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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant, State of Incorporation, I.R.S. Employer
File Address, and Telephone Number Identification
Number No.
- ---------- ------------------------------------------ ----------------
1-9120 PUBLIC SERVICE ENTERPRISE GROUP 22-2625848
INCORPORATED
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 1171
Newark, New Jersey 07101-1171
973 430-7000
http://www.pseg.com
1-973 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 22-1212800
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 570
Newark, New Jersey 07101-0570
973 430-7000
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 ___
The number of shares outstanding of Public Service Enterprise Group
Incorporated's sole class of common stock, as of the latest practicable date,
was as follows:
Class: Common Stock, without par value
Outstanding at October 31, 1999: 218,591,318
As of October 31, 1999, Public Service Electric and Gas Company had issued and
outstanding 132,450,344 shares of common stock, without nominal or par
value, all of which were privately held, beneficially and of record by Public
Service Enterprise Group Incorporated.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
----
Public Service Enterprise Group Incorporated (PSEG):
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998........................ 1
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998........................................... 2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998........................ 4
Public Service Electric and Gas Company (PSE&G):
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998........................ 5
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998........................................... 6
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998........................ 8
Notes to Consolidated Financial Statements -- PSEG................ 9
Notes to Consolidated Financial Statements -- PSE&G............... 28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PSEG ........................................................... 29
PSE&G........................................................... 50
Item 3. Qualitative and Quantitative Disclosures About Market Risk.. 50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 51
Item 5. Other Information........................................... 53
Item 6. Exhibits and Reports on Form 8-K............................ 53
Forward Looking Statements.......................................... 53
Signatures.......................................................... 55
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, except for Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
OPERATING REVENUES
Electric Revenues *
Bundled (1/1/99 - 7/31/99) $ 494 $ 1,212 $ 2,480 $ 3,094
Generation (8/1/99 - 9/30/99) 430 - 430 -
Transmission and Distribution (8/1/99 - 9/30/99) 320 - 320 -
------------ ------------ ------------ -----------
Total Electric Revenues 1,244 1,212 3,230 3,094
Gas Distribution (1/1/99 - 9/30/99) 214 197 1,191 1,081
Other 148 30 416 285
------------ ------------ ------------ -----------
Total Operating Revenues 1,606 1,439 4,837 4,460
------------ ------------ ------------ -----------
OPERATING EXPENSES
Electric Energy Costs 312 280 775 740
Gas Costs 154 135 780 733
Operation and Maintenance 471 363 1,328 1,108
Depreciation and Amortization 122 162 410 485
Taxes Other Than Income Taxes 44 49 143 154
------------ ------------ ------------ -----------
Total Operating Expenses 1,103 989 3,436 3,220
------------ ------------ ------------ -----------
OPERATING INCOME 503 450 1,401 1,240
Other Income - net 26 8 39 21
Interest Charges (126) (114) (355) (344)
Preferred Securities Dividend Requirements (23) (22) (70) (57)
------------ ------------ ------------ -----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 380 322 1,015 860
Income Taxes (159) (142) (425) (367)
------------ ------------ ------------ -----------
INCOME BEFORE EXTRAORDINARY ITEM 221 180 590 493
Extraordinary Item (Net of Tax of $ - and $345) (14) - (804) -
------------ ------------ ------------ -----------
NET INCOME (LOSS) $ 207 $ 180 $ (214) $ 493
============ ============ ============ ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (OOO's) 219,225 231,727 220,413 231,901
============ ============ ============ ===========
EARNINGS (LOSSES) PER SHARE (BASIC AND DILUTED):
Income Before Extraordinary Item $ 1.01 $ 0.78 $ 2.68 $ 2.13
Extraordinary Item (Net of Tax) (0.06) - (3.65) -
------------ ------------ ------------ -----------
Net Income (Loss) $ 0.95 $ 0.78 $ (0.97) $ 2.13
============ ============ ============ ===========
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.54 $ 0.54 $ 1.62 $ 1.62
============ ============ ============ ===========
* Note: Bundled revenues were recorded based on the bundled rates in effect
through 7/31/99. Commencing with the unbundling of rates on 8/1/99, revenues
are disaggregated between Generation Revenue and Transmission and
Distribution Revenue.
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
September 30, December 31,
1999 1998
------------- ---------------
CURRENT ASSETS
Cash and Cash Equivalents $ 84 $ 140
Accounts Receivable:
Customer Accounts Receivable 620 506
Other Accounts Receivable 385 219
Less: Allowance for Doubtful Accounts 45 38
Unbilled Revenues 163 255
Fuel 351 331
Materials and Supplies, net of valuation reserves - 1999, $40;
1998, $12 134 167
Prepayments 163 61
Miscellaneous Current Assets 95 32
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Total Current Assets 1,950 1,673
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PROPERTY, PLANT AND EQUIPMENT
Electric - Generation 1,747 9,226
Electric - Transmission and Distribution 4,983 4,953
Gas - Distribution 2,982 2,882
Other 555 551
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Total 10,267 17,612
Less: Accumulated depreciation and amortization 3,648 7,080
----------- ------------
Net 6,619 10,532
Nuclear Fuel in Service, net of accumulated amortization -
1999, $402; 1998, $312 173 187
----------- ------------
Net Property, Plant and Equipment in Service 6,792 10,719
Construction Work in Progress, including Nuclear Fuel in
Process - 1999, $43; 1998, $72 140 219
Plant Held for Future Use 21 24
----------- ------------
Net Property, Plant and Equipment 6,953 10,962
----------- ------------
NONCURRENT ASSETS
Regulatory Assets 5,078 1,579
Long-Term Investments, net of accumulated amortization - 1999, $40;
1998, $28, and net of valuation allowances - 1999, $19; 1998, $18 3,689 3,034
Nuclear Decommissioning Fund 579 524
Other Special Funds 141 125
Other Noncurrent Assets, net of accumulated amortization -
1999, $10; 1998, $8 200 100
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Total Noncurrent Assets 9,687 5,362
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TOTAL $ 18,590 $ 17,997
=========== ============
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
1999 1998
------------- ----------------
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 755 $ 418
Commercial Paper and Loans 1,602 1,056
Accounts Payable 826 655
Accrued Taxes 68 41
Other 359 288
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Total Current Liabilities 3,610 2,458
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NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 2,890 3,706
Regulatory Liability - Excess Depreciation Reserve 569 -
Nuclear Decommissioning 475 -
OPEB Costs 376 344
Other 692 420
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Total Noncurrent Liabilities 5,002 4,470
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COMMITMENTS AND CONTINGENT LIABILITIES - -
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CAPITALIZATION:
LONG TERM DEBT 4,711 4,763
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SUBSIDIARIES' PREFERRED SECURITIES:
Preferred Stock Without Mandatory Redemption 95 95
Preferred Stock With Mandatory Redemption 75 75
Guaranteed Preferred Beneficial Interest in Subordinated
Debentures 1,038 1,038
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Total Subsidiaries' Preferred Securities 1,208 1,208
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COMMON STOCKHOLDERS' EQUITY:
Common Stock, issued; 231,957,608 shares 3,604 3,603
Treasury Stock, at cost; 1999 - 13,209,490 shares,
1998 - 5,314,100 shares (516) (207)
Retained Earnings 1,177 1,748
Accumulated Other Comprehensive Income (Loss) (206) (46)
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Total Common Stockholders' Equity 4,059 5,098
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Total Capitalization 9,978 11,069
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TOTAL $ 18,590 $ 17,997
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See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1999 1998
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(214) $ 493
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Extraordinary Loss - net of tax 804 -
Depreciation and Amortization 410 485
Amortization of Nuclear Fuel 68 70
Recovery of Electric Energy and Gas Costs - net 68 98
Provision for Deferred Income Taxes and ITC - net (227) -
Investment Distributions 124 79
Gains on Investments (103) (66)
Net Changes in certain current assets and liabilities:
Accounts Receivable and Unbilled Revenues (127) (5)
Prepayments (102) (186)
Accounts Payable 174 39
Other Current Assets and Liabilities 1 (20)
Other 79 (8)
--------- ----------
Net Cash Provided By Operating Activities 955 979
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment,
excluding Capitalized Interest and AFDC (280) (359)
Net Change in Long-Term Investments (846) 8
Contribution to Decommissioning Funds and Other Special Funds (51) (91)
Other - (39)
--------- ----------
Net Cash Used In Investing Activities (1,177) (481)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt 546 (242)
Issuance of Long-Term Debt 713 250
Redemption/Purchase of Long-Term Debt (428) (527)
Issuance of Preferred Securities - 525
Purchase of Treasury Stock (309) (91)
Cash Dividends Paid on Common Stock (357) (376)
Other 1 (42)
--------- ----------
Net Cash Provided By (Used In) Financing Activities 166 (503)
--------- ----------
Net Change In Cash And Cash Equivalents (56) (5)
Cash And Cash Equivalents At Beginning Of Year 140 83
--------- ----------
Cash And Cash Equivalents At End Of Period $ 84 $ 78
========= ==========
Income Taxes Paid $ 426 $ 347
Interest Paid $ 345 $ 339
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ---------- -----------
OPERATING REVENUES
Electric Revenues *
Bundled (1/1/99 - 7/31/99) $ 494 $ 1,212 $ 2,480 $ 3,094
Generation (8/1/99 - 9/30/99) 430 - 430 -
Transmission and Distribution (8/1/99 - 9/30/99) 320 - 320 -
--------- ------------ ----------- -----------
Total Electric Revenues 1,244 1,212 3,230 3,094
Gas Distribution (1/1/99 - 9/30/99) 214 197 1,191 1,081
--------- ------------ ----------- -----------
Total Operating Revenues 1,458 1,409 4,421 4,175
--------- ------------ ----------- -----------
OPERATING EXPENSES
Electric Energy Costs 309 273 765 729
Gas Costs 141 127 730 687
Operation and Maintenance 382 324 1,141 991
Depreciation and Amortization 120 160 405 478
Taxes Other Than Income Taxes 43 51 142 155
--------- ------------ ----------- -----------
Total Operating Expenses 995 935 3,183 3,040
--------- ------------ ----------- -----------
OPERATING INCOME 463 474 1,238 1,135
Other Income - net 5 8 8 14
Interest Charges (98) (94) (284) (276)
Preferred Securities Dividend Requirements (12) (11) (35) (33)
--------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 358 377 927 840
Income Taxes (153) (160) (393) (355)
--------- ------------ ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 205 217 534 485
Extraordinary Item (Net of Tax of $ - and $345) (14) - (804) -
--------- ------------ ----------- -----------
NET INCOME (LOSS) 191 217 (270) 485
Preferred Stock Dividend Requirement (2) (2) (7) (7)
--------- ------------ ----------- -----------
EARNINGS (LOSSES) AVAILABLE TO
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED $ 189 $ 215 $ (277) $ 478
========= ============ =========== ===========
* Note: Bundled revenues were recorded based on the bundled rates in effect
through 7/31/99. Commencing with the unbundling of rates on 8/1/99, revenues
are disaggregated between Generation Revenue and Transmission and
Distribution Revenue.
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
September 30, December 31,
1999 1998
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CURRENT ASSETS
Cash and Cash Equivalents $ 24 $ 42
Accounts Receivable:
Customer Accounts Receivable 500 451
Other Accounts Receivable 352 178
Less: Allowance for Doubtful Accounts 39 34
Unbilled Revenues 163 255
Fuel 348 331
Materials and Supplies, net of valuation reserves - 1999, $40;
1998, $12 134 165
Prepayments 159 52
Miscellaneous Current Assets 41 32
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Total Current Assets 1,682 1,472
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PROPERTY, PLANT AND EQUIPMENT
Electric - Generation 1,747 9,226
Electric - Transmission and Distribution 4,983 4,953
Gas - Distribution 2,982 2,882
Other 449 461
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Total 10,161 17,522
Less: Accumulated depreciation and amortization 3,606 7,049
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Net 6,555 10,473
Nuclear Fuel in Service, net of accumulated amortization -
1999, $402; 1998, $312 173 187
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Net Property, Plant and Equipment in Service 6,728 10,660
Construction Work in Progress, including Nuclear Fuel in
Process - 1999, $43; 1998, $72 140 219
Plant Held for Future Use 21 24
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Net Property, Plant and Equipment 6,889 10,903
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NONCURRENT ASSETS
Regulatory Assets 5,078 1,579
Long-Term Investments 74 65
Nuclear Decommissioning Fund 579 524
Other Special Funds 141 125
Other Noncurrent Assets 102 1
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Total Noncurrent Assets 5,974 2,294
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TOTAL $ 14,545 $ 14,669
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See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
1999 1998
------------- --------------
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 638 $ 100
Commercial Paper and Loans 1,080 850
Accounts Payable 746 611
Other 286 253
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Total Current Liabilities 2,750 1,814
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NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 2,011 2,846
Regulatory Liability - Excess Depreciation Reserve 569 -
Nuclear Decommissioning 475 -
OPEB Costs 376 344
Other 666 397
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Total Noncurrent Liabilities 4,097 3,587
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COMMITMENTS AND CONTINGENT LIABILITIES - -
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CAPITALIZATION:
LONG TERM DEBT 3,261 4,045
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PREFERRED SECURITIES:
Preferred Stock Without Mandatory Redemption 95 95
Preferred Stock With Mandatory Redemption 75 75
Subsidiaries' Preferred Securities:
Guaranteed Preferred Beneficial Interest in Subordinated
Debentures 513 513
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Total Preferred Securities 683 683
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COMMON STOCKHOLDER'S EQUITY:
Common Stock, issued; 132,450,344 shares 2,563 2,563
Contributed Capital 594 594
Retained Earnings 600 1,386
Accumulated Other Comprehensive Income (Loss) (3) (3)
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Total Common Stockholder's Equity 3,754 4,540
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Total Capitalization 7,698 9,268
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TOTAL $ 14,545 $ 14,669
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See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(270) $ 485
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Extraordinary Loss - net of tax 804 -
Depreciation and Amortization 405 478
Amortization of Nuclear Fuel 68 70
Recovery of Electric Energy and Gas Costs - net 68 98
Provision for Deferred Income Taxes - net (203) 11
Net Changes in certain current assets and liabilities:
Accounts Receivable and Unbilled Revenues (126) (66)
Prepayments (107) 41
Accounts Payable 138 (185)
Other Current Assets and Liabilities (9) 12
Other 85 31
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Net Cash Provided By Operating Activities 853 975
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment,
excluding Capitalized Interest and AFDC (280) (359)
Contribution to Decommissioning Funds and Other Special Funds (51) (91)
Other (8) (17)
--------- ----------
Net Cash Used In Investing Activities (339) (467)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt 230 (24)
Issuance of Long-Term Debt - 250
Redemption/Purchase of Long-Term Debt (246) (351)
Cash Dividends Paid on Common Stock (510) (376)
Other (6) (7)
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Net Cash Used In Financing Activities (532) (508)
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Net Change In Cash And Cash Equivalents (18) -
Cash And Cash Equivalents At Beginning Of Year 42 17
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Cash And Cash Equivalents At End Of Period $ 24 $ 17
========= ==========
Income Taxes Paid $ 443 $ 333
Interest Paid $ 297 $ 295
See Notes to Consolidated Financial Statements.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation/Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
in the opinion of management, the disclosures are adequate to make the
information presented not misleading. These consolidated financial statements
and Notes to Consolidated Financial Statements (Notes) should be read in
conjunction with the Registrant's Notes contained in the 1998 Annual Report on
Form 10-K, the Quarterly Reports on Form 10-Q for the quarters ended March 31,
1999 and June 30, 1999 and the Current Reports on Form 8-K filed March 18, 1999,
April 26, 1999, July 21, 1999, September 15, 1999 and October 14, 1999.
The unaudited financial information furnished reflects all adjustments
which are, in the opinion of management, necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated financial statements included in the 1998
Annual Report on Form 10-K. Certain reclassifications of prior period data have
been made to conform with the current presentation.
The presentation of revenues on the Consolidated Statements of Income has
changed, effective August 1, 1999, due to the deregulation of the electric
generation business by the New Jersey Board of Public Utilities' (BPU) in Public
Service Electric and Gas Company's (PSE&G) rate unbundling, stranded costs and
restructuring proceedings. Effective with that date, electric rates charged to
ratepayers have been unbundled and the generation, transmission, distribution
and other components of the total rate have become separate charges. As a
result, the presentation of revenues has also changed. PSE&G's generation
business earns revenues by providing the energy and capacity to meet PSE&G's
basic generation service (BGS) obligation. Generation revenues are also produced
by a variety of wholesale energy and capacity sales and other ancillary
services. PSE&G's transmission and distribution businesses remain rate regulated
and will continue to earn revenues based on PSE&G's tariffs under which PSE&G
provides transmission and distribution services for its residential, commercial
and industrial customers in New Jersey. The rates charged for transmission and
distribution are regulated by the Federal Energy Regulatory Commission (FERC)
and the BPU, respectively. Transmission and distribution revenues are also
generated from a variety of other activities such as sundry sales, wholesale
transmission services and other miscellaneous services. Revenues earned prior to
August 1, 1999 continue to be presented as Bundled Electric revenues on the
Consolidated Statements of Income as they were earned based upon bundled
electric rates prior to the deregulation of PSE&G's generation business. For
more information on deregulation and PSE&G's rate unbundling, stranded costs and
restructuring proceedings, including the BPU's Final Decision and Order (Final
Order), see Note 2. Regulatory Issues.
Summary of Significant Accounting Policies
Effective April 1, 1999, PSE&G discontinued the application of Statement of
Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71), for the electric generation portion of its
business. PSE&G calculated an extraordinary charge consistent with the
requirements of Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation
of the Pricing of Electricity - Issues Related to the Application of FASB
Statements No. 71 and No. 101" (EITF 97-4) and SFAS 101, "Regulated
Enterprises--Accounting for the Discontinuation of Application of FASB Statement
No. 71" (SFAS 101). The portion of the extraordinary charge related to an
impairment of long-lived assets was calculated in accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121). The discontinuation of the application of SFAS 71
had a material impact on Public Service Enterprise Group Incorporated's (PSEG)
and PSE&G's financial condition and results of operations. For further
discussion, see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation. PSE&G's transmission and distribution
businesses, which continue to be regulated, continue to meet the requirements
for the application of SFAS 71.
In concert with the discontinuation of SFAS 71, PSE&G revised a number of
accounting policies related to its generation-related capital assets. Under a
revised capitalization policy, PSE&G will only capitalize costs which increase
the capacity or extend the life of an existing asset, represent a newly acquired
or constructed asset or represent the replacement of a retired asset. Under a
revised depreciation policy, PSE&G will calculate depreciation consistent with
revised asset lives determined by PSE&G policy rather than using depreciation
rates prescribed by the BPU in rate proceedings. Finally, under a revised asset
retirement policy, the portion of future retirements which have not been fully
depreciated will impact earnings.
In the past, fuel revenue and expense flowed through the Electric Levelized
Energy Adjustment Clause (LEAC) mechanism and variances in fuel revenues and
expenses were subject to deferral accounting and had no direct effect on
earnings. Due to the discontinuation of the LEAC mechanism on August 1, 1999,
earnings volatility will increase since the unregulated electric generation
portion of PSEG's business ceased to follow deferral accounting. PSE&G now bears
the full risks and rewards of changes in nuclear and fossil generating fuel
costs and replacement power costs. For further discussion, see Note 4.
Regulatory Assets and Liabilities.
