBIT benefited from an increase of $30 million in
Interest Income recorded in connection with the promissory note pending Global's
sale of its interest in three Argentine distribution companies, EDEN, EDES and
EDELAP, and the CTSN and Parana power plants, to a subsidiary of AES, the loans
to TIE, and the note received as consideration for the withdrawal from its
interest in Eagle Point. EBIT increased an additional $10 million from increased
earnings at Chilquinta and Luz del Sur. EBIT from other projects also benefited
the increase in EBIT for the nine months ended September 30, 2001. These
increases were partially offset by lower revenues of $21 million due to a
reduction in earnings at RGE primarily related to the adverse effect of exchange
rate changes in the Brazilian Real and the continued economic slowdown in
Brazil, and a $4 million increase in corporate operating expenses incurred as
Global continues to grow its business. Other Income decreased by $4 million
primarily due to $3 million of foreign currency transaction gains recorded in
2000 and a $1 million reduction in the fair value of derivatives in 2001.
Resources
Resources earns its leveraged lease revenues (recorded as Income from
Capital and Operating Leases) primarily from rental payments and tax benefits
associated with such transactions. As a passive investor in limited partnership
project financing transactions, Resources recognizes revenue from its pro-rata
share of the income generated by these investments. As an owner of beneficial
interests in two leveraged buyout funds, Resources recognizes revenue as the
share prices of public companies in the leveraged buyout funds fluctuate. In
addition, revenue is recognized as companies in the fund distribute dividend
income through the fund to the investors and as the fund liquidates its
holdings.
Summary Results - Resources
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ------------ ----------- ------------
(Millions of Dollars)
Revenues......................................... $ 50 $ 40 $ 134 $ 131
Expenses......................................... 4 5 12 11
----------- ------------ ----------- ------------
Operating Income and EBIT........................ $ 46 $ 35 $ 122 $ 120
=========== ============ =========== ============
Resources' EBIT contribution increased $11 million or 31% and $2 million or
2% for the quarter and nine months ended September 30, 2001 from the comparable
periods in 2000, respectively.
The Resources' EBIT contribution increase for the quarter ended September
30, 2001 was primarily due to higher leveraged lease income from continued
investment in such financing transactions.
The Resources' EBIT contribution increase for the nine months ended
September 30, 2001 was due to improved revenues of $3 million primarily
attributable to higher leveraged lease income of $34 million from continued
investment in such financing transactions, partially offset by lower Net
Investment Gains (Losses) of $32 million, of which $28 million resulted from a
net decrease in the carrying value of publicly traded equity securities within
certain leveraged buyout funds.
Energy Technologies
Energy Technologies earns its revenues from providing energy-related
engineering, consulting and mechanical contracting services to and constructing,
operating and maintaining heating, ventilating and air conditioning (HVAC)
systems for industrial and commercial customers in the Northeastern and Middle
Atlantic United States.
Summary Results - Energy Technologies
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2001 2000 2001 2000
------------ ------------- ------------ ------------
(Millions of Dollars)
Revenues.......................................... $ 135 $ 96 $ 348 $ 317
Expenses.......................................... 137 95 369 332
------------ ------------- ------------ ------------
Operating Income.................................. (2) 1 (21) (15)
Other Income...................................... -- -- 2 --
------------ ------------- ------------ ------------
EBIT.............................................. $ (2) $ 1 $ (19) $ (15)
============ ============= ============ ============
Energy Technologies' EBIT contribution decreased $3 million and $4 million
for the quarter and nine months ended September 30, 2001, from the comparable
periods in 2000, respectively.
The Energy Technologies EBIT contribution decrease for the quarter ended
September 30, 2001 resulted primarily from lower margins recorded on increased
sales.
The Energy Technologies EBIT contribution decrease for the nine months
ended September 30, 2001 resulted primarily from cost overruns of mechanical
contracts and lower margins on sales recorded in the third quarter of 2001.
Energy Technologies also experienced an increase in the cost of outside services
due to the continued integration of its mechanical contracting business. The
EBIT contribution decrease was partially offset by a reduction in restructuring
charges.
