As filed with the Securities and Exchange Commission on ________, 2001
Registration No.____________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------
PSEG Power LLC
(Exact name of registrant as specified in its charter)
Delaware 4911 22-3663480
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation Classification
or organization) Code Number)
----------
PSEG Fossil LLC
(Exact name of registrant as specified in its charter)
Delaware 4911 22-3663481
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation Classification
or organization) Code Number)
----------
PSEG Nuclear LLC
(Exact name of registrant as specified in its charter)
Delaware 4911 22-3663482
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation Classification
or organization) Code Number)
----------
PSEG Energy Resources & Trade LLC
(Exact name of registrant as specified in its charter)
Delaware 6221 22-3663483
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation Classification
or organization) Code Number)
----------
80 Park Plaza-T16
Newark, New Jersey 07102
(973) 430-7000
http://www.pseg.com
(Address, including zip code and telephone number, including
area code, of Registrants' principal executive offices)
----------
Morton A. Plawner
Vice President and Treasurer
PSEG Power LLC
80 Park Plaza-T6
Newark, New Jersey 07102
(973) 430-7000
(Name, address, including zip code and telephone number, including
area code, of agent for service)
----------
Copies to:
James T. Foran, Esquire
Associate General Counsel
Public Service Enterprise Group Incorporated
80 Park Plaza-T5B
P.O. Box 1171
Newark, New Jersey 07101-1171
(973) 430-7000
----------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, please check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities to be Price Per Offering Registration
to be Registered Registered Unit Price Fee (1)
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<s>
67/8% Senior Notes due 2006 $500,000,000 100% $500,000,000 $125,000
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Guarantees of 67/8% Senior Notes
due 2006 (2) (2) (2) (2)
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73/4% Senior Notes due 2011 $800,000,000 100% $800,000,000 $200,000
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Guarantees of 73/4% Senior Notes
due 2011 (2) (2) (2) (2)
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85/8% Senior Notes due 2031 $500,000,000 100% $500,000,000 $125,000
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Guarantees of 85/8% Senior Notes
due 2031 (2) (2) (2) (2)
=======================================================================================================
(1) The registration fee has been calculated pursuant to Rule 457(f)(2) under
the Securities Act. The proposed maximum aggregate offering price
represents the total value of the bonds being exchanged under this
registration statement.
(2) No additional consideration will be paid for the Guarantees. Pursuant to
Rule 457(n) under the Securities Act, no separate fee is payable in
respect of the Guarantees.
The Registrants hereby amend this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8 (a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8 (a),
may determine.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion dated September 10, 2001
PRELIMINARY PROSPECTUS
[LOGO]
$1,800,000,000
PSEG Power LLC
Offer to Exchange
$500,000,000 67/8% Senior Notes Due 2006
$800,000,000 73/4% Senior Notes Due 2011
$500,000,000 85/8% Senior Notes Due 2031
Which have been registered under the Securities Act
For Any and All Outstanding
$500,000,000 67/8% Senior Notes Due 2006
$800,000,000 73/4% Senior Notes Due 2011
$500,000,000 85/8% Senior Notes Due 2031
Which have not been so registered
TERMS OF THE EXCHANGE OFFER
o The exchange offer expires at 5:00 p.m., Eastern Time, on , 2001, unless
extended by us in our sole discretion, subject to applicable law.
o The terms of the exchange notes are substantially identical to the
original notes, except that the exchange notes are registered under the
Securities Act and the transfer restrictions and registration rights
applicable to the original notes do not apply to the exchange notes.
o The exchange notes, like the original notes, will be fully and
unconditionally guaranteed by PSEG Fossil LLC, PSEG Nuclear LLC and PSEG
Energy Resources & Trade LLC on a joint and several basis. The guarantees
will rank equally in right of payment to all existing and future senior
unsecured indebtedness of the guarantors.
o All original notes that are validly tendered and not validly withdrawn
will be exchanged.
o Tenders of original notes may be withdrawn at any time prior to expiration
of the exchange offer.
o The original notes are listed on the Luxembourg Stock Exchange.
Application will be made to list the exchange notes on the Luxembourg
Stock Exchange. We do not intend to apply for listing of the exchange
notes on any other securities exchange or to arrange for them to be quoted
on any quotation system.
o The exchange offer is subject to customary conditions, including the
condition that the exchange offer not violate applicable law or any
applicable interpretation of the staff of the Securities and Exchange
Commission.
o We will not receive any proceeds from the exchange offer.
o You will not incur any material federal income tax consequences from your
participation in the exchange offer.
Please see "Risk Factors" beginning on page 13 for a discussion of factors
you should consider in connection with the exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the exchange notes or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ______, 2001.
TABLE OF CONTENTS
Page
----
Where to Find More Information ............................................ 3
Prospectus Summary ........................................................ 4
Risk Factors .............................................................. 13
Forward-Looking Statements ................................................ 21
Use of Proceeds ........................................................... 22
Capitalization ............................................................ 22
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 23
Business .................................................................. 35
Management ................................................................ 63
Certain Relationships and Related Transactions ............................ 65
The Exchange Offer ........................................................ 67
Description of the Exchange Notes ......................................... 75
Federal Income Tax Considerations ......................................... 94
Plan of Distribution ...................................................... 97
Legal Opinions ............................................................ 97
Experts ................................................................... 98
Index to Financial Statements ............................................. F-1
Independent Auditors' Report .............................................. F-2
Consolidated Financial Statements ......................................... F-3
When we refer to the term "note" or "notes", we are referring to both the
original notes and the exchange notes to be issued in the exchange offer. When
we refer to "holders" of the notes, we are referring to those persons who are
the registered holders of notes on the books of the registrar appointed under
the indenture. Unless the context otherwise indicates, all references to
"Power," "we," "us" or "our" herein mean PSEG Power LLC, a Delaware limited
liability company, and its consolidated subsidiaries. (For periods prior to
August 21, 2000, " Power," "we," "us" or "our" also includes the generation
business of Public Service Electric and Gas Company.)
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to exchange only the notes offered by this prospectus, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
2
WHERE TO FIND MORE INFORMATION
In connection with the exchange offer, we have filed with the Securities
and Exchange Commission (the "SEC") a registration statement under the
Securities Act of 1933 (the "Securities Act"), relating to the exchange notes to
be issued in the exchange offer. As permitted by SEC rules, this prospectus
omits information included in the registration statement. For a more complete
understanding of this exchange offer, you should refer to the registration
statement, including its exhibits.
The public may read and copy any reports or other information that we file
with the SEC at the SEC's public reference room, Room 1024 at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, or at the SEC's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. The public may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. These documents are also available to the public from commercial
document retrieval services and at the web site maintained by the SEC at
http://www.sec.gov. You may also obtain a copy of the exchange offer
registration statement at no cost by writing or telephoning us at the following
address:
Director, Investor Relations
PSEG Services Corporation
80 Park Plaza-T6
Newark, New Jersey 07102
(973) 430-7000
3
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
prospectus.