Effective January 1, 1999, PSEG and PSE&G adopted EITF 98-10, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities" (EITF
98-10). EITF 98-10 requires that energy trading contracts be marked to market
with gains and losses included in earnings and separately disclosed in the
financial statements or footnotes. Previously, the gains and losses associated
with these contracts were recorded upon settlement. The adoption of EITF 98-10
did not have a material impact on the financial condition, results of operations
or net cash flows of PSEG or PSE&G.
Effective January 1, 1999, PSEG and PSE&G adopted Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1), which provides criteria for capitalizing certain
internal-use software costs. The adoption of SOP 98-1 did not have a material
impact on the financial condition, results of operations or net cash flows of
PSEG or PSE&G.
Effective January 1, 1999, PSEG and PSE&G adopted SOP 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires the expensing of
the costs of start-up activities as incurred. Additionally, previously
capitalized start-up costs must be written off as a Cumulative Effect of a
Change in Accounting Principle. The adoption of SOP 98-5 did not have a material
impact on the financial condition, results of operations or net cash flows of
PSEG or PSE&G.
Note 2. Regulatory Issues
New Jersey Energy Master Plan Proceedings and Related Orders
Following the passage of the New Jersey Electric Discount and Energy
Competition Act (Energy Competition Act), the BPU rendered its summary decision
relating to PSE&G's rate unbundling, stranded costs and restructuring
proceedings (Summary Order) on April 21, 1999. On August 24, 1999, the BPU
issued a Final Order in these matters which provided the reasoning for the
action taken by the BPU and affirmed, in all material respects, the decisions
and actions previously approved in the BPU's Summary Order, with the exception
of PSE&G's treatment of investment tax credits (ITC) of $235 million related to
PSE&G's generation assets (see Investment Tax Credits).
In October and November 1999, two Notices of Appeal of each of the Final
Order and of the BPU's order approving PSE&G's petition relating to the proposed
securitization transaction for an irrevocable Bondable Stranded Costs Rate Order
(Finance Order) (see Securitization Filing and Finance Order) were filed in the
Appellate Division of the New Jersey Superior Court on behalf of several
ratepayers. The Court granted requests to accelerate two of the appeals and
ordered that the matters be consolidated. The Court further established November
3, 1999 as the deadline for the filing of any additional appeals of these Orders
and directed the BPU to certify the record of both proceedings by November 5,
1999. No additional Notices of Appeal were filed and the record was certified to
the Court on such date. In addition, the Court established an expedited briefing
schedule with appellants' briefs due December 10, 1999, respondents' briefs due
January 5, 2000 and reply briefs due January 14, 2000. The Court fixed oral
argument on the consolidated matters for March 8, 2000. While PSEG and PSE&G
believe that the appeals are without merit, no assurances can be given at this
time as to the timing or outcome of these proceedings. Accordingly, neither PSEG
nor PSE&G are able to predict whether such appeals will have a material adverse
effect on their financial condition, results of operations or net cash flows.
The Energy Competition Act, the BPU's Summary Order and Final Order and the
related BPU proceedings are hereinafter referred to as the Energy Master Plan
Proceedings. The result of these proceedings is that all New Jersey retail
electric customers have had the ability to select their electric supplier
beginning August 1, 1999 (see Retail Choice) and all New Jersey retail gas
customers may select their gas supplier commencing December 31, 1999, thus
opening the New Jersey energy markets to competition. For discussion of the
extraordinary charge to earnings recorded as a result of the deregulation of
PSE&G's generation business, see Note 3. Extraordinary Charge and Other
Accounting Impacts of Deregulation.
The Final Order provides for the following; however, the existence of such
appeals noted above may impact the implementation provided in the Final Order:
Transition Period
o A four-year transition period beginning August 1, 1999 and ending July
31, 2003. During this transition period, rates for those services
provided by PSE&G will be capped for all electric customers.
Rate Reductions
o Customers will receive through July 2003 the following rate reductions
from those rates in effect on July 31, 1999 according to the schedule
below:
Effective Date Amount of Rate Reduction
-------------- ------------------------
August 1, 1999: 5%
At the time of securitization: increasing to 7% (minimum)
August 1, 2001: increasing to 9% (minimum)
August 1, 2002: increasing to 13.9% average (10%
off rates in effect in April 1997)
The BPU, in finding that the second and third incremental rate
reductions assume achievement of 2% overall savings from securitization
(in addition to the 1% assumed in the initial 5% reduction),
conditioned these additional interim rate reductions upon
implementation of securitization. The BPU further determined that the
final aggregate rate reduction in 2002 of 13.9% is required by the
Energy Competition Act and is not contingent on the implementation of
securitization.
On August 18, 1999, the BPU approved PSE&G's compliance tariff filing
reflecting the 5% decrease in rates. On August 1, 1999, PSE&G had
implemented this rate reduction, previously approved on a provisional
basis.
Shopping Credits
o Shopping credits (credits which a customer electing a new supplier of
electricity will receive from PSE&G) will be established for the
transition period and will include the cost of energy, capacity,
transmission, ancillary services, losses, taxes and a retail adder. The
average overall credits will be as follows:
1999: 4.95 cents per kilowatt hour (kWh)
2000: 5.03 cents per kWh
2001: 5.06 cents per kWh
2002: 5.10 cents per kWh
2003: 5.10 cents per kWh
Stranded Costs
o The BPU concluded that PSE&G should be provided the opportunity to
recover up to $2.94 billion (net of tax) of its generation-related
stranded costs, through securitization of $2.4 billion (discussed
below) and an opportunity to recover up to $540 million (net of tax) of
its unsecuritized generation-related stranded costs on a present value
basis. The $540 million is subject to recovery by various means,
including an explicit market transition charge (MTC). The stranded
costs recovery is subject to a reconciliation of the collection of
unsecuritized generation-related stranded costs.
o PSE&G was directed to use the overrecovered balance in the LEAC as of
July 31, 1999 as a mitigation tool for stranded cost recovery
associated with non-utility generation (NUG) contracts. PSE&G will
apply the overrecovery as a credit to the starting deferred balance of
the non-utility generation market transition charge (NTC) to offset
future above market costs and/or contract buyouts otherwise recoverable
from ratepayers.
Securitization
o The BPU concluded that it would issue an irrevocable Bondable Stranded
Costs Rate Order, consistent with the provisions of the Energy
Competition Act, to authorize PSE&G to issue up to $2.525 billion of
transition bonds, with a scheduled amortization upon issuance of 15
years, representing $2.4 billion of generation-related stranded costs
(net of tax) and an estimated $125 million of transaction costs. A
transition bond charge will be collected from all existing and future
electric customers via a single per kWh "wires charge" to be subject to
adjustment at least annually. For further details, see Securitization
Filing and Finance Order.
o The BPU determined that the taxes related to securitization, which
reflect the grossed up revenue requirements associated with the $2.4
billion in generation-related stranded costs (net of tax) being
securitized, are recoverable stranded costs. The BPU determined that
such taxes should not be collected through the transition bond charge;
rather, such taxes will be collected via a separate MTC. The duration
of this separate MTC is to be identical to the duration of the
transition bond charge.
o The BPU clarified the language concerning the use of the net proceeds
of securitization to indicate that the refinancing or retirement of
debt and/or equity shall be done in a manner that will not
substantially alter PSE&G's overall capital structure.
Sale of Generation-Related Assets
o As directed by the Final Order, PSE&G will sell its generation
property, plant and equipment to a separate unregulated subsidiary of
PSEG for $2.443 billion plus the net book value of other
generation-related assets and liabilities transferred at the time of
purchase, such as fuel and materials and supplies, currently estimated
to be between $200 million and $400 million. PSE&G and PSEG Power LLC
(Power), the separate unregulated subsidiary of PSEG, will record the
difference between the net book value of the generation property, plant
and equipment and the $2.443 billion of sale proceeds as an increase
and decrease to contributed capital, respectively, on their financial
statements.
o Such separate company will become an exempt wholesale generator (EWG)
under the Public Utility Holding Company Act (PUHCA). Any gains
resulting from any sale of the generation-related assets to a third
party which occurs before August 1, 2004 must be shared equally between
ratepayers and shareholders. For further discussion, see
Generation-Related Asset Sale to Power.
Basic Generation Service
o PSE&G is obligated to provide BGS to customers who do not choose
another electric supplier. PSE&G will contract with Power, through
Power's wholly owned subsidiary PSEG Energy Resources & Trade LLC
(ER&T), to provide the energy and capacity required to meet PSE&G's
BGS and Off-Tariff Rate Agreements (OTRA) obligations for the first
three years of retail choice (see Generation-Related Asset Sale to
Power). PSEG, PSE&G and Power are prohibited from promoting such
service as a competitive alternative to other electricity suppliers
and marketers. BGS will be competitively bid for the fourth year and
thereafter. Any payments resulting from BGS being bid out will be
applied to the deferred societal benefit costs balance for purposes of
establishing the societal benefit clause (SBC) rate in the fifth year.
Societal Benefit Clause and Non-utility Generation Market Transition Clause
o Societal benefit costs and stranded costs associated with NUG
contracts will be collected through separate charges. Both charges
will remain constant throughout the four-year transition period and
PSE&G will use deferral accounting, including interest on any
over/underrecoveries. The charges will be reset annually thereafter.
The charge for the stranded NTC will be initially set at the 1999
level of $183 million annually. Any NUG contract buyouts will also be
charged to the NTC and will be subject to deferral accounting. The SBC
will include costs related to: 1) social programs which include the
universal service fund; 2) nuclear plant decommissioning; 3) demand
side management (DSM) programs (see Other Regulatory Issues); 4)
manufactured gas plant remediation; and 5) consumer education.
Electric Distribution Depreciation
o PSE&G was directed by the BPU to record a regulatory liability by
reducing its depreciation reserve for its electric distribution assets
by $569 million. This regulatory liability will be amortized over the
period from January 1, 2000 to July 31, 2003 (see Note 3. Extraordinary
Charge and Other Accounting Impacts of Deregulation).
Investment Tax Credits
o The BPU directed PSE&G to seek a private letter ruling from the
Internal Revenue Service (IRS) to determine if the ITC can be credited
to customers without violating the tax normalization rules of the
Internal Revenue Code. If the IRS's private letter ruling determines
that the ITC could be passed on to customers of PSE&G without
violating the IRS's normalization rules, then the BPU in the fourth
year of the transition period will consider any action which it may
deem appropriate regarding the treatment of the ITC, giving
consideration to the issues resolved in the Final Order and other
relevant considerations. PSE&G accounted for the ITC as a reduction to
the extraordinary charge recorded in the second quarter of 1999. PSE&G
cannot predict the outcome of the ruling from the IRS or any
subsequent potential actions which may be taken by the BPU. However,
an adverse resolution to this matter would result in an additional
extraordinary charge to income up to the amount of the ITC, which
would likely have a material adverse impact on PSEG's and PSE&G's
financial condition, results of operations and net cash flows.
Securitization Filing and Finance Order
On September 17, 1999, the BPU issued its Finance Order to authorize, among
other things, the imposition of a non-bypassable transition bond charge on
PSE&G's customers; the sale of PSE&G's property right in such charge created by
the Energy Competition Act to a bankruptcy-remote financing entity; the issuance
and sale of $2.525 billion of transition bonds by such entity in payment
therefor, including an estimated $125 million of transaction costs; and the
application by PSE&G of the transition bond proceeds to retire outstanding debt
and/or equity. The order was consistent with the provisions of the Energy
Competition Act and the Final Order.
PSE&G Transition Funding LLC, a wholly owned subsidiary of PSE&G, was
created to issue such transition bonds. Two appeals have been filed which have
challenged the Finance Order and will delay the sale of the transition bonds.
Although PSEG and PSE&G believe the appeals are without merit, PSEG and PSE&G
are unable to predict the outcome of such appeals. However, assuming a favorable
outcome, PSEG and PSE&G expect such sale of transition bonds and receipt of
proceeds therefrom will occur in the first half of 2000.
Generation-Related Asset Sale to Power
In anticipation of the Final Order directing the sale of generation-related
assets, PSEG organized Power and its subsidiaries in June 1999. Power, and its
subsidiaries, PSEG Fossil LLC (Fossil) and PSEG Nuclear LLC (Nuclear), will
acquire and manage PSE&G's electric generation-related assets. The appeal, which
has been filed challenging the approval granted by the BPU in the Final Order
for this sale, will delay this sale. Although PSEG and PSE&G believe the
appeals are without merit, PSEG and PSE&G are unable to predict the outcome of
such appeals. However, assuming a favorable outcome, PSEG and PSE&G expect such
sale will occur in the first half of 2000.
Certain regulatory approvals are required prior to the sale of the
generation-related assets to Power and its subsidiaries. Power has made the
necessary filings and is awaiting final approval from the Nuclear Regulatory
Commission (NRC) (to transfer PSE&G's nuclear licenses), the New Jersey
Department of Environmental Protection (NJDEP) and the Pennsylvania Public
Utility Commission (PAPUC). Additionally, in October 1999, Nuclear and Fossil
filed with the FERC for EWG status. In September 1999, FERC approved PSE&G's
proposed sale of its generating units to Power and its subsidiaries. FERC
conditionally accepted a number of other agreements. Additionally, FERC directed
Power to make amendments clarifying the proposed rate formula by which ER&T
would compensate Fossil and Nuclear for their actual costs and to redesignate
the proposed market-based rate tariff from PSE&G to ER&T.
Metering, Billing and Account Services
In accordance with the Energy Competition Act, the BPU has mandated the
creation of a Customer Account Services working group comprised of electric
and/or gas utilities, including PSE&G, alternative energy service providers and
other interested parties. The focus of the working group and the BPU will be to
outline a timeline and the extent to which competition will be introduced to
various functions, including metering, billing and customer service, and to
create regulatory guidelines for making these services competitive. Meetings
began in November 1999 with expectations that a formal proceeding will be
scheduled sometime after January 2000.
Generic Issues
In 1999, the BPU issued a series of interim orders that decided generic
issues related to the deregulation of the electric and gas industries in New
Jersey. These orders addressed environmental disclosure standards, energy
aggregation program standards, anti-slamming standards, retail choice consumer
protection standards and licensing and registration standards applicable to all
energy service providers. It is also anticipated that the BPU will issue an
order addressing affiliate relationships and transactions, which could impact
the pricing of affiliate transactions.
Retail Choice
Retail choice of electric energy suppliers started on August 1, 1999. Those
retail customers who choose a third party supplier (TPS) are expected to begin
to receive electric energy from such TPS commencing in the fourth quarter of
1999. As previously noted, the appeals of the Final Order may delay this
implementation.
Gas Unbundling
The Energy Competition Act requires that all residential customers have the
ability to choose a competitive gas supplier by December 31, 1999. As a result,
on March 17, 1999, the BPU issued its Order requiring each natural gas utility
to submit a rate unbundling filing.
On April 30, 1999, PSE&G submitted its required gas unbundling compliance
filing with the BPU. The discovery process has been completed, intervenor
testimony has been filed and hearings before the BPU commenced on September 27,
1999. The BPU is expected to render a decision by the end of December 1999.
PSE&G cannot predict the outcome of this proceeding.
The Energy Competition Act also mandated similar rules for the gas industry
as those for the electric industry addressing affiliate relations and consumer
protection, among others. The standards adopted by the BPU for generic issues
also apply to the competitive gas industry (see Generic Issues).
Other Regulatory Issues
Energy Efficiency and Renewable Energy (Formerly DSM)
The BPU adopted rules in 1991 to encourage utilities to offer DSM-related
load management and conservation services. These rules were re-adopted in 1996
and were designed to treat DSM on equal regulatory footing with supply side or
energy production investments. The Energy Competition Act requires the
continuation of these energy efficiency programs and the initiation of renewable
energy programs, the costs of which are to be recovered through a societal
benefits charge on all electric and gas customers' bills. On June 9, 1999, the
BPU initiated a proceeding causing a comprehensive resource analysis of energy
programs to be undertaken including the reevaluation of DSM programs and
incorporation of new renewable programs. Key to this proceeding is the
determination of the appropriate level of funding for energy efficiency and
renewable energy programs on a statewide basis. Hearings have been scheduled by
the BPU with a target established that would permit it to render decisions for
each of the utilities in lieu of settlements, if necessary, by February 9, 2000.
PSE&G filed its proposed plan with the BPU on August 23, 1999.
Non-utility Generation Buydown
Under Federal and State regulations, utilities were required to enter into
long-term power purchase agreements with NUGs at prices which have subsequently
proven to be above market. PSE&G is seeking to restructure certain of its BPU
approved contracts with NUGs, which were estimated to be $1.6 billion above
assumed future market prices. In July 1999, PSE&G and American Ref-Fuel Company
announced an agreement to amend a NUG contract originally signed in 1985 for the
Essex County Resource Recovery Facility, a waste incinerator located in Newark,
New Jersey. Under the terms of the agreement, PSE&G ratepayers will receive a
cost reduction of up to $100 million over the remaining 20 years of the
contract. In September 1999, the agreement was approved by the BPU and the costs
to restructure this contract will be recovered through the NTC.
Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation
As previously disclosed, as a result of the BPU's issuance of the Summary
Order in April 1999 and in accordance with EITF 97-4, PSE&G determined that SFAS
71 was no longer applicable to the electric generation portion of its business.
Accordingly, in the second quarter, PSE&G recorded an extraordinary charge to
earnings of $790 million (net of tax). PSE&G accounted for this charge
consistent with the requirements of SFAS 101. In the third quarter of 1999,
PSE&G revised the estimates inherent in the extraordinary charge and recorded an
additional $14 million extraordinary charge. For discussion of the Final Order
and PSE&G's treatment of ITC, see Note 2. Regulatory Issues.
The extraordinary charge recorded in the second and third quarters of 1999
consisted primarily of the write-down of PSE&G's nuclear and fossil generating
stations in accordance with SFAS 121. PSE&G performed a discounted cash flow
analysis on a unit-by-unit basis to determine the amount of the impairment. As a
result of this impairment analysis, the net book value of the generating
stations was reduced by approximately $5.0 billion (pre-tax) or approximately
$3.09 billion (net of tax). This amount was offset by the creation of a $4.057
billion (pre-tax), or $2.4 billion (net of tax), regulatory asset related to the
future receipt of securitization proceeds, as provided for in the Summary Order
and affirmed in the Final Order.
In addition to the impairment of PSE&G's electric generating stations, the
extraordinary charge consisted of various accounting adjustments to reflect the
absence of cost of service regulation in the electric generation portion of the
business in the future. The adjustments primarily related to materials and
supplies, general plant items and liabilities for certain contractual and
environmental obligations.
Other accounting impacts of the discontinuation of SFAS 71 included
reclassifying the Accrued Nuclear Decommissioning Reserve and the Accrued Cost
of Removal for generation-related assets from Accumulated Depreciation to
Long-Term Liabilities. PSE&G also reclassified a $569 million excess
depreciation reserve related to PSE&G's electric distribution assets from
Accumulated Depreciation to a Regulatory Liability. Such amount will be
amortized in accordance with the terms of the Final Order over the period from
January 1, 2000 to July 31, 2003.
Note 4. Regulatory Assets and Liabilities
Regulatory assets and liabilities are recorded in accordance with the
provisions of SFAS 71. In general, SFAS 71 recognizes that accounting for
rate-regulated enterprises should reflect the relationship of costs and revenues
as determined by regulators. As a result, a regulated utility may defer
recognition of costs (a regulatory asset) or recognize obligations (a regulatory
liability) if it is probable that, through the ratemaking process, there will be
a corresponding increase or decrease in revenues. Accordingly, PSE&G has
deferred certain costs, which are being amortized over various periods. To the
extent that collection of such costs or payment of liabilities is no longer
probable as a result of changes in regulation and/or PSE&G's competitive
position, the associated regulatory asset or liability has been charged or
credited to income.
