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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
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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
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
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements...................................... 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 20
Item 3. Qualitative and Quantitative Disclosures About
Market Risk............................................... 32
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings......................................... 34
Item 6. Exhibits and Reports on Form 8-K.......................... 34
Signature......................................................... 35
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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)
For the Quarters Ended
March 31,
----------------------------------
2002 2001
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OPERATING REVENUES
Energy Service Revenues.................................................. $ 95 $ 97
Electric Generation and Distribution Revenues............................ 92 -
Income from Capital and Operating Leases................................. 58 47
Income from Joint Ventures and Partnerships.............................. 20 33
Interest and Dividend Income............................................. 9 5
Gain on Withdrawal from Partnership Interests............................ 7 51
Net Losses on Investments................................................ (5) (15)
Other.................................................................... 14 7
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Total Operating Revenues............................................. 290 225
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OPERATING EXPENSES
Operation and Maintenance................................................ 99 93
Electric Energy Costs.................................................... 45 -
Administrative and General............................................... 31 28
Depreciation and Amortization............................................ 11 5
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Total Operating Expenses............................................. 186 126
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OPERATING INCOME........................................................... 104 99
OTHER (LOSS) INCOME
Foreign Currency Transaction Loss........................................ (52) -
Change in Fair Value of Derivative Financial Instruments................. 10 1
Other.................................................................... - 1
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Total Other (Loss) Income.............................................. (42) 2
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INTEREST EXPENSE-NET........................................................ (57) (38)
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.................... 5 63
INCOME TAXES................................................................ - (10)
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INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACOUNTING PRINCIPLE..................... 5 53
Extraordinary Loss on Early Retirement of Debt (net of tax)............. - (2)
Cumulative Effect of a Change in Accounting Principle (net of tax)...... - 9
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NET INCOME................................................................. 5 60
Preferred Stock Dividend Requirements....................................... (6) (6)
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EARNINGS AVAILABLE TO
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED............................. $ (1) $ 54
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See Notes to Consolidated Financial Statements.
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
March 31, December 31,
2002 2001
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CURRENT ASSETS
Cash and Cash Equivalents............................................... $ 68 $ 56
Accounts Receivable:
Trade, net of doubtful accounts - 2002, $7; 2001, $7.................. 264 244
Affiliated Companies.................................................. 59 -
Other................................................................. 28 21
Notes Receivable........................................................ 142 26
Assets Held for Sale.................................................... 457 422
Costs and Estimated Earnings in Excess of Billings on Uncompleted
Contracts.................................................................. 14 19
Inventory.............................................................. 15 18
Other Current Assets.................................................... 11 3
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Total Current Assets................................................ 1,058 809
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PROPERTY, PLANT AND EQUIPMENT
Electric Generation and Distribution Assets............................. 732 863
Construction in Progress................................................ 369 345
Real Estate............................................................. 114 115
Property and Equipment.................................................. 75 88
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Total.............................................................. 1,290 1,411
Accumulated Depreciation and Amortization............................... (167) (190)
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Net Property, Plant and Equipment................................... 1,123 1,221
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INVESTMENTS
Capital Leases - Net.................................................... 2,820 2,784
Corporate Joint Ventures................................................ 1,161 1,111
Partnership Interests - Net............................................. 595 659
Other Investments....................................................... 62 63
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Total Investments................................................... 4,638 4,617
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OTHER ASSETS
Goodwill................................................................ 600 628
Deferred Costs.......................................................... 66 84
Other................................................................... 80 80
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Total Other Assets.................................................. 746 792
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TOTAL ASSETS............................................................ $7,565 $7,439
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See Notes to Consolidated Financial Statements.
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
March 31, December 31,
2002 2001
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CURRENT LIABILITIES
Long-Term Debt Due Within One Year........................................ $ 288 $ 270
Short-Term Borrowings Due to Public Service Enterprise Group Incorporated. 3 38
Accounts Payable:
Trade................................................................... 116 100
Taxes.................................................................. 18 21
Interest............................................................... 68 49
Other................................................................... 41 66
Affiliated Companies.................................................... 3 49
Billing in Excess of Costs and Estimated Earnings on Uncompleted Contracts 25 19
Non-Recourse Notes Payable................................................ 284 285
Borrowings Under Lines of Credit......................................... 272 300
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Total Current Liabilities............................................. 1,118 1,197
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NONCURRENT LIABILITIES
Deferred Income Taxes and Investment and Energy Tax Credits............... 1,241 1,211
Other Noncurrent Liabilities.............................................. 132 101
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Total Noncurrent Liabilities.......................................... 1,373 1,312
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COMMITMENTS AND CONTINGENT LIABILITIES....................................... - -
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MINORITY INTERESTS........................................................... 58 66
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CAPITALIZATION
Project Level, Non-Recourse Long-Term Debt................................ 769 744
Senior Notes.............................................................. 1,644 1,644
Medium Term Notes......................................................... 252 252
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Total Long-Term Debt.................................................. 2,665 2,640
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STOCKHOLDER'S EQUITY
Common Stock, Issued: 100 Shares........................................ - -
Preferred Stock......................................................... 509 509
Additional Paid-in Capital.............................................. 1,690 1,490
Retained Earnings....................................................... 509 510
Accumulated Other Comprehensive Loss.................................... (357) (285)
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Total Stockholder's Equity............................................ 2,351 2,224
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TOTAL LIABILITIES AND CAPITALIZATION......................................... $7,565 $7,439
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See Notes to Consolidated Financial Statements.
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
For the Quarters Ended
March 31,
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2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................................. $ 5 $ 60
Adjustments to Reconcile Net Income to Net Cash Flows from Operating
Activities:
Depreciation and Amortization............................................ 14 3
Deferred Income Taxes (Other than Leases)................................ 13 (15)
Leveraged Lease Income, Adjusted for Rents Received...................... 15 2
Investment Distributions................................................. 3 36
Undistributed Earnings from Affiliates................................... (14) (25)
Change in Fair Value of Derivative Financial Instruments................. (10) (1)
Foreign Currency Transaction Loss........................................ 52 -
Net Losses on Investments................................................ 5 15
Gain on Withdrawal from Partnership Interests............................ (7) (51)
Proceeds from Withdrawal from Partnership Interests...................... 7 50
Cumulative Effect of a Change in Accounting Principle.................... - (9)
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable................................................... (76) 6
Accounts Payable....................................................... (62) 52
Other Current Assets and Liabilities................................... 30 (6)
Other.................................................................... 6 2
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Net Cash (Used in) Provided by Operating Activities...................... (19) 119
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CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Partnerships and Joint Ventures............................ (95) (108)
Return of Capital from Partnerships........................................ 89 1
Additions to Property, Plant and Equipment................................. (77) (9)
Acquisitions, Net of Cash Acquired......................................... - (9)
Other...................................................................... (60) 1
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Net Cash Used in Investing Activities.................................... (143) (124)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Short-Term Debt............................................ (28) (386)
Net (Decrease) Increase in Short-Term Affiliate Borrowings................. (35) 29
Proceeds from Contributed Capital.......................................... 200 -
Proceeds from Long-Term Debt............................................... 43 554
Repayment of Long-Term Debt................................................ - (160)
Cash Dividends Paid........................................................ (6) (9)
Other...................................................................... 4 -
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Net Cash Provided by Financing Activities................................ 178 28
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Effect of Exchange Rate Changes on Cash and Cash Equivalents.................. (4) -
Net Change in Cash and Cash Equivalents....................................... 12 23
Cash and Cash Equivalents at Beginning of Period.............................. 56 22
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Cash and Cash Equivalents at End of Period.................................... $ 68 $ 45
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Supplemental Disclosure of Cash Flow Information:
Cash Payments During the Period for:
Income Taxes........................................................... $ 48 $ 2
Interest............................................................... $ 33 $ 21
Non-Cash Financing Activities:
Debt Assumed with Companies Acquired................................... $ - $ 92
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
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). Unless the context otherwise
indicates, all references to "Energy Holdings", "we", "us" or "our" herein mean
PSEG Energy Holdings Inc. and its consolidated subsidiaries. We have three
principal direct wholly-owned subsidiaries; PSEG Global Inc. (Global), PSEG
Resources Inc. (Resources) and PSEG Energy Technologies Inc. (Energy
Technologies).
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in the
opinion of management, the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements and Notes to
Consolidated Financial Statements (Notes) should be read in conjunction with our
Notes contained in the 2001 Annual Report on Form 10-K. These Notes update and
supplement matters discussed in the 2001 Annual Report on Form 10-K.
The unaudited financial information furnished reflects all adjustments
which are, in the opinion of management, necessary to fairly state the results
for the interim periods presented. The year-end Consolidated Balance Sheet was
derived from the audited consolidated financial statements included in the 2001
Annual Report on Form 10-K. Certain reclassifications of prior period data have
been made to conform with the current period presentation.
Note 2. Accounting Matters
On January 1, 2002 we adopted the Financial Accounting Standards Board
(FASB) 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 certain events or circumstances occur. The impact of
adopting SFAS 142 is likely to be material to our Consolidated Statements of
Income. We are required to complete our analysis of implementing SFAS No. 142 by
June 30, 2002, and the related financial statement impact is required to be
recorded by December 31, 2002. Any impairment losses, as of the date of
adoption, would be recognized as the cumulative effect of a change in accounting
principle in the first interim period, if applicable. If certain events or
changes in circumstance indicate that goodwill might be impaired before
completion of the transitional goodwill impairment test, goodwill shall be
tested for impairment and any impairment loss shall be recorded as a component
of operating expenses. For further analysis of our goodwill as of March 31,
2002, see Note 5. Commitments and Contingencies.
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
On January 1, 2002 we adopted SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" (SFAS 144), and there was no effect on our
Consolidated Statements of Income. Under SFAS 144 long-lived assets to be
disposed of are measured at the lower of carrying amount or fair value less
costs to sell, whether reported in continued operations or in discontinued
operations. 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. A long-lived asset
shall be tested for impairment whenever events or changes in circumstances
indicate that its carrying amount may be impaired. For additional information
relating to potential asset impairments, see Note 5. Commitments and
Contingencies.
In July 2001, the FASB issued SFAS 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. We are
currently evaluating this guidance and cannot determine the impact on our
financial position, results of operations, or net cash flows. However, such
impact could be material.