Summary of the Exchange Offer
The Exchange Offer .............. We are offering to exchange an aggregate of
$1,800,000,000 principal amount of exchange
notes in three series, the $500,000,000 67/8%
Senior Notes due 2006, the $800,000,000 73/4%
Senior Notes due 2011 and the $500,000,000
85/8% Senior Notes due 2031, for
$1,800,000,000 of original notes of like
series. The original notes may be exchanged
only in minimum denominations of $100,000 and
integral multiples of $1,000 in excess
thereof.
Issuance of the Original Notes .. The original notes were issued and sold on
April 16, 2001 in a transaction not requiring
registration under the Securities Act.
Registration .................... Rights At the time we issued the original
notes, we entered into a registration rights
agreement which obligates us to make this
exchange offer.
Required Representations ........ In order to participate in the exchange
offer, you will be required to make some
representations in a letter of transmittal,
including that:
o you are not affiliated with us,
o you are not a broker-dealer who bought your
original notes directly from us,
o you will acquire the exchange notes in the
ordinary course of business, and
o you have not agreed with anyone to
distribute the exchange notes.
If you are a broker-dealer that purchased
original notes for your own account as part
of market-making or trading activities, you
may represent to us that you have not agreed
with us or our affiliates to distribute the
exchange notes. If you make this
representation, you need not make the last
representation provided for above.
Resale of the Exchange Notes .... We are making the exchange offer in reliance
on the position of the staff of the Division
of Corporation Finance of the SEC as defined
in certain interpretive letters issued to
third parties in other transactions. We
believe that the exchange notes acquired in
this exchange offer may be freely traded
without compliance with the provisions of the
Securities Act that call for registration and
delivery of a prospectus, except as described
in the following paragraph.
The exchange notes will be freely tradable
only if the holders meet the conditions
described under "Required Representations"
above. If you are a broker-dealer that
purchased original notes for your own account
as part of market-making or trading
activities, you must deliver a prospectus
when you sell exchange notes. We have agreed
in the registration rights agreement relating
to the original notes to allow you to use
this prospectus for this purpose during the
90-day period following completion of the
exchange offer, subject to our right under
some circumstances to restrict your use of
this prospectus. See "The Exchange Offer--
Resales of Exchange Notes".
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4
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Broker dealers who acquired original notes
directly from us may not rely on the staff's
interpretations and must comply with the
registration and prospectus delivery
requirements of the Securities Act, including
being named as a selling security holder, in
order to resell the original notes or the
exchange notes.
Accrued Interest on the
Original Notes ................ The exchange notes due 2006 will bear
interest at an annual rate of 67/8%, the
exchange notes due 2011 will bear interest at
an annual rate of 73/4% and the exchange
notes due 2031 will bear interest at an
annual rate of 85/8%. Any interest that has
accrued on any series of the original notes
before their exchange in this exchange offer
will be payable on the exchange notes on the
first interest payment date after the
conclusion of this exchange offer.
Procedures for Exchanging
Notes ......................... The procedures for exchanging original notes
involve notifying the exchange agent before
the expiration date of the exchange offer of
your intention to do so. The procedures for
properly making notification are described in
this prospectus under the heading "The
Exchange Offer -- Procedures for Tendering
Original Notes".
Expiration Date ................. 5:00 p.m., Eastern Time, on , 2001, unless
the exchange offer is extended.
Exchange Date ................... We will notify the exchange agent of the date
of acceptance of the original notes for
exchange.
Withdrawal Rights ............... If you tender your original notes for
exchange in this exchange offer and later
wish to withdraw them, you may do so at any
time before 5:00 p.m., Eastern Time, on the
day this exchange offer expires.
Acceptance of Original
Notes and Delivery of
Exchange ...................... Notes We will accept any original notes that
are properly tendered for exchange before
5:00 p.m., Eastern Time, on the day this
exchange offer expires. The exchange notes
will be delivered promptly after expiration
of this exchange offer.
Tax Consequences ................ You will not incur any material federal
income tax consequences from your
participation in this exchange offer.
Use of Proceeds ................. We will not receive any cash proceeds from
this exchange offer.
Exchange Agent .................. The Bank of New York is serving as the
exchange agent. Its address and telephone
number are provided in this prospectus under
the heading "The Exchange Offer -- Exchange
Agent".
Effect on Holders of
Original Notes ................ Any original notes that remain outstanding
after this exchange offer will continue to be
subject to restrictions on their transfer.
After this exchange offer, holders of
original notes will not (with limited
exceptions) have any further rights under the
registration rights agreement. Any market for
original notes that are not exchanged could
be adversely affected by the consummation of
this exchange offer.
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5
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Summary of the Exchange Notes
This exchange offer applies to $1,800,000,000 aggregate principal amount
of the original notes. The terms of the exchange notes will be essentially the
same as the original notes, except that the exchange notes will not contain
language restricting their transfer and holders of the exchange notes generally
will not be entitled to further registration rights under the registration
rights agreement. The exchange notes issued in the exchange offer will evidence
the same debt as the outstanding original notes, which they will replace, and
both the original notes and the exchange notes are governed by the same
indenture. The exchange notes, like the original notes, will be fully and
unconditionally guaranteed by our three principal operating subsidiaries, PSEG
Fossil LLC ("Fossil"), PSEG Nuclear LLC ("Nuclear") and PSEG Energy Resources &
Trade LLC ("ER&T"), on a joint and several basis. The guarantees will rank
equally in right of payment to all existing and future senior unsecured
indebtedness of the guarantors.
Issuer PSEG Power LLC
Securities Offered .............. $500,000,000 of 67/8% Senior Notes due 2006,
$800,000,000 of 73/4% Senior Notes due 2011
and $500,000,000 of 85/8% Senior Notes due
2031 which have been registered under the
Securities Act.
Interest Payment Dates .......... April 15 and October 15 of each year,
beginning October 15, 2001.
Maturities ...................... 67/8% Senior Notes due April 15, 2006, 73/4%
Senior Notes due April 15, 2011 and 85/8%
Senior Notes due April 15, 2031.
Optional Redemption ............. We may redeem any or all of each series of
the exchange notes at any time at a price
equal to the sum of (i) 100% of the principal
amount of the exchange notes being redeemed,
(ii) a make whole premium and (iii) unpaid
interest accrued up to and including the
applicable redemption date. See "Description
of Exchange Notes -- Optional Redemption".
Ranking ......................... The exchange notes will be senior unsecured
obligations, will rank equally with all of
our senior unsecured indebtedness and will
rank senior to our subordinated unsecured
indebtedness. As of , 2001, we had
outstanding $ million of debt that ranks
equal with the exchange notes and, as of that
date, we had no secured debt outstanding.
Guarantees ...................... Each series of the exchange notes will be
fully and unconditionally guaranteed by
Fossil, Nuclear and ER&T on a joint and
several basis. The guarantees will rank
equally in right of payment to all existing
and future senior unsecured indebtedness of
the guarantors. We have issued a guarantee of
the obligations of ER&T, which guarantee is
subordinate to the exchange notes.
