================================================================================
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 March 31, 2002
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.
- --------------- ------------------------------------------- -------------------
001-00973 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 22-1212800
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 570
Newark, New Jersey 07101-0570
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 April 30, 2002, Public Service Electric and Gas Company and had
issued and outstanding 132,450,344 shares of common stock, without nominal or
par value, all of which were privately held, beneficially and of record by
Public Service Enterprise Group Incorporated.
================================================================================
================================================================================
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
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 11
Item 3. Qualitative and Quantitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
================================================================================
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars)
(Unaudited)
For the Quarters Ended
March 31,
------------------------------------
2002 2001
--------------- -----------------
OPERATING REVENUES
Electric Transmission and Distribution $ 844 $ 870
Gas Distribution 815 1,082
--------------- -----------------
Total Operating Revenues 1,659 1,952
--------------- -----------------
OPERATING EXPENSES
Electric Energy Costs 532 553
Gas Costs 527 787
Operation and Maintenance 249 250
Depreciation and Amortization 98 72
Taxes Other Than Income Taxes 43 43
--------------- -----------------
Total Operating Expenses 1,449 1,705
--------------- -----------------
OPERATING INCOME 210 247
Other Income and Deductions 4 11
Interest Expense-- Net (101) (58)
Preferred Securities Dividend Requirements (3) (11)
--------------- -----------------
INCOME BEFORE INCOME TAXES 110 189
Income Taxes (42) (77)
--------------- -----------------
NET INCOME 68 112
Preferred Securities Dividend Requirements and Premium on
Redemption (1) (3)
--------------- -----------------
EARNINGS AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP INCORPORATED $ 67 $ 109
=============== =================
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
March 31, December 31,
2002 2001
---------------- ----------------
CURRENT ASSETS
Cash and Cash Equivalents $ 94 $ 102
Accounts Receivable:
Customer Accounts Receivable 675 556
Other Accounts Receivable 87 67
Allowance for Doubtful Accounts (37) (38)
Unbilled Revenues 221 291
Natural Gas 167 415
Materials and Supplies 54 50
Prepayments 34 40
Energy Contracts 30 32
Restricted Cash 13 12
Other 29 22
---------------- ----------------
Total Current Assets 1,367 1,549
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
Electric 5,543 5,501
Gas 3,311 3,284
Other 385 385
---------------- ----------------
Total 9,239 9,170
Accumulated Depreciation and Amortization (3,402) (3,329)
---------------- ----------------
Net Property, Plant and Equipment 5,837 5,841
---------------- ----------------
NONCURRENT ASSETS
Regulatory Assets 5,116 5,247
Long-Term Investments 116 112
Other Special Funds 182 130
Other 71 84
---------------- ----------------
Total Noncurrent Assets 5,485 5,573
---------------- ----------------
TOTAL ASSETS $ 12,689 $ 12,963
================ ================
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
March 31, December 31,
2002 2001
---------------- ----------------
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 823 $ 668
Accounts Payable 534 642
Energy Contracts 52 169
Accrued Taxes 97 30
Other 292 277
---------------- ----------------
Total Current Liabilities 1,798 1,786
---------------- ----------------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 2,551 2,551
Regulatory Liabilities 344 373
OPEB Costs 475 466
Other 204 205
---------------- ----------------
Total Noncurrent Liabilities 3,574 3,595
---------------- ----------------
CAPITALIZATION
LONG-TERM DEBT
Long-Term Debt 2,476 2,626
Securitization Debt 2,321 2,351
---------------- ----------------
Total Long-Term Debt 4,797 4,977
PREFERRED SECURITIES
Preferred Stock Without Mandatory Redemption 80 80
Subsidiaries' Preferred Securities:
Guaranteed Preferred Beneficial Interest in Subordinated
Debentures 155 155
---------------- ----------------
Total Preferred Securities 235 235
---------------- ----------------
COMMON STOCKHOLDER'S EQUITY
Common Stock, 150,000,000 shares authorized, 132,450,344 892 892
shares issued and outstanding
Basis Adjustment 986 986
Retained Earnings 409 493
Accumulated Other Comprehensive Loss (2) (1)
---------------- ----------------
Total Common Stockholder's Equity 2,285 2,370
---------------- ----------------
Total Capitalization 7,317 7,582
---------------- ----------------
TOTAL LIABILITIES AND CAPITALIZATION $ 12,689 $ 12,963
================ ================
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
For the Quarters Ended
March 31,
-------------------------------------
2002 2001
-------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 68 $ 112
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization 98 72
Market Transition Charge (MTC) Overcollections 8 16
Deferral of Gas Costs-- net (86) (80)
Provision for Deferred Income Taxes and ITC-- net (9) (4)
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable and Unbilled Revenues (70) (59)
Inventory - Natural Gas and Materials and Supplies 244 160
Accounts Payable (108) (191)
Accrued Taxes 67 79
Other Current Assets and Liabilities 13 71
Other 87 (26)
-------------- -----------------
Net Cash Provided By Operating Activities 312 150
-------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment, excluding AFDC (80) (63)
Contributions to Other Special Funds (63) --
Other (1) (3)
-------------- -----------------
Net Cash Used in Investing Activities (144) (66)
-------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt -- (1,386)
Issuance of Long-Term Debt -- 2,525
Deferred Issuance Costs -- (200)
Redemption/Purchase of Long-Term Debt (24) (51)
Collection of Note Receivable - Affiliated Company -- 2,786
Issuance of Note Receivable -Affiliated Company -- (1,084)
Redemption of Preferred Securities -- (240)
Return of Capital -- (2,265)
Cash Dividends Paid on Common Stock (150) (112)
Other (2) (3)
-------------- -----------------
Net Cash Used in Financing Activities (176) (30)
-------------- -----------------
Net Change in Cash and Cash Equivalents (8) 54
Cash and Cash Equivalents at Beginning of Period 102 39
-------------- -----------------
Cash and Cash Equivalents at End of Period $ 94 $ 93
============== =================
Income Taxes Paid $ 81 $ --
Interest Paid $ 112 $ 84
See Notes to Consolidated Financial Statements.