Starting in the second quarter of 1999, PSE&G no longer met the
requirements for the application of SFAS 71 to the electric generation portion
of its business. In accordance with SFAS 101 and EITF 97-4, regulatory assets
and liabilities related to the generation portion of PSE&G's business were
written off, except to the extent the Summary and Final Orders provided for
future recovery through regulated operations. Additionally, certain new
regulatory assets and regulatory liabilities were recorded, in compliance with
the Summary and Final Orders. For discussion of the Energy Master Plan
Proceedings, see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation.
At September 30, 1999 and December 31, 1998, respectively, PSEG and PSE&G
had deferred the following regulatory assets and liabilities on the Consolidated
Balance Sheets:
September 30, December 31,
1999 1998
------------------ --------------
Regulatory Assets (Millions of Dollars)
Regulatory Asset--Stranded Costs $4,057 $--
SFAS 109 Income Taxes 287 704
OPEB Costs 237 270
Regulatory Asset--SBC 137 --
Demand Side Management Costs 7 150
Environmental Costs 106 139
Unamortized Loss on Reacquired Debt and Debt Expense 122 135
Underrecovered Gas Costs -- 35
Other 125 146
-------------- ------------
Total Regulatory Assets $5,078 $1,579
============== ============
Regulatory Liabilities
Regulatory Liability--Excess Depreciation Reserve $569 $--
Regulatory Liability--NTC 56 --
Overrecovered Gas Costs 23 --
Overrecovered Electric Energy Costs -- 39
Other Stranded Cost Recovery Offsets 6 4
-------------- ------------
Total Regulatory Liabilities $654 $43
============== ============
Regulatory Asset - Stranded Costs: PSE&G has recorded this regulatory asset
to reflect the future revenues which will be collected via the securitization
transition charge which was authorized by the BPU's Finance Order.
SFAS 109 Income Taxes: This amount represents the regulatory asset related
to the recognition of deferred income taxes arising from the implementation of
SFAS 109, "Accounting for Income Taxes" (SFAS 109). Due to the discontinuation
of SFAS 71 for the electric generation portion of PSE&G's business, the deferred
taxes related to these assets have been reduced and included in the
determination of the Extraordinary Item.
Regulatory Asset - SBC: See Note 2. Regulatory Issues for a description of
the SBC. Before creation of the SBC, the electric DSM and manufactured gas plant
remediation costs were included in DSM and Environmental Costs, respectively, as
listed above.
Regulatory Liability - Excess Depreciation Reserve: As required by the BPU,
PSE&G reduced its depreciation reserve for its electric distribution assets by
$569 million and recorded such amount as a regulatory liability to be amortized
over the period from January 1, 2000 to July 31, 2003. In 2000 and 2001, $125
million will be amortized each year. In 2002 and 2003, $135 million and $184
million will be amortized, respectively.
Regulatory Liability - NTC: See Note 2. Regulatory Issues for a description
of the NTC.
Regulatory Liability - Overrecovered Electric Energy Costs: As provided by
the BPU in the Final Order, PSE&G continued to follow deferral accounting
treatment for the LEAC through July 31, 1999. At July 31, 1999, Overrecovered
Electric Energy Costs were $59 million. Pursuant to the Final Order, the
overrecovered balance as of July 31, 1999 was applied as a credit to the
starting deferred balance of the NTC.
Note 5. Commitments and Contingent Liabilities
Pending Asset Purchases
PSEG has entered into contracts to purchase a number of combustion
turbines to expand capacity at a number of generating sites. PSEG's commitment
under these contracts is approximately $392 million to be expended through
December 2001. Through October 31, 1999, payments of approximately $70 million
were made under these contracts.
On October 6, 1999, Power announced an agreement with Niagara Mohawk Power
Corporation (Niagara Mohawk), a New York State utility, to purchase its 400
megawatt oil and gas-fired electric generating station in Albany, New York
(Albany Steam Station) for $47.5 million. Payment of Power's obligation under
such agreement has been guaranteed by PSEG. Niagara Mohawk could also receive up
to an additional $11.5 million if Power chooses to pursue redevelopment of the
Albany Steam Station. Under a transition power contract in place through
September 2003, Niagara Mohawk will purchase electricity from Power at prices
consistent with those established in Niagara Mohawk's regulatory agreement with
the New York Public Service Commission (NYPSC). The purchase of the Albany Steam
Station will provide Power entry into the New York Power Pool. The purchase is
subject to approval by the NYPSC and Federal agencies including FERC. Power
expects to complete the transaction in the first quarter of 2000.
On September 30, 1999, Power announced that it has signed an agreement to
acquire all of Conectiv's interests in the Salem Nuclear Generating Station
(Salem) and the Hope Creek Nuclear Generating Station (Hope Creek) and half of
Conectiv's interest in the Peach Bottom Atomic Power Station (Peach Bottom), for
an aggregate purchase price of $15.4 million plus the net book value of nuclear
fuel at closing. Payment of Power's obligation under such agreement has been
guaranteed by PSEG. Conectiv is the parent of Atlantic City Electric Company
(ACE) and Delmarva Power & Light Company (DP&L). Power will purchase Conectiv's
14.82% interest (328 megawatts) in Salem, Conectiv's 5% interest (52 megawatts)
in Hope Creek and half of Conectiv's 15.02% interest (164 megawatts) in Peach
Bottom. Once completed, PSEG would own a 57.41% interest (1,270 megawatts) in
Salem, a 100% interest (1,031 megawatts) in Hope Creek and a 50% interest (1,094
megawatts) in Peach Bottom. The addition of the nuclear assets to Power's
portfolio is in line with its growth-oriented generation and trading strategy in
the Northeast/Mid-Atlantic region. The purchases are subject to approval by the
BPU, the Delaware Public Service Commission, the Maryland Public Service
Commission, the PAPUC and Federal agencies including the NRC and FERC. Power
expects to complete the purchases by mid-2000.
Nuclear Operating Performance Standard (OPS)
PECO Energy Company (PECO Energy), DP&L and PSE&G, three of the co-owners of
Salem and Peach Bottom, have agreed to an OPS through December 31, 2011 for
Salem and through December 31, 2007 for Peach Bottom. Under the OPS, the station
operator is required to make payments to the non-operating owners (excluding
ACE) commencing in January 2001 if the three-year historical average net maximum
dependable capacity factor for that station, calculated as of December 31 of
each year commencing with December 31, 2000, falls below 40%. At December 31,
1998, the capacity factors were 67% and 81% for Salem 1 and Salem 2,
respectively. Any such payment is limited to a maximum of $25 million per year.
The parties have further agreed to forego litigation in the future, except for
limited cases in which the operator would be responsible for damages of no more
than $5 million per year.
As noted above, Power has announced that it has signed an agreement to
acquire all of Conectiv's interests in Salem and Hope Creek and half of
Conectiv's interest in Peach Bottom. Once the purchases are completed, DP&L will
no longer have an interest in the OPS agreement.
Year 2000 Readiness Disclosure
Many of PSEG's and PSE&G's systems, which include information technology
applications, plant control and telecommunications infrastructure systems, must
be modified due to computer program limitations in recognizing dates beyond
1999. Management estimates the total cost related to Year 2000 readiness will
approximate $76 million, to be incurred through 2001, of which $8 million was
incurred in 1997, $27 million was incurred in 1998 and approximately $35 million
is expected to be incurred in 1999. During the nine months ended September 30,
1999, $20 million was incurred. A portion of these costs is not incremental to
PSEG or PSE&G, but rather, represents a redeployment of existing
personnel/resources.
If PSEG, PSE&G, their domestic and international subsidiaries, their
project affiliates, other members of the PJM Interconnection, LLC (PJM), PJM
trading partners supplying power through PJM, PSEG's or PSE&G's key vendors
and/or customers or the capital markets are unable to meet the Year 2000
deadline, such inability could have a material adverse impact on PSEG's and
PSE&G's operations, financial condition, results of operations or net cash
flows.
Site Restorations and Other Environmental Costs
It is difficult to estimate the future financial impact of environmental
laws, including potential liabilities. PSEG and PSE&G accrue environmental
liabilities when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. Estimated losses related to
site environmental remediation are based primarily on internal and third party
environmental studies, the number and participation level of other Potentially
Responsible Parties (PRP), the extent of the contamination and the nature of
required remediation.
Certain environmental costs are currently recoverable through the RAC and
are expected to be recoverable in accordance with the Final Order, through the
SBC. Other environmental costs may be recoverable through future recovery
mechanisms, including the SBC; however, no assurances can be given. To the
extent these costs are material and not recoverable, they could have a material
adverse impact on PSEG's and PSE&G's financial condition, results of operations
or net cash flows.
Hazardous Waste
Certain Federal and state laws authorize the U.S. Environmental Protection
Agency (EPA) and the NJDEP, among other agencies, to issue orders and bring
enforcement actions to compel responsible parties to investigate and take
remedial actions at any site that is determined to present an actual or
potential threat to human health or the environment because of an actual or
threatened release of one or more hazardous substances. Because of the nature of
PSEG's and PSE&G's business, including the production of electricity, the
distribution of gas and, formerly, the manufacture of gas, various by-products
and substances are or were produced or handled which contain constituents
classified as hazardous. PSE&G generally provides for the disposal or processing
of such substances through licensed independent contractors. However, these
statutory provisions impose joint and several responsibility without regard to
fault on all responsible parties, including the generators of the hazardous
substances, for certain investigative and remediation costs at sites where these
substances were disposed of or processed. PSE&G has been notified with respect
to a number of such sites and the investigation and remediation of these
potentially hazardous sites is receiving attention from the government agencies
involved. Generally, actions directed at funding such site investigations and
remediation include all suspected or known responsible parties. Based on current
information, except as discussed below with respect to its manufactured gas
plant remediation program (Remediation Program), PSEG and PSE&G do not expect
their expenditures for any such site, individually or all such current sites in
the aggregate, except as noted below (see Passaic River Site), will have a
material effect on financial condition, results of operations or net cash flows.
The NJDEP regulations concerning site investigation and remediation require
an ecological evaluation of potential injuries to natural resources in
connection with a remedial investigation of contaminated sites. The NJDEP is
presently working with the utility industry to develop procedures for
implementing these regulations. These regulations may substantially increase the
costs of remedial investigations and remediations, where necessary, particularly
at sites situate on surface water bodies. PSE&G and predecessor companies owned
and/or operated certain facilities situate on surface water bodies, certain of
which are currently the subject of remedial activities. The financial impact of
these regulations on these projects is not currently estimable. PSE&G does not
anticipate that the compliance with these regulations will have a material
adverse effect on its financial position, results of operations or net cash
flows.
PSE&G Manufactured Gas Plant Remediation Program
In 1988, NJDEP notified PSE&G that it had identified the need for PSE&G,
pursuant to a formal arrangement, to systematically investigate and, if
necessary, resolve environmental concerns existing at PSE&G's former
manufactured gas plant sites. To date, NJDEP and PSE&G have identified 38 former
manufactured gas plant sites. PSE&G is currently working with NJDEP under a
program to assess, investigate and, if necessary, remediate environmental
conditions at these sites. The Remediation Program is periodically reviewed and
revised by PSE&G based on regulatory requirements, experience with the
Remediation Program and available remediation technologies. The cost of the
Remediation Program cannot be reasonably estimated, but experience to date
indicates that costs of approximately $20 million per year could be incurred
over a period of about 30 years and that the overall cost could be material. The
Energy Competition Act provides for the continuation of RAC programs. The Final
Order provides for the recovery of costs for this remediation effort through the
SBC.
Air Pollution Control
In June 1998, NJDEP adopted regulations implementing a memorandum of
understanding among 11 Northeastern states and the District of Columbia,
establishing a regional plan for reducing nitrogen oxide (NOx) emissions from
utilities and large industrial boilers. The extent of investment in control
technologies, operational changes and purchases of emission allowances required
to comply with these regulations will be directly related to the number of
emission allowances PSE&G receives. PSE&G received a preliminary allocation of
emission allowances in March 1999, which were sufficient for the Summer of 1999.
The final allocation will be determined in accordance with the NJDEP regulations
in November 1999, which is subsequent to the May 1 through September 30, 1999
period governed by the regulations. It is currently anticipated that the NOx
allowances will be sold to Power at the time of the sale of the generating
assets.
Passaic River Site
The EPA has determined that a six mile stretch of the Passaic River in
Newark, New Jersey is a "facility" within the meaning of that term under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA) and that, to date, at least thirteen corporations, including
PSE&G, may be potentially liable for performing required remedial actions to
address potential environmental pollution at the facility. The EPA anticipates
identifying other PRPs. One PRP entered into a consent decree with the EPA in
1994 obligating it to conduct a remedial investigation and feasibility study
(RI/FS) of available and applicable corrective actions for the site. It is
anticipated that a report of the RI/FS will be issued in 2001.
PSE&G and certain of its predecessors operated industrial facilities at
properties within the six mile stretch of the Passaic River designated as the
facility. In April 1996, the EPA directed PSE&G to provide information
concerning the nature and quantity of raw materials, by-products and wastes
which may have been generated, treated, stored or disposed at certain of these
facilities. The facilities are PSE&G's former Harrison Gas Plant and Essex
Generating Station. PSE&G submitted responses to the EPA requests for these
sites in August 1996. In July 1997, the EPA named PSE&G as a PRP for this site.
PSE&G cannot predict what action, if any, the EPA or any third party may take
against PSE&G with respect to this matter, or in such event, what costs PSE&G
may incur to address any such claims. However, such costs may be material.
Subsurface Contamination
PSE&G's sale of generation-related assets to PSEG Power may trigger the
requirements of the New Jersey Industrial Site Recovery Act (ISRA). ISRA
requires that before any transfer of an industrial establishment can be made,
the interested parties shall remediate or cause to be remediated potential site
environmental concerns in accordance with NJDEP requirements. Certain of the
generation-related assets being sold are industrial establishments as defined by
ISRA. In October 1999, PSE&G filed a request with the NJDEP for a determination
that the sale involves a transfer to an affiliate and, as such, is not a covered
transaction under ISRA. In the second quarter of 1999, PSEG recorded a $53
million liability related to these obligations (see Note 3. Extraordinary Charge
and Other Accounting Impacts of Deregulation).
Note 6. Financial Instruments and Risk Management
PSEG's operations give rise to exposure to market risks from changes in
commodity prices, interest rates, foreign currency exchange rates and securities
prices. PSEG's policy is to use derivative financial instruments for the purpose
of managing market risk consistent with its business plans and prudent business
practices.
Fair Value of Financial Instruments
The estimated fair value was determined using the market quotations or
values of instruments with similar terms, credit ratings, remaining maturities
and redemptions at September 30, 1999 and December 31, 1998, respectively. Note
that certain future events in connection with securitization and the sale by
PSE&G of generation-related assets to Power will trigger certain redemption
features of certain PSE&G mortgage bonds.
September 30, 1999 December 31, 1998
------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ------------- ------------
(Millions of Dollars)
Long-Term Debt (A):
PSEG.................................................. $575 $575 $275 $275
Energy Holdings....................................... 992 980 762 769
PSE&G................................................. 3,899 3,874 4,145 4,389
Preferred Securities Subject to Mandatory Redemption:
PSE&G Cumulative Preferred Securities................. 75 68 75 77
Monthly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures.................... 210 209 210 213
Quarterly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures.................... 303 296 303 315
Quarterly Guaranteed Preferred Beneficial Interest in
PSEG's Subordinated Debentures..................... 525 471 525 518
<FN>
(A) Includes current maturities. Includes interest rate swaps of $33 million
and $150 million for Energy Holdings and PSEG, respectively, for the
period ended September 30, 1999 and interest rate swaps of $44 million
and $150 million for Energy Holdings and PSEG, respectively, for the
period ended December 31, 1998.
Global has $67 million of project debt that is non-recourse to PSEG,
Global and Energy Holdings associated with investments in Argentina that
was refinanced in June 1999 for a term of one year. An interest rate swap
was entered into which effectively converts 50% of the floating rate
obligation into a fixed rate obligation. The interest rate differential
to be received or paid under the agreement is recorded over the life of
the agreement as an adjustment to interest expense. The pricing on the
loan is indexed to the London Interbank Offered Rate (LIBOR).
</FN>
Commodity-Related Instruments--PSE&G
At September 30, 1999 and December 31, 1998, PSE&G held or issued commodity
and financial instruments that reduce exposure to price fluctuations from
factors such as weather, environmental policies, changes in demand, changes in
supply, state and Federal regulatory policies and other events. These
instruments, in conjunction with owned electric generating capacity and physical
gas supply contracts, are designed to cover estimated electric and gas customer
commitments. PSE&G uses futures, forwards, swaps and options to manage and hedge
price risk related to these market exposures.
At September 30, 1999, PSE&G had outstanding commodity financial
instruments with a notional contract quantity of 10.4 million megawatt-hours
(MWH) of electricity and 47.5 million MMBTU (million British thermal units) of
natural gas. At December 31, 1998, PSE&G had outstanding commodity financial
instruments with a notional contract quantity of 1.6 million MWH of electricity
and 65.2 million MMBTU of natural gas. Notional amounts are indicative only of
the volume of activity and are not a measure of market risk.
As discussed in Note 1. Basis of Presentation/Summary of Significant
Accounting Policies, PSE&G implemented EITF 98-10 effective January 1, 1999. As
a result, PSE&G's energy trading contracts were marked to market and gains and
losses from such contracts were included in earnings. Previously, such gains and
losses were recorded upon settlement of the contracts. PSE&G recorded $3 million
of gains in the quarters ended September 30, 1999 and 1998. PSE&G recorded $20
million and $21 million of gains in the nine months ended September 30, 1999 and
1998, respectively.
Commodity-Related Instruments--Energy Holdings
PSEG Energy Technologies Inc.'s (Energy Technologies) policy is to enter
into natural gas and electricity futures contracts and forward purchases to lock
in prices related to future fixed sales commitments. Whenever possible, Energy
Technologies attempts to be 100% covered on its electric and gas sales
positions. During the nine months ended September 30, 1999 and 1998, Energy
Technologies entered into futures contracts to buy natural gas and electricity
related to fixed-price sales commitments. Energy Technologies had 97% and 90% of
its fixed price natural gas sales commitments hedged and 100% and 63% of its
fixed price electric commodity sales commitments hedged at September 30, 1999
and December 31, 1998, respectively. As of September 30, 1999 and December 31,
1998, Energy Technologies had a net unrealized gain of approximately $3 million
and net unrealized loss of $5 million, respectively, related to its electric and
gas hedges.
Equity Securities--Energy Holdings
PSEG Resources Inc. (Resources) directly and indirectly has investments 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
September 30, 1999 and December 31, 1998 were $118 million and $204 million,
respectively. The decrease in fair value was primarily due to the sale of
certain of such investments during 1999. The potential change in fair value
resulting from a hypothetical 10% change in quoted market prices of these
investments amounted to $11 million at September 30, 1999 and $17 million at
December 31, 1998.
Foreign Currencies--Energy Holdings
In accordance with their growth strategies, Global and Resources have made
approximately $1.4 billion and $1.0 billion, respectively, of international
investments.
Resources' international investments are primarily leveraged leases of
assets located in the Netherlands and the United Kingdom with associated
revenues denominated in U.S. dollars and, therefore, not subject to foreign
currency risk.