Ratings ......................... The exchange notes have been assigned ratings
of "Baa1" by Moody's Investors Service, Inc.,
"BBB+" by Fitch, Inc. and "BBB" by Standard &
Poor's Ratings Services.
A security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any time
by the assigning rating agency. Each rating
should be evaluated independently of any
other rating.
Sinking Fund .................... None.
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6
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Certain Covenants ............... The indenture under which the original notes
were, and the exchange notes will be, issued
contains covenants restricting us and the
above-referenced restricted subsidiaries.
Each of these covenants is subject to a
number of important qualifications and
exceptions. See "Description of the Exchange
Notes-- Selected Indenture Covenants." These
covenants limit our ability, and the ability
of our restricted subsidiaries to, among
other things:
o in the case of our restricted
subsidiaries, incur certain
indebtedness;
o create liens;
o in the case of our restricted
subsidiaries, create or permit to exist
dividend or payment restrictions with
respect to us;
o sell assets; and
o engage in mergers and consolidations.
ER&T ............................ Dividends In addition, the indenture contains
a covenant requiring one of our restricted
subsidiaries, ER&T, to pay periodic dividends
or distributions to us of the excess cash not
required for its business operations. See
"Description of the Exchange Notes --
Selected Indenture Covenants."
Form ............................ Each series of the exchange notes will be
represented by one or more permanent global
exchange notes in fully registered form
without interest coupons, deposited with the
Trustee as custodian for, and registered in
the name of, a nominee of DTC, except in
certain limited circumstances described in
this prospectus.
Risk ............................ Factors An investment in the exchange notes
involves certain risks relating to our
business, prospects, financial condition and
results of operations and the terms of the
exchange notes. These risks are described in
"Risk Factors."
PSEG Power
We are one of the largest independent electric generating and wholesale
energy marketing and trading companies in the United States. Through our three
principal operating subsidiaries, we generate and market electricity, capacity,
ancillary services and natural gas products on a wholesale basis. As of June 30,
2001, our generation portfolio consisted of 11,490 megawatts ("MW") of installed
capacity owned or under contract. Our target market, which we refer to as the
Super Region, extends from Maine to the Carolinas and the Atlantic Coast to
Indiana, encompassing 37% of the nation's power consumption. With 20% of
installed capacity, we are the single largest power supplier in our primary
market, the Pennsylvania-New Jersey-Maryland Power Pool ("PJM"), which is one of
the nation's largest and most well-developed energy markets.
We expect to continue to increase our generation capacity within our
target market, and we believe that we are favorably positioned to do so through
site expansions, strategic acquisitions and new generation development. We seek
to continually maximize the value of our generation portfolio through the
centralized control of its operations and its integration with our trading, fuel
procurement, marketing and risk management expertise. Our electric generation
portfolio is diversified by fuel source and market segment and we have
demonstrated expertise in natural gas procurement.
We began operating as a deregulated energy supplier in 1999. On August 21,
2000, we acquired ownership of the electric generation portfolio of our utility
affiliate, Public Service Electric and
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Gas Company ("PSE&G"), New Jersey's largest public utility. This portfolio
included more than 10,200 megawatts of nuclear and fossil capacity which we
acquired at a cost of $239/kW. Through June 30, 2001, we:
o acquired 544 MW of nuclear capacity in Pennsylvania and New Jersey;
o acquired 380 MW of steam capacity in New York;
o completed construction and began operation of 332 MW of combustion
turbines in New Jersey;
o began construction of 1,854 MW of combined cycle and combustion
turbine units in New Jersey;
o began construction of 2,000 MW of combined cycle units in Indiana
and Ohio;
o are in advanced development of 750 MW of combined cycle units in New
York.
We expect that the new generating assets under construction at June 30,
2001, which will add 4,604 MW to our generation portfolio, will be completed by
the end of the second quarter of 2003. This new capacity will expand our
generation portfolio to three contiguous reliability regions.
As a result of New Jersey's deregulation and restructuring of the electric
power industry, PSE&G was required by the New Jersey Board of Public Utilities
("BPU") to transfer its generation facilities and related assets to an
unregulated affiliate. We and our three principal operating subsidiaries,
Fossil, which operates our fossil generating facilities; Nuclear, which operates
our nuclear generating facilities; and ER&T, which conducts our wholesale energy
marketing and trading activities, were therefore formed to own and operate what
were formerly PSE&G's electric generation assets and business. As an Exempt
Wholesale Generator ("EWG"), we do not directly serve any retail customers and
we use our generation facilities exclusively for the production of electricity
for sale at the wholesale level. We have contracted with PSE&G to provide its
energy, capacity and ancillary services required to fulfill its BPU-mandated
basic generation service ("BGS") obligation through July 2002. As part of our
380 MW asset purchase from Niagara Mohawk Power Corporation ("NIMO"), we have
contracted to provide NIMO with energy and capacity at prices consistent with
its regulatory agreement through September 2003.
We are a wholly-owned subsidiary of Public Service Enterprise Group
Incorporated ("PSEG"). PSEG is an exempt public utility holding company and one
of the leading providers of energy and energy related services in the nation.
PSEG has three other direct, wholly-owned subsidiaries: PSE&G, PSEG Energy
Holdings Inc. ("Energy Holdings") and PSEG Services Corporation ("Services").
PSE&G is New Jersey's largest public utility and is engaged principally in the
transmission, distribution and sale of electric energy and gas service in New
Jersey. Energy Holdings participates nationally and internationally in
energy-related lines of business through its subsidiaries. Services provides
corporate support and managerial and administrative services to PSEG and its
affiliates.
Deregulation
Since the target markets in which we operate are deregulated at the
wholesale level, continued deregulation of the retail markets within these
regions is likely to bring new purchasers of electricity into the wholesale
markets, thus increasing the volume of transactions. This should continue to
strengthen the efficient operation and liquidity of those markets. Liquidity is
essential for efficiency as it provides a ready market for our generation output
and marketing and trading activities.
We expect that deregulation will continue in the regions in which we
compete. In our target market, 13 of the 19 states and the District of Columbia
have enacted restructuring legislation, while six of the remaining states have
either issued a regulatory order relating to restructuring or are in the process
of investigating restructuring. Retail competition has already begun in 12 of
the states and the District of Columbia with two additional states scheduled to
begin competition in 2001 and 2002. Three of the five wholesale marketplaces in
our Super Region are operated by Independent System Operators ("ISOs"), and the
other two markets are expected to develop similar governance structures in the
near future.