Note 3. Income Taxes
We file a consolidated Federal income tax return with PSEG. We have entered
into tax allocation agreements with PSEG which provide that we will record our
tax liabilities as though we were filing separate returns and will record tax
benefits to the extent that PSEG is able to receive those benefits. Deferred
income taxes are provided for the temporary differences between book and taxable
income, resulting primarily from the use of revenue recognition under the equity
method of accounting for book purposes, as well as the use of accelerated
depreciation for tax purposes and the recognition of fair value accounting for
book purposes. We defer and amortize investment and energy tax credits over the
lives of the related properties. Our 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 many 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
and the foreign income taxes are a component of our equity in earnings rather
than included as a component of our income tax provision.
Our effective tax rate was 0% and 22% for the quarters ended March 31, 2002
and 2001, respectively. The reduction in the effective tax rates was due to a
35% tax benefit associated with the $47 million pre-tax loss, net of minority
interests, related to the consolidated losses at Empresa Distribuidora de
Electricidad de Entre Rios S.A. (EDEERSA) in Argentina. This tax benefit offset
the tax expense recorded in connection with Resources' pre-tax income and
Global's pre-tax income, excluding the impacts of EDEERSA, and resulted in a net
tax benefit of less than $1 million for the quarter ended March 31, 2002.
Note 4. Financial Instruments and Risk Management
Our operations are exposed to market risks from changes in commodity
prices, foreign currency exchange rates, interest rates and equity prices that
could affect our results of operations and financial condition. 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 financial
instruments as risk management tools which are consistent with our business
plans and prudent business practices and not for speculative purposes.
The notional amounts of derivatives do not represent amounts exchanged by
the parties and, thus, are not a measure of our exposure through our use of
derivatives.
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
March 31, 2002 and December 31, 2001 were $28 million and $34 million,
respectively.
Foreign Currencies
We conduct our business on a multinational basis in a wide variety of
foreign currencies. Our objective for foreign currency risk management policy is
to preserve the economic value of cash flows in currencies other than the US
Dollar. Our policy is to hedge significant probable future cash flows identified
as subject to significant foreign currency variability. In addition, we
typically hedge a portion of our exposure resulting from identified anticipated
cash flows, providing the flexibility to deal with the variability of
longer-term forecasts as well as changing market conditions, in which the cost
of hedging may be excessive relative to the level of risk involved. Our foreign
currency hedging activities to date include hedges of US Dollar debt
arrangements in operating companies that conduct business in currencies other
than the US Dollar.
As of March 31, 2002, Global and Resources had international assets of
approximately $3.5 billion and $1.4 billion, respectively. For further analysis
of our international assets, see Note 6. Financial Information by Business
Segments.
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 US
Dollars and therefore, not subject to foreign currency risk.
Global's international investments are primarily in projects that
presently, or upon completion are expected to, 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 Dollar,
there is a corresponding change in Global's investment value in terms of the US
Dollar. Such change is reflected as an increase or decrease in the investment
value and Other Comprehensive (Loss) Income (OCI), as part of the cumulative
translation adjustment, a separate component of Stockholder's Equity. As of
March 31, 2002, net foreign currency devaluations have reduced the reported
amount of our total Stockholder's Equity by $320 million, of which $159 million,
$84 million and $63 million were caused by the devaluation of the Brazilian
Real, Chilean Peso and Argentine Peso, respectively. For the net foreign
currency devaluations for the quarter ended March 31, 2002, see Note 7.
Comprehensive Income.
Global holds a 60% ownership interest in Carthage Power Company (CPC), a
Tunisian generation facility under construction. The Power Purchase Agreement
(PPA), signed in 1999, contains an embedded derivative that indexes a portion of
the fixed Tunisian Dinar payments to US Dollar exchange rates. The indexation of
the PPA to the US Dollar is considered an embedded derivative and has been
recognized and valued separately as a derivative financial instrument. As the
Dinar depreciates or appreciates in relation to the US Dollar, the derivative
increases or decreases in fair value equal to the discounted present value of
additional units of foreign currency (measured in US Dollars) over the life of
the PPA. The cumulative fair value is recorded on the Consolidated Balance
Sheets as an asset or liability. To the extent that such indexation is provided
to hedge foreign currency debt exposure, the offsetting amount is recorded in
OCI. Amounts will be reclassified from OCI to Consolidated Statements of Income
over the life of the debt beginning on the date of commercial operation of the
project, expected to occur in the second quarter of 2002. To the extent such
indexation is provided to hedge an equity return in US Dollars, the offsetting
amount is recorded in the Consolidated Statements of Income as a component of
Other (Loss) Income. As of March 31, 2002, we recorded a derivative asset of $40
million related to the US Dollar indexation of the PPA. During the first quarter
of 2002, a gain of $4 million, net of tax and minority interest, was recorded to
our Consolidated Statements of Income as a result of a net increase in the fair
value of the derivative.
Global holds a 32% ownership interest in a Brazilian distribution company,
Rio Grande Energia (RGE), whose debt is denominated in US Dollars. As of March
31, 2002, Global's pro-rata share of such debt was approximately $60 million. In
order to hedge the risk of fluctuations in the exchange rate between the two
currencies associated with the debt principal payments due in May, June and July
2002, RGE entered into a series of three forward exchange contracts to purchase
US Dollars for Brazilian Reais in December 2001. Global's share of the notional
value of these contracts, which expire in the same months as the respective
principal payments are due, is approximately $12 million. These contracts were
established as hedges for accounting purposes, and accordingly the change in
fair value was recorded in OCI. As of March 31, 2002, Global's share of the
derivative liability associated with these contracts was $2 million and the
change in fair value for the three months ended March 31, 2002 was negligible.
Additionally, in order to hedge the risk of fluctuations in the exchange rate
between the two currencies associated with the interest payment due in May 2002,
RGE entered into a cross currency interest rate swap in January 2002. The
instrument converts the variable LIBOR-based interest payments to variable CDI
(the Brazilian inter-bank offered rate) based payments. As a result, RGE hedged
its foreign currency exposure but is still at risk for variability in the
Brazilian CDI interest rate during the terms of the instruments. Global's share
of the notional value of this instrument is approximately $1 million. The fair
market value of the instrument as of March 31, 2002, and the change in the fair
market value of the instrument for the three months ended March 31, 2002 were
negligible to our Consolidated Balance Sheets and Consolidated Statements of
Income. Further, in order to hedge the risk of fluctuations in the exchange rate
between the two currencies associated with the principal payments due in May,
June and July of 2003 through 2005, RGE entered into a series of nine similar
cross currency interest rate swaps in January 2002. Global's share of the
notional value of the instruments totals approximately $15 million per year for
the instruments maturing in May, June and July of 2003 through 2004 and totals
approximately $19 million for the instruments maturing in May, June and July
2005. For accounting purposes, the fluctuations in the fair value of the
interest rate components of these cross currency swaps were not recorded under
hedge accounting rules and were recorded directly to the Consolidated Statements
of Income. As of March 31, 2002, these contracts had an aggregate fair value of
approximately $1 million and an aggregate change in fair value for the three
months ended March 31, 2002 of approximately $1 million.
Through its 50% joint venture, Meiya Power Company, Global holds a 17.5%
ownership interest in a Taiwanese generation project under construction where
the construction contractor's fees, payable in installments through July 2003,
are payable in Euros. To manage the risk of foreign exchange rate fluctuations
associated with these payments, the project entered into a series of forward
exchange contracts to purchase Euros in exchange for Taiwanese Dollars. As of
March 31, 2002, Global's share of the fair value and aggregate notional value of
these forward exchange contracts was an asset of less than $1 million and $16
million, respectively. These forward exchange contracts were designated as
hedges for accounting purposes and were recorded to OCI, resulting in an
increase to OCI of $1 million, net of tax, for the three months ended March 31,
2002.
During 2001, Global purchased 100% interest in Sociedad Austral de
Electricidad S.A. (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. In order to economically hedge final
Chilean Peso denominated payments required for the acquisition, Global entered
into a forward exchange contract to purchase Chilean Pesos for US Dollars. Upon
settlement of the transaction, Global recognized an after-tax loss of $1
million. Furthermore, as a requirement to obtain certain debt financing
necessary to fund the acquisition, and in order to hedge against fluctuations in
the US Dollar to Chilean Peso foreign exchange rates, Global entered into two
forward contracts with notional values of $75 million each to exchange Chilean
Pesos for US Dollars. These transactions expire in October 2002 and are
considered hedges for accounting purposes. As of March 31, 2002, the derivative
liability value of $15 million has been recorded to OCI, net of taxes.
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. As of March 31,
2002, a hypothetical 10% change in market interest rates would result in a $3
million change in annual interest costs related to our short-term and floating
rate debt.
Global is constructing electric generation facilities in Oman, Poland and
Tunisia. The operating companies of these facilities have entered into interest
rate swaps to lock in fixed interest rates on up to $599 million of its
construction loans. Such interest rate swaps hedge the value of the cash flows
of future interest payments. The gross notional amounts, interest rates, fair
values and impacts to Accumulated OCI as of March 31, 2002 are listed below.
Global currently owns 81%, 55%, and 60% of the Oman, Polish, and Tunisian
investments, respectively:
Oman Poland Tunisia
---------- --------------------------- -----------------------------
US $ US $ Polish Zloty US $ Euro
Tranche Tranche Tranche Tranche Tranche
---------- ----------- ------------- ----------- --------------
(Millions of Dollars, where applicable)
Notional Amount.......................... $70 $108 $47 $57 $63
Pay Rate................................. 6.3% 8.4% 13.3% 7.0% 5.2%
Receive Rate............................. LIBOR LIBOR WIBOR* LIBOR EURIBOR**
Fair Value .............................. $(1) $(28) $(22) $(4) $(1)
Balance in Accumulated OCI............... $1 $10 $7 $1 -
Percent Ownership........................ 81% 55% 55% 60% 60%
Maturity................................. 2018 2010 2010 2009 2009
* WIBOR- Warsaw Inter-Bank Offered Rate
** EURIBOR-Euro Area Inter-Bank Offered Rate
The ineffective portion of these interest rate swaps is recorded in the
Consolidated Statements of Income. During the quarter ended March 31, 2002,
Global recorded a loss of less than $1 million, after taxes and minority
interest, due to the ineffectiveness of such interest rate swaps.