Global's international investments are primarily in projects that generate
or distribute electricity in Argentina, Brazil, Chile, China, India, Peru and
Venezuela. Investing in foreign countries involves certain risks. Economic
conditions that result in higher comparative rates of inflation in foreign
countries likely result in declining values in such countries' currencies. As
currencies fluctuate against the U.S. dollar, there is a corresponding change in
Global's investment value in terms of the U.S. dollar. Such change is reflected
as an increase or decrease in comprehensive income, a separate component of
stockholders' equity. Net foreign currency devaluations have reduced the
reported amount of PSEG's total stockholders' equity by $160 million, $147
million of which was caused by the devaluation of the Brazilian Real, for the
nine months ended September 30, 1999.
In January 1999, Brazil abandoned its managed devaluation strategy and
allowed its currency, the Real, to float against other currencies. As of
September 30, 1999, the Real had devalued approximately 37% against the U.S.
dollar since December 31, 1998, affecting the carrying value of Global's
investment in a Brazilian distribution company. For additional information, see
Note 8. Financial Information by Business Segments.
Higher comparative rates of inflation in foreign economies also means that
borrowing costs in local currency will be higher than in the United States. When
warranted, Global has financed certain foreign investments with U.S. dollar
denominated debt. While less costly to service in terms of U.S. dollars, such
debt is exposed to currency risk because a devaluation would cause repayment to
be more expensive in local currency terms since more units of local currency
would be required to repay the debt. Dollar denominated debt was incurred by
Global in Argentina, Chile and Peru to finance the acquisition of interests in
rate regulated distribution entities. These entities may be able to recover
higher costs incurred as a result of a devaluation specifically through the
terms of the concession agreement or as a pass through of higher inflation costs
in rates over time, although no assurances can be given that this will occur. In
evaluating its investment decisions, Global considers the social, economic,
political and currency risks associated with each potential project, and if
warranted, assumes a certain level of currency devaluation when making its
investment decisions. In Argentina, the currency is pegged 1:1 with the U.S.
dollar and a legislative act is required to de-couple the currency from the
dollar.
Global had consolidated project debt totaling $106 million as of September
30, 1999 associated with Global's investment in a Brazilian distribution company
that is non-recourse to Global, Energy Holdings and PSEG. The debt is
denominated in the Brazilian Real and is indexed to a basket of currencies,
approximately 50% of which is the U.S. dollar. Global is subject to foreign
currency exchange rate risk as a result of exchange rate movements between the
indexed foreign currencies and the U.S. dollar. Exchange rate changes ultimately
impact the debt level outstanding in the reporting currency and result in
foreign currency gains or losses. Gains or losses resulting from such exchange
rate movements are included in other income for the period and amounted to a
loss of $3 million and a gain of $1 million in the quarters ended September 30,
1999 and 1998, respectively, and gains of $2 million and $4 million in the nine
months ended September 30, 1999 and 1998, respectively.
Although Global generally seeks to structure power purchase contracts and
other project revenue agreements to provide for payments to be made in, or
indexed to, U.S. dollars or a currency freely convertible into U.S. dollars, its
ability to do so in all cases may be limited. As Energy Holdings continues to
invest internationally, the financial statements of PSEG will be increasingly
affected by changes in the global economy. PSEG cannot predict foreign currency
exchange rate movements and, therefore, cannot predict the impact of such
movements on PSEG's financial condition, results of operations or net cash
flows.
Interest Rates
PSEG, PSE&G and Energy Holdings are subject to the risk of fluctuating
interest rates in the normal course of business. Their policy is to manage
interest rate risk through the use of fixed rate debt, floating rate debt and
interest rate swaps. As of September 30, 1999, a hypothetical 10% change in
market interest rates would result in a $4 million, $10 million and $3 million
change in annual interest costs related to short-term and floating rate debt at
PSEG (parent company), PSE&G and Energy Holdings, respectively.
Nuclear Decommissioning Trust Funds
Contributions made to the Nuclear Decommissioning Trust Funds are invested
in debt and equity securities. The carrying values of these funds approximate
their fair market values.
Note 7. Income Taxes
PSEG's effective income tax rate is as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1999 (A) 1998 1999 (A) 1998
----------- --------- ----------- ----------
Federal tax provision at statutory rate................... 35.0% 35.0% 35.0% 35.0%
New Jersey Corporate Business Tax, net of Federal benefit. 5.9% 5.9% 5.9% 5.9%
Other-- net............................................... 0.6% 2.6% 0.7% 1.4%
----------- --------- ----------- ----------
Effective Income Tax Rate............................. 41.5% 43.5% 41.6% 42.3%
=========== ========= =========== ==========
<FN>
(A) Excludes the impact of the extraordinary charge recorded in the second
and third quarters of 1999. The associated income tax benefits resulting
from the extraordinary charge had an effective income tax rate of 30.04%.
The effective rate is below the statutory rate of 40.85% primarily due to
some of the income tax benefits being flowed through to ratepayers in
prior periods under regulated accounting methods. This was partially
offset by the investment tax credit being credited to the benefit of
PSEG's stockholders pursuant to the Summary Order. For further
discussion, see Note 2. Regulatory Issues.
</FN>
Note 8. Financial Information by Business Segments
Basis of Organization
The reportable segments disclosed herein were determined based on a variety
of factors including the regulatory environment of each of PSEG's lines of
business and the types of products and services offered. Effective with the
unbundling of PSE&G's rates on August 1, 1999 and the deregulation of the
electric generation portion of PSE&G's business, the basis of segment reporting
has changed beginning with the third quarter of 1999. The generation and energy
trading portions of PSE&G's business are now separate reportable segments,
whereas they previously had been part of the Electric segment. Note that
estimates have been used to separate historical, pre- August 1, 1999, electric
segment data into the Generation, Energy Resources and Trade, and Transmission
and Distribution segments of PSE&G's business.
Generation
The generation segment of PSE&G's business earns revenue through the sale
of its energy and capacity. This segment consists of the power plants that will
be sold to Fossil and Nuclear.
Energy Resources and Trade
The Energy Resources and Trade segment of PSE&G's business earns revenues
through a variety of wholesale energy and capacity sales and other ancillary
services.
Transmission and Distribution (T&D)
This segment represents regulated utility services provided by PSE&G. The
electric transmission and electric and gas distribution segment of PSE&G's
business generates revenue from its tariffs under which it provides electric
transmission and electric and gas distribution services to residential,
commercial and industrial customers in New Jersey. The rates charged for
electric transmission are regulated by FERC while the rates charged for electric
and gas distribution are regulated by the BPU. Revenues are also generated from
a variety of other activities such as sundry sales, wholesale transmission
services and other miscellaneous services.
Resources
Resources earns revenues from its passive investments in leveraged leases,
limited partnerships, leveraged buyout funds and marketable securities.
Global
Global earns revenues from its investment in and operation of projects in
the generation and distribution of energy, both domestically and
internationally.
Other
PSEG's other activities generate revenues from Energy Technologies and
Enterprise Group Development Corporation (EGDC). Energy Technologies earns
revenues from energy sales and a variety of energy related services provided to
industrial and commercial customers to reduce costs and improve related energy
efficiencies. EGDC, which has been conducting a controlled exit from the real
estate business since 1993, earns revenues from its nonresidential real estate
property management business. Other activities also include amounts applicable
to PSEG, the parent corporation, and Energy Holdings, excluding Resources and
Global.
Information related to the segments of PSEG's business is detailed below:
Energy
Resources Consolidated
Generation and Trade T & D Resources Global Other Total
---------- ---------- -------- --------- -------- -------- ---------------
(Millions of Dollars)
For the Quarter Ended September 30,
1999:
Total Operating Revenues........... $736 $10 $712 $22 $40 $86 $1,606
Segment Income before 104 4 97 4 15 (3) 221
Extraordinary Item......................
Segment Net Income (Loss).......... 90 4 97 4 15 (3) 207
========== ========== ======== ========= ======== ======== ============
For the Quarter Ended September 30,
1998:
Total Operating Revenues........... $743 $9 $657 $(38) $28 $40 $1,439
Segment Net Income (Loss).......... 104 4 109 (34) 3 (6) 180
========== ========== ======== ========= ======== ======== ============
For the Nine Months Ended September 30,
1999:
Total Operating Revenues........... $2,068 $51 $2,302 $ 119 $102 $195 $4,837
Segment Income before 285 23 226 46 21 (11) 590
Extraordinary Item......................
Segment Net Income (Loss)(A)....... (2,919) 23 2,626 46 21 (11) (214)
========== ========== ======== ========= ======== ========= ============
For the Nine Months Ended September 30,
1998:
Total Operating Revenues........... $1,934 $43 $2,198 $75 $84 $126 $4,460
Segment Net Income (Loss).......... 191 22 272 20 5 (17) 493
========== ========== ======== ========= ======== ========= ============
As of September 30, 1999:
Total Assets (A)................... $2,295 $352 $11,898 $1,945 $1,658 $442 $18,590
========== ========== ======== ========= ======== ========= ============
As of December 31, 1998:
Total Assets....................... $7,881 $164 $6,624 $1,809 $1,124 $395 $17,997
========== ========== ======== ========= ======== ========= ============
<FN>
(A) See Note 3. Extraordinary Charge and Other Accounting Impacts of
Deregulation for discussion fo the extraordinary charge recorded by the
Generation segment and the related regulatory asset for securitization
recorded by the T&D segment.
</FN>
Geographic information for PSEG is disclosed below. The foreign investments
and operations noted below were made through Energy Holdings. PSE&G does not
have foreign investments or operations.
Revenues (1) Identifiable Assets
------------------------------------------------- ----------------------------------
Quarter Ended Nine Months Ended
September 30, September 30, September 30, December 31,
---------------------- --------------------- --------------- --------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------------- --------------
United States................. $1,569 $1,410 $4,734 $4,387 $16,266 $16,395
Foreign Countries (2)......... 37 29 103 73 2,324 1,602
--------- --------- --------- --------- --------------- --------------
Total.................... $1,606 $1,439 $4,837 $4,460 $18,590 $17,997
========= ========= ========= ========= =============== ==============
Identifiable investments in foreign countries include:
Argentina $355 $304
Brazil (3) 322 480
Chile and Peru 528 --
Netherlands 608 400
(1) Revenues are attributed to countries based on the locations of the
investments. Global's revenue includes its share of the net income from
joint ventures recorded under the equity method of accounting.
(2) Total assets are net of foreign currency translation adjustment of $(224)
million (pre-tax) as of September 30, 1999 and $(48) million (pre-tax) as
of December 31, 1998.
(3) Amount is net of foreign currency translation adjustment of $(206) million
(pre-tax) as of September 30, 1999 and $(43) million (pre-tax) as of
December 31, 1998.
Note 9. Accounting Matters
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137) to defer the effective date of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) for
one year. Consequently, SFAS 133 will now be effective for all fiscal quarters
beginning after January 1, 2001. The FASB also decided to defer by one year the
transition date regarding embedded derivatives in SFAS 133.
Note 10. Comprehensive Income (Loss)
Comprehensive Income (Loss), Net of Tax:
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
(Millions of Dollars)
Net income (loss)................................... $207 $180 $(214) $493
Foreign currency translation, net of tax (A) ....... (33) (10) (160) (22)
----------- ----------- ------------ ----------
Comprehensive income (loss)......................... $174 $ 170 $(374) $ 471
=========== =========== ============ ==========
<FN>
(A) Net of tax of $(4) million and $(1) million for the quarters ended
September 30, 1999 and 1998, respectively, and $(18) million and $(2)
million for the nine months ended September 30, 1999 and 1998,
respectively.
</FN>
================================================================================
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes to Consolidated Financial Statements of PSEG are incorporated by
reference insofar as they relate to PSE&G and its subsidiaries:
Note 1. Basis of Presentation/Summary of Significant Accounting Policies
Note 2. Regulatory Issues
Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation
Note 4. Regulatory Assets and Liabilities
Note 5. Commitments and Contingent Liabilities
Note 6. Financial Instruments and Risk Management
Note 8. Financial Information by Business Segments
Note 9. Accounting Matters
Note 7. Income Taxes
PSE&G's effective income tax rate is as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 (A) 1998 1999 (A) 1998
----------- --------- ----------- ---------
Federal tax provision at statutory rate.................. 35.0% 35.0% 35.0% 35.0%
New Jersey Corporate Business Tax, net of Federal benefit 5.9% 5.9% 5.9% 5.9%
Other-- net.............................................. 1.3% 0.9% 1.4% 1.4%
----------- --------- ----------- ---------
Effective Income Tax Rate............................ 42.2% 41.8% 42.3% 42.3%
=========== ========= =========== =========
<FN>
(A) Excludes the impact of the extraordinary charge recorded in the second
and third quarters of 1999. The associated income tax benefits resulting
from the extraordinary charge had an effective income tax rate of 30.04%.
The effective rate is below the statutory rate of 40.85% primarily due to
some of the income tax benefits being flowed through to ratepayers in
prior periods under regulated accounting methods. This was partially
offset by the investment tax credit being credited to the benefit of
PSEG's stockholders pursuant to the Summary Order. For further
discussion, see Note 2. Regulatory Issues.
</FN>
Note 10. Comprehensive Income (Loss)
For the quarters and nine months ended September 30, 1999 and 1998, PSE&G's
comprehensive income (loss) equaled the consolidated net income (loss) of PSE&G.
================================================================================
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following are the significant changes in or additions to information
reported in the Public Service Enterprise Group Incorporated (PSEG) 1998 Annual
Report on Form 10-K, the Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 1999 and the Current Reports on Form 8-K filed March
18, 1999, April 26, 1999, July 21, 1999, September 15, 1999 and October 14, 1999
affecting the consolidated financial condition and the results of operations of
PSEG and its subsidiaries. This discussion refers to the Consolidated Financial
Statements (Statements) and related Notes to Consolidated Financial Statements
(Notes) of PSEG and should be read in conjunction with such Statements and
Notes.
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 and risks for PSEG,
Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG
Energy Holdings Inc. (Energy Holdings). At the same time, competitive pressures
are increasing.
Following the passage of the New Jersey Electric Discount and Competition
Act (Energy Competition Act), the New Jersey Board of Public Utilities (BPU)
rendered its summary decision relating to PSE&G's rate unbundling, stranded
costs and restructuring proceedings (Summary Order) and subsequently issued a
Final Decision and Order (Final Order) in these matters. The Energy Competition
Act, the BPU's Summary Order and Final Order and the related BPU proceedings are
hereinafter referred to as the Energy Master Plan Proceedings (Energy Master
Plan Proceedings). These proceedings provide that all New Jersey retail electric
customers may select their electric supplier commencing August 1, 1999 and all
New Jersey retail gas customers may select their gas supplier commencing
December 31, 1999, thus opening the New Jersey energy markets to competition.
In October and November 1999, two Notices of Appeal of each of the Final
Order and of the BPU's order approving PSE&G's petition relating to the proposed
securitization transaction for an irrevocable Bondable Stranded Costs Rate Order
(Finance Order) were filed in the Appellate Division of the New Jersey Superior
Court on behalf of several ratepayers. While PSEG and PSE&G believe that the
appeals are without merit, no assurances can be given at this time as to the
timing or outcome of these proceedings. Accordingly, neither PSEG nor PSE&G are
able to predict whether such appeals will have a material adverse effect on
their financial condition, results of operations or net cash flows.
After analysis of the Summary Order, PSE&G concluded that it no longer met
the requirements of Statement of Financial Accounting Standards (SFAS) 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71), for the
electric generation portion of its business. As a result, PSE&G recorded a net
extraordinary charge to earnings of $790 million, net of tax, in the second
quarter of 1999. In the third quarter of 1999, PSE&G revised the estimates
inherent in the extraordinary charge and recorded an additional $14 million
extraordinary charge. This extraordinary charge reflects the impairment of
PSE&G's electric generation-related assets and related fuel, equipment,
materials and supplies, calculated in accordance with SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). The extraordinary charge also included recording certain liabilities
stemming from the deregulation of PSE&G's electric generation business.
For further discussion of the Energy Master Plan Proceedings including the
appeals, the related extraordinary charge to earnings and securitization, see
Note 2. Regulatory Issues and Note 3. Extraordinary Charge and Other Accounting
Impacts of Deregulation of Notes and Liquidity and Capital Resources.
As set forth in the Final Order, PSE&G will sell its electric
generation-related assets and all associated rights and liabilities to a
separate corporate entity to be owned by PSEG. The Final Order specifies a sale
price of $2.443 billion plus the book value of PSE&G's other generation-related
assets, including materials, supplies and fuel, currently estimated to be
between $200 million and $400 million. To effectuate the sale, PSEG organized
Power, a Delaware limited liability company (LLC), as a wholly owned subsidiary
in June 1999. Power, and its subsidiaries, PSEG Fossil LLC (Fossil) and PSEG
Nuclear LLC (Nuclear), will acquire and manage PSE&G's electric
generation-related assets. Power's subsidiaries, Fossil, Nuclear and PSEG Energy
Resources & Trade LLC (ER&T), are also Delaware LLCs. Assuming a favorable
outcome of the appeals, PSEG and PSE&G expect that the sale of such assets will
occur in the first half of 2000. Prior to the execution of such sale, Power must
obtain approval from the Nuclear Regulatory Commission (NRC) (to transfer
PSE&G's licenses), the New Jersey Department of Environmental Protection (NJDEP)
and the Pennsylvania Public Utility Commission (PAPUC). In September 1999, the
Federal Energy Regulatory Commission (FERC) approved PSE&G's proposed sale of
its generating units to Power and its subsidiaries.
The Final Order requires PSE&G to provide basic generation service (BGS)
for all customers who do not elect a different service provider. Once the
generation-related asset sale to Power is complete, pursuant to a contractual
relationship, Power, through ER&T, will provide PSE&G with the energy and
capacity required to meet its BGS and off-tariff rate agreement (OTRA)
obligations. ER&T will provide such energy and capacity under the BGS contract
rate for the first three years of the transition period, beginning August 1,
1999. BGS will be competitively bid for the fourth year and thereafter. Once the
generation-related asset sale to Power is complete, pursuant to contractual
relationships, ER&T will obtain the energy and capacity to supply PSE&G's BGS
and OTRA requirements from its affiliates, Nuclear and Fossil, supplemented as
necessary with energy purchased in the competitive wholesale electricity market.
Power's earnings and its contribution to PSEG's earnings will be exposed to the
risks of the competitive wholesale electricity market to the extent that Power
has to purchase energy and/or capacity or generate energy to meet its
obligations to supply power to PSE&G at market prices or costs, respectively,
which approach or exceed the BGS or OTRA contract rates (see PJM
Interconnection, LLC and Item 3. Qualitative and Quantitative Disclosures About
Market Risk). ER&T's policy will be to use derivatives to manage this risk
consistent with its business plans and prudent practices. Power will also
participate in the competitive wholesale electricity market for other items such
as energy, capacity and ancillary services.
The Energy Master Plan Proceedings have dramatically reshaped the utility
industry in New Jersey and have directly affected how PSEG will conduct business
and therefore, its financial prospects in the future. PSEG is realigning its
organizational structure to address the competitive environment brought about by
the deregulation of the electric generation industry in New Jersey. PSEG had
been engaged in the competitive energy business for a number of years through
certain of its unregulated subsidiaries and, in 1998, generated approximately
10% of its earnings from these subsidiaries. However, due to the regulatory
changes outlined above, competitive businesses will constitute a much larger
portion of PSEG's activities going forward. It is expected that by July 31,
2003, the end of the transition period under the Energy Master Plan Proceedings,
PSEG's unregulated subsidiaries (comprised of Energy Holdings and Power) will
contribute between 60% and 70% of PSEG's earnings. Additionally, PSEG will be
more dependent on cash flows generated from its unregulated operations for its
capital needs. As the unregulated portion of the business continues to grow,
potential financial risks and rewards will be greater, financial requirements
will change and the volatility of earnings and cash flows will increase.