================================================================================
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Organization
Unless the context otherwise indicates, all references to "PSE&G," "we,"
"us" or "our" herein means Public Service Electric & Gas Company, a New Jersey
corporation with its principal executive offices at 80 Park Plaza, Newark, New
Jersey 07102 and its consolidated subsidiaries. We are a wholly-owned subsidiary
of Public Service Enterprise Group Incorporated (PSEG) and are an operating
public utility providing electric transmission and electric and gas distribution
service in certain areas within the State of New Jersey. PSEG owns all of our
common stock.
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 (Statements)
and Notes to Consolidated Financial Statements (Notes) update and supplement
matters discussed in our 2001 Annual Report on Form 10-K and should be read in
conjunction 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 our 2001
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
On January 1, 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Under SFAS
142, goodwill is considered a nonamortizable asset and is subject to an annual
review for impairment and an interim review when required by events or
circumstances. We currently do not have any goodwill or other intangible assets
on our balance sheet. Therefore, there was no effect on our financial position
or results of operations as a result of adopting this standard.
In July 2001, the Financial Accounting Standards Board (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 created with an offsetting amount to an
asset. 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. We are currently
evaluating the effect of this guidance and cannot predict the impact on our
financial position or results of operations. However, such impact could be
material.
On January 1, 2002, we also adopted SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" (SFAS 144). Under SFAS 144,
long-lived assets to be disposed of are measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continued operations or in
discontinued operations.
================================================================================
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Discontinued operations will no longer be measured at net realizable value
or include amounts for operating losses that have not yet occurred. SFAS 144
also broadens the reporting of discontinued operations. The adoption of this
standard did not have any impact on our financial position or results of
operations.
Note 3. Regulatory Assets and Liabilities
At March 31, 2002 and December 31, 2001, respectively, we deferred the
following regulatory assets and liabilities on the Consolidated Balance Sheets:
-------------- -----------------
March 31, December 31,
2002 2001
-------------- -----------------
(Millions of Dollars)
Regulatory Assets
Stranded Costs To Be Recovered.................................. $4,059 $4,105
SFAS 109 Income Taxes........................................... 306 302
OPEB Costs...................................................... 207 212
Societal Benefits Charges (SBC)................................. -- 4
Environmental Costs............................................. 87 87
Unamortized Loss on Reacquired Debt and Debt Expense............ 90 92
Underrecovered Gas Costs........................................ 166 120
Unrealized Losses on Gas Contracts.............................. 22 137
Other........................................................... 179 188
-------------- -----------------
Total Regulatory Assets................................... $5,116 $5,247
============== =================
Regulatory Liabilities
Excess Depreciation Reserve..................................... $282 $319
Non-Utility Generation Transition Charge (NTC).................. 37 48
SBC............................................................. 18 --
Other........................................................... 7 6
-------------- -----------------
Total Regulatory Liabilities.............................. $344 $373
============== =================
Note 4. Commitments and Contingent Liabilities
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
industry to develop procedures for implementing these regulations. These
regulations may substantially increase the costs of remedial investigations and
remediations, where necessary, particularly at sites situated on surface water
bodies. We and our 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. We do not anticipate that the
compliance with these regulations will have a material adverse effect on our
financial position, results of operations or net cash flows.
Manufactured Gas Plant Remediation Program
We are currently working with the NJDEP under a program (Remediation
Program) to assess, investigate and, if necessary, remediate environmental
conditions at our former manufactured gas plant sites (MGPs). To date, 38 sites
have been identified. The Remediation Program is periodically reviewed and
revised by us 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 at least $20 million per year could be incurred over a period of
about 30 years since inception of the program in 1988 and that the overall cost
could be material. The costs for this remediation effort are recovered through
the SBC.