Global holds investments in various generation facilities in the United
States that are accounted for under the equity method of accounting and,
therefore, are not consolidated in Global's financial statements. Global holds a
50% indirect ownership in two investments located in Texas and a 50% direct
ownership in one investment in Hawaii (collectively the investees), which hold
US Dollar denominated debt with variable interest payments tied to LIBOR rates.
In order to lock in fixed interest rates on such debt, the investees each
entered into interest rate swaps to hedge the value of the cash flows of their
future interest payments. As of March 31, 2002, the aggregate notional balance
of these swaps was $317 million (Global's share was $159 million), the weighted
average fixed interest rate paid was 6.9% and Global's share of the aggregate
fair value of these swaps was a liability of $10 million. These swaps were
designated as hedges for accounting purposes and, as a result, changes in the
fair value of the hedge were recorded in OCI.
The fair value of interest rate swaps, designated and effective as cash
flow hedges, are initially recorded in OCI. Reclassification of unrealized gains
or losses on cash flow hedges of variable-rate debt instruments from OCI into
earnings occurs as interest payments are accrued on the debt instrument and
generally offsets the change in the interest accrued on the underlying variable
rate debt. We estimate reclassifying $11 million of losses from cash flow
hedges, including our pro-rata share from our equity method investees, from OCI
to our Consolidated Statements of Income over the next 12 months.
Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of
nonperformance by counterparties, pursuant to the terms of their contractual
obligations. We have established credit policies that we believe significantly
minimize our exposure to credit risk. These policies include an evaluation of
potential counterparties' financial condition, including credit ratings.
Note 5. Commitments and Contingencies
Argentine Economic Crisis
As of March 31, 2002, our aggregate investment exposure in Argentina was
$585 million. The $632 million of investment exposure as of December 31, 2001
was reduced by $47 million during the quarter ended March 31, 2002 due to the
charge associated with a change in the functional currency from the US Dollar to
the Argentine Peso, as noted below. Investments include $165 million in the 90%
owned distribution company, EDEERSA; and $420 million in our minority interests
in three 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) and two generating companies, Central
Termica San Nicolas (CTSN), and Parana which are under contract for sale to
certain subsidiaries of the AES Corporation (AES). Goodwill related to our
investment in EDEERSA is approximately $63 million and is included in our
investment exposure.
The Argentine economy has been in a state of recession for approximately
five years. Continued deficit spending in the 23 Argentine provinces coupled
with low growth and high unemployment has precipitated an economic, political
and social crisis. Toward the end of 2001, a liquidity crisis ensued causing the
Argentine government to default on $141 billion of national debt. The economic
crisis was fueled by political instability and social unrest as 2002 began. The
present Argentine Federal government is in the process of developing an economic
plan to avert a return to the economic instability and hyperinflationary economy
of the 1980s. In early January 2002, the decade-old convertibility formula that
maintained the Argentine Peso at a 1:1 exchange rate with the US Dollar was
abandoned. In early February 2002, the Argentine Peso began to float and was no
longer pegged to the US Dollar. In the first day of the free floating formula,
the currency weakened to a rate of 2 Pesos per 1 US Dollar. At the end of March
2002, the currency weakened further to a rate of 2.90 Pesos per 1 US Dollar. As
of April 30, 2002, the currency weakened further to a rate of 2.96 Pesos per 1
US Dollar.
In the Province of Entre Rios, where EDEERSA is located, the electricity
law provided for a pass-through of devaluation to the end-user customer.
Customers' bills were to be first computed in US Dollars and then converted into
Pesos for billing. This mechanism assured that devaluation would not impact the
level of US Dollar revenues an electric distribution company received. However,
in January 2002, the Argentine Federal government implemented a new emergency
law that prohibits any foreign price or currency indexation and any US Dollar or
other foreign currency adjustment clauses relating to public service tariffs,
thus prohibiting the pass through of the costs of devaluation to customers. The
provincial governments have been requested to adopt this provision. The
provincial government of the Province of Entre Rios has recently adopted this
provision as well as a law that requires public service companies within the
Province including EDEERSA to accept payment for all billed services in a
provincial promissory note, the "Federal". The terms of the "Federal" require
principal payment at maturity in an equal amount of Argentine Pesos. However,
the "Federal" is not freely convertible in the financial markets into Argentine
Pesos or US Dollars. Approximately 75% of cash receipts generated from EDEERSA's
operations are currently settled in "Federals". There are ongoing negotiations
to remedy this situation, although no assurances can be given. While we continue
to operate EDEERSA, there has been an adverse impact to the financial condition
and cash flows of EDEERSA due to its inability to pass through the costs of
devaluation to customers and its receipt of an illiquid provincial currency. We
are pursuing remedies on several fronts, including holding discussions with the
Province and United States government officials both individually and
collectively with a coalition of international investors, and are pursuing legal
recourse under the Bilateral Investment Treaty between the United States and
Argentina. We have been notified by lenders of the occurrence of events of
default related to the Parana, EDEN, EDES and EDELAP credit facilities, all of
which assets are under contract to be sold to certain subsidiaries of AES. If
Argentine conditions do not improve, Global's other Argentina properties may
also default on non-recourse obligations in connection with other financings.
Currently, we cannot predict the outcome of our ongoing negotiations with the
lenders.
The situation in Argentina is quite uncertain and highly volatile. While it
is likely that some or all of our investment in Argentina is impaired, the
continued lack of stability in the political and economic environment causes
significant variability in the quantification of value. However, the continued
passage of time without a credible solution and continuing instability
diminishes the prospect of recovery. Other potential impacts of the Argentine
economic, political and social crisis, include increased collection risk,
further devaluation of the Peso, potential nationalization of assets,
foreclosure of our assets by lenders and an inability to complete the pending
sale of certain Argentine assets to certain subsidiaries of AES. Global
anticipates that evolving economic and political events, ongoing discussions
with regulators about tariff levels, and discussions with lenders should enable
it to reach a determination of value in the second quarter of 2002.
Functional Currency - Argentine Operations
As of December 31, 2001, the functional currency of EDEERSA was the US
Dollar, as all revenues, most expenses and all financings were denominated in US
Dollars or were linked to the US Dollar. As a US Dollar reporting entity,
EDEERSA's monetary accounts denominated in Pesos, such as short-term receivables
or payables, were re-measured into the US Dollar with a minimal impact to
earnings. At December 31, 2001, our 90% share of EDEERSA's US Dollar denominated
debt was approximately $76 million. This debt is non-recourse to us. Due to the
recent events described above, we have changed the functional currency of
EDEERSA's operations to the Argentine Peso, effective March 1, 2002. As a
result, all monetary accounts denominated in US Dollars were re-measured to the
Argentine Peso, including the US Dollar denominated debt using the applicable
exchange rate of 2.90 Pesos per 1 US Dollar. This resulted in a pre-tax loss of
approximately $47 million after deductions for minority interest for the quarter
ended March 31, 2002. In addition to this impact on our Consolidated Statements
of Income, the recorded amount of our net investment in EDEERSA decreased by
approximately $100 million due to the translation adjustment as of March 31,
2002.
Assets Held for Sale-Certain Argentine Projects
On August 24, 2001, Global entered into a Stock Purchase Agreement to sell
its minority interests in EDEN, EDES, EDELAP, CTSN and Parana, to certain
subsidiaries of AES. The transaction is subject to regulatory approval and
consent of lenders.
On February 6, 2002, AES notified Global that it was terminating the Stock
Purchase Agreement. In the Notice of Termination, AES alleged that a Political
Risk Event, within the meaning of the Stock Purchase Agreement, had occurred, by
virtue of certain decrees of the Government of Argentina, thereby giving AES the
right to terminate the Stock Purchase Agreement. Global disagrees that a
Political Risk Event as defined in the Stock Purchase Agreement, which is
limited to expropriation of assets, has occurred and has so notified AES. In
April 2002, Global filed a lawsuit in New York State Supreme Court for New York
County against AES to enforce its rights under the Stock Purchase Agreement,
which it will vigorously pursue. We cannot predict the ultimate outcome of this
matter.
As of March 31, 2002, we had approximately $19 million of interest and
other receivables due from the AES Corporation as provided for in the
transaction documents.
In the first quarter of 2002, the Administrative Agent for the non-recourse
project financing for Parana notified Global that the Parana Project was in
default and a $28 million equity commitment was accelerated by two weeks. Global
made such payment in March 2002 and it is included in the $585 million of
investment exposure.
Dispute of Power Contract-Tanir Bavi
Global owns a 74% interest in Tanir Bavi Power Company Private Ltd. (Tanir
Bavi), which owns and operates a 220 MW barge mounted, combined-cycle generating
facility. The plant commenced combined-cycle commercial operation in November
2001. Power from the plant is being sold under a seven-year fixed price PPA with
the Karnataka Power Transmission Company Limited (KPTCL), a State affiliated
entity, formerly known as Karnataka Electricity Board.
Tanir Bavi has been in dispute with KPTCL regarding the terms of payment
specified in the PPA relating to the fixed portion of the tariff, which is
approximately US $.04 per kilowatt-hour. The amount of the dispute is
approximately half of this fixed amount. During the first quarter of 2002, KPTCL
referred the dispute to the government of Karnataka, which directed KPTCL to
accept Tanir Bavi's position. Prior to KPTCL's acceptance of such direction,
however, the Karnataka Electricity Regulatory Commission (KERC) exercised
jurisdiction over the matter and requested that KPTCL not comply with the
requests of the government of Karnataka until KERC had reviewed the matter. A
hearing was held in May 2002, at which KERC determined that the disputed amounts
could not be paid until the parties complied with the dispute resolution process
called for in the PPA. KERC did not rule on the merits regarding the arrearages
but directed the parties on the process of the dispute. The dispute resolution
process could take several months.
Beginning in January 2002, approximately 50% of the disputed amounts were
subject to a reserve established by Global. Beginning in the second quarter of
2002, Global began to reserve 100% of the disputed amount. As of March 31, 2002,
the amount in dispute due from KPTCL was $22 million, net of reserves, of which
our share was $16 million. We cannot predict the outcome due to the uncertainty
of the dispute resolution process. If there was an unfavorable outcome in this
matter, we would be required to recognize a loss of up to our share of the
entire unrecovered and unreserved amount in dispute, and the recorded amount of
the goodwill could be impaired. In addition, an unfavorable outcome would
adversely impact this project's future earnings and cash flows and could lead to
an impairment of the existing $27 million of goodwill associated with the
project.