Going forward, PSEG will continue to pursue its strategies to grow its
family of energy-related businesses. As previously reported, more emphasis will
be placed on finding opportunities for expansion outside of its traditional
utility services and markets. Power's business strategy is to size its fleet of
generation assets to take advantage of market opportunities, while seeking to
increase its value and manage commodity price risk through its wholesale trading
activity. PSE&G's transmission and distribution objective, both gas and
electric, is to provide cost-effective, high quality, reliable service. PSEG has
positioned Energy Holdings as a major part of its planned growth strategy. In
order to achieve this strategy, PSEG Global Inc. (Global) will focus on
generation and distribution investments within targeted high-growth regions of
the worldwide energy market. PSEG Resources Inc. (Resources) will utilize its
market access, industry knowledge and transaction structuring capabilities to
expand its energy-related financial investment portfolio. PSEG Energy
Technologies Inc. (Energy Technologies) will continue to provide heating,
ventilating and air conditioning (HVAC) contracting and other energy-related
services to industrial and commercial customers in the Northeastern and Middle
Atlantic United States. However, Energy Holdings will assess the growth
prospects and opportunities for Energy Technologies' business before committing
additional capital. Energy Technologies plans to grow existing operations and
utilize the recently acquired companies to deliver expanded energy-related
services and products, including gas and electricity, to existing and new
customers. In addition to internal growth, PSEG expects to pursue opportunities
for expansion through business combinations.
To the extent that the discussion that follows reports on business
conducted under full monopoly regulation of the utility business, it must be
understood that such business has evolved due to the deregulation of the
electric generation business. Past results are not an indication of future
business prospects or financial results.
Results of Operations
Earnings (Losses)
---------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
PSE&G, Before Extraordinary Item $203 $215 $527 $478
PSE&G Extraordinary Item (14) -- (804) --
------------ ----------- ------------ ------------
Total PSE&G 189 215 (277) 478
Energy Holdings 18 (35) 63 15
------------ ----------- ------------ ------------
Total PSEG $207 $180 $(214) $493
============ =========== ============ ============
Contribution to Earnings Per Share (Basic and Diluted)
---------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
PSE&G, Before Extraordinary Item $0.93 $0.93 $2.40 $2.07
PSE&G Extraordinary Item (0.06) -- (3.65) --
------------ ----------- ------------ ------------
Total PSE&G 0.87 0.93 (1.25) 2.07
Energy Holdings 0.08 (0.15) 0.28 0.06
------------ ----------- ------------ ------------
Total PSEG $0.95 $0.78 $(0.97) $2.13
============ =========== ============ ============
Basic and diluted earnings per share of PSEG common stock (Common Stock)
were $0.95 for the quarter ended September 30, 1999, representing an increase of
$0.17 per share from the comparable 1998 period. Basic and diluted earnings per
share of Common Stock were $(0.97) for the nine months ended September 30, 1999,
representing a decrease of $3.10 per share from the comparable 1998 period.
In the second quarter of 1999, PSE&G recorded an extraordinary charge to
earnings of $790 million, net of tax, as a result of the BPU's Summary Order in
the Energy Master Plan Proceedings. In the third quarter of 1999, PSE&G revised
the estimates inherent in the extraordinary charge and recorded an additional
$14 million extraordinary charge. For further discussion, see Note 2. Regulatory
Issues and Note 3. Extraordinary Charge and Other Accounting Impacts of
Deregulation of Notes. Excluding that extraordinary charge, basic and diluted
earnings per share of Common Stock were $1.01 for the quarter ended September
30, 1999, representing an increase of $0.23 per share over the comparable 1998
period and $2.68 for the nine months ended September 30, 1999, representing an
increase of $0.55 per share over the comparable 1998 period.
Excluding the extraordinary charge, PSE&G's contribution to earnings per
share of Common Stock for the quarter ended September 30, 1999 was flat with the
comparable 1998 period. Although PSE&G's contribution to earnings per share was
flat, PSE&G's net income was down by $12 million or $0.05 per share of Common
Stock as compared to the same period in 1998. The decrease in net income for the
quarter ended September 30, 1999 was offset by the impact of the stock
repurchase program with fewer shares outstanding in 1999 as compared to 1998.
The decrease in net income was due to decreased electric revenues due to the 5%
rate reduction, beginning August 1, 1999, associated with the Energy Master Plan
Proceedings, and higher operating and maintenance expenses attributable to
several factors, including restoration work required in the wake of Tropical
Storm Floyd and the flooding and damage it caused, a change in the
capitalization policy for PSE&G's electric generation business and the effects
of depreciation policy changes stemming from the discontinuation of SFAS 71 (see
Note 1. Basis of Presentation/Summary of Significant Accounting Policies of
Notes). This decrease was partially offset by an improvement in electric sales
volumes due to hot summer weather in 1999 and lower generation-related
depreciation expenses due to the lower net book value of generation-related
assets as a result of the SFAS 121 write-down.
Excluding the extraordinary charge, PSE&G's contribution to earnings per
share of Common Stock for the nine months ended September 30, 1999 increased
$0.33 from the comparable 1998 period, including $0.12 as a result of PSEG's
stock repurchase program. The increase for the nine months ended September 30,
1999 was primarily due to increased sales of gas and electricity resulting from
favorable weather conditions in 1999 augmented by positive economic factors in
New Jersey and profits realized from wholesale energy activities. In addition,
generation-related depreciation expenses were lower as a result of the
impairment write-down, partially offset by a change in the capitalization policy
for PSE&G's electric generation business and the effects of depreciation policy
changes stemming from the discontinuation of SFAS 71. The increase in earnings
was also partially offset by the 5% rate reduction discussed above and higher
operating and maintenance expenses, including higher transmission, distribution
and wholesale energy costs, than those incurred in the nine months ended
September 30, 1998.
Energy Holdings' contribution to earnings per share of Common Stock for the
quarter and nine months ended September 30, 1999 increased $0.23 and $0.22
including $0.01 as a result of PSEG's stock repurchase program, respectively,
from the comparable 1998 periods, primarily due to the better overall
performance of Resources, Global and Energy Technologies. The improvements were
attributable largely to Resources which benefited from an upturn in the equities
markets as compared to the same period in 1998. In addition, Energy Holdings'
results reflect Global's gain from the sale of its interest in a co-generation
facility in Newark, New Jersey, partially offset by write-downs of other
investments in Global's portfolio.
As a result of PSEG's stock repurchase program which began in September
1998, earnings per share of Common Stock for the quarter and nine months ended
September 30, 1999 increased $0.05 and $0.13, respectively, from the comparable
1998 periods. As of September 30, 1999, approximately 13.2 million shares had
been repurchased at a cost of approximately $516 million under this program.
PSE&G -- Revenues
The presentation of revenues on the Consolidated Statements of Income has
changed effective August 1, 1999, due to the change in regulation as required by
the Final Order. PSE&G's generation business has been deregulated and, starting
August 1, 1999, earns revenues by providing the energy and capacity necessary to
meet PSE&G's BGS and OTRA obligations as well as by a variety of wholesale
energy and capacity sales and other ancillary services. PSE&G's transmission and
distribution businesses remain regulated and will continue to earn revenues
based on its tariffs under which it provides transmission and distribution
services for its residential, commercial and industrial customers in New Jersey.
The rates charged for transmission and distribution are regulated by FERC and
the BPU, respectively. Revenues are also generated from a variety of other
activities such as sundry sales, wholesale transmission services and other
miscellaneous services. For more information on the Energy Master Plan
Proceedings, see Note 1. Basis of Presentation/Summary of Significant Accounting
Policies and Note 2. Regulatory Issues of Notes. Because historical information
is not available for the Electric Generation and Electric Transmission and
Distribution Revenues, variances in Electric Revenues will be discussed in the
aggregate. For estimates of historical Electric Generation and Electric
Transmission and Distribution Revenues, see Note 8. Financial Information by
Business Segments of Notes.
Certain of the below listed year to year variances did not impact earnings
as there was an offsetting variance in expense. To the extent fuel revenue and
expense flowed through the Electric Levelized Energy Adjustment Clause (LEAC)
through July 31, 1999, the Levelized Gas Adjustment Clause (LGAC), the Societal
Benefits Clause (SBC) or the non-utility generation market transition charge
(NTC) mechanisms, variances in certain revenues and expenses offset and thus had
no direct effect on earnings. These include base fuel revenues through July 31,
1999, demand side management (DSM) revenue and Remediation Adjustment Charge
(RAC) revenue. On August 1, 1999, the LEAC mechanism was eliminated as a result
of the Energy Master Plan Proceedings. This is likely to increase earnings
volatility since PSE&G now bears the full risks and rewards of changes in
nuclear and fossil generating fuel costs and replacement power costs. See Note
2. Regulatory Issues and Note 4. Regulatory Assets and Liabilities of Notes for
a discussion of LEAC, LGAC, SBC, NTC, RAC and DSM and their status under the
Energy Master Plan Proceedings.
Electric
Revenues increased $32 million or 3% and $136 million or 4% for the quarter
and nine months ended September 30, 1999 from the comparable periods in 1998,
respectively, primarily due to favorable weather conditions in 1999 augmented by
positive economic factors in New Jersey. These factors increased both generation
and transmission and distribution revenues; however, the increase in generation
revenues was partially offset by the 5% rate reduction, discussed below. The
increase in the nine months ended September 30, 1999 was also due to profits
realized from wholesale energy activities being higher than in the comparable
1998 period. Also, higher DSM revenues in the nine months ended September 30,
1999 than in the comparable 1998 period contributed to increased distribution
revenues.
On August 18, 1999, the BPU approved PSE&G's compliance tariff filing
reflecting the 5% decrease in rates. On August 1, 1999, PSE&G had implemented
this rate reduction previously approved on a provisional basis. In 1999, this
rate reduction is expected to decrease generation revenues by approximately $80
million. For the schedule of future rate reductions mandated by the BPU, see
Note 2. Regulatory Issues of Notes. Additionally, the probable loss of
generation customers through the opening of competition could reduce future
revenues. However, this could create the opportunity for the generation business
to sell available energy and capacity into the wholesale market. The degree to
which generation revenues will be impacted will depend on the amount by which
prices to wholesale customers vary from prices under the BGS contract. Further,
although the probable loss of retail customers will not impact total
transmission revenues, the mix of revenues from retail versus wholesale
customers, including third party suppliers, will change.
Gas
Revenues increased $17 million or 9% and $110 million or 10% for the
quarter and nine months ended September 30, 1999 from the comparable periods in
1998, respectively. The increases were primarily due to increased revenues from
gas service contracts and higher sales to large commercial and industrial
customers than in the comparable periods in 1998. Additionally, favorable
weather in the first and second quarters of 1999 contributed to the increases.
The potential loss of residential customers due to the opening of competition in
2000 could reduce future revenues.
PSE&G -- Expenses
Electric Energy Costs
Electric Energy Costs increased $36 million or 13% and $36 million or 5%
for the quarter and nine months ended September 30, 1999 from the comparable
1998 periods, respectively. The increases were primarily due to an increase in
electric sales volumes due to hot summer weather in 1999. Beginning in August
1999, higher prices for power purchases also contributed to the increase.
Due to the elimination of the LEAC on August 1, 1999, these historical
trends are not to be considered an indication of future Electric Energy Costs.
Given the elimination of the LEAC, the lifting of the requirements that electric
energy offered for sale in the PJM Interconnection, LLC (PJM) not exceed the
variable cost of producing such energy and that such transactions are now capped
at $1,000 per megawatt-hour (MWH) (see Competitive Environment), the absence of
a PJM price cap in situations involving emergency purchases and the potential
for plant outages; price movements could have a material impact on PSEG's and
PSE&G's financial condition, results of operations or net cash flows. For a
discussion of market risks, see Item 3. Qualitative and Quantitative Disclosures
About Market Risk. Additionally, it is expected that the probable loss of
customers through the opening of competition could reduce future expenses.
Gas Costs
Gas Costs increased $14 million or 11% for the quarter ended September 30,
1999 from the comparable 1998 period due to higher sales to large commercial and
industrial customers than in the comparable 1998 period. Gas Costs for the nine
months ended September 30, 1999 increased $43 million or 6% primarily due to
increased sales of gas resulting from colder weather in the first and second
quarters of 1999. It is expected that the potential loss of residential
customers due to the opening of competition in 2000 could reduce future
expenses.
Operation and Maintenance
Operation and Maintenance expense increased $58 million or 18% and $150
million or 15% for the quarter and nine months ended September 30, 1999 from the
comparable 1998 periods, respectively. The increase was primarily due to higher
transmission and distribution costs, including higher material and outside
services in 1999, attributable to several factors, including restoration work
required in the wake of Tropical Storm Floyd and higher information technology
costs, including costs related to Year 2000 readiness. The change in the
capitalization policy for PSE&G's electric generation business caused higher
Operation and Maintenance expense as did higher costs related to wholesale power
activities. Also contributing to the increase were higher fringe benefits and
higher costs associated with the preparation for deregulation. Additionally, in
the nine months ended September 30, 1999, there were higher Other Post
Retirement Benefits (OPEB) costs incurred and higher DSM recovery of previously
deferred expenses.
With an increasingly competitive energy market as an outcome of the Energy
Master Plan Proceedings and energy industry restructuring, the composition and
level of Operation and Maintenance expense is likely to change. Additionally,
the change in capitalization policy will likely yield a material increase in the
Operation and Maintenance expenses associated with the electric generation
business (see Note 1. Basis of Presentation/Summary of Significant Accounting
Policies of Notes). This increase in Operation and Maintenance expense is not
expected to exceed $85 million per year and will be offset by lower depreciation
expense in the future due to the lower level of expenditures capitalized to
electric generation assets.
Depreciation and Amortization
Depreciation and Amortization expense decreased $40 million or 25% and $73
million or 15% for the quarter and nine months ended September 30, 1999 from the
comparable 1998 periods, respectively. The decreases were due to lower net book
value balances of PSE&G's generation-related assets which were reduced as of
April 1, 1999 as a result of the impairment calculated and recorded pursuant to
SFAS 121. These decreases were partially offset by higher depreciation rates for
generation-related assets used in the second and third quarters of 1999 due to
the change in depreciation policy for generation-related assets (see Note 1.
Basis of Presentation/Summary of Significant Accounting Policies of Notes). The
decreases were partially offset by higher depreciation expense related to
capital additions to the transmission and distribution business.
Despite the higher depreciation rates for generation-related assets, the
net decrease in generation-related depreciation expense will continue due to the
reduced asset balances. Such reductions are currently anticipated to approximate
$230 million per year. Additionally, beginning in 2000, electric distribution
asset-related depreciation will be further reduced due to the amortization of
the excess electric distribution depreciation reserve over the period from
January 1, 2000 to July 31, 2003. See Note 4. Regulatory Assets and Liabilities
of Notes for a discussion of the amortization schedule. Once the securitization
transaction is complete, the regulatory asset recorded for PSE&G's stranded
costs will be amortized with such amortization expense partially offsetting
these decreases.
Income Taxes
Income Taxes decreased $7 million or 4% and increased $38 million or 11%
for the quarter and nine months ended September 30, 1999 from the comparable
1998 periods, respectively. The increase in the nine months ended September 30,
1999 is primarily due to higher pre-tax operating income.
Energy Holdings -- Earnings (Losses)
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Millions of Dollars)
Earnings Before Interest, Taxes and
Preferred Dividends:
Resources $20 $(40) $112 $67
Global 44 21 85 55
Energy Technologies (1) (5) (6) (12)
----------- ----------- ----------- -----------
Sub-total 63 (24) 191 110
Interest, Taxes and Preferred Dividends 45 11 128 95
----------- ----------- ----------- -----------
Earnings (Losses) $18 $(35) $63 $15
=========== =========== =========== ===========
Energy Holdings' earnings (losses) for the quarter ended September 30, 1999
and 1998 were $18 million and $(35) million, respectively. Energy Holdings'
earnings for the nine months ended September 30, 1999 and 1998 were $63 million
and $15 million, respectively. The increases in Energy Holdings' earnings were
primarily due to the better overall performance of Resources, Global and Energy
Technologies. The improvements were attributable largely to Resources which
benefited from an upturn in the equities markets as compared to the same period
in 1998. In addition, Energy Holdings' results reflect Global's gain from the
sale of its interest in a Newark, New Jersey co-generation facility, partially
offset by write-downs on other investments in Global's portfolio.
Additionally, higher earnings for the nine months ended September 30, 1999
were primarily due to investment gains in Resources' financial investment
portfolio and income from new capital leases. Improved revenue at Global was
partially offset by higher expenses associated with project development. Energy
Technologies' losses narrowed due to higher revenues from recent acquisition
activities partially offset by higher operating expenses.
Energy Holdings -- Revenues
Revenues increased $118 million to $148 million from $30 million for the
quarter ended September 30, 1999 as compared to the same period in 1998. The
increase was primarily due to a $60 million increase in revenues at Resources
primarily due to improved market conditions benefiting Resources' financial
investments and a $49 million increase in revenues at Energy Technologies due to
the addition of revenues from acquisitions in 1999.
Revenues increased $131 million to $416 million from $285 million for the
nine months ended September 30, 1999 as compared to the same period in 1998. The
increase was due to an increase of $44 million at Resources due to higher income
from financial investments and higher income from new capital lease investments,
a $71 million increase in revenues at Energy Technologies due to the addition of
revenues from acquisitions in 1999 and a $17 million increase in revenues at
Global primarily due to improvement in revenues from the electric distribution
companies in Brazil and Argentina as well as the addition of revenues from the
energy distribution companies in Chile and Peru acquired in June 1999. Global's
revenue includes its share of the net income from joint ventures recorded under
the equity method of accounting.
Global is a 50% partner in six generating facilities in California.
Beginning in 2000, revenue from these facilities will be reduced due to lower
energy prices to be paid by the purchaser under the energy contracts associated
with the plants. Energy prices under such contracts will be reduced from the
current fixed rates to short-run avoided cost (SRAC) energy prices approved by
the California Public Utilities Commission (CPUC). The CPUC is considering the
issue of transitioning SRAC energy payments under contracts of this type to the
clearing price of the California Power Exchange (PX). Although the CPUC has not
yet initiated a proceeding, Global anticipates that eventually energy prices
under these contracts will be based upon the PX clearing price. Two-thirds of
the primary California facilities in which Global has an interest will change
from fixed energy pricing by December 31, 2000, with the remainder changing in
2001. Both the SRAC and the PX energy prices are currently substantially lower
than the fixed energy prices charged in these contracts. Based on current SRAC
and PX energy prices, Global's share of annual income before income taxes from
these facilities is projected to decrease by approximately $30 million to $35
million when all such contracts reflect the lower energy pricing. Actual
revenues over the remaining contract terms, which begin to expire in 2011, will
depend on a number of factors, including the actual energy prices in effect in
the applicable future periods. Global's projects in operation, construction and
development are expected to offset this revenue shortfall; however, no
assurances of that result can be given.
Energy Holdings -- Expenses
Operation and Maintenance
Operation and Maintenance expense increased $52 million to $91 million from
$39 million for the quarter ended September 30, 1999 as compared to the same
period in 1998. Operation and Maintenance expense increased $69 million to $190
million from $121 million for the nine months ended September 30, 1999 as
compared to the same period in 1998. The increases were primarily due to the
addition of expenses from the entities acquired by Energy Technologies and to a
lesser degree, by higher development expenses at Global.