At March 31, 2002 and December 31, 2001, our estimated liability for
remediation costs through 2004 aggregated $87 million. Expenditures beyond 2004
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 the area of Newark, New Jersey is a
"facility" within the meaning of that term under the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 and that, to
date, at least thirteen corporations, including us, may be potentially liable
for performing required remedial actions to address potential environmental
pollution at the Passaic River "facility." We and certain of our predecessors
conducted industrial operations at properties within the Passaic River
"facility." The operations include one operating electric generating station,
one former generating station, and four former MGPs. Our costs to clean up
former MGPs are recoverable from utility customers under the SBC. We have
contracted to sell the former generating site to a third party that would be
responsible for remediation costs. Regulatory action by the state is pending. We
cannot predict what action, if any, the EPA or any third party may take against
it with respect to these matters, or in such event, what costs it may incur to
address any such claims. However, such costs may be material.
Note 5. Financial Instruments and Risk Management
Our operations are exposed to market risks from changes in commodity prices
and interest rates that could affect our results of operations and financial
conditions. We manage our exposure to these market risks through our regular
operating and financing activities and, when deemed appropriate, hedge these
risks through the use of derivative financial instruments. We use the term hedge
to mean a strategy designed to manage risks of volatility in prices or rate
movements on certain assets, liabilities or anticipated transactions and by
creating a relationship in which gains or losses on derivative instruments are
expected to counterbalance the losses or gains on the assets, liabilities or
anticipated transactions exposed to such market risks. We use derivative
instruments as risk management tools consistent with our business plans and
prudent business practices and not for speculative purposes.
Commodity-Related Instruments
We use natural gas futures and swaps to reduce exposure to price
fluctuations in natural gas from factors such as weather, changes in demand and
changes in supply to manage the price risk associated with gas supply to our
customers. These instruments, in conjunction with physical gas supply contracts,
are designed to cover estimated gas customer commitments. We have entered into
268 and 330 MMBTU of gas futures, swaps and options to hedge forecasted
requirements as of March 31, 2002 and December 31, 2001 respectively. As of
March 31, 2002 and December 31, 2001, the fair value of those instruments was
$(22) million and $(137) million, respectively, with a maximum term of
approximately one year. We utilize derivatives to hedge our gas purchasing
activities which, when realized, are recoverable through our Levelized Gas
Adjustment Clause (LGAC). Accordingly, the offset to the change in fair value of
these derivatives is recorded as a regulatory asset or liability.
As a result of the gas contract transfer that was effective May 1, 2002,
the price risk relating to gas purchases was transferred to PSEG Power LLC
(Power), an unregulated affiliate. As a result, after that date, we are no
longer utilizing these derivative instruments in our gas distribution business.
Through the Basic Generation Service (BGS) auction, we have contracted for
our expected peak load of 9,600 MW. If our peak load should exceed this amount
or one of our suppliers defaults on their contract, we may have to purchase
power on the open market and use commodity contracts during periods of high
demand. To the extent that the market prices exceed the auction contract price,
the difference will be deferred and collected from our customers as provided in
the New Jersey Board of Public Utilities (BPU) Order approving the auction
process. Given the absence of a Pennsylvania-New Jersey-Maryland Power Pool
(PJM) price cap in situations involving emergency purchases, extreme price
movements can occur and could have a material impact on our financial condition
and net cash flows.
Interest Rates
We are subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rate risk through the use
of fixed rate debt, floating rate debt and interest rate swaps. We currently
have no floating rate debt outstanding that is exposed to interest rate risk.
PSE&G Transition Funding (Transition Funding), our wholly-owned subsidiary,
has entered into an interest rate swap on its sole class of floating rate
transition bonds. The notional amount of the interest rate swap was
approximately $497 million. The interest rate swap is indexed to the three-month
LIBOR rate. The fair value of the interest rate swap was approximately $(11)
million as of March 31, 2002 and $(18) million as of December 31, 2001 and was
recorded as a derivative liability, with an offsetting amount recorded as a
regulatory asset on the Consolidated Balance Sheet. This amount will vary over
time as a result of changes in market conditions.
Note 6. Income Taxes
Our effective income tax rate is as follows:
Quarter Ended
March 31,
-----------------------------
2002 2001
----------- ------------
Federal tax provision at statutory rate............................ 35.0% 35.0%
New Jersey Corporate Business Tax, net of Federal benefit.......... 5.9% 5.9%
Other-- net........................................................ (2.7)% (0.2)%
----------- ------------
Effective Income Tax Rate..................................... 38.2% 40.7%
=========== ============
Note 7. Financial Information by Business Segments
Following the transfer of our generation-related assets to Power in August
2000, we continue to own and operate our transmission and distribution (T&D)
business as our only reportable segment.