Goodwill
We are required to adopt SFAS 142 in 2002, which requires certain goodwill
impairment testing. For a comprehensive discussion of SFAS 142, see Note 2.
Accounting Matters.
As of March 31, 2002, the carrying value of consolidated unamortized
goodwill was $600 million, of which $451 million was recorded in connection with
Global's acquisitions of SAESA and Electroandes in Chile and Peru in August and
December 2001, respectively. The amortization expense related to goodwill was
approximately $3 million for the year ended December 31, 2001.
As of March 31, 2002, our pro-rata share of goodwill included in equity
method investees totaled $378 million. In accordance with generally accepted
accounting principles, such goodwill is not consolidated on our balance sheet.
Global's share of the amortization expense related to such goodwill was
approximately $8 million for the year ended December 31, 2001.
We are in the process of finalizing our evaluation of the effect of
adopting SFAS 142 on the recorded amount of goodwill at RGE, EDEERSA, Energy
Technologies and Tanir Bavi. It is likely that the entire carrying value of the
goodwill at EDEERSA and Energy Technologies is completely impaired, that a
material portion of the goodwill at RGE up to approximately half of the recorded
carrying value is impaired and that the goodwill at Tanir Bavi could be
impaired. The goodwill at EDEERSA is included in the $585 million of investment
exposure associated with our assets in Argentina.
As of March 31, 2002, our consolidated unamortized goodwill of $600 million
and pro-rata share of goodwill in equity method investees of $378 million was as
follows:
As of
March 31, 2002
--------------
(Millions of Dollars)
Consolidated Goodwill
Global
EDEERSA ................................................................................... $ 63
SAESA ..................................................................................... 315
Electroandes .............................................................................. 136
Tanir Bavi ................................................................................ 27
ELCHO ..................................................................................... 6
----
Total Global Goodwill .......................................................... 547
----
Energy Technologies ......................................................................... 53
----
Total Consolidated Goodwill .................................................... $600
----
Pro-Rata Share of Equity Method Investment Goodwill
Global
RGE ...................................................................................... $140
Chilquinta ............................................................................... 174
Luz del Sur .............................................................................. 39
Kalaeloa ................................................................................. 25
----
Total Pro-Rata Share of Equity Method Investment Goodwill ............................ $378
----
Total Goodwill ................................................................... $978
====
Other
In 2002, we adopted SFAS 144. SFAS 144 requires periodic reviews of
long-lived assets for impairment and supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Review is generally initiated by a certain event or series of events that causes
a change in the operation or business environment in which we operate. The
recent economic crisis in Argentina will cause us to initiate a review of our
Argentine operations under SFAS 144 and will likely result in a material
impairment to our Consolidated Statements of Income.
As of March 31, 2002, we had $50 million, or 1%, of our assets invested in
the Turboven generation facilities, located in Venezuela. Recently, Venezuela
has been subject to a loss of capital as the country's debt has been subject to
a credit rating downgrade. In February 2002, the government of Venezuela
abandoned the crawling currency peg and allowed the Venezuelan Bolivar to float
freely with the US Dollar. The Bolivar devalued approximately 18% since year-end
2001 from 758 Bolivars to 1 US Dollar to 921 Bolivars to 1 US Dollar as of March
31, 2002. The Turboven power purchase contracts are indexed to the US Dollar as
are the fuel supply costs. This implies that a devaluation will not impact the
level of US Dollar revenues realized as allowed by the power purchase contracts.
Our near term income statement exposure relates to our net monetary position in
Bolivars. Since Turboven is a US Dollar functional entity, any receivables and
payables in Bolivars must be re-measured to the US Dollar. The impact of the
re-measurement is recorded as a loss or gain to our Consolidated Statements of
Income. The recent decision to devalue the Bolivar did not have a material
adverse impact on our financial position, results of operations or net cash
flows.
We, and/or Global 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 $188 million as of March 31, 2002. The guarantees consist of a $61
million equity commitment for Elektrocieplownia Chorzow Sp. Z o.o. (ELCHO) in
Poland, $56 million of various guarantees for Dhofar Power Company in Oman, a
$25 million guarantee for Chilquinta Energia, S.A. (Chilquinta) in Chile and
Peru, and various other guarantees comprise the remaining $46 million. A
substantial portion of such guarantees is cancelled upon successful completion,
performance and/or refinancing of construction debt with non-recourse project
debt.
In the normal course of business, Energy Technologies secures construction
obligations with performance bonds issued by insurance companies. In the event
that Energy Technologies' tangible equity falls below $100 million, we would be
required to provide additional support for the performance bonds. Tangible
equity is defined as net equity less goodwill. As of March 31, 2002, Energy
Technologies had tangible equity of $111 million and performance bonds
outstanding of approximately $130 million. The performance bonds are not
included in the $188 million of guaranteed obligations, discussed above.
In May 2001, GWF Energy LLC (GWF Energy), a 50/50 joint venture between
Global and Harbinger GWF LLC, entered into a 10-year power purchase agreement
(PPA) with the California Department of Water Resources (CDWR) to provide 340 MW
of electric capacity to California from three new natural gas-fired peaking
plants, Hanford, Henrietta and Tracy Peaking Plants. Total project cost is
estimated at approximately $335 million. The Hanford Peaking Plant, a 90 MW
facility, was completed and began operation in August 2001. The Henrietta
Peaking Plant, a 90 MW facility, is currently under construction, with
completion expected in July 2002, and the Tracy Peaking Plant, a 160 MW
facility, is in the permitting process. Permitting for the Tracy Peaking project
has been delayed significantly. The California Energy Commission is not expected
to issue a permit allowing the start of construction before the end of June
2002. This date does not allow sufficient time to complete construction before
the final Commercial Operations Date deadline of October 31, 2002 under the
contract. On February 28, 2002, GWF Energy asserted a force majeure claim under
the provisions of its contract for an appropriate extension of the deadline.
On April 24, 2002, GWF Energy received notice from the CDWR rejecting GWF
Energy's force majeure claim. We and Global are evaluating the appropriate
course of action to protect GWF Energy's rights under the CDWR PPA. Global's
permanent equity investment in these plants, including contingencies, is not
expected to exceed $100 million after completion of project financing, which is
currently expected to occur in late 2002 or in 2003. For a description of the
loans to GWF Energy, see Note 8. Related-Party Transactions.
On February 25, 2002, the Public Utilities Commission of the State of
California (CPUC) and the State of California Electricity Oversight Board filed
complaints with the Federal Energy Regulatory Commission (FERC) under Section
206 of the Federal Power Act against sellers, which pursuant to long-term FERC
authorized contracts, provide power to the CDWR. GWF Energy is a named
respondent in these proceedings. The complaints, which address over 40
transactions embodied in over 30 contracts with over 20 sellers, allege that,
collectively, the specified long-term wholesale power contracts are priced at
unjust and unreasonable levels and request FERC to abrogate the contracts to
enable the State to obtain replacement contracts as necessary or in the
alternative, to reform the contracts to provide for just and reasonable pricing,
reduce the length of the contracts and strike from the contracts the specific
non-price conditions found to be unjust and unreasonable. On April 25, 2002,
FERC consolidated the two dockets and set the contracts of GWF Energy and
certain other respondents, including the ten year PPA, for hearing "to determine
whether the dysfunctional California spot markets adversely affected the
long-term bilateral markets and, if so, whether modification of any individual
contract at issue is warranted." FERC determined that the GWF contract, among
others, was entitled to presumption of validity, requiring the CPUC to prove it
was "against the public interest." FERC also strongly encouraged the parties to
negotiate settlements and directed a settlement judge to be appointed to oversee
such negotiations. GWF Energy has indicated to representatives of the State of
California its willingness to enter into negotiations in an attempt to resolve
differences between the parties. GWF Energy plans to attend FERC settlement
conference discussions in mid-May. We cannot predict the outcome of this matter
or its impact on future earnings or cash flows.
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 (81% ownership) and several major Omani
investment groups owns DPCO. The project will enhance the existing network of
generation, transmission and distribution assets and is expected to add 200 MW
of new generating capacity. The project achieved financial closure in September
2001 and construction on the project commenced in the same month. 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 January 2002, Global completed negotiations to buy a 35% interest in the
590 MW (electric) and 618 MW (thermal) coal-fired Skawina CHP Plant (Skawina),
located in Southern Poland. As part of the transaction, Global will purchase
additional shares at closing, which will make Global the majority owner of
Skawina. The transaction includes the obligation to purchase additional shares
in 2003 that will bring Global's aggregate interest in Skawina CHP to
approximately 75%. Skawina supplies electricity to three local distribution
companies and heat mainly to the city of Krakow, under annual one-year contracts
consistent with current practice in Poland. The sale is part of the Polish
Government's energy privatization program. Global's equity investment is
expected to be approximately $44 million.
The Brazilian Consumer Association of Water and Energy has filed a lawsuit
against RGE (of which Global is a 32% owner), and two other utilities, claiming
that certain value added taxes and the residential tariffs that are being
charged by such utilities to their respective customers are illegal. RGE
believes that its collection of the tariffs and value added taxes are in
compliance with applicable tax and utility laws and regulations. While it is the
contention of RGE that the claims are without merit, and that it has valid
defenses and potential third party claims, an adverse determination could have a
material adverse effect on our financial condition, results of operations and
net cash flows.
RGE is also currently engaged in a dispute with its regulator, ANEEL, which
is seeking to mandate a reduction in RGE's fixed asset base due to a
pre-privatization review of Companhia Estadual de Energia's (CEEE) asset base.
This pre-privatization review was not brought to the attention of the bidders
during the RGE privatization process. The result of such a decrease in RGE's
fixed asset base would be a likely reduction in RGE's tariff of approximately $8
million during the next rate case as RGE's return on fixed assets would be above
the accepted level. RGE is currently contesting the matter. We do not expect
that there will be a material adverse effect on our financial condition, results
of operations and net cash flows as a result of this dispute, although no
assurances can be given.
We and our equity method investees are involved in various legal actions
arising in the normal course of business. We do not expect that there will be a
material adverse effect on our financial condition, results of operations and
net cash flows as a result of these proceedings, although no assurances can be
given.