Interest Expense and Preferred Dividends
Interest Expense and Preferred Dividends increased $6 million to $31
million from $25 million for the quarter ended September 30, 1999 as compared to
the same period in 1998. Interest Expense and Preferred Dividends increased $5
million to $84 million from $79 million for the nine months ended September 30,
1999 as compared to the same period in 1998. The increases were primarily due to
financing 1999 investment and acquisition activity.
Income Taxes
Income Taxes increased $27 million to $14 million from $(13) million for
the quarter ended September 30, 1999 as compared to the same period in 1998.
Income Taxes increased $28 million to $44 million from $16 million for the nine
months ended September 30, 1999 as compared to the same period in 1998. The
increases were primarily due to higher pre-tax income for the quarter ended
September 30, 1999.
Energy Holdings -- Other Income (Loss)
Other Income (Loss) increased $20 million to $21 million from $1 million
for the quarter ended September 30, 1999 as compared to the same period in 1998.
Other Income increased $22 million to $28 million from $6 million for the nine
months ended September 30, 1999 as compared to the same period in 1998. The
increases were primarily due to a gain on the sale of Global's interest in a
co-generation facility in Newark, New Jersey, as discussed above, partially
offset by write-downs on other investments, as discussed below.
In the third quarter of 1999, Global completed a comprehensive review of
its existing assets and development activities focusing on rationalizing the
portfolio to ensure efficient capital deployment. As part of this review, Global
assessed the present carrying value of its equity investments in such
activities. Global's management has decided that it will not commit additional
resources to its investments in Thailand and the Philippines and will focus its
current Asian development activities in China. As a result, Global recorded an
$8 million write-down, net of tax, in the third quarter of 1999 to adjust the
carrying value of these assets to net realizable value. In addition, the
projected substantial decline in revenue, discussed above, related to energy
contracts for six generation facilities in California resulted in a $19 million
write-down, net of tax, of Global's equity investment in such facilities in the
third quarter of 1999.
PSEG -- Preferred Securities Dividend Requirements of Subsidiaries
Preferred Securities Dividend Requirements increased $1 million or 5% and
$13 million or 23% for the quarter and nine months ended September 30, 1999 as
compared to the same periods in 1998. The increase was due to the issuance of
trust preferred securities by three special purpose statutory business trusts
controlled by PSEG, Enterprise Capital Trust I, II and III, in January, June and
July 1998 of $525 million.
Liquidity and Capital Resources
PSEG and PSE&G
PSEG is a holding company and, as such, has no operations of its own. The
following discussion of PSEG's liquidity and capital resources is on a
consolidated basis, noting the uses and contributions of PSEG's two direct
operating subsidiaries, PSE&G and Energy Holdings.
PSEG and PSE&G believe that the deregulation of the utility industry will
impact the sources and uses of cash going forward. Also, as a result of
deregulation and related corporate structure reorganizations, the capital
structure of PSEG will likely change with a likely increase in debt levels. As
of September 30, 1999, PSEG's capital structure consisted of 40.7% common
equity, 47.2% long-term debt and 12.1% preferred stock and other preferred
securities. As of September 30, 1999, PSE&G's capital structure consisted of
48.7% common equity, 42.4% long-term debt and 8.9% preferred stock and other
preferred securities. The BPU, in the Final Order, required that the use of the
net proceeds of securitization shall be done in a manner that will not
substantially alter PSE&G's overall capital structure.
On September 17, 1999, the BPU issued its Finance Order which authorized,
among other things, the imposition of a non-bypassable transition bond charge on
PSE&G's customers; the sale of PSE&G's property right in such charge created by
the Energy Competition Act to a bankruptcy-remote financing entity; the issuance
and sale of $2.525 billion of transition bonds by such entity in payment
therefor, including an estimated $125 million of transaction costs; and the
application by PSE&G of the transition bond proceeds to retire outstanding debt
and/or equity. Assuming a favorable outcome of the appeals, PSEG and PSE&G
expect such sale of transition bonds and receipt of proceeds therefrom will
occur in the first half of 2000.
For a discussion of the pending appeals of the Final Order and the Finance
Order, see Note 2. Regulatory Issues of Notes.
Both the right of PSE&G to receive the bondable transition charge pursuant
to the securitization transaction and the proceeds from the sale of its
generation-related assets to Power are property subject to the lien of PSE&G's
First and Refunding Mortgage (Mortgage). All such property will be released from
the lien of the Mortgage at the time of sale. In accordance with the provisions
of the Mortgage, the net proceeds from the sale of such released property will
be deposited with the Trustee.
As previously reported, the Mortgage authorizes PSE&G to exercise one or
more of the following options as to the application of proceeds of such released
property, at its sole discretion:
1. Withdraw funds for corporate use by utilizing additions and
improvements. (Option 1)
2. Direct the Trustee to invest the proceeds in U.S. Government
Securities. (Option 2)
3. Direct the Trustee to purchase its Mortgage Bonds at the lowest prices
obtainable, at or below par value. If the Trustee is unable to
purchase sufficient Mortgage Bonds to exhaust such proceeds deposited
with it, the balance may be applied on a pro rata basis towards the
redemption of eligible series of Mortgage Bonds outstanding at par.
(Option 3)
At September 30, 1999, PSE&G had a total of $3.9 billion of Mortgage Bonds
outstanding, of which $3.105 billion are taxable registered Mortgage Bonds
subject to special redemption provisions, outlined in Option 3 (Redeemable
Bonds). At October 31, 1999, PSE&G had a total of $3.729 billion of Mortgage
Bonds outstanding, of which $2.934 billion are Redeemable Bonds (see External
Financings). $624 million of these Redeemable Bonds are scheduled to mature
within twelve months. $780 million of the Mortgage Bonds outstanding are
tax-exempt Pollution Control Bonds and $15 million are two series of taxable
coupon Mortgage Bonds due 2037 (Coupon Bonds). Both the Pollution Control Bonds
and the Coupon Bonds are not subject to Option 3.
PSE&G has not yet made a final decision as to the amount and the manner in
which it will retire or redeem its Mortgage Bonds. Such a decision will be made
on or about the time the proceeds from securitization and the sale of the
generation-related assets to Power are deposited with the Trustee, on the basis
of market conditions and other factors existing at that time. However, based on
current information, a likely utilization of the options available to PSE&G, as
noted above, could be as follows:
1. Withdraw $2.4 billion of net proceeds from securitization under Option
1, above. These proceeds would be used to:
(a) Tender for all Coupon Bonds;
(b) Redeem $126.5 million of Pollution Control Bonds now redeemable;
(c) Retire up to an additional $300 million of Redeemable Bonds
through various means, such as maturities, open market purchases
and make-whole calls;
(d) Reduce PSE&G's short-term debt; and
(e) Reduce PSE&G common and/or preferred equity with the balance of
proceeds, if any.
2. Apply proceeds ($2.4 billion to $2.8 billion) from the
generation-related asset sale to Power under Option 3 against any
remaining taxable Mortgage Bonds outstanding.
As previously reported, in anticipation of securitization, PSEG's Board of
Directors authorized the repurchase of up to an aggregate of 20 million shares
of Common Stock in the open market. The repurchased shares have been held as
treasury stock. At September 30, 1999, PSEG had repurchased approximately 13.2
million shares of Common Stock at a cost of approximately $516 million, under
these authorizations. As of October 31, 1999, PSEG had repurchased approximately
13.6 million shares of Common Stock at a cost of approximately $532 million.
Market conditions and the availability of alternative investments will dictate
if and when more shares of Common Stock will be repurchased under this
authorization.
Going forward, cash generated from PSE&G's regulated business is expected
to provide the majority of the funds for PSE&G's regulated business needs.
Power's capital needs will be dictated by its strategy to size its generation
fleet, and will likely require cash generated from external financings, equity
infusions from PSEG and cash generated from operations to support its
anticipated growth. Energy Holdings' growth will be funded through external
financings, equity infusions from PSEG and cash generated from operations.
Dividend payments on Common Stock were $1.62 per share and totaled
approximately $357 million and $376 million for the nine months ended September
30, 1999 and 1998, respectively. Amounts and dates of such dividends on Common
Stock as may be declared in the future will necessarily be dependent upon PSEG's
future earnings, cash flows, financial requirements, the receipt of dividend
payments from its subsidiaries and other factors. Since 1986, PSE&G has made
regular cash payments to PSEG in the form of dividends on outstanding shares of
PSE&G's common stock. PSEG has not increased its dividend rates in seven years
in order to retain additional capital for reinvestment and to reduce its payout
ratio. PSE&G paid common stock dividends of $510 million and $376 million to
PSEG during the nine months ended September 30, 1999 and 1998, respectively.
These amounts were used to fund PSEG's Common Stock dividends, and in 1999, to
support a portion of PSEG's stock repurchase program. Based on its analysis of
the Final Order, PSEG believes that its dividend payments can be maintained at
their current level (see Note 2. Regulatory Issues of Notes). In the future,
PSEG expects to fund its dividend payments through cash generated by the
operations of PSE&G and Power. Note that due to the competitive environment in
which Power will operate and due to reduced revenues at PSE&G resulting from
mandated rate reductions, such dividend payments will be at a greater risk. Due
to the growth in Energy Holdings investment activities, no dividends on Energy
Holdings' common stock were paid in the nine months ended September 30, 1999 and
1998.
PSEG and PSE&G have each issued Deferrable Interest Subordinated Debentures
in connection with the issuance of their respective tax deductible preferred
securities. If, and for as long as, payments on those Deferrable Interest
Subordinated Debentures have been deferred, or PSEG or PSE&G has defaulted on
the applicable indenture related thereto or its guarantee thereof, neither PSEG
nor PSE&G may pay any dividends on its common or preferred stock. Currently,
there has been no deferral nor default.
As a result of the 1992 focused audit of PSEG's non-utility businesses
(Focused Audit), the BPU approved a plan which, among other things, provides
that: (1) PSEG will not permit Energy Holdings' non-utility investments to
exceed 20% of PSEG's consolidated assets without prior notice to the BPU (such
investments at September 30, 1999 were approximately 21% of PSEG's consolidated
assets); (2) the PSE&G Board of Directors will provide an annual certification
that the business and financing plans of Energy Holdings will not adversely
affect PSE&G; (3) PSEG will (a) limit debt supported by the minimum net worth
maintenance agreement between PSEG and PSEG Capital Corporation (PSEG Capital)
to $650 million and (b) make a good-faith effort to eliminate such support over
a six to ten year period from April 1993; and (4) Energy Holdings will pay PSE&G
an affiliation fee of up to $2 million a year to be applied by PSE&G to reduce
utility rates. PSEG and Energy Holdings and its subsidiaries continue to
reimburse PSE&G for the costs of all services provided to them by employees of
PSE&G.
Capital resources and capital requirements will be affected by the outcome
of the Energy Master Plan Proceedings and the requirements of the Focused Audit.
As a result of the final outcome and the accounting impacts resulting from the
deregulation of the generation of electricity and the unbundling of the utility
business in New Jersey, PSEG and PSE&G do not believe that the Focused Audit
provision requiring notification of the BPU if PSEG's non-utility assets exceed
20% of its consolidated assets remains appropriate and believe that
modifications will be required. The Final Order addressed the Focused Audit,
noted that PSEG's non-regulated assets would likely exceed 20% of total PSEG
assets once the utility's generating assets were sold to a non-regulated
subsidiary and directed PSE&G to file a petition with the BPU to maintain the
existing regulatory parameters or to propose modifications to the Focused Audit
order no later than the end of the first quarter of 2000 (see Note 2. Regulatory
Issues of Notes). It was also recognized in the Final Order that, due to
significant changes in the industry and, in particular, PSEG's corporate
structure as a result of the Final Order, modifications to or relief from the
Focused Audit might be warranted.
Regulatory oversight by the BPU to ensure that there is no harm to utility
ratepayers from PSEG's non-utility investments is expected to continue. PSEG and
PSE&G believe that these issues will be satisfactorily resolved, although no
assurances can be given. In addition, if PSEG were no longer to be exempt under
the Public Utility Holding Company Act (PUHCA), PSEG and its subsidiaries would
be subject to additional regulation by the SEC with respect to financing and
investing activities, including the amount and type of non-utility investments.
Inability to achieve satisfactory resolution of these matters could impact the
future relative size and financing activities of Energy Holdings and Power and
accordingly, their future prospects. Consequently, this could have a material
adverse impact on PSEG's and PSE&G's financial condition, results of operations
or net cash flows. For discussion of the Energy Master Plan Proceedings, see
Note 2. Regulatory Issues of Notes.
Energy Holdings
As noted above, it is intended that Global and Resources provide earnings
and cash flow for long-term growth for Energy Holdings and PSEG. Resources'
investments are designed to produce immediate earnings and cash flow that enable
Global and Energy Technologies to focus on longer investment horizons.
Energy Holdings plans to continue the growth of Global and Resources
through further investments made by these subsidiaries. Energy Holdings will
assess the growth prospects and opportunities for Energy Technologies' business
before committing substantial amounts of additional capital. Investing activity
in 1999 will be subject to periodic review and revision and may vary depending
on the opportunities presented. During the next five years, Energy Holdings'
will need significant capital to fund its planned growth. Factors affecting
actual expenditures and investments include availability of capital and suitable
investment opportunities, market volatility and local economic trends. The
anticipated sources of funds for such growth opportunities are additional equity
from PSEG, cash flow from operations and external financings. A significant
portion of Global's growth is expected to occur internationally due to the
current and anticipated growth in electric capacity required in certain regions
of the world. Resources will continue its focus on investments related to energy
infrastructure. Energy Technologies is expected to expand upon the
energy-related services currently being provided to industrial and commercial
customers.
In June 1999, PSEG contributed approximately $200 million of additional
equity to Energy Holdings, which was applied by Energy Holdings to pay down
short-term debt that was used to acquire its interest in the Chilean and
Peruvian distribution companies.
For a discussion of the source of Energy Holdings' funds, see External
Financings. Over the next several years, Energy Holdings and its subsidiaries
will be required to refinance their maturing debt and provide additional debt
and equity financing for growth. 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 PSEG's and
Energy Holdings' financial condition, results of operations or net cash flows.
As of September 30, 1999 and 1998, Energy Holdings' embedded cost of debt was
approximately 6.99% and 7.75%, respectively. Energy Holdings' embedded cost of
debt increased to approximately 7.75% as of October 31, 1999 (see External
Financings).
Capital Requirements
PSEG
PSEG has entered into contracts to purchase a number of combustion turbines
to expand capacity at a number of generating sites (see Note 5. Commitments and
Contingent Liabilities of Notes).
PSE&G (including Power)
PSE&G has substantial commitments as part of its ongoing construction
program. PSE&G's construction program is continuously reviewed and periodically
revised as a result of changes in economic conditions, revised load forecasts,
scheduled retirement dates of existing facilities, business strategies, site
changes, cost escalations under construction contracts, requirements of
regulatory authorities and laws, the timing of and amount of electric and gas
transmission and/or distribution rate changes and the ability of PSE&G to raise
necessary capital.
In concert with separating the electric generation portion of the
business from PSE&G's regulated transmission and distribution businesses and
with reviewing PSE&G's strategic initiatives, PSEG is in the process of
assessing the construction requirements of its businesses. This will include a
breakdown of anticipated construction expenditures between the generation
business and the transmission and distribution businesses. For discussion of the
Energy Master Plan Proceedings and their impacts, see Note 2. Regulatory Issues
of Notes.
On October 6, 1999, Power announced an agreement with Niagara Mohawk Power
Corporation (Niagara Mohawk), a New York State utility, to purchase its 400
megawatt oil (MW) and gas-fired electric generating station in Albany, New York
(Albany Steam Station) for $47.5 million. On September 30, 1999, Power announced
that it has signed an agreement to acquire all of Conectiv's interests in the
Salem Nuclear Generating Station (Salem) and the Hope Creek Nuclear Generating
Station (Hope Creek) and half of Conectiv's interest in the Peach Bottom Atomic
Power Station (Peach Bottom), for an aggregate purchase price of $15.4 million
plus the net book value of nuclear fuel at closing. For further discussion, see
Note 5. Commitments and Contingent Liabilities of Notes.
For the nine months ended September 30, 1999, PSE&G had plant additions,
including capitalized interest and Allowance for Funds Used During Construction
(AFDC), of $285 million, an $83 million decrease from the corresponding 1998
period. This decrease is primarily due to PSE&G's capitalization policy change
for the electric generation portion of its business. See Note 1. Basis of
Presentation/Summary of Significant Accounting Policies of Notes for further
discussion regarding the capitalization policy change.
PSE&G has attempted to minimize the uncertainty associated with the timing
of the final allocation of nitrogen oxide (NOx) allowances by purchasing
allowances, upgrading control technologies and estimating the expected
allocation with as much precision as is practicable using available data (see
Air Pollution discussion of Note 5. Commitments and Contingent Liabilities of
Notes). According to PSE&G's present analysis, the potential costs for
purchasing additional NOx budget allowances should not exceed a total of $10
million through December 31, 2002. Expenditures associated with installing
control technology could result in an additional $72 million. However, PSE&G is
currently analyzing alternatives which could preclude the necessity of capital
improvements.
PSE&G's regulated business expects to be able to internally generate the
majority of its construction and capital requirements over the next five years,
assuming adequate and timely recovery of costs, as to which no assurances can be
given, with the balance to be provided by issuance of debt to replace
maturities. The unregulated generation portion of PSE&G's current operations
(i.e., Power) will likely be required to finance externally based on its growth
strategy.
Energy Holdings
From December 31, 1998 through September 30, 1999, Energy Holdings'
subsidiaries made investments totaling approximately $931 million. These
investments include acquisitions and other investments made by Global, Resources
and Energy Technologies, discussed below. Projected investment expenditures for
the fourth quarter of 1999 are approximately $250 million, comprised of
investments in generation and distribution facilities and projects and leveraged
lease transactions. Energy Holdings has approximately $35 million of debt
principal payments due in November 1999 which are expected to be refinanced or
funded through existing credit facilities and operating cash flow.
Global
In October 1999, Global closed on the acquisition of a 70% interest in a
power project development company in Italy specializing in renewable energy. The
company currently has approximately 550 MW of power projects either in
development or under construction consisting of biomass, hydro and gas powered
production. Global's acquisition and equity investment requirements over the
next two years are expected to be approximately $80 million.
In August 1999, Global and its partners closed project financing for a 487
MW gas-fired combined-cycle electric generating facility in Rades, Tunisia.
Construction of the facility began in August 1999 and is expected to be
completed in the Summer of 2001 at a total cost of approximately $261 million.
Upon completion, the facility is expected to qualify as a foreign utility
company (FUCO). Global's equity investment for its 35% interest is expected to
be approximately $27 million including contingencies.
In August 1999, Global sold its 50% partnership interest in a 137 MW
gas-fired combined-cycle co-generation facility in Newark, New Jersey and
received net cash proceeds of approximately $70 million. Global recognized an
after-tax gain of approximately $40 million as a result of this transaction.
In June 1999, Global and a partner acquired 90% of a Chilean distribution
company, which at the time owned a 37% controlling interest in a distribution
company in Peru, together providing electric and gas service to approximately
one million customers. The acquisition was made in a 50/50 joint venture
arrangement. Global's equity investment was approximately $268 million including
fees and closing costs. In addition, Global's portion of the acquisition was
financed with $160 million of debt that is non-recourse to Global, Energy
Holdings and PSEG, which is consolidated on the Global balance sheet. In
September 1999, Global and its partner purchased an additional interest in the
Peruvian distribution company. Global's investment in connection with this
purchase was approximately $108 million, resulting in a total combined ownership
share of 84.5% in the Peruvian distribution company.