Note 8. Comprehensive Income
Comprehensive Income, Net of Tax:
Comprehensive Income
-------------------------------
Quarter Ended
March 31,
-------------------------------
2002 2001
-------------- -----------
Millions of Dollars
Net Income............................................. $68 $112
Pension Adjustment, Net of Tax $1...................... (1) --
-------------- -----------
Comprehensive Income................................... $67 $112
============== ===========
Note 9. Property, Plant and Equipment
Information related to our Property, Plant and Equipment is detailed below:
March 31, December 31,
2002 2001
---------------- ----------------
Millions of Dollars
Property, Plant and Equipment
Electric Plant in Service:
Transmission...................................... $1,221 $1,201
Distribution...................................... 4,293 4,254
---------------- ----------------
Total Electric Plant in Service.............. 5,514 5,455
---------------- ----------------
Construction Work in Progress....................... 10 26
Plant Held for Future Use........................... 19 20
---------------- ----------------
Total Electric Plant 5,543 5,501
---------------- ----------------
Gas Plant in Service:
Transmission...................................... 75 74
Distribution...................................... 3,147 3,121
Other............................................. 89 89
---------------- ----------------
Total Gas Plant in Service................... 3,311 3,284
---------------- ----------------
Other Plant in Service.............................. 385 385
---------------- ----------------
Total Property, Plant and Equipment....... $9,239 $9,170
================ ================
================================================================================
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Concluded
Note 10. Related-Party Transactions
In August 2000, we transferred our electric generating assets to Power in
exchange for a $2.786 billion Promissory Note. Interest on the Promissory Note
was payable at an annual rate of 14.23%, which represented our weighted average
cost of capital. For the period from January 1, 2001 to January 31, 2001, we
recorded interest income of approximately $34 million relating to the Promissory
Note. Power repaid the Promissory Note on January 31, 2001.
In addition, on January 31, 2001, we loaned $1.084 billion to PSEG at
14.23% per annum and recorded interest income of approximately $26 million
relating to the loan for the quarter ended March 31, 2001. PSEG repaid the loan
on April 16, 2001. We also returned $2.265 billion of capital to PSEG on January
31, 2001 utilizing proceeds from the $2.525 billion securitization transaction
and the generation asset transfer, as required by the Final Order, as part of
the recapitalization.
Effective with the transfer of the electric generation business, Power
charges us for the Market Transition Charge (MTC) and the energy and capacity
provided to meet our BGS requirements. For the quarters ended March 31, 2002 and
2001, we were charged by Power approximately $460 million and $463 million for
the MTC and BGS. As of March 31, 2002 and December 31, 2001, our payable to
Power relating to these costs was approximately $154 million and $158 million.
For the quarters ended March 31, 2002 and 2001, we sold energy and capacity to
Power at the market price of approximately $28 million and $43 million, which we
purchased under various non-utility generation (NUG) contracts at costs above
market prices. As of March 31, 2002 and December 31, 2001, our receivable
related to these purchases was approximately $11 million and $7 million. As a
result of the Final Order, we have established an NTC to recover the above
market costs related to these NUG contracts. The difference between our costs
and recovery of costs through the NTC and sales to Power, which are priced at
the locational marginal price (LMP) set by the PJM ISO for energy and at
wholesale market prices for capacity, is deferred as a regulatory asset.
PSEG Services Corporation provides and bills administrative services to us
on a monthly basis. Our costs related to such service amounted to approximately
$52 million and $55 million for the quarters ended March 31, 2002 and 2001. As
of March 31, 2002 and December 31, 2001 our related party payable related to
these costs was approximately $20 million and $25 million.
================================================================================
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise indicates, all references to "PSE&G," "we,"
"us" or "our" herein means Public Service Electric & Gas Company (PSE&G), a New
Jersey corporation with its principal executive offices at 80 Park Plaza,
Newark, New Jersey 07102. This discussion makes reference to our Consolidated
Financial Statements and related Notes to the Consolidated Financial Statements
(Notes) and should be read in conjunction with such statements and notes.
Following are the significant changes in or additions to information
reported in our 2001 Annual Report on Form 10-K affecting the consolidated
financial condition and the results of operations of our subsidiaries and us.
This discussion refers to our Consolidated Financial Statements (Statements) and
related Notes to Consolidated Financial Statements (Notes) and should be read in
conjunction with such Statements and Notes.
RESULTS OF OPERATIONS
Operating Revenues
Electric Transmission and Distribution
Transmission and Distribution revenues decreased $26 million or 3% in the
first quarter of 2002 as compared to the first quarter of 2001 primarily due to
the implementation of two electric rate reductions and the effects of warmer
weather. In accordance with the New Jersey Energy Master Plan, an electric rate
reduction of 2% started in February of 2001 and another 2% electric rate
reduction was implemented in August of 2001.
Gas Distribution
Gas distribution revenue decreased by $267 million or 25% in the first
quarter of 2002 as compared to the first quarter of 2001 primarily due to the
effects of warmer weather and decreased commodity rates offset by increased gas
base rates. For the quarter ended March 31, 2002, we experienced an 18% decrease
in degree days, as compared to the first quarter 2001.
Operating Expenses
Electric Energy Costs
Electric Energy costs decreased $21 million or 4% in the first quarter of
2002 as compared to the first quarter of 2001 primarily due to the
implementation of two electric rate reductions and the effects of warmer
weather.