Note 6. Financial Information by Business Segments
Information related to the segments of our business is detailed below:
Global (A) Resources Energy Other (B) Consolidated
Technologies Total
- ---------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
For the Quarter Ended March 31, 2002:
------------------------------------
Total Operating Revenues........................ $ 137 $ 53 $ 101 $ (1) $ 290
Segment Net Income (Loss) Available to PSEG..... $ (10) $ 14 $ (3) $ (2) $ (1)
For the Quarter Ended March 31, 2001:
------------------------------------
Total Operating Revenues........................ $ 89 $ 33 $ 102 $ 1 $ 225
Extraordinary Loss on Early Retirement of Debt.. $ (2) $ - $ - $ - $ (2)
Cumulative Effect of a Change in
Accounting Principle.......................... $ 9 $ - $ - $ - $ 9
Segment Net Income (Loss) Available to PSEG..... $ 55 $ 3 $ (3) $ (1) $ 54
As of March 31, 2002:
--------------------
Total Assets.................................... $4,122 $3,091 $ 286 $ 66 $7,565
As of December 31, 2001:
-----------------------
Total Assets.................................... $4,074 $3,026 $ 290 $ 49 $7,439
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(A) For the quarter ended March 31, 2002, Global recorded an after tax and
after minority interest charge of $31 million to recognize the effects of
changing from the functional currency at EDEERSA from the US Dollar to the
Argentine Peso.
(B) Other activities include amounts applicable to Energy Holdings (parent
corporation), Enterprise Group Development Corporation, PSEG Capital
Corporation and intercompany eliminations.
</FN>
Our geographic information is disclosed below.
Revenues (1) Assets (2)
---------------------------- -------------------------------------
For the Quarters Ended As of
March 31, March 31, December 31,
----------------------------
2002 2001 2002 2001
------------ ----------- -------------- --------------
(Millions of Dollars) (Millions of Dollars)
United States............................. $135 $174 $2,677 $2,675
Foreign Countries......................... 155 51 4,888 4,764
------------ ----------- ----------- ----------
Total..................................... $290 $225 $7,565 $7,439
============ =========== =========== ==========
Assets in foreign countries include:
Netherlands................................................................. $ 921 $ 911
Chile....................................................................... 917 880
Argentina................................................................... 636 737
Peru........................................................................ 547 520
India....................................................................... 315 288
Brazil .................................................................... 302 282
Tunisia..................................................................... 268 245
Other....................................................................... 982 901
------------ ------------
Total......................................................................... $4,888 $4,764
============ ============
<FN>
(1) Revenues are attributed to countries based on the locations of the
investments.
(2) Assets are comprised of investment in corporate joint ventures and
partnerships that are accounted for under the equity method and companies
in which we have a controlling interest for which the assets are
consolidated on our financial statements. Amount is net of pre-tax and
minority interest foreign currency translation adjustment of $393 million
and $283 million as of March 31, 2002 and December 31, 2001, respectively.
</FN>
The table below reflects our investment exposure in Latin American
countries:
Investment Exposure
-------------------------------------
March 31, December 31,
2002 2001
------------- ----------------
(Millions of Dollars)
Argentina....................... $ 585 $ 632
Brazil.......................... 476 467
Chile........................... 528 542
Peru............................ 425 387
Venezuela....................... 52 53
The investment exposure consists of invested equity plus equity commitment
guarantees. The investment exposure in these Latin American countries is
Global's.
================================================================================
PSEG ENERGY HOLDINGS INC.
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Concluded
Note 7. Comprehensive Income
For the Quarters Ended
March 31,
---------------------------
2002 2001
------------ -----------
(Millions of Dollars)
Net income........................................................................... $ 5 $ 60
Currency translation adjustments..................................................... (62) (2)
Cumulative effect of a change in accounting principle................................ - (15)
Current period declines in fair value of financial derivative instruments - net...... (13) (1)
Reclassifications to earnings - net.................................................. 3 -
----------- ----------
Comprehensive (loss) income.......................................................... $ (67) $ 42
=========== ==========
Note 8. Related-Party Transactions
Administrative Costs
PSEG Services Corporation (Services) provides and bills administrative
services to us on a monthly basis. Our costs related to such services amounted
to approximately $5 million for the quarter ended March 31, 2002.
Additional Paid-in Capital
For the three months ended March 31, 2002, PSEG invested $200 million of
additional equity in us, the proceeds of which were used to repay short-term
debt and fund additional investments at Global.
Loans to TIE
In April 1999, Global and its partner, Panda Energy International, Inc.,
established Texas Independent Energy, L.P. (TIE), a 50/50 joint venture, to
develop, construct, own, and operate electric generation facilities in Texas. As
of March 31, 2002, Global's investments in the TIE partnership include $76
million of loans that earn interest at an annual rate of 12% that are expected
to be repaid over the next 10 years.
Loans to GWF Energy
In May 2001, GWF Energy, a 50/50 joint venture between Global and Harbinger
GWF LLC, entered into a 10-year PPA with the DWR to provide 340 MW of electric
capacity to California from three new natural gas-fired peaking plants that GWF
Energy expects to build and operate in California. Total project cost is
estimated at approximately $335 million. The first plant, a 90 MW facility, was
completed and began operation in August 2001. The second plant is currently
under construction, with completion expected in July 2002, and the third plant
is in the permitting process. Global's permanent equity investment in these
plants, including contingencies, is not expected to exceed $100 million after
completion of project financing, which is currently expected to occur in late
2002 or in 2003. Pending completion of project financing, Global has provided
GWF Energy approximately $98 million of secured loans to finance the purchase of
turbines. The turbine loans bear interest at rates ranging from 12% to 15% per
annum and are payable in installments beginning May 31, 2002, with final
maturity no later than December 31, 2002. Global has also provided GWF Energy
$27 million of working capital loans that bear interest at 20% per annum and are
convertible into equity at Global's option on various dates expiring in May
2002.
================================================================================
PSEG ENERGY HOLDINGS INC.
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview and Future Outlook
The electric and gas utility industries in the United States and around the
world continue to experience significant change. Deregulation, restructuring,
privatization and consolidation are creating opportunities for us. At the same
time, competitive pressures are increasing.
We are a major part of Public Service Enterprise Group Incorporated
(PSEG's) growth strategy. In order to achieve this strategy, Global will
selectively focus on generation and distribution investments within targeted
high-growth regions. Resources will utilize its market access, industry
knowledge and transaction structuring capabilities to expand its energy-related
financial investment portfolio. We are evaluating the future prospects of Energy
Technologies' business model and its fit in our portfolio given the slower pace
of retail deregulation in the markets in which we operate. Resources' assets
generate cash flow and earnings in the near term, while investments at Global
generally have a longer time horizon before achieving expected cash flow and
earnings. Also, Resources' passive lower-risk assets serve to balance the higher
risk associated with operating assets at Global and Energy Technologies.
While Global realized substantial growth in 2001, significant challenges
began developing during the fourth quarter of 2001 and into 2002. These
challenges include the Argentine economic crisis, the soft power market in Texas
and the worldwide economic downturn. As a result, Global has refocused its
strategy, from one of accelerated growth to one that places emphasis on
increasing the efficiency and returns of its existing assets.
Future revenue growth will be partially offset by the reduction of revenue,
anticipated in 2002 from certain generation facilities in California and Texas
due to lower energy prices, and distribution facilities in Argentina due to the
current economic, political and social crisis. Global has investment exposure of
$585 million in four distribution companies and two generation plants in
Argentina and we are evaluating such investments for potential impairment. In
addition, as part of the implementation of SFAS 142, the goodwill associated
with Rio Grande Energia S.A. (RGE), Empresa Distribuidora de Electricidad de
Entre Rios S.A. (EDEERSA), Energy Technologies and Tanir Bavi Power Company
Private Ltd. (Tanir Bavi) is being evaluated for potential impairment. Under a
worst case scenario, if the results of these evaluations indicate a complete
impairment of all such assets, we would record an approximate $735 million
pre-tax and pre-minority interest, $473 million after-tax and after-minority
interest charge to our Consolidated Statement of Income in 2002. The related,
worst case charge to equity would be approximately $410 million due to the $63
million charge to Other Comprehensive (Loss) Income (OCI) previously recorded in
the first quarter of 2002. We expect to complete our evaluations of these issues
during the second quarter of 2002. For further discussion of the Argentine
economic crisis and our investment exposure, potential goodwill impairments, and
certain other contingencies, see Note 5. Commitments and Contingencies of the
Notes to Consolidated Financial Statements. For further discussion of the Texas
power market, see "Business Environment."
Access to sufficient capital from external sources and from PSEG as well as
the availability of cash flow and earnings from Global and Resources will be
essential to fund future investments. We continuously evaluate our plans and
capital structure in light of available investment opportunities and seek to
maintain the flexibility to pursue strategic growth investments. Depending upon
the level of investment activity, we anticipate obtaining additional equity
contributions from PSEG as necessary to maintain our growth objectives and
targeted capital structure. The availability of equity capital from PSEG cannot
be assured since it is dependent upon our performance and the needs of PSEG and
PSEG's other subsidiaries.
Following are the significant changes in or additions to information
reported in our 2001 Annual Report on Form 10-K affecting our consolidated
financial condition and the results of operations of us and those of our
subsidiaries. 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. Unless the context
otherwise indicates, all references to "Energy Holdings", "we", "us" or "our"
herein mean PSEG Energy Holdings Inc. and its consolidated subsidiaries.
Results of Operations
Energy Holdings -- Revenues
Our revenues increased $65 million or 29% to $290 million from $225 million
for the quarter ended March 31, 2002 as compared to the same period in 2001.
Revenues at Global increased $48 million or 54% to $137 million from $89
million for the quarter ended March 31, 2002 as compared to the same period in
2001 primarily attributable to consolidated Electric Generation and Distribution
and Other revenues of $98 million recorded in connection with the acquisitions
of Elektrocieplownia Chorzow Sp. Z o.o. (ELCHO) in the fourth quarter of 2000,
EDEERSA in the second quarter of 2001, Sociedad Austral de Electricidad S.A.,
(SAESA) in the third quarter of 2001, Empresa de Electricidad de los Andes S.A.