Also in June 1999, Global and a partner closed the project financing for an
845 MW gas-fired combined-cycle electric generating facility to be constructed
in San Nicolas, Argentina. The new facility will be adjacent to an existing 650
MW facility also owned by Global and its partner. Construction began in August
1999 and is expected to be completed by 2001 at a total cost of approximately
$448 million. Global's equity investment for its 33% interest, including
contingencies, is expected to be approximately $86 million.
In May 1999, Global acquired a 63% equity interest in a company which is
developing a 525 MW coal-fired electric generating facility to be constructed in
North Chennai, India. Upon scheduled completion in 2003, Global will be the
operator of the plant. The total project cost is expected to be approximately
$633 million, of which Global's maximum equity investment for its 63% interest,
including contingencies, is expected to be approximately $180 million. Financial
closure is expected in the Fall of 1999 with construction to begin by the end of
1999.
In April 1999, Global and a partner entered into a joint venture agreement
to develop, construct and operate a 1,000 MW gas-fired combined-cycle electric
generating facility in Guadalupe County in south central Texas. 500 MW of this
facility is expected to be operational in late 2000 and is expected to qualify
as an EWG. Global's maximum equity investment for its 50% interest is expected
to be approximately $193 million including loans and guarantees. In October
1999, Global closed on a $312 million non-recourse project financing, consisting
of a $260 million term loan and $52 million in letter of credit facilities for
the Guadalupe facility. At the completion of construction (approximately fifteen
months), the loan will convert to a five year term loan.
Also in April 1999, Global and a partner announced the formation of a joint
venture to construct and operate three gas-fired electric generating facilities
with total installed capacity of 200 MW and associated distribution systems to
serve, under contract, industrial customers in Venezuela. Global expects the
first two facilities, which are in construction, to be operational in late 1999
with the third facility in service in early 2001. The total cost of these
facilities is expected to be approximately $140 million and Global's equity
investment, including contingencies, for its 50% interest, is expected to be
approximately $70 million.
Resources
In 1999, Resources, through its investment in a leveraged buyout (LBO)
fund, has received cash distributions of $99 million resulting in a realized,
after-tax gain of $23 million from the fund's sale of a portion of its equity
interests. This includes distributions totaling approximately $40 million
resulting in a realized, after-tax gain of approximately $11 million from the
sales of equity interests held by an LBO fund in the third quarter of 1999.
In the third quarter of 1999, Resources received net cash proceeds of
approximately $76 million from early buy-outs of leveraged leases of a
generation station and an office building, resulting in an after-tax gain of $10
million.
In 1999, Resources has invested approximately $243 million in five
leveraged lease transactions of energy-related assets: gas distribution networks
in the Netherlands, cogeneration plants in Germany and a liquefied natural gas
storage facility in the United States. This includes an investment of
approximately $66 million in a leveraged lease transaction of a natural gas
distribution network in the Netherlands and an investment of approximately $40
million in a leveraged lease transaction of cogeneration plants in Germany in
September 1999.
Energy Technologies
During 1999, Energy Technologies acquired six mechanical and building
service contractors in New Jersey, Virginia and Rhode Island for a total cost of
approximately $44 million including debt assumed. The latest acquisition was
completed in November 1999.
External Financings
The changes in the utility industry are attracting increased attention of
bond rating agencies which regularly assess business and financial matters
including how utility companies are meeting competition and competitive
initiatives, especially as they affect potential stranded costs. Bond ratings
affect the cost of capital and the ability to obtain external financing. Given
the changes in the industry and the anticipated use of securitization, attention
and scrutiny of PSEG's, PSE&G's and Energy Holdings' competitive strategies by
rating agencies will likely continue. These changes could affect the bond
ratings, cost of capital and market prices of the respective securities of PSEG,
PSE&G and Energy Holdings.
The availability and cost of external capital could be affected by the
performance of Energy Holdings and PSE&G and by the actions ultimately taken by
the BPU with regard to the Energy Master Plan Proceedings as well as by rating
agencies' views of such matters including the degree of structural or regulatory
separation between the utility and its affiliates and the potential impact of
affiliate ratings on the consolidated credit quality of PSEG, PSE&G and Energy
Holdings.
PSEG, PSE&G and Energy Holdings are analyzing their future capital and
financing needs in light of securitization, the sale of generation-related
assets to Power and their business strategies. However, it is expected that
following completion of securitization and the generation-related asset sale,
PSE&G will refinance a portion of its debt and reduce its equity level, which
will not substantially alter its existing capitalization ratios. Power and
Energy Holdings will likely issue debt through the capital markets to fund their
projects and acquisitions, including the sale of generation-related assets by
PSE&G to Power.
PSEG
At September 30, 1999, PSEG had a committed $150 million revolving credit
facility which expires in December 2002. At September 30, 1999, PSEG had $41
million outstanding under this revolving credit facility. On September 8, 1999,
PSEG entered into an uncommitted line of credit with a bank for an unlimited
amount.
In June 1999, PSEG issued $300 million of Extendible Notes, Series C, due
June 15, 2001 with interest at the three-month London Interbank Offered Rate
(LIBOR) plus 0.40%, reset quarterly. These Notes will be automatically tendered
to the remarketing agent for remarketing on March 15, 2000. PSEG used the net
proceeds to make an equity investment in Energy Holdings and to reimburse its
treasury for expenditures made to repurchase shares of its Common Stock.
PSE&G
In addition to the petition filed with the BPU to effectuate the
securitization transaction, PSE&G will need to file petitions with the BPU for
authorization for any additional debt financing needed. PSE&G is currently
evaluating the potential uses of the proceeds of securitization (see Liquidity
and Capital Resources).
Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds
against previous additions and improvements and/or retired Mortgage Bonds
provided that its ratio of earnings to fixed charges calculated in accordance
with its Mortgage is at least 2:1. As of September 30, 1999, the Mortgage would
permit up to $3.8 billion aggregate principal amount of new Mortgage Bonds to be
issued against previous additions and improvements, the level of which could be
impacted by the actions ultimately taken in connection with securitization and
the sale of generation-related assets to Power. At September 30, 1999, PSE&G's
Mortgage coverage ratio was 4.481:1. PSE&G expects to apply for and receive
necessary BPU authorization for external financings to meet its requirements
over the next five years, as needed. For a related discussion, see Liquidity and
Capital Resources and Generation-Related Asset Sale to Power of Note 2.
Regulatory Issues of Notes.
In anticipation of securitization, PSE&G purchased certain of its
outstanding series of Mortgage Bonds in the open market. These purchases totaled
$129 million in September 1999 and $171 million in October 1999.
On July 1, 1999, $100 million of PSE&G's 8.750% Bonds, Series Z, matured.
On September 27, 1999, PSE&G called its $2.990 million of 6.9% Pollution Control
Bonds, Series C, due September 1, 2009. Redemption is scheduled for November 12,
1999.
To provide liquidity for its commercial paper program, PSE&G has an $850
million revolving credit agreement expiring in June 2000 and a $650 million
revolving credit agreement expiring in June 2002 with a group of commercial
banks, which provide for borrowings of up to one year. On September 30, 1999,
there were no borrowings outstanding under these credit agreements.
The BPU has authorized PSE&G to issue and have outstanding at any one time
through January 4, 2000, not more than $1.5 billion of short-term obligations,
consisting of commercial paper and other unsecured borrowings from banks and
other lenders. PSE&G has filed with the BPU for extension of this authorization
through January 2, 2001 and for an increase to $2.0 billion in order to provide
for temporary funding of maturing long-term debt in light of the uncertainty
associated with the timing of securitization and the generation asset sale due
to the recent appeals. An inability to issue short-term obligations would have a
material adverse impact on PSEG's and PSE&G's financial condition, results of
operations and net cash flows. On September 9, 1999, PSE&G entered into an
uncommitted line of credit with a bank for an unlimited amount. Borrowings under
this line of credit and all other short-term borrowings in aggregate cannot
exceed the maximum amount of short-term debt authorized, currently $1.5 billion.
PSE&G also had additional uncommitted lines of credit totaling $70 million on
September 30, 1999. On September 30, 1999, PSE&G had $1.014 billion of
short-term debt outstanding, including $30 million borrowed against its
uncommitted bank lines of credit.
PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125
million revolving credit facility with a group of banks, which expires on June
28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations
under this program. As of September 30, 1999, Fuelco had commercial paper of $68
million outstanding. Once the purchase of PSE&G's generation-related assets is
completed, Fuelco's commercial paper program will be discontinued and financing
of Peach Bottom nuclear fuel will be funded through Power.
Energy Holdings
In October 1999, Energy Holdings issued $400 million of 10.0% Senior Notes
due October 2009. The proceeds were used for the repayment of short-term debt
outstanding under revolving credit facilities. Borrowings under the revolving
credit facilities were used to finance investments and acquisitions and for
general corporate purposes. Energy Holdings expects to file a registration
statement with the SEC relating to an exchange offer for, or the resale of,
these Senior Notes. At September 30, 1999, Energy Holdings had total debt
outstanding of $1.471 billion, including debt at PSEG Capital as discussed below
and consolidated debt that is non-recourse to PSEG, Global and Energy Holdings.
The minimum net worth maintenance agreement between PSEG Capital and PSEG
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. In 1993, PSEG agreed with the BPU to
make a good-faith effort to eliminate such PSEG support within six to ten years.
Effective January 31, 1995, PSEG Capital notified the BPU of its intention not
to have more than $650 million of debt outstanding at any time. PSEG Capital has
a $650 million Medium Term Note (MTN) program which provides for the private
placement of MTNs without registration.
PSEG Capital's assets consist principally of demand notes of Global and
Resources. Intercompany borrowing rates are established based upon PSEG
Capital's cost of funds. In March and June 1999, PSEG Capital issued $252
million of 6.25% MTNs due May 2003 and $35 million of 6.73% MTNs due June 2001,
respectively. The proceeds were used to repay $100 million of PSEG Capital MTNs
which matured in February 1999 and $35 million which matured in May 1999 and to
reduce Energy Holdings' short-term debt. At September 30, 1999, PSEG Capital had
total debt outstanding of $650 million, all of which was comprised of MTNs with
maturities between 1999 and 2003. Energy Holdings believes it is capable of
eliminating PSEG support of PSEG Capital debt within the time period set forth
in the Focused Audit.
In September 1999, Energy Holdings closed on a $150 million letter of
credit facility to support a future equity investment in a generation project in
Texas.
In May 1999, Energy Holdings closed on two separate senior revolving credit
facilities, with a syndicate of banks, a $165 million, 364 day revolving credit
facility and a $495 million, five year revolving credit and letter of credit
facility. These facilities replaced existing revolving credit facilities at
Enterprise Capital Funding Corporation (Funding), a financing subsidiary of
Energy Holdings, totaling $450 million. Effective May 1999, Funding is no longer
being used as a financing vehicle for Energy Holdings.
Financial covenants contained in this new facility 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 of Energy Holdings by the total
recourse capitalization. This ratio excludes the debt of PSEG Capital which is
supported by PSEG. As of September 30, 1999, the latest 12 months CFADS coverage
ratio was 10.9x and the ratio of recourse indebtedness to recourse
capitalization was 0.25 to 1.00.
Compliance with applicable financial covenants will depend upon Energy
Holdings' future financial position and levels of earnings and cash flow, as to
which no assurances can be given. In addition, Energy Holdings' ability to
continue to grow its business will depend to a significant degree on PSEG's
ability to access capital and Energy Holdings' ability to obtain additional
financing beyond current levels. At September 30, 1999, Energy Holdings had $481
million outstanding under existing revolving credit facilities totaling $660
million.
Foreign Operations
In accordance with their growth strategies, Global and Resources have made
approximately $1.4 billion and $1.0 billion, respectively, of international
investments.
Resources' international investments are primarily leveraged leases of
assets located in Australia, the Netherlands and the United Kingdom with
associated revenues denominated in U.S. dollars and, therefore, not subject to
foreign currency risk.
Global's international investments are primarily in projects that generate
or distribute electricity in Argentina, Brazil, Chile, China, Peru and
Venezuela. Investing in foreign countries involves certain risks. Economic
conditions that result in higher comparative rates of inflation in foreign
countries likely result in declining values in such countries' currencies. As
currencies fluctuate against the U.S. dollar, there is a corresponding change in
Global's investment value in terms of the U.S. dollar. Such change is reflected
as an increase or decrease in comprehensive income, a separate component of
stockholders' equity. Net foreign currency devaluations, $185 million of which
was caused by the devaluation of the Brazilian Real, have reduced the reported
amount of PSEG's total stockholders' equity by $203 million as of September 30,
1999. For further discussion of foreign currency risk and the devaluation of the
Brazilian Real, see Note 6. Financial Instruments and Risk Management of Notes.
Competitive Environment
Generation
PSE&G is required to provide BGS for all customers who do not elect a
different service provider. Once the sale of the generation-related assets to
Power is complete, Power, through ER&T, will provide PSE&G with the energy and
capacity required to meet PSE&G's BGS and OTRA obligations. ER&T will provide
such energy and capacity under the BGS contract rate for the first three years
of the transition period, which began August 1, 1999. Once the sale of the
generation-related assets to Power is complete, ER&T will obtain the energy and
capacity to supply PSE&G's BGS and OTRA requirements from its affiliates,
Nuclear and Fossil, supplemented as necessary with energy purchased in the
competitive wholesale electricity market. Power's earnings will be exposed to
the risks of the competitive wholesale electricity market to the extent that
ER&T has to purchase energy and/or capacity to meet its BGS and OTRA obligations
at market prices which approach or exceed the BGS contract rate (see PJM
Interconnection, LLC and Item 3. Qualitative and Quantitative Disclosures About
Market Risk). ER&T's policy will be to use derivatives to manage this risk
consistent with its business plans and prudent practices. Also, as part of its
growth strategy, Power is seeking to mitigate this risk by building and
purchasing additional capacity in the PJM and surrounding regions. BGS will be
competitively bid for the fourth year and thereafter. ER&T will also participate
in the competitive wholesale electricity market for other items such as energy,
capacity and ancillary services. Prior to the sale of the generation-related
assets to Power, such energy and capacity continues to be provided by the
generation-related assets owned by PSE&G as well as through any energy purchases
needed. For further discussion of the sale of generation-related assets, see
Note 2. Regulatory Issues of Notes.
State Regulatory Matters
For discussions of the Energy Master Plan Proceedings, Gas Unbundling, and
other rate matters, see Note 2. Regulatory Issues of Notes.
PJM Interconnection, LLC
PSE&G is a member of PJM and participates on the PJM Members Committee as
part of its governance structure. PSE&G is also a member of the Mid-Atlantic
Area Reliability Council which provides for review and evaluation of plans for
generation and transmission facilities and other matters relevant to the
reliability of the bulk electric supply systems in the Mid-Atlantic area.
As of April 1, 1999, FERC lifted the requirement that bids for electric
energy offered for sale in the PJM interchange energy market from utility-owned
generation located within the PJM control area not exceed the variable cost of
producing such energy. FERC found that no single market participant can unduly
influence market prices. Additionally, a market monitoring function is provided
by the PJM Independent System Operator (ISO). Transactions that are bid into the
PJM pool are now capped at $1,000 per megawatt hour. The current PJM market
structure, which includes this price cap on offers into the spot market and an
installed capacity obligation, is being studied by a PJM user group and may be
modified in the future.
All power providers are paid the locational marginal price (LMP) set
through power providers' bids. Furthermore, in the event that all available
generation within the PJM control area is insufficient to satisfy demand, PJM
may institute emergency purchases from adjoining regions. The cost of such
emergency purchases is not subject to any PJM price cap. Since the LEAC was
discontinued as of August 1, 1999, to the extent PSEG's generation business
produces less energy than required to supply PSE&G's BGS customers and OTRA
customers, the lifting of such caps could present additional risks with respect
to the difference between the LMP and the BGS rate. For further discussion of
price volatility of electricity, see Item 3. Qualitative and Quantitative
Disclosures About Market Risk.
On May 12, 1999, FERC issued a Notice of Proposed Rulemaking regarding
Regional Transmission Organizations (RTO). Although PJM is consistent with the
proposed requirements for a RTO, the proposed rulemaking may restrict PSE&G's
ability to recover its transmission related revenue requirements. Also, under
some RTO structures, ownership of transmission assets would be limited to a de
minimus level. Both of these possible restrictions could have a material adverse
impact on PSEG's and PSE&G's financial condition, results of operations or net
cash flows. PSE&G is actively participating in this rulemaking proceeding to
advocate positions favorable to PSE&G, although no assurances on the outcome of
these proceedings can be given.
Year 2000 Readiness Disclosure
Many of PSEG's and PSE&G's systems, which include information technology
applications, plant control and telecommunications infrastructure systems, must
be modified due to computer program limitations in recognizing dates beyond
1999. PSEG, PSE&G and Energy Holdings have had a formal project in place since
1997 to address Year 2000 issues. Based upon project progress to date, all
mission critical systems are expected to be ready before January 1, 2000.
Year 2000 Readiness Status
PSEG, PSE&G and Energy Holdings have established a three-phase program to
achieve Year 2000 readiness. The initial phase (Inventory) identified systems
having potential Year 2000 issues and set priorities for assessing and
remediating those systems. The second phase (Assessment) determined whether
systems are digital/date sensitive and the extent of date related issues. The
third phase (Remediation/Testing) repairs programming code, upgrades or replaces
systems and validates that code repairs were implemented as intended. Year 2000
readiness work is considered finished upon completion of all three phases.
PSEG and PSE&G have completed required Year 2000 readiness work for more
than 99% of their mission critical systems as of October 31, 1999. Mission
critical systems are those systems whose unavailability would immediately impact
PSEG's or PSE&G's ability to meet their regulatory, safety or fiduciary duties.
By the end of 1999, a majority of PSEG's and PSE&G's non-critical systems are
also expected to be Year 2000 ready with the remainder of such non-critical
systems to be ready in 2000.
Energy Holdings and its subsidiaries have essentially completed Inventory
and Assessment work on all systems impacted by Year 2000 readiness issues.
Remediation/Testing is expected to be completed in 1999 on all mission critical
systems and a majority of non-critical systems, with the remaining non-critical
systems to be completed in 2000. Energy Holdings (parent company), Energy
Technologies and Resources have completed required Year 2000 readiness work for
100% of their mission critical systems and such systems are Year 2000 ready as
of June 30, 1999. Global has completed required Year 2000 readiness work for 95%
of its mission critical systems through September 1999.
As previously reported, on May 11, 1998, the NRC issued a Generic Letter to
all nuclear facilities requiring certain written responses addressing the status
of their Year 2000 programs. In its responses, PSE&G indicated that planned
implementation will allow PSE&G's nuclear facilities to be Year 2000 ready and
in compliance with the terms and conditions of their licenses and NRC regulation
by January 1, 2000. On June 30, 1999, PSE&G reaffirmed its plan to have all
mission critical systems ready and in compliance with the terms and conditions
of their license and NRC regulation by January 1, 2000. On October 20, 1999,
PSE&G provided an update to its June 30, 1999 response, noting that all mission
critical systems for Hope Creek and Salem were Year 2000 ready. PSE&G has
identified no Year 2000 problem that could affect the proper functioning of any
nuclear safety system. All safety-related systems that could have a Year 2000
issue have already been identified and, where necessary, corrected and tested.
PSE&G will continue to monitor the Year 2000 issue to ensure that it is prepared
for any issues, internal or external to the plants, which could impact PSE&G.