Gas Costs
Gas Costs decreased $260 million or 33% in the first quarter of 2002 as
compared to the first quarter of 2001 primarily due to the effects of warmer
weather and decreased commodity costs.
Depreciation and Amortization
Depreciation and Amortization increased $26 million or 36% in the first
quarter of 2002 as compared to the first quarter of 2001 primarily due to a full
period's recognition of amortization of the regulatory asset recorded for our
stranded costs, whose amortization began in February 2001 and an increase in gas
depreciation expense recorded in accordance with our increased gas base rates.
Interest Expense
Net Interest Expense increased $43 million or 74% in the first quarter of
2002 as compared to the first quarter of 2001 primarily due to lower interest
income. In 2001, we recorded approximately $60 million of interest income
relating to an intercompany note from Power. This was offset by lower levels of
long-term and short-term debt in the first quarter of 2002 as compared to the
first quarter of 2001.
Preferred Securities Dividends
Preferred Securities Dividends decreased $8 million or 73% in 2002 as
compared to 2001 primarily due to redemptions in March 2001 and June 2001.
Income Taxes
Income taxes decreased $35 million or 45% in 2002 as compared to 2001
primarily due to lower pre-tax income in the current year.
LIQUIDITY AND CAPITAL RESOURCES
Financing Methodology
Our capital requirements are met through liquidity provided by internally
generated cash flow and external financings. Any excess funds are invested in
accordance with guidelines adopted by our Board of Directors.
External funding to meet our needs is comprised of corporate finance
transactions. The debt incurred is our direct obligation. External financing may
consist of public and private capital market debt and equity transactions, bank
revolving credit and term loan facilities and/or commercial paper.
The availability and cost of external capital could be affected by our
performance as well as by the performance of our affiliates. This could include
the degree of structural or regulatory separation between us and our non-utility
affiliates and the potential impact of affiliate ratings on consolidated and
unconsolidated credit quality. Additionally, compliance with applicable
financial covenants will depend upon future financial position and levels of
earnings and net cash flows, as to which no assurances can be given.
All of our publicly traded debt has received investment grade ratings from
each of the three major credit rating agencies. The changes in the energy
industry and the recent bankruptcy of Enron Corp. are attracting increased
attention from the rating agencies, which regularly assess business and
financial matters. Given the changes in the industry, attention to and scrutiny
of our performance, capital structure and competitive strategies by rating
agencies will likely continue. These changes could affect the bond ratings, cost
of capital and market prices of our securities. We will continue to evaluate our
capital structure, financing requirements, competitive strategies and future
capital expenditures to maintain our current credit ratings.
Cross Default Provisions, Material Adverse Changes and Ratings Triggers
Our credit agreements contain cross-default provisions under which a
default by us involving $50 million or more of aggregate indebtedness in other
agreements would result in a default and the potential acceleration of payment
under such credit agreements.
Such lenders, or the debt holders under any of our indentures, could
determine that debt payment obligations may be accelerated as a result of a
cross-default. These occurrences could severely limit our liquidity and restrict
our ability to meet our debt, capital and, in extreme cases, operational cash
requirements. Any inability to satisfy required covenants and/or borrowing
conditions would have a similar impact. This would have a material adverse
effect on our financial condition, results of operations and net cash flows.
In addition, our credit agreements generally contain provisions under which
the lenders could refuse to advance loans in the event of a material adverse
change in our business or financial condition. In the event that we or the
lenders in any of our credit agreements determine that a material adverse change
has occurred, loan funds may not be advanced.
Our debt indentures and credit agreements do not contain any "ratings
triggers" that would cause an acceleration of the required interest and
principal payments in the event of a ratings downgrade. However, in the event of
a downgrade we may be subject to increased interest costs on certain bank debt.
Regulatory Restrictions
Capital resources and investment requirements could be affected by the
outcome of proceedings by the BPU pursuant to its Energy Master Plan and Energy
Competition Act and the requirements of the 1992 Focused Audit conducted by the
BPU of the impact of Public Service Enterprise Group's Incorporated (PSEG)
non-utility businesses, owned by PSEG Energy Holdings, Inc. (Energy Holdings),
on us. As a result of the Focused Audit, the BPU ordered that, among other
things:
(1) PSEG will not permit Energy Holdings' investments to exceed 20% of our
consolidated assets without prior notice to the BPU;
(2) Our Board of Directors would provide an annual certification that the
business and financing plans of Energy Holdings will not adversely
affect us;
(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 us an affiliation fee of up to $2 million a
year, which is to be used to reduce customer rates.
In the Final Order relating to our rate unbundling, stranded costs and
restructuring proceedings, the BPU noted that, due to significant changes in the
industry and, in particular, our corporate structure as a result of the Final
Order, modifications to or relief from the Focused Audit order might be
warranted. We have notified the BPU that PSEG will eliminate PSEG Capital debt
by the end of the second quarter of 2003 and that we believe that the Final
Order otherwise supercedes the requirements of the Focused Audit. The BPU is
expected to address this matter later this year. While we believe that this
issue will be satisfactorily resolved, no assurances can be given.