Liquidity and Capital Resources
It is intended that Global and Resources will continue to provide the
earnings and cash flow for Energy Holdings' long-term growth. Resources'
investments are designed to produce immediate cash flow and earnings that enable
Global and Energy Technologies to focus on longer investment horizons. During
the next five years, Energy Holdings will need material amounts of capital to
fund its planned growth. In addition to cash generated from operations, Energy
Holdings' growth will be funded through external financings and equity infusions
from PSEG.
Over the next several years, Energy Holdings, certain of its project
affiliates and PSEG Capital will be required to refinance maturing debt, incur
additional debt and provide equity to fund investment activity. Any inability to
obtain required additional external capital or to extend or replace maturing
debt and/or existing agreements at current levels and reasonable interest rates
may affect Energy Holdings' financial condition, results of operations and net
cash flows.
Regulatory Matters
Capital resources and investment requirements may be affected by the
outcome of the proceedings being conducted by the New Jersey Board of Public
Utilities (BPU) pursuant to its Energy Master Plan and the New Jersey Electric
Discount and Energy Competition Act (Energy Competition Act) and the
requirements of the 1992 Focused Audit conducted by the BPU, of the impact of
PSEG's non-utility businesses, owned by Energy Holdings, on Public Service
Electric and Gas Company (PSE&G), an Energy Holdings' affiliate. As a result of
the Focused Audit, the BPU approved a plan which, among other things, provides
that:
(1) PSEG will not permit Energy Holdings' investments to exceed 20% of PSEG's
consolidated assets without prior notice to the BPU;
(2) 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
(3) Energy Holdings will pay PSE&G an affiliation fee of up to $2 million a
year.
In its Order requiring PSE&G to transfer its generation assets to PSEG
Power LLC, a wholly-owned subsidiary of PSEG (Final Order), the BPU noted that,
due to significant changes in the industry and, in particular, PSEG's corporate
structure as a result of the Final Order, modifications to or relief from the
Focused Audit might be warranted. PSE&G must make a filing in the first quarter
of 2002 to address the provisions of the Focused Audit in light of the Final
Order. Energy Holdings believes that the BPU order issued in 1986 with respect
to the formation of PSEG (Holding Company Order), the Final Order and The Energy
Competition Act provide the appropriate regulatory framework in the restructured
electric and gas markets, and that the provisions of the Focused Audit, if
applicable, will not adversely affect its financial condition, results of
operations or net cash flows. Regulatory oversight by the BPU to assure that
there is no harm to utility ratepayers from non-utility investments is expected
to continue under the Holding Company Order. At September 30, 2001, Energy
Holdings' assets were approximately 28% of PSEG's consolidated assets and PSEG
Capital debt amounted to $615 million.
In addition, if PSEG were no longer to be exempt under the Public Utility
Holding Company Act of 1935 (PUHCA), PSEG and its subsidiaries would be subject
to additional regulation by the SEC with respect to financing and investing
activities, including the amount and type of non-utility investments. Energy
Holdings believes that this would not have a material adverse effect on its
financial condition, results of operations and net cash flows.
Capital Requirements
Energy Holdings plans to continue the growth of Global and Resources.
Energy Holdings will assess the growth prospects and opportunities for Energy
Technologies' business before committing substantial amounts of additional
capital. For the nine months ended September 30, 2001, Energy Holdings'
subsidiaries made net investments totaling approximately $1.311 billion. These
net investments included leveraged lease investments of $442 million by
Resources and net investments of $871 million by Global, primarily related to
the acquisition of SAESA and incremental investments in certain existing
generation and distribution projects including those in operation and currently
under construction and loans to TIE. Factors affecting actual expenditures and
investments include availability of capital and suitable investment
opportunities, market volatility and local economic trends.
For the nine months ended September 30, 2001, PSEG invested $400 million of
additional equity in Energy Holdings, the proceeds of which were used to fund
additional investments at Global
For a discussion of Global's pending investments, see Note 8. Commitments
and Contingencies of Notes.
External Financings
As of September 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 of which $91 million are outstanding as of September 30,
2001. The 364-day facility and the five-year facility mature in May 2002 and May
2004, respectively. As of September 30, 2001, Energy Holdings had $200 million
borrowed under its revolving credit facilities.