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Competitive Strengths
We believe that we are well positioned to build upon our successful
history and existing asset base to remain one of the largest independent
electric generating and wholesale energy marketing and trading companies in the
United States. Our significant competitive strengths include the following:
o We have one of the largest and most diversified unregulated
generating portfolios in PJM and the eastern United States:
o our assets represent a diversified mix in terms of fuel type,
technology and energy market segments, which reduces our risk
associated with market demand cycles and allows us to
participate in each segment of the dispatch curve;
o our assets are strategically located near concentrations of
customers; and
o our base load coal and nuclear assets continue to achieve high
capacity factors, while our load-following and peaking units
have high equivalent availability factors.
o We have a wholesale marketing and trading function with integrated
control of our generating assets, fuel procurement and trading
activities:
o we seek to create the optimal mix of financial and physical
assets, mitigating the effects of adverse movement in the fuel
and electricity markets;
o we enter into both short-term and longer term bilateral
contracts with over 100 credit-approved counterparties; and
o we provide effective management of the spark spread - the
difference between the cost of fuel and the price of power.
o We utilize a conservative risk management strategy to minimize our
exposure to long-term and short-term market risks, which has been
instrumental in our ability to consistently grow the profitability
of our trading operations:
o our corporate risk management committee provides oversight of
the entire process and reports directly to the PSEG Board of
Directors;
o we have a corporate risk management group independent of our
trading operations that reports to the chief financial officer
of PSEG and provides independent risk oversight of trading
activity and monitors, measures and aggregates the financial
risk activities of all trading operations; and
o we monitor the value-at-risk associated with our forward
positions, including our generation and sales obligations on a
weekly basis, and we mark our positions to market and stress
test our portfolio on a daily basis.
o We possess extensive experience within PJM and surrounding regions,
which provides us with in-depth knowledge and insight about the
market's assets, market rules and transmission constraints.
o We have a management team that is comprised of seasoned individuals
who have long-standing experience with our generating assets, market
conditions, labor relations, business development, commodity trading
and risk management. Our management and operating teams have, for
the most part, managed and controlled our generating assets since
their construction.
o We are committed as an environmental leader:
o we led the industry as an advocate for integrated power plant
emissions strategy that would coordinate reductions of
nitrogen oxides, sulfur dioxide, mercury, and carbon dioxide;
o we implemented the largest privately-funded wetlands
restoration program in the U.S.;
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o we achieved a voluntary 80% reduction in nitrogen oxide
emissions in our New Jersey facilities; and
o we were recognized by the U.S. Environmental Protection Agency
("EPA") for our efforts to reduce solid and hazardous wastes.
Business Strategy
Our objective is to continue to profitably build our multi-regional
generating and wholesale energy marketing and trading company based upon our
successful formula of integrating generating asset operations with our wholesale
energy, fuel supply, trading and risk management expertise. To implement our
strategy we plan to:
o Maximize the value of our existing assets based upon their location,
low cost and fuel diversity. More specifically, we plan to:
o continue to provide for long term power supply contracts
associated with about 75% of portfolio;
o benefit from the advantageous location of assets near the load
centers - therefore allowing us to benefit from the impacts of
transmission constraints; and
o take advantage of the value of possessing assets across the
entire market spectrum - base load, load following and
peaking.
o Continue the strong integration between the operation of our
generating assets, fuel procurement, trading and risk management.
More specifically, we plan to:
o continue to optimize the value of our generating assets by
coordinating their dispatch with our fuel management and
electricity and natural gas trading operations; and
o continue to maintain a strong control environment through the
use of best practices in risk management oversight for both
market and credit risk.
o Profitably expand our asset base across the eastern United States -
focusing both within the PJM region and in adjoining regions. More
specifically, we plan to:
o continue to expand our existing brownfield sites, based upon
their favorable location with respect to load centers,
priority position in the transmission queue and existing fuel
supplies; and
o pursue a disciplined approach to asset growth in neighboring
regions where we can bring our expertise to bear with regard
to operations, market rules, trading and risk management; and
o Maintain our commitment to the environment - both by improving the
environmental performance of our assets and by taking a leadership
position for a uniform set of stringent, but achievable, air
pollution standards for all U.S. power plants. More specifically, we
plan to:
o continue to advocate an integrated power plant emissions
strategy that coordinates reductions of nitrogen oxides,
sulfur dioxide, mercury, and carbon dioxide;
o continue our implementation of the largest privately-funded
wetlands restoration program in the U.S.; and
o achieve a 90% reduction in nitrogen oxide emissions at our New
Jersey facilities by 2003.
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10
Recent Developments
Development Activities
In June 2001, our Kearny Unit #12 (175 MW) in Kearny, New Jersey, began
commercial operation for one half of the capacity. The unit was fully
operational in August 2001.
We are in the process of obtaining permits and approvals to authorize the
development of the Bethlehem Energy Center, a 750 MW combined-cycle power plant
that will use natural gas as its primary fuel and low-sulfur distillate oil as a
secondary fuel. The Bethlehem Energy Center will be located on the site of the
400 MW Albany Steam Station (which was acquired from Niagara Mohawk Power
Corporation in May 2000) and will replace that facility. In September, the New
York Department of Environmental Conservation issued draft air and water permits
for the project. In addition, the New York State Board on Electric Generation
Siting and Environment determined that the plant's application Certificate of
Environmental Compatibility and Public Need was in compliance with state
regulations. Public hearings on the application are scheduled to commence in
October.
On August 22, 2001, construction and term loans with a group of banks were
closed for the Waterford, Ohio ($355 million) and Lawrenceburg, Indiana ($445
million) projects. The interest rate on these loans is set at LIBOR plus 1.375%
during the construction phase and 1.5% thereafter. Construction on each of these
projects has commenced.
In June 2001, we sold 350 MW of turbine equipment.
License Renewals
Exelon, co-owner and operator of Peach Bottom Atomic Power Station ("Peach
Bottom"), has informed us that on July 3, 2001 an application was submitted to
the Nuclear Regulatory Commission to renew the operating licenses for Peach
Bottom Units 2 and 3. If approved, the current licenses would be extended by 20
years, to 2033 and 2034 for Units 2 and 3 respectively. Nuclear Regulatory
Commission review of the application is expected to take approximately two
years.
The New Jersey Department of Environmental Protection ("NJDEP") issued a
final New Jersey Pollutant Discharge Eliminating System permit (Permit) for our
Salem Generating Station (Salem), effective August 1, 2001, allowing for the
continued operation of Salem with its existing cooling water system. This Permit
renews Salem's variance from applicable thermal water quality standards under
Section 316(a) of the federal Clean Water Act ("CWA"), determines that the
existing intake structure represents best technology available under Section
316(b) of the CWA, requires that we continue to implement the wetlands
restoration and fish ladder programs established under the 1994 permit and
imposes requirements for additional analyses of data and studies to determine if
other intake technologies are available for application at Salem that are
biologically effective. The Permit also requires us to install up to two
additional fish ladders in New Jersey and fund an escrow account in the amount
of $500,000 for the construction of artificial reefs by NJDEP. The Permit's
expiration date is July 31, 2006.