In addition, if PSEG were no longer to be exempt under the Public Utility
Holding Company Act of 1935 (PUHCA), we would be subject to additional
regulation by the SEC with respect to financing and investing activities. We
believe that this would not have a material adverse effect on our financial
condition, results of operations and net cash flows.
Over the next several years, we will be required to refinance maturing
debt, incur additional debt and retain earnings 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 our financial condition, results of operations and net
cash flows.
Liquidity
We have the following credit facilities for various funding purposes and to
provide liquidity for our $550 million commercial paper program. These
agreements are with a group of banks and provide for borrowings with maturities
of up to one year. As of March 31, 2002, we had no commercial paper outstanding.
The following table summarizes our various facilities as of March 31, 2002:
Expiration Total Primary
Company Date Facility Purpose
- -------------------------------------------------------------------------- ---------- --------- ----------
(Millions of Dollars)
364-day Credit Facility ................................................. June 2002* $275 CP Support
5-year Credit Facility .................................................. June 2002* $275 CP Support
Uncommitted Bilateral Credit Agreement .................................. N/A ** Funding
*Expected to be refinanced in the second quarter of 2002.
**Availability varies based on market conditions.
Under our Mortgage, we may issue new First and Refunding Mortgage Bonds
against previous additions and improvements and/or retired Mortgage Bonds
provided that our ratio of earnings to fixed charges calculated in accordance
with our Mortgage is at least 2:1. At March 31, 2002, our Mortgage coverage
ratio was 3:1. As of March 31, 2002, the Mortgage would permit up to
approximately $1 billion aggregate principal amount of new Mortgage Bonds to be
issued against previous additions and improvements. We also need BPU
authorization to issue any financing for our capital program including refunding
of maturing debt and opportunistic refinancing. We have authorization from the
BPU to issue $1 billion of long-term debt through December 31, 2003 for the
refunding of maturing debt and opportunistic refinancing of debt.
On December 27, 2001, we filed a shelf registration statement on Form S-3
for the issuance of $1 billion of debt and tax deferred preferred securities,
which was declared effective by the SEC in February 2002.
Since 1986, we have made regular cash payments to PSEG in the form of
dividends on outstanding shares of our common stock. We paid common stock
dividends of $150 million and $112 million to PSEG for the quarters ended March
31, 2002 and 2001, respectively.
In prior years, we have issued Deferrable Interest Subordinated Debentures
in connection with the issuance of tax-deductible preferred securities. If
payments on those Deferrable Interest Subordinated Debentures are deferred, in
accordance with their terms, we may not pay any dividends on our common or
preferred stock until such deferral is cured. Currently, there has been no
deferral or default.
CAPITAL REQUIREMENTS
We have substantial commitments as part of our ongoing construction
programs. We expect that the majority of our capital requirements over the next
five years will come from internally generated funds, with the balance to be
provided by the issuance of debt and equity contributions from PSEG.
For the quarter ended March 31, 2002, we made net plant additions of $80
million, excluding Allowance for Funds Used During Construction (AFDC), related
to improvements in our transmission and distribution system, gas system and
common facilities. Our projected construction expenditures for the next five
years range from $440 million to $485 million per year. Our plant additions for
the quarter ended March 31, 2002 were included in our current year's forecast.
Our construction expenditures are primarily to maintain the safety and
reliability of our electric and gas transmission and distribution facilities.
Our ongoing construction 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 our
ability to raise necessary capital.
ITEM 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our market risk sensitive instruments and
positions is the potential loss arising from adverse changes in commodity prices
and interest rates as discussed in the Notes to Consolidated Financial
Statements. Our policy is to use derivatives to manage risk consistent with our
business plans and prudent practices. PSEG has a Risk Management Committee
comprised of executive officers, which we utilize for an independent risk
oversight function to ensure compliance with corporate policies and prudent risk
management practices.
Commodity Contracts
We use natural gas futures and swaps to reduce exposure to price
fluctuations from factors such as weather, changes in demand and changes in
supply to manage the price risk associated with gas supply to our customers.
These instruments, in conjunction with physical gas supply contracts, are
designed to cover estimated gas customer commitments. As of March 31, 2002, we
have entered into 268 MMBTU of gas futures, swaps and options to hedge
forecasted requirements. As of March 31, 2002, the fair value of those
instruments was $(22) million with a maximum term of approximately one year. We
utilize derivatives to hedge our gas purchasing activities which, when realized,
are recoverable through our LGAC. Accordingly, the offset to the change in fair
value of these derivatives is recorded as a regulatory asset or liability.
As a result of the gas contract transfer that was effective May 1, 2002,
the price risk relating to gas purchases was transferred to Power. As a result,
after that date, we are not utilizing these derivative instruments in our gas
distribution business.