PSE&G has developed contingency plans to address issues that may arise during
the December 31, 1999 through January 1, 2000 rollover. PECO informed PSE&G that
it provided the required July 1999 response to the NRC confirming that Peach
Bottom's Year 2000 effort is on schedule to also be Year 2000 ready and in
compliance with the terms and conditions of their license and NRC regulation by
January 1, 2000. Additionally, PECO informed PSE&G that the remaining work on
Peach Bottom's mission critical systems has been completed and those systems are
Year 2000 ready.
PSEG, PSE&G and their subsidiaries are continuing to work with their
supplier base to assess the Year 2000 readiness status of vendors who provide
critical materials and services (key vendors). PSEG, PSE&G and their
subsidiaries designate a vendor as key under the Year 2000 project if that
vendor's product or service has a fiduciary, regulatory or safety impact on PSEG
or PSE&G or their subsidiaries. PSEG and PSE&G have indications from more than
97% of their key vendors that they are making or have made preparations for the
Year 2000. To date, all such key vendors responding indicate that their business
operations will be ready. Global's vendors are not included in that statistic;
however, Global's key vendors have also indicated that they expect to be able to
meet Year 2000 requirements. Strategies are being put into place to minimize the
impact of potential vendor failures on PSEG's, PSE&G's and Energy Holdings'
operations. However, failure of key vendors to be Year 2000 ready could result
in material adverse impacts to PSEG's and PSE&G's operations, financial
condition, results of operations or net cash flows.
Year 2000 Costs
For a discussion of Year 2000 Costs, see Note 5. Commitments and Contingent
Liabilities of Notes.
Year 2000 Risks
PSEG, PSE&G and Energy Holdings have identified some scenarios and will
continue working to determine the most reasonably likely worst case scenarios
arising from Year 2000 readiness issues. PSE&G anticipates its most reasonably
likely worst case scenario as follows:
o Many customers may revert to their own back-up generation or may
preemptively shut down their operations during critical Year 2000
periods (primarily around December 31, 1999 through January 1, 2000).
Their individual decisions could aggregate to unpredictable and/or low
electrical demand patterns, especially given that this is typically a
low electrical demand period. Because electricity cannot be stored,
PSE&G must anticipate and balance supply and demand in order to
maintain electric generation, transmission and distribution systems.
Unusual demand patterns could overburden these systems so that PSE&G
could fail to coordinate demand and supply. In order to prepare for
this contingency, PSE&G has sought to increase system flexibility by
implementing measures to:
o Prepare all plants for significant increase or decrease in
production,
o Have equipment and facilities that can use electricity ready to
run,
o Generate with a more diverse fuel mix than usual, and
o Have additional generating units that typically do not run
during this time of the year (i.e., combustion turbines)
ready to operate.
PSEG and PSE&G are planning for intense media attention on PSE&G's
operations. The period surrounding December 31, 1999 through January
1, 2000 will provide an opportunity to closely review PSE&G's status.
Part of PSE&G's contingency plans is to provide timely and accurate
status information.
Energy Holdings has identified some scenarios and will continue to
determine the most reasonably likely worst case scenarios arising from Year 2000
readiness issues. Global's most reasonably likely worst case scenarios may
include potential external disturbances of its systems including, but not
limited to, fuel supply or transmission interruptions or telecommunications
systems outages. Global's contingency plans have been finalized to address these
scenarios.
PSEG, PSE&G and Energy Holdings have no outstanding litigation relating to
Year 2000 issues. The likelihood of future Year 2000 related liabilities cannot
be determined at this time. PSEG and PSE&G have been subject to the following
Year 2000 regulatory action:
o The BPU has issued a specific order requiring a number of
customer related disclosures, including bill inserts,
establishment of an "800" number, and others.
o The BPU has issued an interim report assessing Year 2000 program
progress by PSE&G up to June 15, 1999. The report indicated that
the BPU agreed with the overall status of the project, and that
based on reported progress, the Year 2000 program should come to
a successful termination.
o The BPU has informed PSE&G that it will expect periodic status
reports and specific outage information during the period
December 31, 1999 through January 1, 2000.
Additionally, Energy Holdings, through Global, is subject to international
Year 2000 regulatory initiatives, which could include sanctions being imposed
and requirements to indemnify consumers for damages resulting from Year 2000
non-compliance, in the countries in which it has operations, including
Argentina, Brazil, Chile, China, Peru and Venezuela. Global has reviewed the
impacts of local regulations and laws, has taken all necessary steps to comply
with the international regulatory initiatives and, as noted above, has completed
required Year 2000 readiness work for 95% of its mission critical systems
through September 1999.
Contingency Plans
PSEG, PSE&G and Energy Holdings have adopted the North American Electric
Reliability Council's (NERC) timetable, guidelines and detailed requirements for
developing these contingency plans. The planning process is an iterative one.
PSEG, PSE&G and Energy Holdings have completed their preliminary contingency
plans. The second version of their contingency plans was completed by June 30,
1999, consistent with NERC's timetable.
PSEG and PSE&G conducted a limited scope internal drill on March 19, 1999.
The scope of the drill involved using alternate communication capabilities
(i.e., radio) to monitor electric generation and transmission should the public
switched phone network become unavailable. The drill showed the basic
feasibility of preliminary plans and it identified needed procedural
enhancements, which have since been included in the contingency plans. On April
9, 1999, PSEG and PSE&G participated in a NERC industry-coordinated Year 2000
readiness drill. It involved a scope similar to the March 19, 1999 drill plus
the involvement of PJM. Additionally, PSEG and PSE&G participated in the
NERC-led drill on September 8-9, 1999. The drill was intended to be a full-scale
dress rehearsal for the rollover period of December 31, 1999 to January 1, 2000.
For PSE&G, this drill built on previous exercises. Multiple functions were
involved including gas, electric and distribution. The centralized status and
reporting function created for Year 2000 was activated. As with the previous
drills, this exercise showed the basic feasibility of the contingency plans.
Some procedural details, such as the final development of facility preparation
checklists, creation of contact listings and the distribution of communication
equipment, will be completed before December 31, 1999.
PSEG, PSE&G and Energy Holdings expect that with completion of the Year
2000 readiness work and implementation of programs from SAP America, Inc. (SAP),
the possibility of significant interruptions of normal operations should be
reduced. However, if PSEG, PSE&G, Energy Holdings, their domestic and
international subsidiaries, their project affiliates, the other members of PJM,
PJM trading partners supplying power through PJM, PSEG's or PSE&G's key vendors
and/or customers or the capital markets are unable to meet the Year 2000
deadline, such inability could have a material adverse impact on PSEG's and
PSE&G's operations, financial condition, results of operations or net cash
flows.
Environmental Costs
For discussion of potential environmental and other remediation costs, see
Note 5. Commitments and Contingent Liabilities of Notes.
Accounting Issues
For a discussion of significant accounting matters including SFAS 71; SFAS
121; Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the
Pricing of Electricity-Issues Related to the Application of FASB Statements No.
71 and No. 101" (EITF 97-4); SFAS 101, "Regulated Enterprises-Accounting for the
Discontinuation of Application of FASB Statement No. 71" (SFAS 101); changes in
capitalization, depreciation and asset retirement policies; discontinuation of
deferral accounting for fuel revenues and expenses; EITF 98-10, "Accounting for
Energy Trading and Risk Management Activities" (EITF 98-10); Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1) and SOP 98-5, "Reporting on the Costs of
Start-Up Activities" (SOP 98-5), see Note 1. Basis of Presentation/Summary of
Significant Accounting Policies of Notes.
Impact of New Accounting Pronouncements
For a discussion of the impact of new accounting pronouncements including
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133) and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137), see Note
9. Accounting Matters of Notes.
PSE&G
The information required by this item is incorporated herein by reference
to the following portions of PSEG's Management's Discussion and Analysis of
Financial Condition and Results of Operations, insofar as they relate to PSE&G
and its subsidiaries: Overview and Future Outlook; Results of Operations;
Liquidity and Capital Resources; External Financings; Competitive Environment;
Year 2000 Readiness Disclosure; Environmental Costs; Accounting Issues and
Impact of New Accounting Pronouncements.
ITEM 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
The market risk inherent in PSEG's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in commodity
prices, equity security prices, interest rates and foreign currency exchange
rates as discussed below. PSEG's policy is to use derivatives to manage risk
consistent with its business plans and prudent practices. PSEG has a Risk
Management Committee comprised of executive officers which utilizes an
independent risk oversight function to ensure compliance with corporate policies
and prudent risk management practices.
PSEG is exposed to credit losses in the event of non-performance or
non-payment by counterparties. PSEG also has a credit management process which
is used to assess, monitor and mitigate counterparty exposure for PSE&G and
Energy Holdings. In the event of non-performance or non-payment by a major
counterparty, there may be a material adverse impact on PSEG's and PSE&G's
financial condition, results of operations or net cash flows.
For discussion of interest rates and Energy Holdings' commodity-related
instruments, equity securities and foreign currency risks, see Note 6. Financial
Instruments and Risk Management of Notes.
Commodity-Related Instruments--PSE&G
The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
supply and demand, state and Federal regulatory policies and other events. To
reduce price risk caused by market fluctuations, PSE&G enters into derivative
contracts, including forwards, futures, swaps and options with approved
counterparties, to hedge its anticipated demand. These contracts, in conjunction
with owned electric generating capacity and physical gas supply contracts, are
designed to cover estimated electric and gas customer commitments.
PSE&G uses a value-at-risk model to assess the market risk of its commodity
business. This model includes fixed price sales commitments, owned generation,
native load requirements, physical contracts and financial derivative
instruments. Value-at-risk represents the potential gains or losses for
instruments or portfolios due to changes in market factors, for a specified time
period and confidence level. PSE&G estimates value-at-risk across its commodity
business using a model with historical volatilities and correlations.
The measured value-at-risk using a variance/co-variance model with a 95%
confidence level and assuming a one week time horizon at September 30, 1999 was
approximately $5 million, compared to the December 31, 1998 level of $4 million.
PSE&G's calculated value-at-risk represents an estimate of the potential change
in the value of its portfolio of physical and financial derivative instruments.
These estimates, however, are not necessarily indicative of actual results,
which may differ due to the fact that actual market rate fluctuations may differ
from forecasted fluctuations and due to the fact that the portfolio of hedging
instruments may change over the holding period.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain information reported under Item 3 of Part I of Public Service
Enterprise Group Incorporated's (PSEG) and Public Service Electric and Gas
Company's (PSE&G) 1998 Annual Report on Form 10-K, the Quarterly Reports on Form
10-Q for the quarters ended March 31, 1999 and June 30, 1999 and the Current
Reports on Form 8-K filed March 18, 1999, April 26, 1999, July 21, 1999,
September 15, 1999 and October 14, 1999 is updated below.
(1) Form 10-K, page 29 and June 30, 1999 Form 10-Q, page 52. As previously
disclosed, by complaints filed in 1995 and 1996, shareholder derivative
actions on behalf of PSEG shareholders were commenced by purported
shareholders against certain directors and officers. The four complaints
generally sought recovery of damages for alleged losses purportedly arising
out of PSE&G's operation of the Salem and Hope Creek generating stations,
together with certain other relief, including removal of certain executive
officers of PSE&G and PSEG and certain changes in the composition of PSEG's
Board of Directors. By decision dated July 28, 1999, the Court granted the
defendants' motions for summary judgement dismissing all four derivative
actions. The plaintiffs have filed Notices of Appeals in all these actions.
PSEG cannot predict the outcome of these appeals. Public Service Enterprise
Group Inc. by G. E. Stricklin, derivatively v. E. James Ferland, et. al.,
Superior Court of New Jersey, Chancery Division, Essex County, Docket No.
C-160-96. Dr. Steven Fink and Dr. David Friedman, P.C. Profit Sharing Plan,
derivatively, et. al. v. Lawrence R. Codey, et. al., Superior Court of New
Jersey, Chancery Division, Essex County, Docket No. C-65-96. A. Harold Datz
Pension and Profit Sharing Plan derivatively, et. al., v. Lawrence R.
Codey, et. al., Superior Court of New Jersey, Chancery Division, Essex
County, Docket No. C-68-96. Tillie Greenberg, derivatively v. E. James
Ferland, et. al., Superior Court of New Jersey, Chancery Division, Essex
County, Docket No. C-188-96.
(2) March 31, 1999 Form 10-Q, page 38 and June 30, 1999 Form 10-Q, page 52. As
previously disclosed, a complaint was received by PSEG naming as defendants
the current directors of PSEG, and naming PSEG as a nominal defendant, from
the same purported shareholder of PSEG who instituted the December 1995
shareholder derivative suit and who instituted the June 1998 proxy
litigation, alleging that the 1999 proxy statement provided to shareholders
of PSEG was false and misleading by reason, among other things, of failure
to disclose certain material facts relating to (i) the controls over and
oversight of PSEG's nuclear operations, (ii) the condition of problems at
and reserves with respect to PSEG's nuclear operations and (iii) the demand
letter and derivative litigation described above. The complaint seeks to
have the 1999 proxy statement declared to be in violation of law, to set
aside the election of directors of PSEG and the ratification of the
selection of Deloitte & Touche LLP as PSEG's auditors at the 1999 annual
shareholder meeting, and to require PSEG to conduct a special meeting of
shareholders providing for election of directors following timely
dissemination of a proxy statement approved by the Court hearing the
matter, which should include as nominees for election as directors persons
having no previous relationship with PSEG or the current directors, and
other relief. A motion to dismiss the complaint was filed by the defendants
on June 28, 1999. On August 2, 1999, the Court issued an order granting the
defendants' motion to dismiss the complaint. Plaintiff has filed a Notice
of Appeal. PSEG cannot predict the outcome of this appeal. G. E. Stricklin
v. I. Lerner, et. al., United States District Court for the Eastern
District of Pennsylvania. Civil Action No. 99-1950.
In addition, see the following at the pages hereof indicated:
(1) Pages 10 through 15 and 29 through 30. Proceedings before the BPU in
the matter of the Energy Master Plan Phase II Proceeding to
investigate the future structure of the Electric Power Industry,
Docket Nos. EX94120585Y, EO97070461, EO97070462 and EO97070463.
(2) Pages 10 through 15 and 29 through 30. Appeals of I/M/O PSE&G's Rate
Unbundling, Stranded Costs and Restructuring Filings before the New
Jersey Superior Court, Appellate Division, Docket No. A-643-99-T3 and
second pending docket number assignment.
(3) Pages 10 through 15 and 29 through 30. Proceedings before the BPU in
the Matter of the Petition of PSE&G for a Bondable Stranded Cost Rate
Order, Docket No. EF99060390.
(4) Pages 10 through 15 and 29 through 30. Appeals of I/M/O the Petition
of PSE&G for a Bondable Stranded Cost Rate Order before the New Jersey
Superior Court, Appellate Division, Docket Nos. A-772-99T3 and
A-1050-99T3.
(5) Page 15. Proceedings before the BPU in the Matter of the Filings of
the Comprehensive Resource Analysis of Energy Programs pursuant to
Section 12 of the Electric Discount and Energy Competition Act of
1999, Docket Nos. EX99050347, EO99050348, EO99050349, EO99050350,
EO99050351, EO99050352, EO99050353 and EO99050354.
(6) Page 15. Proceeding before the BPU Establishing Procedures for gas
unbundling, Docket Nos. GX99030121, GO99030122, GO99030123, GO99030124
and GO99030125.
(7) Page 20. Investigation by the U.S. Environmental Protection Agency
(EPA) regarding the Passaic River site.
(8) Page 21. Additional investigation by the U.S. Environmental Protection
Agency (EPA) regarding the Passaic River site.
ITEM 5. OTHER INFORMATION
Certain information reported under PSEG's and PSE&G's 1998 Annual Report
and the March 31, 1999 and June 30, 1999 Quarterly Reports to the SEC is updated
below. References are to the related pages of the Form 10-K and the Quarterly
Reports for the quarters ended March 31, 1999 and June 30, 1999 as printed and
distributed.
Executive Officers
Form 10-K, page 127. Lawrence R. Codey, President and Chief Operating
Officer of PSE&G and a member of the Boards of Directors of PSEG and PSE&G, has
announced that he will retire on February 29, 2000. It is anticipated that
Alfred C. Koeppe, currently Senior Vice President-Corporate Services and
External Affairs of PSE&G, will succeed Mr. Codey as President and Chief
Operating Officer at that time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) A listing of exhibits being filed with this document is as follows:
PSEG
- --------------------------------------------------------------------------------
Exhibit Number Document
- ------------------ ------------------------------------------------------------
10a PSE&G Thrift and Tax-Deferred Savings Plan, as amended
effective October 1, 1999
10b PSE&G Employee Savings Plan, as amended effective
October 1, 1999
12 Computation of Ratios of Earnings to Fixed Charges (PSEG)
27(A) Financial Data Schedule (PSEG)
PSE&G
- --------------------------------------------------------------------------------
Exhibit Number Document
- ------------------ ------------------------------------------------------------
10a PSE&G Thrift and Tax-Deferred Savings Plan, as amended
effective October 1, 1999
10b PSE&G Employee Savings Plan, as amended effective
October 1, 1999
12(A) Computation of Ratios of Earnings to Fixed Charges (PSE&G)
12(B)
Computation of Ratios of Earnings to Fixed Charges plus
Preferred Stock Dividend Requirements (PSE&G)
27(B) Financial Data Schedule (PSE&G)
(B) Reports on Form 8-K:
Registrant Date of Report Items Reported
- --------------- ------------------------ ----------------------
PSEG and PSE&G July 21, 1999 Items 5 and 7
PSEG and PSE&G September 15, 1999 Item 5
PSEG and PSE&G October 14, 1999 Items 5 and 7
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used herein, the words
"will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential", variations of such words and similar expressions
are intended to identify forward-looking statements. PSEG and PSE&G undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. The following review
of factors should not be construed as exhaustive or as any admission regarding
the adequacy of disclosures made by PSEG and PSE&G prior to the effective date
of the Private Securities Litigation Reform Act of 1995.
In addition to any assumptions and other factors referred to specifically
in connection with such forward-looking statements, factors that could cause
actual results to differ materially from those contemplated in any
forward-looking statements include, among others, the following: deregulation
and the unbundling of energy supplies and services and the establishment of a
competitive energy marketplace for products and services; managing rapidly
changing wholesale energy trading operations in conjunction with electricity and
gas production, transmission and distribution systems; managing foreign
investments and electric generation and distribution operations in locations
outside of the traditional utility service territory; political and foreign
currency risks; an increasingly competitive energy marketplace; sales retention
and growth potential in a mature PSE&G service territory; ability to complete
development or acquisition of current and future investments; partner and
counterparty risk; exposure to market price fluctuations and volatility of fuel
and power supply, power output, marketable securities, among others; ability to
obtain adequate and timely rate relief, cost recovery, and other necessary
regulatory approvals; ability to obtain securitization proceeds; Federal, state
and foreign regulatory actions; regulatory oversight with respect to utility and
non-utility affiliate relations and activities; Year 2000 issues; operating
restrictions, increased cost and construction delays attributable to
environmental regulations; nuclear decommissioning and the availability of
reprocessing and storage facilities for spent nuclear fuel; licensing and
regulatory approval necessary for nuclear and other operating stations; the
ability to economically and safely operate nuclear facilities in accordance with
regulatory requirements; environmental concerns; and market risk and debt and
equity market concerns associated with these issues.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused these reports to be signed on their respective
behalf by the undersigned thereunto duly authorized.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
---------------------------------------
(Registrants)
By: PATRICIA A. RADO
---------------------------------------
Patricia A. Rado
Vice President and Controller
(Principal Accounting Officer)
Date: November 12, 1999