(Electroandes) in the fourth quarter of 2001, and the commencement of operations
at Tanir Bavi in the second quarter of 2001. Revenues further increased by $10
million due to improved earnings from RGE as certain generation costs previously
expensed, were reclassified as they were due to be recovered from customers in
the future. These increases were partially offset by a decrease of $43 million
in gains due to Global's withdrawal of its interest in Eagle Point Cogeneration
Partnership (Eagle Point) and reduced earnings of $11 million from Texas
Independent Energy, L.P. (TIE) and GWF. In December 2000, Global withdrew from
its interest in Eagle Point in exchange for a series of payments through 2005,
expected to total up to $290 million. Such payments will be made in each year
until 2005, provided certain operating contingencies are met. With respect to
Eagle Point, Global expects to record a total of $46 million in the second and
third quarters of 2002, as operating contingencies for the facility are expected
to be met. Losses at TIE increased $5 million due to lower energy prices
resulting from an over-supply of energy in the Texas power market. Global
expects this trend in the Texas power market to continue until 2004-2005 when
market prices are expected to increase, as older less efficient plants are
expected to be retired and the demand for electricity is expected to increase.
Earnings at GWF decreased by $6 million as high energy prices in the California
power market did not return to more normalized levels until late January 2001.
Revenues at Resources increased $20 million or 61% to $53 million from $33
million for the quarter ended March 31, 2002 due to an increase of $11 million
in higher leveraged lease income from continued investment by Resources in such
financing transactions and $10 million primarily due to reduced losses with
respect to the marking to market of publicly traded equity securities in
Resources' investments in leveraged buyout funds.
Energy Holdings -- Operating Expenses
Operating expenses increased $60 million or 48% to $186 million from $126
million for the quarter ended March 31, 2002 as compared to the same period in
2001. The increase was primarily due to Electric Energy Costs of $45 million and
increased depreciation and amortization of $6 million recorded in connection
with the acquisitions of ELCHO, EDEERSA, SAESA, Electroandes, and the
commencement of operations at Tanir Bavi.
Energy Holdings -- Net Interest Expense and Preferred Dividends
Net Interest Expense and Preferred Dividends increased $19 million or 43%
to $63 million from $44 million for the quarter ended March 31, 2002 as compared
to the same period in 2001. The increase was primarily due to interest expense
of $12 million associated with the $550 million 8.5% Senior Notes issued in June
2001 and increased interest expense of $3 million associated with the $400
million of 8.625% Senior Notes issued in February 2001. The proceeds from the
sale of Senior Notes were used for general corporate purposes, including the
funding of the aforementioned acquisitions. In addition, interest expense
increased an additional $7 million from non-recourse financings at Tanir Bavi,
SAESA, EDEERSA and Electroandes. Partially offsetting these increases was
reduced interest expense of $4 million associated with the repayments of $35
million PSEG Capital Corporation (PSEG Capital) 6.73% Medium-Term Notes in June
2001 and $135 million 6.74% Medium-Term Notes in October 2001.
At March 31, 2002 and December 31, 2001, we had total debt outstanding of
$3.512 billion and $3.533 billion, respectively, of which $1.113 billion and
$1.070 billion respectively, was non-recourse to us.
Energy Holdings - Earnings Before Interest and Taxes (EBIT) Contribution
The results of operations for each of our business segments are explained
below with reference to the EBIT contribution. We borrow on the basis of a
combined credit profile to finance the activities of our subsidiaries. As such,
the capital structure of each of the businesses is managed by us. Debt at each
subsidiary is evidenced by demand notes with us and PSEG Capital.
For the Quarters Ended
March 31,
----------------------
2002 2001
-------- ---------
(Millions of Dollars)
EBIT:
Global ................................ $20 $78
Resources ............................. 49 29
Energy Technologies ................... (4) (5)
Other ................................. (3) (2)
-------- ---------
Total EBIT ................................. $62 $100
======== =========
Global
Until the fourth quarter of 2000, Global's investments consisted primarily
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 are 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 55% economic
interest in ELCHO, a power plant in Poland with the expectation of an increase
to a 90% economic interest by 2003.
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 and an additional 6% interest in the fourth quarter of
2001 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. In the fourth quarter of 2001, Global
acquired Electroandes, a hydroelectric generation and transmission company in
Peru. 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
For the Quarters Ended
March 31,
------------------------
2002 2001
--------- --------
(Millions of Dollars)
Revenues................................... $137 $89
Expenses................................... 74 13
--------- --------
Operating Income........................... 63 76
Other (Loss) Income........................ (43) 2
--------- --------
EBIT....................................... $20 $78
========= ========
Global's EBIT contribution decreased $58 million or 74% for the quarter
ended March 31, 2002 from the comparable period in 2001 primarily due to a
change in the functional currency of EDEERSA from the US Dollar to the Argentine
Peso. Due to a change in the functional currency, $76 million of non-recourse,
US Dollar denominated debt was marked to the Argentine Peso that resulted in a
$52 million pre-tax and pre-minority interest charge to Other (Loss) Income. The
decrease to Other (Loss) Income was partially offset by an increase of $10
million in the change of derivative fair value. For a further discussion of the
effects of a change to the functional currency of EDEERSA from the US Dollar to
the Argentine Peso and the economic, political and social crisis in Argentina,
see Note 5. Commitments and Contingencies of the Notes to the Consolidated
Financial Statements. For a further description of the change of derivative fair
value, see Note 4. Financial Instruments and Risk Management of the Notes to the
Consolidated Financial Statements.
In addition to the reduction in Other (Loss) Income, Operating Income
decreased $13 million attributable to several factors including a decrease of
$43 million in gains from Global's withdrawal and subsequent sale of its
interest in Eagle Point and reduced earnings of $11 million from TIE and GWF and
$4 million from Chilquinta Energy, S.A. (Chilquinta) and Luz del Sur. Partially
offsetting the decreases in Operating Income was the recognition of $20 million
in Operating Income for SAESA and Electroandes, two acquisitions made subsequent
to March 31, 2001 and $10 million from Tanir Bavi and PPN, two projects
commencing operations subsequent to March 31, 2001. Further offsetting the
decreases were improved financial results at RGE and ELCHO totaling $13 million
and reduced operating expenses of $6 million at Global primarily due to a
reduction in compensation expense.
Resources
Resources earns its leveraged lease revenues 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
For the Quarters Ended
March 31,
------------------------
2002 2001
--------- --------
(Millions of Dollars)
Revenues.......................................... $53 $33
Expenses.......................................... 4 4
--------- --------
Operating Income and EBIT......................... $49 $29
========= ========
Resources' EBIT contribution increased $20 million or 69% for the quarter
ended March 31, 2002 from the comparable period in 2001. The increase was due to
higher leveraged lease income of $11 million from continued investment by
Resources in such financing transactions and reduced losses of $10 million with
respect to the marking to market of publicly traded equity securities in
Resources' investments in 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
For the Quarters Ended
March 31,
------------------------
2002 2001
--------- --------
(Millions of Dollars)
Revenues.......................................... $101 $102
Expenses.......................................... 105 107
--------- --------
Operating Income and EBIT......................... $ (4) $ (5)
========= ========
Energy Technologies' EBIT contribution increased $1 million for the quarter
ended March 31, 2002 from the comparable period in 2001.
Liquidity and Capital Resources
The following discussion of our liquidity and capital resources is on a
consolidated basis, noting the uses and contributions of our three direct
operating subsidiaries, Global, Resources and Energy Technologies.
Financing Methodology
Our capital requirements and those of our subsidiaries are met and
liquidity provided by internally generated cash flow, external financings and
equity contributions from PSEG. We make equity contributions from time to time
to our subsidiaries to provide for part of their capital and cash requirements,
generally relating to long-term investments. At times, we utilize inter-company
dividends and inter-company loans to satisfy various subsidiary needs and
efficiently manage our and our subsidiaries' short-term cash needs. 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 and bank credit agreements. The debt incurred is our direct
obligation. We use some of the proceeds of this debt to make equity investments
in our subsidiaries.
The availability and cost of external capital could be affected by each
subsidiary's performance as well as by the performance of their respective
subsidiaries and affiliates. This could include the degree of structural or
regulatory separation between us and our subsidiaries and between Public Service
Electric and Gas Company and its 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.
Financing for Global's projects and investments is generally provided by
non-recourse project financing transactions. These consist of loans from banks
and other lenders that are typically secured by project and special purpose
subsidiary assets and/or cash flows. Non-recourse transactions generally impose
no obligation on the parent-level investor to repay any debt incurred by the
project borrower. However, in some cases, certain obligations relating to the
investment being financed, including additional equity commitments, are
guaranteed by Global and/or us. Further, the consequences of permitting a
project-level default could include loss of any invested equity by us or any of
our subsidiaries.
Debt Covenants, Cross Default Provisions, Material Adverse Changes, and Ratings
Triggers
Our debt indenture and credit agreements and the credit agreements of our
subsidiaries and PSEG contain cross-default provisions under which a default by
us or by specified subsidiaries or by PSEG involving specified levels of
indebtedness in other agreements would result in a default and the potential
acceleration of payment under such indentures and credit agreements. For
example, a default with respect to specified indebtedness of us or Global of $5
million or more, including our or Global's equity contribution obligations in
subsidiaries' non-recourse transactions, as set forth in various credit
agreements, could cause a cross-default in one of our or our subsidiaries'
credit agreements and potential acceleration thereunder. A default with respect
to specified indebtedness in an aggregate amount of $50 million for each of
PSEG, PSEG Power, and Public Service Electric and Gas Company, and $5 million
for us, including relevant equity contribution obligations in subsidiaries'
non-recourse transactions could cause a cross-default in PSEG's credit
agreements and potential acceleration thereunder.
If such a default were to occur, lenders, or the debt holders under our
indenture or any of our or our subsidiaries' credit agreements could determine
that debt payment obligations may be accelerated. A declaration of cross-default
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 could have a similar
impact. This would have a material adverse effect on our financial condition,
results of operations and net cash flows, as well as those of our subsidiaries.
In addition, our credit agreements and those of PSEG and our subsidiaries
generally contain provisions under which the lenders could refuse to advance
loans in the event of a material adverse change in the borrower's, and as may be
relevant, our, business or financial condition. In the event that we or the
lenders in any of our or our subsidiaries' credit agreements determine that a
material adverse change has occurred, advances of loan funds may be limited.