Through the BGS auction, we have contracted for our energy needs for our
expected peak load of 9,600 MW for the period August 1, 2002 through July 31,
2003. If our peak load should exceed this amount or one of our suppliers
defaults on their contract, we may have to purchase power on the open market and
use commodity contracts during periods of high demand. To the extent that the
market prices exceed the auction contract price, the difference will be deferred
and collected from our customers as provided in the BPU Order approving the
auction process.
Given the absence of a PJM price cap in situations involving emergency
purchases, extreme price movements can occur and could have a material impact on
our financial condition and net cash flows.
Interest Rate Risk
We are subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rate risk through the use
of fixed rate debt, floating rate debt and interest rate swaps. We currently
have no floating rate debt outstanding that is exposed to interest rate risk.
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 approximately $497 million. The interest rate swap is indexed to the
three-month LIBOR rate. The fair value of the interest rate swap was
approximately $(11) million as of March 31, 2002 and was recorded as a
derivative liability, with an offsetting amount recorded as a regulatory asset
on the Consolidated Balance Sheet. This amount will vary over time as a result
of changes in market conditions.
Credit Risk
We are exposed to credit losses in the event of non-performance or
non-payment by counterparties. We also have a credit management process, which
is used to assess, monitor and mitigate our counterparty exposure. In the event
of non-performance or non-payment by a major counterparty, there may be a
material adverse impact on our financial condition, results of operations or net
cash flows.
ACCOUNTING ISSUES
Critical Accounting Policies and Other Accounting Matters
Our most critical accounting policies include the application of: Statement
of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of
Certain Types of Regulation" (SFAS 71) for our regulated transmission and
distribution business and SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended (SFAS 133), to account for our various
hedging transactions.
Accounting for the Effects of Regulation
We prepare our financial statements in accordance with the provisions of
SFAS No. 71, which differs in certain respects from the application of Generally
Accepted Accounting Principles (GAAP) by non-regulated businesses. In general,
SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect
the economic effects of regulation. As a result, a regulated entity is required
to defer the recognition of costs (a regulatory asset) or the recognition of
obligations (a regulatory liability) if it is probable that, through the
rate-making process, there will be a corresponding increase or decrease in
future rates. Accordingly, we have deferred certain costs, which will be
amortized over various future periods. To the extent that collection of such
costs or payment of liabilities is no longer probable as a result of changes in
regulation and/or our competitive position, the associated regulatory asset or
liability is charged or credited to income.
As a result of New Jersey deregulation legislation and regulatory orders
issued by the BPU, certain regulatory assets and liabilities were recorded. Two
of these items will have a significant effect on our annual earnings. They
include the estimated amount of Market Transition Charge (MTC) revenues to be
collected in excess of the authorized amount of $540 million and the amount of
excess electric distribution depreciation reserves.
The MTC was authorized by the BPU as an opportunity to recover up to $540
million (net of tax) of our unsecuritized generation-related stranded costs on a
net present value basis. As a result of the appellate reviews of the Final
Order, our securitization transaction was delayed until the first quarter of
2001, causing a delay in the implementation of the Securitization Transition
Charge (STC), which would have reduced the MTC. As a result, the MTC was being
recovered at a faster rate than intended under the Final Order and a significant
overrecovery was probable. In order to properly recognize the recovery of the
allowed unsecuritized stranded costs over the transition period, we recorded a
regulatory liability and a charge to net income of $76 million, pre-tax, or $45
million, after tax, in the third quarter of 2000 for the cumulative amount of
estimated collections in excess of the allowed unsecuritized stranded costs for
the period prior to the generation-related asset transfer to Power. We then
began deferring a portion of these revenues each month to recognize the
estimated collections in excess of the allowed unsecuritized stranded costs. As
of March 31, 2002, this deferred amount was $177 million and is aggregated with
the Societal Benefits Clause.
The amortization of the Excess Electric Distribution Depreciation Reserve
is another significant regulatory liability affecting our earnings. As required
by the BPU, we reduced our depreciation reserve for our electric distribution
assets by $569 million and recorded such amount as a regulatory liability to be
amortized over the period from January 1, 2000 to July 31, 2003. Through March
31, 2002, $287 million has been amortized and recorded as a reduction of
depreciation expense pursuant to the Final Order, of which $37 million relates
to 2002. The remaining $282 million will be amortized through July 31, 2003.
See Note 3. Regulatory Assets and Liabilities for further discussion of
these and other regulatory issues.
SFAS 133 - Accounting for Derivative Instruments and Hedging Activities
SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires an entity to recognize the
fair value of derivative instruments held as assets or liabilities on the
balance sheet. In accordance with SFAS 133, the effective portion of the change
in the fair value of a derivative instrument designated as a cash flow hedge is
reported in other comprehensive income (OCI), net of tax, or as a Regulatory
Asset or Liability. Amounts in accumulated OCI are ultimately recognized in
earnings when the related hedged forecasted transaction occurs. The change in
the fair value of the ineffective portion of the derivative instrument
designated as a cash flow hedge is recorded in earnings. Derivative instruments
that have not been designated as hedges are adjusted to fair value through
earnings. We have entered into several derivative instruments, including
interest rate swaps which have been designated as cash flow hedges. The fair
value of the derivative instruments is determined by reference to quoted market
prices, listed contracts, published quotations or quotations from
counterparties.