We also reached a settlement with the Delaware Department of Natural
Resources and Environmental Control ("DNREC") providing that we will fund
additional habitat restoration and enhancement activities as well as fisheries
monitoring and that we and DNREC will work cooperatively on the finalization of
other regulatory approvals required for implementation of the Permit. As part of
this agreement, we were required to deposit approximately $5.8 million into an
escrow account to be used for future costs related to this settlement.
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11
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Summary Selected Historical Consolidated Financial Data
The following table sets forth our summary selected historical
consolidated financial data. The historical consolidated financial data as of
June 30, 2001, and for the six months ended June 30, 2001 and 2000 have been
derived from our unaudited financial statements included elsewhere in this
prospectus. The historical consolidated financial data as of December 31, 2000
and 1999, and for the three years ended December 31, 2000 have been derived from
our audited financial statements included elsewhere in this prospectus. The
historical consolidated financial data as of December 31, 1998 and 1997, and for
the year ended December 31, 1997 have been derived from audited financial
statements not included herein. The historical consolidated financial data as of
and for the year ended December 31, 1996 has been derived from unaudited
financial statements not included herein and, in the opinion of management,
include all adjustments necessary for a fair presentation of our financial
position and results of operations for this period. The information set forth
below should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") and the Consolidated
Financial Statements and accompanying Notes to Consolidated Financial Statements
included elsewhere in this prospectus. Data related to periods prior to August
2000 have been derived from PSE&G's financial statements and are not necessarily
indicative of the financial condition, results of operations or net cash flows
that would have existed had PSE&G's generation-related business been an
independent company during those periods.
For the Six
Months Ended
(in millions) June 30, For the Years Ended December 31,
------------ ---------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Income Statement Data
Operating Revenue ......... $ 2,320 $ 2,373 $ 4,927 $ 4,494 $ 4,428 $ 2,822 $ 2,510
Operating Expenses ........ 1,883 2,003 4,215 3,563 3,794 2,195 1,957
Operating Income .......... 437 370 712 931 634 627 553
Interest Expense .......... 89 43 198 112 216 223 221
Income Taxes .............. 140 136 208 291 156 101 129
Income Before Extraordinary
Item .................... 206 198 313 516 237 195 187
Extraordinary Item (1) .... -- -- -- (3,204) -- -- --
Net Income (Loss) ......... 206 198 313 (2,688) 237 195 187
Earnings (Loss) Available
to PSEG ................. $ 206 $ 198 $ 313 $(2,691) $ 232 $ 186 $ 184
As of June 30, As of December 31,
-------------- -----------------------------------------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
Balance Sheet Data
Assets ................. $4,830 $4,530 $3,301 $8,045 $8,183 $8,405
Current Liabilities .... 1,388 1,470 1,038 762 984 838
Noncurrent Liabilities . 1,000 1,006 991 2,096 2,075 2,086
Capitalization (2) ..... 2,442 2,054 1,272 5,187 5,124 5,481
For the Six
Months Ended
June 30, For the Years Ended December 31,
-------- ----------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Other Data
EBITDA (3) ......... $ 490 $ 445 $ 855 $1,155 $1,015 $ 905 $ 911
Capital Expenditures 741 177 479 92 265 166 75
- ----------
(1) Effective April 1, 1999, we discontinued the application of SFAS 71 and
recorded an extraordinary charge. The extraordinary charge consisted
primarily of the write-down of our nuclear and fossil generating stations.
(2) Includes notes payable to an affiliated company in the year 2000.
(3) Earnings before Interest, Taxes, Depreciation and Amortization.
Information concerning EBITDA is presented here not as a measure of
operating results, rather as a measure of ability to service debt. In
addition, EBITDA may not be comparable to similarly titled measures by
other companies. EBITDA should not be construed as an alternative to
operating income or cash flow from operating activities, each as
determined according to generally accepted accounting principles. Although
we are not required to meet minimum EBITDA to interest charges tests as
part of our debt covenants, we use these measures in our financial and
business planning process to provide reasonable assurance that our
forecasts will provide adequate interest coverage to maintain or improve
our target credit ratings.
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12
RISK FACTORS
In addition to the information contained elsewhere in this prospectus,
prospective investors should carefully consider the risks described
below. Each of the following factors could have a material adverse
effect on our business, prospects, financial condition, results
of operations or net cash flows.
Power generation operating performance may fall below projected levels
The risks associated with operating power generation facilities (each of
which could result in performance below expected capacity levels) include:
o performance below expected levels of output or efficiency;
o breakdown or failure of equipment or processes;
o disruptions in the transmission of electricity;
o labor disputes;
o fuel supply interruptions;
o limitations which may be imposed by environmental or other
regulatory requirements;
o violations of permit limitations; and
o operator error or other catastrophic events such as fires,
earthquakes, explosions, floods or other similar occurrences.
Operation below expected capacity levels may result in lost revenues,
increased expenses, higher maintenance costs and penalties. Individual
facilities may be unable to meet operating and financial obligations resulting
in reduced cash flow.
Although we employ experienced personnel to maintain and operate our
facilities and carry insurance (including business interruption insurance for
our nuclear units) to mitigate the effects of certain operating risks described
above, we cannot give any assurance that, should one or more of the events
described above occur, it would not significantly decrease or eliminate revenues
from operations or significantly increase the costs of operations.
A decrease in revenues or an increase in operating costs could decrease or
eliminate funds available to us to make payments on our debt, including the
exchange notes.
We have a limited operating history as a stand-alone power generator
Although our generation stations had a significant operating history at
the time they were acquired by us from PSE&G, we have a very limited history of
owning and operating them on a stand-alone basis. In addition, the generation
stations were previously operated as integrated parts of a regulated utility
prior to their acquisition by us and their output of electricity was sold by
PSE&G at prices that were based upon rates set by regulatory authorities. We
cannot make any assurance that the generation stations will perform as expected
or produce revenues sufficient to meet their cost of operation, necessary
capital expenditures or debt service on our indebtedness.
Our historical consolidated financial statements do not allow us to
predict with any certainty our future income because:
o of our generation business' limited experience operating as a
separate, competitive, non-regulated enterprise;
o we have been operating the generation stations for a short period of
time on a stand-alone basis;
o PJM's and New York ISO's pricing and operating rules have changed
significantly in recent years; and
13
o since August 1, 1999, commodity/fuel risk is no longer being offset
by regulatory fuel/energy adjustment clause mechanisms.
Unavailability of power transmission facilities may impact our ability to
deliver our output to customers
We depend on transmission and distribution facilities owned and operated
by others to deliver the electricity we generate and sell. If transmission is
disrupted, or if transmission capacity is inadequate, our ability to sell and
deliver our electric energy products may be adversely impacted. If a region's
power transmission infrastructure is inadequate, our ability to generate power
and earn revenues may be limited.