Some of these credit agreements also contain maximum debt to equity ratios,
minimum cash flow tests and other restrictive covenants and conditions to
borrowing. Compliance with applicable financial covenants will depend upon our
future financial position and the level of earnings and cash flow, as to which
no assurances can be given. As part of our financial planning forecast, we
perform stress tests on our financial covenants. These tests include a
consideration of the impacts of potential asset impairments, foreign currency
fluctuations, and other items. Our current analyses and projections indicate
that, even in a worst-case scenario with respect to our investments in Argentina
and considering other potential events, we will still be able to meet our
financial covenants.
Our debt indenture and credit agreements and those of our subsidiaries 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 and/or our subsidiaries may be subject
to increased interest costs on certain bank debt. We and Global may have to
provide collateral for certain of our and their equity commitments if our
ratings should fall below investment grade. This would increase our costs of
doing business.
PSEG Capital has a $650 million Medium Term Note (MTN) program which
provides for the private placement of MTNs. This MTN program is supported by a
minimum net worth maintenance agreement between PSEG Capital and PSEG which
provides, among other things, that PSEG (1) maintain its ownership, directly or
indirectly, of all outstanding common stock of PSEG Capital, (2) cause PSEG
Capital to have at all times a positive tangible net worth of at least $100,000
and (3) make sufficient contributions of liquid assets to PSEG Capital in order
to permit it to pay its debt obligations. At March 31, 2002 and December 31,
2001, total debt outstanding under the MTN program was $480 million, maturing in
2002 and 2003.
Regulatory Restrictions
Capital resources and investment requirements could be affected by the
outcome of proceedings by the New Jersey Board of Public Utilities (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
PSEG's non-utility businesses, owned by us, on PSE&G. As a result of the Focused
Audit, the BPU ordered that, among other things:
(1) PSEG would not permit Energy Holdings' investments to exceed 20% of
its consolidated assets without prior notice to the BPU;
(2) PSE&G's Board of Directors would provide an annual certification that
the business and financing plans of Energy Holdings will not adversely
affect PSE&G;
(3) PSEG would (a) limit debt supported by the minimum net worth
maintenance agreement between it 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 would pay PSE&G
an affiliation fee of up to $2 million a year which is to be used to
reduce customer rates.
In the 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 order might be
warranted. The BPU is expected to consider this matter later this year. We
believe that this issue will be satisfactorily resolved, although no assurances
can be given. We will eliminate PSEG Capital debt by the end of the second
quarter of 2003 as required by the Focused Audit.
In addition, if PSEG were no longer to be exempt under the Public Utility
Holding Company Act of 1935 (PUHCA), we and our 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. 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 and our subsidiaries 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 our financial condition,
results of operations and net cash flows.
Short-Term Liquidity
We have the following credit facilities for various funding purposes and to
provide us liquidity. These agreements are with a group of banks and provide for
borrowings with maturities of up to one year. The following table summarizes our
various facilities as of March 31, 2002.
Energy Holdings
Expiration Total Primary Amount
Date Facility Purpose Outstanding
--------------- ----------- ----------- -------------
(Millions of Dollars)
364-day Revolving Credit Facility................... May 2003 $ 200 Funding $ -
Five-year Revolving Credit Facility................. May 2004 495 Funding 265
Uncommited Bilateral Agreement...................... N/A 100 Funding 7
----------- -------------
Total....................................... $ 795 $ 272
=========== =============
The five-year facility also permits up to $250 million of letters of credit
to be issued of which $14 million were outstanding as of March 31, 2002.
Financial covenants contained in these facilities include the ratio of cash
flow available for debt service (CFADS) to fixed charges. At the end of any
quarterly financial period such ratio shall not be less than 1.50x for the
12-month period then ending. As a condition of borrowing, the pro-forma CFADS to
fixed charges ratio shall not be less than 1.75x as of the quarterly financial
period ending immediately following the first anniversary of each borrowing or
letter of credit issuance. CFADS includes, but is not limited to, operating cash
before interest and taxes, pre-tax cash distributions from all asset
liquidations and equity capital contributions from PSEG to the extent not used
to fund investing activity. In addition, the ratio of consolidated recourse
indebtedness to recourse capitalization, at the end of any quarterly financial
period, shall not be greater than 0.60 to 1.00. This ratio is calculated by
dividing the total recourse indebtedness by the total recourse capitalization.
This ratio excludes the debt of PSEG Capital which is supported by PSEG. As of
March 31, 2002, the latest 12 months CFADS coverage ratio was 5.2x and the ratio
of recourse indebtedness to recourse capitalization was 0.43 to 1.00.
Compliance with applicable financial covenants will depend upon our future
financial position and the level of earnings and cash flow, as to which no
assurances can be given. In addition, our ability to continue to grow our
business will depend to a significant degree on PSEG's ability to access capital
and our ability to obtain additional financing beyond current levels.
It is intended that Global and Resources will provide our earnings and cash
flow for long-term growth. Resources' investments are designed to produce
immediate cash flow and earnings that enable Global to focus on longer
investment horizons. During the next five years, we will need significant
capital to fund our planned growth. Capital is expected to be provided from
additional debt financing, equity from PSEG and operating cash flows.
Capital Requirements
We plan to continue the growth of Resources. Global has refocused its
strategy, from one of accelerated growth to one that places emphasis on
increasing the efficiency and returns of its existing assets. We are evaluating
the future prospects and opportunities of Energy Technologies' business. For the
quarter ended March 31, 2002, our subsidiaries made net investments totaling
approximately $143 million. These investments included additional investments in
existing generation and distribution facilities and projects by Global.
Partially offsetting these investments was an $88 million loan repayment from
TIE. For a discussion of the loans to TIE, see Note 8. Related-Party
Transactions of the Notes to Consolidated Financial Statements.
In 2002, capital expenditures to fund Global's anticipated acquisitions and
existing generation and distribution projects are expected to approximate $150
million of equity for projects currently under construction or contract. Capital
expenditures to fund Resources' investments are expected to approximate $400
million. Resources has committed to invest approximately 50% of the total and
the remaining expenditures are discretionary and are dependent upon availability
of potential investments meeting certain profit thresholds. We have $288 million
of long-term debt due within one year, including $228 million of Medium-Term
Notes maturing in 2002.
Discussion of Critical Accounting Policies
The accounting policies listed below are policies that involve the use of
both objectively and subjectively derived information to record financial
statement transactions in accordance with Generally Accepted Accounting
Principles (GAAP) applied in the United States. The use of subjective judgment
and estimates by management is a critical element in the application of GAAP.
The principles below were determined to be most significant in the determination
of our financial statements for the years presented, and will impact our
financial statements prospectively.
Leveraged Leases
A leveraged lease is recorded by applying cash flows to lease income and
amortization on a constant return basis throughout the lease term. A key
assumption in our lease transactions is the residual value at the end of the
lease term. The residual value is estimated at the beginning of the lease term
and is reviewed annually for adequacy. If management were to determine that
there is a permanent impairment to the residual value of an asset subject to
lease, the reduction must be recorded immediately. Appreciation in residual
value is not booked immediately, but is deferred until termination of the lease
transaction normally through the purchase of the asset by the lessee.
Lease accounting also includes estimates of the likelihood of a borrower's
ability to pay the rent contractually derived in the transaction. If significant
uncertainty exists over the level of rent to be received, or rent is deferred to
future periods, the income accrual must be reduced to reflect lower estimates of
future lease income. In the event of default by a lessee, the leased asset may
be recorded on the balance sheet along with the related non-recourse debt.
Lease accounting also includes estimates of future tax rates. Changes in
statutory rates could affect the level of lease income recorded, as tax cash
flow is a key component of income in a lease transaction.
Percentage of Completion Accounting
Percentage of completion accounting is applied to construction and service
contracts by Energy Technologies. This method involves estimates of gross profit
percentage at the inception of a contract term. As contract work is complete,
the gross profit is recognized in our Income Statement. If there is a change in
the expected contract gross profit, the change is recognized immediately in the
Consolidated Statements of Income. The determination of gross profit includes
significant use of contract estimates, both of variables that are directly
within our control, and those that are not.
Measurement of Derivative Financial Instruments
We use derivative financial instruments to hedge floating interest rate and
foreign currency exposure in many markets where we invest. Derivative financial
instruments must be valued and recorded as assets or liabilities in the
financial statements. The derivation of value includes estimates of future
interest rates and exchange rates that are often quite volatile. For a
discussion of our derivative financial instruments, see Note 4. Financial
Instruments and Risk Management of the Notes to Consolidated Financial
Statements.
Use of Fair Value Accounting
Resources applies fair value accounting for certain securities held in
Limited Partnership interests that have quotable market prices on liquid
exchanges. For other securities in the portfolio that do not trade on liquid
exchanges, securities are carried at cost unless a valuation report prepared by
the fund manager indicates a permanent impairment in value below cost. While
objectively derived, the volatility of securities markets over the past few
years has caused significant fluctuations in security prices. For example, we
recorded net pretax (losses)/gains from fair value adjustments or security sales
totaling $(16) million, $(4) million and $24 million for the three years ended,
December 31, 2001, December 31, 2000 and December 31, 1999, respectively. While
the carrying value of the trading portfolio was only $34 million as of December
31, 2001, it is possible that a volatile market could cause significant
fluctuations in our reported income in prospective periods.
Accounting for the Effects of Goodwill
Our 2002 Consolidated Statements of Income will likely be materially
impacted by the application of SFAS 142. This new standard, effective in January
2002, requires the amount of any goodwill impairment to be disclosed in the
second quarter and recorded by the fourth quarter of 2002, applied retroactively
to the first quarter. The basic difference between previous accounting guidance
and this new standard is that a discounted cash flow test must be performed to
test goodwill for impairment under the new standard, compared to an undiscounted
cash flow test required under the old standard. The new test must be completed
using data as of January 1, 2002. Any amounts impaired using data as of that
date will be recorded as a "Cumulative Effect of an Accounting Change". Any
amounts impaired under the new test using data after that date will be recorded
as a component of Operating Expenses. The discounted cash flow tests require
broad assumptions and significant judgment to be exercised by management. This
includes projections of future energy prices, customer demand, operating costs,
rate relief from regulators, customer growth and many other items. While we
believe that our assumptions are reasonable, actual results will likely differ
from our projections.
For an analysis of our existing goodwill as of March 31, 2002, see Note 5.
Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Accounting for Long-Lived Assets
SFAS 144, a new standard related to testing assets for impairment, was
adopted on January 1, 2002. Testing under SFAS 144 is essentially the same as
the asset impairment tests we performed under SFAS 121. This test consisted of
an undiscounted cash flow test to determine if an impairment existed, and, if an
impairment existed, a discounted cash flow test would be done to quantify it.