In March 2001, $160 million of non-recourse bank debt originally incurred
to fund a portion of the purchase price of Global's interest in Chilquinta
Energia, S.A. was refinanced. The private placement offering by Chilquinta
Energia Finance Co. LLC, a Global affiliate, of senior notes was structured in
two tranches: $60 million due 2008 at an interest rate of 6.47% and $100 million
due 2011 at an interest rate of 6.62%. An extraordinary loss of $2 million
(after-tax) was recorded in connection with the refinancing of the $160 million
non-recourse bank debt.
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. In September 2001, Energy
Holdings filed a registration statement with the SEC relating to an exchange
offer for, or the resale of, these Senior Notes. The exchange offer is expected
to be completed during the fourth quarter of 2001.
In September 2001, Energy Holdings filed a registration statement with the
SEC relating to an exchange offer for, or the resale of, the $400 million of
8.625% Senior Notes due 2008 sold in February 2001. The exchange offer for these
notes is expected to be completed during the fourth quarter of 2001.
In October 2001, Energy Holdings obtained an uncommitted credit line of up
to $100 million from a single financial institution, which can be accessed as
market conditions warrant.
In October 2001, $135 million of 6.74% medium term notes (MTN) matured
under the PSEG Capital MTN program and were refinanced with funds from the
issuance of short-term debt at Energy Holdings.
In October 2001, PSEG Chile Holdings, a wholly-owned subsidiary of Global
and a $US functional currency entity closed on $150 million of project financing
related to its investment in SAESA, a Chilean Peso functional currency entity.
The debt is variable and is based on LIBOR. In connection with this project
financing, PSEG Chile Holdings entered into two foreign currency forward
exchange contracts with a total notional amount of $150 million. The two
contracts were entered into to hedge the peso/US dollar exposure on the net
investment. This transaction qualifies for hedge accounting under SFAS 133.
Foreign Operations
As of September 30, 2001, Global and Resources had approximately $3.014
billion and $1.406 billion, respectively, of international assets. As of
September 30, 2001, foreign assets represented 60% of Energy Holdings'
consolidated assets and the revenues related to those foreign assets contributed
30% to consolidated revenues for the nine months ended September 30, 2001.
As of September 30, 2001, approximately $2.207 billion or 31% of Energy
Holdings' assets are invested in Latin America, specifically in Brazil,
Argentina, Chile, Peru and Venezuela. The Argentine economy has been in a state
of recession for approximately three years. Continued deficit spending in the 23
Argentine provinces coupled with low growth and high unemployment have caused
much speculation in the ability of the country to service and refinance $130
billion of debt over the next several years. The Argentine situation has
contributed to downward pressure on the Brazilian and Chilean currencies. The
Brazilian Real has devalued approximately 41% since year-end 2000 from 1.9510 to
$1US to 2.7631 to $1US as of September 30, 2001 and the Chilean Peso has
devalued approximately 25% since year-end 2000 from 573.90 to $1US to 720.82 to
$1US as of September 30, 2001. The Argentine currency remains pegged at 1 peso
to 1 $US though there has been much speculation as to whether or not the peg
will hold. Recent actions by the current Argentine administration provide for a
more favorable exchange rate for exporters, which has continued to fuel the
speculation that the currency peg may not hold. In addition, the Argentine
administration cut spending to balance its budget by year-end 2001 to improve
financial stability in the region.
In Argentina, the electricity law provides for a pass-through of
devaluation to the end user customer. Customers' bills are first computed in the
$US and converted into the peso for billing. This implies that a devaluation
will not impact the level of $US revenues an electric distribution company
receives. Energy Holdings' faces exposure as a result of secondary impacts of a
devaluation on the overall economy, which could follow many different scenarios.
In addition, Energy Holdings' share of $US operating company debt is
approximately $118 million. This is of concern because such debt becomes more
costly to service with a devaluation, and the immediate impact of the
devaluation must be recorded through the income statement as the $US debt is
revalued into the local currency. Additionally, upon devaluation, Global's
operating companies in the region may be exposed to increased collection risk.