We may not be able to obtain adequate fuel supplies and purchased power at
attractive prices
Prior to August 1, 1999, our revenues and expenses were impacted by the
Electric Levelized Energy Adjustment Clause ("LEAC"). LEAC was a utility
regulatory rate setting mechanism for compensating the utility and electric
consumers for unpredicted fuel and purchased power price fluctuations. LEAC
allowed for adjustments to electric rates on a periodic basis. In effect, the
utility credited electric customers for lower than predicted fuel and purchased
power prices and collected additional revenues when fuel and purchased power
prices were higher than predicted. On August 1, 1999, LEAC was eliminated,
introducing an increased potential for earnings and cash flow volatility
associated with exposure to price fluctuations in the fuel and purchased power
markets. We are now subject to the full effects of price fluctuations in the
energy markets.
Among the factors that will influence such energy prices (all of which are
beyond our control) are:
o prevailing availability and market prices for coal, natural gas,
fuel oil, enriched uranium and uranium fuel;
o the extent of additional supplies of electric energy from our
current competitors or new market entrants, including the
development of new generation facilities that may be able to produce
electricity less expensively;
o the extent of additional supplies of electricity from an increase in
physical transmission capacity into the energy markets in which we
participate;
o weather conditions from time to time; and
o the possibility of a reduction in the projected rate of growth in
electricity usage as a result of such factors as regional economic
conditions and the implementation of energy conservation programs.
We cannot guarantee that we will be consistently able to obtain adequate
supplies of fuel and purchased power at attractive prices.
We may have to purchase electricity at substantially higher prices than we can
sell it under our BGS contract with PSE&G
In the event that demand associated with the BGS contract exceeds our
generation capacity, we will have to purchase wholesale power to meet this sales
commitment. The cost of obtaining the electricity needed to service the full
amount of the contract may exceed the price that we receive from PSE&G for
providing that energy under the BGS contract. The price that we receive under
the BGS contract is fixed (at the retail tariff rate on file with the BPU),
while electricity prices in the wholesale market can be extremely volatile. In
the event that we have to purchase electricity to cover our BGS commitments,
high market prices for that purchased electricity, whether hedged or not, are
likely to increase our energy costs and adversely affect our earnings.
The seasonality of our business may impact cash flow
Through July 31, 2002, our cash flow will be primarily influenced by the
BGS contract that we have with PSE&G. Our BGS revenues will be a function of the
terms of this contract, while our associated costs will be a function of the
variable cost of our generation asset portfolio and power purchase
14
opportunities relative to the capacity and energy needs of PSE&G's BGS customer
base. When the capacity and energy output of our owned generation units is
insufficient to cover the needs of PSE&G's BGS load, which is more likely during
summer months, we will purchase additional energy and capacity from the
wholesale markets. In such instances, we could be exposed to the price
volatility of the wholesale markets and our cash flows may vary throughout the
course of a year.
After July 31, 2002, our cash flow will largely be determined by the size
of our generation asset portfolio relative to our contractual obligations to
provide retail aggregators and other wholesale market participants capacity and
energy. Similar to the short-term situation, we will purchase or sell additional
energy and capacity to/from the wholesale markets when necessary and such
exposure may result in varying cash flows from month to month.
Upon expiration of the BGS contract, we cannot guarantee we will be able to
replace those revenues
PSE&G is required by the BPU to competitively seek bids for the supply of
its BGS obligations for periods after July 31, 2002. We will have the
opportunity to submit a bid to continue to supply PSE&G or another load serving
entity ("LSE") in New Jersey under a new contract, or we can sell our energy and
capacity into the spot market, enter into other bilateral agreements or a
combination thereof. Our goal is to realize a majority of our generation
revenues from bilateral agreements. In addition, we will continue to sell
additional energy and capacity into the spot market and will continue to be
subject to the risks and rewards associated with the competitive wholesale
electricity market to the extent that the price at which we sell our energy and
capacity differs from our production or purchased power costs.
Credit, commodity and financial market risks may have an adverse impact
The revenues generated by the operation of our generation stations are
subject to market risks that are beyond our control. Our generation output will
either be used to satisfy our wholesale contracts or be sold into the
competitive power markets or under other bilateral contracts. Participants in
the competitive power markets are not guaranteed any specified rate of return on
their capital investments through recovery of mandated rates payable by
purchasers of electricity. Therefore, with the exception of revenue generated by
the BGS contract (which expires on July 31, 2002) and from bilateral contracts
for the sale of electricity with third-party LSEs and power marketers, our
revenues and results of operations will be dependent upon prevailing market
prices for energy, capacity and ancillary services in the markets we serve.
Among the factors that will influence the market prices for energy,
capacity and ancillary services are:
o the extent of additional supplies of capacity, energy and ancillary
services from current competitors or new market entrants, including
the development of new generation facilities that may be able to
produce electricity less expensively;
o changes in the rules set by regulatory authorities with respect to
the manner in which electricity sales will be priced;
o transmission congestion in PJM and/or other competitive markets;
o the operation of nuclear generation plants in PJM and other
competitive markets beyond their presently expected dates of
decommissioning;
o prevailing market prices for enriched uranium, fuel oil, coal and
natural gas and associated transportation costs;
o weather conditions prevailing in PJM and other competitive market
regions from time to time;
o the possibility of a reduction in the projected rate of growth in
electricity usage as a result of factors such as national and
regional economic conditions and the implementation of conservation
programs; and
o changes in regulations applicable to PJM and other ISOs.
15
Trading risks may have an adverse impact
Our trading and marketing business frequently involves the establishment
of trading positions in the wholesale energy markets on long-term and short-term
bases. To the extent that we have long positions in the energy markets, a
downturn in the markets is likely to result in losses from a decline in the
value of such long positions. Conversely, to the extent that we enter into
forward sales contracts to deliver energy we do not own, or take short positions
in the energy markets, an upturn in the energy markets is likely to expose us to
losses as we attempt to cover our short positions by acquiring energy in a
rising market.
In addition, from time to time we may have a trading strategy consisting
of simultaneously holding a long position and a short position, from which we
expect to earn a profit based on changes in the relative value of the two
positions. If, however, the relative value of the two positions changes in a
direction or manner we did not anticipate, we could realize losses from such a
paired position.
If the strategy we utilize to hedge our exposures to these various risks
is not effective, we could incur significant losses. Our substantial trading
positions can also be adversely affected by the level of volatility in the
energy markets that, in turn, depends on various factors, including weather in
various geographical areas and short-term supply and demand imbalances, which
cannot be predicted with any certainty.
In addition, we are exposed to the risk that counterparties that owe us
money or energy will not perform their obligations. Although we have devoted
significant resources to develop our risk management policies and procedures and
counterparty credit requirements and expect to continue to do so in the future,
we can give no assurance that losses from our trading activities will not have a
material adverse effect on our business, prospects, results of operations,
financial condition, or net cash flows.
We may not have access to sufficient capital in the amounts and at the times
needed for our business
Our capital and, in turn, that of our subsidiaries, is provided by equity
contributions from PSEG, internally-generated cash flow, borrowings by us and
borrowings by our subsidiaries. In order to ensure continued growth, we will
increasingly require access to debt capital from outside sources on acceptable
terms.