The new standard is broader in that it includes discontinued operations as part
of its scope. This test requires the same judgment to be employed by management
in building assumptions related to future earnings of individual assets or
investments as was required in determining potential impairments of goodwill as
discussed above.
We have $585 million of investment exposure in Argentina. Due to the
economic, political and social crisis in Argentina, our investments there are
faced with considerable fiscal and cash flow uncertainties. As a result of these
events, an impairment test of these investments is required. However, due to the
vast uncertainty related to the situation in Argentina, reasonable assumptions
related to the environment in Argentina cannot be easily made. As the situation
continues to evolve, we will be able to develop assumptions related to the
environment in Argentina and these investments and will complete our impairment
test.
In addition to impairment testing for the Argentine investments, an
impairment test for Energy Technologies is also being done as negative operating
cash flow of certain parts of that entity indicate a potential impairment.
These tests are required whenever events or circumstances indicate an
impairment may exist. Examples of potential events which could require an
impairment test are when power prices become depressed for a prolonged period in
a market, when a foreign currency significantly devalues, or when an investment
generates negative operating cash flows. Any potential impairment of investments
under these circumstances is recorded as a component of operating expenses.
Foreign Currency Accounting
Our financial statements are prepared using the US Dollar as the reporting
currency. In accordance with SFAS 52 "Foreign Currency Translation", foreign
operations whose functional currency is deemed to be the local (foreign)
currency, asset and liability accounts are translated into US Dollars at current
exchange rates and revenues and expenses are translated at average exchange
rates prevailing during the period. Translation gains and losses (net of
applicable deferred taxes) are not included in determining net income but are
reported in Other Comprehensive (Loss) Income (OCI). Gains and losses on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred.
The determination of an entity's functional currency requires management's
judgment. It is based on an assessment of the primary currency in which
transactions in the local environment are conducted, and whether the local
currency can be relied upon as a stable currency in which to conduct business.
As economic and business conditions change, we are required to reassess the
economic environment and determine the appropriate functional currency. The
impact of foreign currency accounting could have a material adverse impact on
our financial condition, results of operation and net cash flows. For a
discussion of the recent change of the functional currency from the US Dollar to
the Argentine Peso at EDEERSA, see Note 5. Commitments and Contingencies of the
Notes to Consolidated Financial Statements.
Environmental Matters
Global has ownership interests in facilities, including operating power
plants and distribution companies and power plants under construction or in
development, in numerous countries. These include the United States (California,
Hawaii, Maine, New Hampshire, Pennsylvania and Texas), Argentina, Brazil, Chile,
China, India, Italy, Oman, Peru, Poland, Taiwan, Tunisia and Venezuela. These
operations are subject to compliance with environmental laws and regulations by
relevant authorities at each location, which may include air and water quality
control, land use, disposal of wastes, aesthetics and other matters. In order to
achieve compliance, expenditures may be needed for construction, continued
operation or remediation of new and existing facilities and sites.
As Global pursues new opportunities, it will be required to comply with
applicable environmental laws and regulations. Global attempts to take such
expenditures into consideration when considering an investment; however, there
can be no assurance that environmental laws and regulations will not change. If
environmental laws or regulations change in the future, there can be no
assurance that our financial condition, results of operations and net cash flows
will not be materially and adversely affected. We are committed to operating our
businesses cleanly, safely and reliably and strive to comply with all
environmental laws, regulations, permits and licenses. However, despite such
efforts, there have been instances of non-compliance, although no such instance
resulted in revocation of any permit or license or caused a materially adverse
effect on our financial condition, results of operations and net cash flows.
We do not anticipate any material capital expenditures for environmental
control facilities or in connection with compliance with federal, state or local
environmental laws and regulations in 2002 or in connection with the generation
projects currently in construction or advanced development. We do not believe
that compliance with federal, state and local environmental laws and regulations
will have a material adverse effect on our financial condition, results of
operations and net cash flows.
Business Environment
We continue to evaluate 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
Argentine Peso, Brazilian Real, the Chilean Peso, the Peruvian Nuevo Sol, and
the Venezuelan Bolivar, 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
March 31, 2002, $2.5 billion or 33% of our assets were invested in Latin
America, specifically in Argentina, Brazil, Chile, Peru and Venezuela and $107
million or 1% of our assets were comprised of leveraged leases of seven aircraft
leased to five separate lessees.
As of December 31, 2001, Global had $281 million invested in two 1000 MW
gas-fired combined-cycle electric generating facilities in Texas, including
approximately $165 million of loans earning an annual rate of 12%. Of the $165
million outstanding at December 31, 2001, $88 million was repaid in February
2002. TIE's funding for these payments to Global were made from equity
contributions of $44 million from Global and $44 million from Panda Energy.
Earnings and cash distributions from TIE during 2001 were $15 million and $25
million, respectively, below expectations due to lower energy prices, resulting
from the over-supply of energy in the Texas power market and mild summer
temperatures suppressing demand in the region. Global expects this trend to
continue until the 2004-2005 time frame when market prices are expected to
increase, as older less efficient plants in the Texas power market are expected
to be retired and the demand for electricity is expected to increase. However,
no assurances can be given as to the accuracy of these estimates. Current
projections of future cash flows for each plant, using independent market
studies for estimating gas and electricity prices, market heat rates and
capacity prices, do not indicate the investment to be impaired. We believe that
those independent market studies are the best available for estimating future
prices. This impairment test was done in accordance with SFAS 121 at the project
level and no assurance can be given as to the accuracy of the projections used
in the analysis.
We 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 our
financial condition, results of operations and net cash flows.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in our market risk sensitive instruments and positions is
the potential loss arising from adverse changes in commodity prices, equity
security prices, interest rates and foreign currency exchange rates as discussed
below. Our policy is to use financial instruments to manage risk consistent with
our business plans and prudent practices. PSEG has a Risk Management Committee
comprised of executive officers, which utilizes an independent risk oversight
function to ensure compliance with corporate policies and prudent risk
management practices for all of its subsidiaries, including us and our
subsidiaries.
Counterparties expose us to credit losses in the event of nonperformance or
nonpayment. We have a credit management process which is used to assess, monitor
and mitigate counterparty exposure. In the event of nonperformance or nonpayment
by a major counterparty, there may be a material adverse impact on our financial
condition, results of operations and net cash flows.
Commodity Risk
We are subject to commodity price risk related to the selling prices of
electricity at our merchant generation facilities, particularly in the Texas
power market. For a comprehensive discussion of our generation plants in Texas
and the Texas power market, see "Business Environment", shown above.
Equity Securities
Resources has investments in equity securities and limited partnerships
which invest in equity securities. Resources carries its investments in equity
securities at their approximate fair value. 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
March 31, 2002 and December 31, 2001, were $28 million and $34 million,
respectively. A sensitivity analysis has been prepared to estimate our exposure
to market volatility of these investments. The potential change in fair value
resulting from a hypothetical 10% change in quoted market prices of these
investments would result in a $2 million change in revenues for the quarter
ended March 31, 2002.
Interest Rates
We are subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate debt, floating rate debt and interest rate swaps. As of March 31,
2002, a hypothetical 10% change in market interest rates would result in a $2
million change in interest costs related to short-term and floating rate debt.
For a description of interest rate swaps, see Note 4. Financial Instruments and
Risk Management of the Notes to Consolidated Financial Statements.
Foreign Currencies
We conduct our business on a multinational basis in a wide variety of
foreign currencies. Our objective for foreign currency risk management policy is
to preserve the economic value of cash flows in currencies other than the US
Dollar. Our policy is to hedge significant cash flows, which are probable of
occurring, and identified as subject to significant foreign currency
variability. In addition, we typically hedge a portion of our exposure resulting
from identified anticipated cash flows, providing the flexibility to deal with
the variability of longer-term forecasts as well as changing market conditions,
in which the cost of hedging may be excessive relative to the level of risk
involved. Our foreign currency hedging activities to date include hedges of US
Dollar debt arrangements in operating companies that conduct business in
currencies other than the US Dollar.
Accounting Matters
For a discussion of significant accounting matters, see Note 2. Accounting
Matters of the Notes to Consolidated Financial Statements.
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 because a significant portion of our business is conducted outside the
United States, adverse international developments could negatively
impact our business;
o credit, commodity, and financial market risks may have an adverse
impact;
o the electric industry is undergoing substantial change;
o generation operating performance may fall below projected levels;
o we and our subsidiaries are subject to substantial competition from
well capitalized participants in the worldwide energy markets;
o our ability to service debt could be limited;
o if our operating performance or cash flow from minority interests
falls below projected levels, we may not be able to service our debt;
o power transmission facilities may impact our ability to deliver our
output to customers;
o government regulation affects many of our operations;
o environmental regulation significantly impacts our operations;
o insurance coverage may not be sufficient;
o acquisition, construction and development may not be successful;
o changes in technology may make our power generation assets less
competitive; 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.
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PSEG ENERGY HOLDINGS INC.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
New Matter. See Pages 12 and 13. AES termination of the Stock Purchase
Agreement, relating to the sale of certain Argentine assets. New York State
Supreme Court for New York County (Docket No. 60155/2002) PSEG Global, et al vs.
The AES Corporation, et al.
In addition, see information on the following proceedings at the pages
indicated:
(1) Form 10-K Page 25. See Pages 15 and 16. Complaint filed with the
Federal Energy Regulatory Commission addressing contract terms of
certain Sellers of Energy and Capacity under Long-Term Contracts with
the California Department of Water Resources. Public Utilities
Commission of the State of California v. Sellers of Long-Term
Contracts to the California Department of Water Resources FERC Docket
No. EL02-60-000. California Electricity Oversight Board v. Sellers of
Energy and Capacity Under Long-Term Contracts with the California
Department of Water Resources FERC Docket No. EL02-62-000.
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
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12 Computation of Ratios of Earnings to Fixed
Charges
(B) Reports on Form 8-K:
Date of Report Items Reported
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February 6, 2002 5
April 16, 2002 5 & 7
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PSEG ENERGY HOLDINGS INC.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSEG ENERGY HOLDINGS INC.
(Registrant)
By: Derek M. DiRisio
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Derek M. DiRisio
Vice President and Controller
(Principal Accounting Officer)
Date: May 15, 2002