The Brazilian distribution company in which Global has a 32% interest,
entered into a $190 million $US denominated loan, of which Global's share is $62
million. The functional currency of the distribution company is the Brazilian
Real. Therefore, its debt is subject to exchange rate risk as the Brazilian Real
fluctuates with the $US. Changes in the exchange rate cause the loan amount, as
reported in the functional currency, to be marked upward or downward, with an
offset to the income statement.
In Chile, the operating performance of Energy Holdings' assets is
offsetting the impact of the weakening currency in relation to the $US.
Energy Holdings cannot predict if and when currencies will fluctuate
against the $US or changes in economic situations in the operating companies in
which it invests. However, the impact of these changes could cause material
adverse effects to Energy Holdings' financial condition, results of operations
or net cash flows. For further discussion of Global's foreign currency risk, see
Note 4. Financial Instruments and Risk Management of the Notes.
Business Environment
Energy Holdings is currently evaluating the economic consequences of the
September 11, 2001 terrorist attacks on the United States and subsequent
developments, particularly their impact on accelerating the continued economic
slowdown in the United States and worldwide. The consequences of a prolonged
recession may include the continued weakening of certain Latin American
currencies, including the Brazilian Real and the Chilean Peso, lower energy
prices in power markets, including power markets where Global invests in
merchant generation assets, and further credit rating downgrades of certain
airlines in the United States and worldwide. As of September 30, 2001, $2.207
billion or 31% of Energy Holdings' assets were invested in Latin America,
specifically in Brazil, Argentina, Chile, Peru and Venezuela and $196 million or
2% of Energy Holdings' assets were comprised of leveraged leases of sixteen
aircraft leased to six separate lessees. Energy Holdings cannot predict the
impact of any further currency devaluations, continued economic slowdown, lower
energy prices and potential lessee payment defaults; however, such impact could
have a material adverse effect on its financial condition, results of operations
and net cash flows.
Accounting Matters
For a discussion of SFAS 133 and related DIG issues, and SFAS 141, SFAS
142, SFAS 143, and SFAS 144 see Note 3. Recent Accounting Pronouncements of the
Notes.
Forward-Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. These
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used in this report, the
words "will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential" and variations of such words and similar expressions
are intended to identify forward-looking statements. Energy Holdings undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
In addition to any assumptions and other factors referred to specifically
in connection with forward-looking statements, factors that could cause actual
results to differ materially from those contemplated in any forward-looking
statements include, among others, the following, some of which relate to Energy
Holdings indirectly as a result of their potential impact upon PSEG or PSE&G:
o deregulation and the unbundling of energy supplies and services and the
establishment of a competitive energy marketplace for products and
services;
o managing rapidly changing wholesale energy trading operations in
conjunction with electricity and gas production, transmission and
distribution systems;
o managing foreign investments and electric generation and distribution
operations in locations outside of the traditional utility service
territory;
o political and foreign currency risks;
o sales retention and growth potential in a mature PSE&G service territory;
o ability to complete development or acquisition of current and future
investments;
o partner and counterparty risk;
o exposure to market price fluctuations and volatility of fuel and power
supply, power output and marketable securities, among others;
o ability to obtain adequate and timely rate relief, cost recovery, and other
necessary regulatory approvals;
o federal, state and foreign regulatory actions;
o regulatory oversight with respect to utility and non-utility affiliate
relations and activities;
o operating restrictions, increased costs and construction delays
attributable to environmental regulations;
o nuclear decommissioning and the availability of reprocessing and storage
facilities for spent nuclear fuel;
o licensing and regulatory approvals necessary for nuclear and other
operating stations;
o the ability to economically and safely operate nuclear facilities in which
PSEG has an interest in accordance with regulatory requirements;
o environmental concerns;
o market risk and debt and equity market concerns associated with these
issues; and
o acts of war and terrorism.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no updates to information reported under Item 3 of Part I of
Energy Holdings' 2000 Annual Report on Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) A listing of exhibits being filed with this document is as follows:
Exhibit Number Document
-------------- --------------------------------------------------
12 Computation of Ratios of Earnings to Fixed Charges
(B) Reports on Form 8-K:
NONE.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSEG ENERGY HOLDINGS INC.
(Registrant)
By: Derek M. DiRisio
-------------------------------
Derek M. DiRisio
Vice President and Controller
(Principal Accounting Officer)
Date: November 1, 2001