We can give no assurances that our current and future capital structure,
operating performance or financial condition will permit us to access the
capital markets or to obtain other financing at the times, in the amounts and on
the terms necessary or advisable for us to successfully carry out our business
strategy or to service our indebtedness, including the exchange notes.
Acquisition, construction and development activities may not be successful
We may seek to acquire, develop and construct new energy projects, the
completion of any of which (including the pending acquisition of 298 MW of
nuclear assets from Atlantic City Electric Company ("ACE")) is subject to
substantial risk. Such activity can require us to expend significant sums for
preliminary engineering, permitting, fuel supply, resource exploration, legal
and other expenses in preparation for competitive bids which we may not win or
before it can be established whether a project is feasible, economically
attractive or capable of being financed. Successful development and construction
is contingent upon, among other things, negotiation of terms satisfactory to us
of engineering, construction, fuel supply and power sales contracts with other
project participants, receipt of required governmental approvals and consents
and timely implementation of construction. Further, we can give no assurance
that we will obtain access to the substantial debt and equity capital required
to develop and construct new generation projects or to refinance existing
projects.
Our future growth is dependent, in large part, upon the demand for
significant amounts of additional energy and our ability to supply portions of
this demand. Even if such contracts are obtained, we can give no assurance that
acquisition, construction or development efforts on any particular project, or
our efforts generally, will be successful in supplying such demand.
16
Government regulation affects many of our operations
The electric power generation business is subject to substantial
regulation and permitting requirements from federal, state and local
authorities. See "Business -- Regulation." We are required to comply with
numerous laws and regulations and to obtain numerous governmental permits in
order to operate our generation stations.
We believe that we have obtained all material energy-related federal,
state and local approvals currently required to operate our generation stations.
Although not currently required, additional regulatory approvals may be required
in the future due to a change in laws and regulations or for other reasons. No
assurance can be given that we will be able to obtain any required regulatory
approval that we may require in the future, or that we will be able to obtain
any necessary extension in obtaining any required regulatory approvals. If we
fail to obtain or comply with any required regulatory approvals, there could be
a material adverse effect on our ability to operate our generation stations or
to sell electricity to third parties.
PSEG has claimed an exemption from regulation by the SEC as a registered
holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"),
except for Section 9(a)(2) thereof, which relates to the acquisition of 5% or
more of the voting securities of an electric or gas utility company. PUHCA
regulates public utility holding companies and their subsidiaries. The
subsidiaries which operate our generation stations are EWGs under PUHCA. Failure
to maintain EWG status could subject us to regulation by the SEC under PUHCA. In
addition, actions taken by PSE&G could cause PSEG, and therefore its
subsidiaries, including us, to no longer be exempt from regulation under PUHCA.
If we, PSEG or any of our subsidiaries were to no longer be exempt from PUHCA,
we or they would be subject to additional regulation by the SEC with respect to
financing and investing activities.
We are subject to regulation by the Federal Energy Regulatory Commission
("FERC") with respect to certain matters, including interstate sales and
exchanges of electric capacity and energy.
We are subject to pervasive regulation by the Nuclear Regulatory
Commission ("NRC") with respect to the operation of our nuclear generation
stations. Such regulation involves testing, evaluation and modification of all
aspects of plant operation in light of NRC safety and environmental
requirements. Continuous demonstrations to the NRC that plant operations meet
applicable requirements are also required. The NRC has the ultimate authority to
determine whether any nuclear generation unit may operate.
We can give no assurance that existing regulations will not be revised or
reinterpreted, that new laws and regulations will not be adopted or become
applicable to us or any of our generation stations or that future changes in
laws and regulations will not have a detrimental effect on our business.
Environmental regulation significantly impacts our operations
We are required to comply with numerous statutes, regulations and
ordinances relating to the safety and health of employees and the public, the
protection of the environment and land use. These statutes, regulations and
ordinances are constantly changing. While we believe that we have obtained all
material environmental-related approvals required as of the date hereof to own
and operate our facilities or that such approvals have been applied for and will
be issued in a timely manner, we may incur significant additional costs because
of compliance with these requirements. Failure to comply with environmental
statutes, regulations and ordinances could have a material effect on us,
including potential civil or criminal liability and the imposition of clean-up
liens or fines and expenditures of funds to bring our facilities into
compliance.
Regulatory approval for the construction of new facilities is a costly and
time-consuming process. Intricate and rapidly changing environmental regulations
may require major expenditures for permitting, thereby creating the risk of
expensive delays or material impairment of project value if these projects
cannot function as planned due to changing regulatory requirements or local
opposition.
17
We can give no assurance that we will be able to:
o obtain all required environmental approvals that we do not yet have
or that may be required in the future;
o obtain any necessary modifications to existing environmental
approvals; or
o maintain compliance with all applicable environmental laws,
regulations and approvals.
Delay in obtaining or failure to obtain and maintain in full force and
effect any such environmental approvals, or delay or failure to satisfy any
applicable environmental regulatory requirements, could prevent construction of
new facilities, operation of our existing facilities or sale of energy therefrom
or could result in significant additional cost to us.
We are subject to more stringent environmental regulation than many of our
competitors
Most of our facilities are located in the State of New Jersey and are
subject to both federal and state pollution control requirements. New Jersey's
environmental programs are generally considered to be particularly stringent in
comparison to similar programs in other states. As such, there may be instances
where the facilities located in New Jersey are subject to more stringent and
therefore more costly pollution control requirements than competitive facilities
in other states.
We are responsible for pre-existing environmental liabilities of the assets we
acquired
In acquiring the generation stations from PSE&G, we assumed all
environmental liabilities associated with the generation stations, regardless of
when such liabilities arose and whether known or unknown, and agreed to
indemnify PSE&G for these liabilities. Our contract to purchase the Albany Steam
Station required our assumption of on-site environmental liabilities.
The indenture restricts our ability to enter into certain transactions
The indenture restricts our ability and the ability of our Restricted
Subsidiaries (as defined below under "Description of the Exchange Notes") to,
among other things:
o in the case of our Restricted Subsidiaries, incur certain
indebtedness;
o create liens;
o in the case of our Restricted Subsidiaries, create or permit to
exist dividend or payment restrictions with respect to us;
o sell assets; and
o engage in mergers and consolidations.
These restrictions may limit our ability to finance future operations,
respond to changing business and economic conditions, secure any needed
additional financing and engage in opportunistic transactions. See "Description
of the Exchange Notes -- Selected Indenture Covenants."
Insurance coverage may not be sufficient
We have insurance for our generation stations, including all-risk property
damage insurance, commercial general public liability insurance, boiler and
machinery coverage, nuclear liability and, for our nuclear units, replacement
power and business interruption insurance in amounts and with deductibles that
we consider appropriate. We can give no assurance that such insurance coverage
will be available in the future on commercially reasonable terms nor that the
insurance proceeds received for any loss of or any damage to any of the
generation stations will be sufficient to permit us to continue to make payments
on our debt, including the exchange notes.