For additional information regarding Derivative Financial Instruments, See
Note 5 - Financial Instruments and Risk Management.
Other Accounting Issues
For additional information on our accounting policies and the
implementation of recently issued accounting standards, see Note 1. Organization
and Basis of Presentation and Note 2. Accounting Matters, respectively.
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. We 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 our disclosures 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:
o failure to obtain adequate and timely rate relief may have an adverse
impact;
o deregulation and the unbundling of energy supplies and services and
the establishment of a competitive energy marketplace;
o inability to raise capital on favorable terms to refinance existing
indebtedness or to fund capital commitments;
o changes in the economic and electricity and gas consumption growth
rates;
o environmental regulation may limit our operations;
o insurance coverage may not be sufficient; and
o recession, acts of war or terrorism could have an adverse impact.
Consequently, all of the forward-looking statements made in this report are
qualified by these cautionary statements and we cannot assure you that the
results or developments anticipated by us will be realized, or even if realized,
will have the expected consequences to or effects on us or our business
prospects, financial condition or results of operations. You should not place
undue reliance on these forward-looking statements in making any investment
decision. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to these forward-looking statements to reflect
events or circumstances that occur or arise or are anticipated to occur or arise
after the date hereof. In making any investment decision regarding our
securities, we are not making, and you should not infer, any representation
about the likely existence of any particular future set of facts or
circumstances. The forward-looking statements contained in this report are
intended to qualify for the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended.
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
Certain information reported under Item 3 of Part I of Public Service
Electric and Gas Company's (PSE&G) 2001 Annual Report on Form 10-K is updated
below.
New Matter. On November 15, 2001, Consolidated Edison, Inc. (Con Edison)
filed a complaint against us at the Federal Energy Regulatory Commission (FERC)
pursuant to Section 206 of the Federal Power Act asserting that we had breached
agreements covering 1,000 MW of transmission by curtailing service and failing
to maintain sufficient system capacity to satisfy all our service obligations.
We denied the allegations set forth in the complaint. While finding that Con
Edison's presentation of evidence failed to demonstrate several of the
allegations, on April 26, 2002, FERC found sufficient reason to set the
complaint for hearing. The hearing will be conducted on an expedited basis, with
an Initial Decision to be issued by the end of May and a FERC Order by the end
of June. If Con Edison is successful, we could be required to provide future
transmission services with uneconomic generation resources at a substantial cost
to us. We believe we have complied with the terms of the Agreement and will
vigorously defend our position. The nature and cost of any remedy, which is
expected to be prospective only, cannot be predicted. Docket No. EL02-23-000.
In addition see the following at the pages hereof indicated:
(1) Form 10-K, Pages 7 and 8. See Pages 8 and 16 regarding our Gas
Contract Transfer, Docket Nos. GR01050328 and GR01050297.
(2) Form 10-K, Pages 10 and 49. See Page 7 regarding our MGP remediation
program.
(3) Form 10-K, Page 49. See Page 7. Investigation and additional
investigation by the EPA regarding the Passaic River site. Docket No.
EX93060255.
ITEM 5. OTHER INFORMATION
Employee Relations
Form 10-K, page 20. As previously disclosed, we have collective bargaining
arrangements with the Utility Co-Workers Association, (UWUA) covering
approximately 1,400 employees primarily in the customer operations area. This
contract expired on April 30, 2002, and was extended through May 6, 2002. A
tentative agreement was reached on May 7, 2002, and is subject to a ratification
vote by union membership.
Gas Contract Transfer
Form 10K, page 7. On August 11, 2000, we filed a gas merchant restructuring
plan with the BPU. The BPU approved an amended stipulation, which authorized the
transfer of our gas supply business, including our interstate capacity, storage
and gas supply contracts to Power which will, under a requirements contract,
provide gas supply to us to serve our Basic Gas Supply Service (BGSS) customers.
The transfer was effective May 1, 2002. On May 1, 2002, the Ratepayer Advocate
requested rehearing by the BPU of its decision, but did not seek a stay.
The gas contract transfer is expected to reduce volatility in our cash
flows. Gas residential commodity costs are currently recovered through
adjustment charges that are periodically trued-up to actual costs and reset.
After the gas contract transfer, we will pay Power the amount we charge our gas
distribution customers for the commodity. Industrial and commercial BGSS
customers will be priced under our Market Priced Gas Service (MPGS). Residential
BGSS customers will remain under current pricing until April 1, 2004, after
which, subject to further BPU approval, those residential gas customers would
also move to MPGS service.
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
12(A) Computation of Ratios of Earnings to Fixed Charges
Plus Preferred Securities
(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 ELECTRIC AND GAS COMPANY
(Registrant)
By: Patricia A. Rado
----------------------------------------
Patricia A. Rado
Vice President and Controller
(Principal Accounting Officer)
Date: May 15, 2002