We are subject to substantial competition
The United States electric utility industry is currently experiencing
increasing competitive pressures as a result of state and federal deregulation
legislation and related regulatory initiatives, consumer
18
demands, distributed generation, technological advances, greater availability of
natural gas and other factors. Pursuant to the National Energy Policy Act of
1992, FERC has effected certain regulatory changes to increase access to the
nationwide transmission grid by utility and non-utility purchasers and sellers
of electricity in order to create more competition in wholesale power markets.
Many states are implementing or considering methods to introduce and promote
retail competition. Thirteen of the nineteen states and the District of Columbia
in our target markets have enacted restructuring legislation and twelve have
opened their retail energy markets to competition. Furthermore, six of the
remaining states have issued a regulatory order or are otherwise investigating
restructuring. In addition, proposals have been introduced in Congress to repeal
the Public Utility Regulatory Policy Act ("PURPA") and PUHCA which would further
impact the markets in which we operate.
We are subject to substantial competition. Deregulation may not only
continue to accelerate the current trend toward consolidation among domestic
utilities, but may also continue to result in the splitting of
vertically-integrated utilities into separate generation, transmission and
distribution businesses. We face competition from independent power producers,
numerous well-capitalized investment and finance company affiliates of banks,
large energy marketing companies, utilities and industrial companies. As a
result, additional significant competitors have become active in the independent
power industry and the potential for excess capacity exists in portions of our
target market.
The electric utility industry is undergoing substantial change
The electric utility industry in the State of New Jersey, across the
country and around the world is undergoing major transformations. We, PSEG and
PSE&G are affected by many issues that are common to the electric industry such
as:
o deregulation, the unbundling of energy supplies and services and the
establishment of a competitive energy marketplace for products and
services;
o energy sales retention and growth;
o the need to reduce operating and capital costs and operate
efficiently in a competitive environment;
o revenue stability and growth;
o nuclear operations and decommissioning;
o increased capital investments attributable to environmental
regulations;
o managing wholesale energy trading operations;
o ability to complete development or acquisition of current and future
investments;
o managing electric generation and distribution operations in
locations outside of the traditional utility service territory;
o exposure to market price fluctuations and volatility;
o fair competition and affiliate transactions;
o accounting changes resulting from deregulation; and
o debt and equity market concerns associated with these issues.
Changes in technology may make our power generation assets less competitive
A key element of our business plan is that generating power at central
power plants produces electricity at relatively low cost. There are other
technologies that produce electricity, most notably fuel cells, microturbines,
windmills and photovoltaic (solar) cells. It is possible that advances in
technology will reduce the cost of alternative methods of producing electricity
to a level that is competitive with that of most central station electric
production. If this were to happen, our market share could be eroded and the
value of our power plants could be significantly impaired. Changes in technology
could also alter the channels through which retail electric customers buy
electricity, thereby affecting our financial results.
19
We are subject to control by PSEG
Our sole limited liability company member, PSEG, controls the election of
our directors and all other matters submitted for member approval and has
control over our management and affairs. In circumstances involving a conflict
of interest between PSEG, as the sole member, on the one hand, and our
creditors, on the other, we can give no assurance that PSEG would not exercise
its power to control us in a manner that would benefit PSEG to the detriment of
our creditors, including the holders of the exchange notes.
The Indenture imposes no limitations on our ability to pay dividends or to
make other payments to PSEG or on our ability to enter into transactions with
PSEG or our other affiliates.
There is no public market for the exchange notes
Although the application for listing on the Luxembourg Stock Exchange of
the exchange notes has been made, we do not intend to list any series of the
exchange notes on any U.S. securities exchange. We can give no assurance
concerning the liquidity of any market that may develop for the exchange notes,
the ability of any investor to sell the exchange notes or the price at which
investors would be able to sell their exchange notes.
Fraudulent transfer statutes and similar limitations may limit your rights as a
noteholder
Each of our Restricted Subsidiaries will guarantee our obligations on the
exchange notes (each a "Subsidiary Guaranty"). See "Description of the Exchange
Notes -- Guaranty of Senior Notes."
Under federal and state fraudulent transfer laws, a court could find that
the Subsidiary Guaranty provided by a Restricted Subsidiary constituted a
fraudulent conveyance by that Restricted Subsidiary. To do so, a court would
typically have to find that, at the time the Subsidiary Guaranty was issued, the
relevant Restricted Subsidiary:
o issued the Subsidiary Guaranty with the intent of hindering,
delaying or defrauding our current or future creditors; or
o (a) received less than fair consideration or reasonably equivalent
value for incurring the indebtedness represented by its Subsidiary
Guaranty; and (b) either (x) was insolvent or was rendered insolvent
by reason of the issuance of the Subsidiary Guaranty, (y) was
engaged, or about to engage, in a business or transaction for which
its assets were unreasonably small or (z) intended to incur, or
believed or should have believed it would incur, debts beyond its
ability to pay as such debts mature.
Many of the foregoing terms are defined in or interpreted under those fraudulent
transfer statutes.
Different jurisdictions define "insolvency" differently. However, an
entity generally would be considered insolvent at the time it incurred any
particular obligation if (1) its liabilities exceeded its assets, at a fair
valuation, or (2) the present saleable value of its assets is less than the
amount required to pay its total existing debts and liabilities (including any
probable liability related to contingent liabilities) as they become absolute or
matured. We cannot assure you of the standard a court would apply in order to
determine whether any Restricted Subsidiary was "insolvent" as of the date the
applicable Subsidiary Guaranty was issued, or that regardless of the method of
valuation, a court would not determine, regardless of whether such Restricted
Subsidiary was insolvent on the date the Subsidiary Guaranty was issued, that
the payments constituted fraudulent transfers on another ground.
If a court were to make any such finding, it could:
o avoid all or a portion of the relevant Restricted Subsidiary's
obligations on the Subsidiary Guarantees;
o subordinate the relevant Restricted Subsidiary's obligations on the
Subsidiary Guarantees to obligations owed to its other existing and
future creditors, entitling those creditors to be paid in full
before any payment is made on the relevant Subsidiary Guaranty;
and/or
o take other actions detrimental to you, including invalidating the
relevant Subsidiary Guaranty.
20
In that event, we cannot assure you that you would receive any payment
under the Subsidiary Guaranty of the relevant Restricted Subsidiary.
If you fail to exchange original notes, they will remain subject to transfer
restrictions
Any original notes that remain outstanding after this exchange offer will
continue to be subject to restrictions on their transfer. After this exchange
offer, holders of original notes will not (with limited exceptions) have any
further rights under the exchange and registration rights agreement. Any market
for original notes that are not exchanged could be adversely affected by the
conclusion of this exchange offer.
Late deliveries of notes and other required documents could prevent a holder
from exchanging its notes
Holders are responsible for complying with all exchange offer procedures.
Issuance of exchange notes in exchange for original notes will only occur upon
completion of the procedures described in this prospectus under the heading "The
Exchange Offer -- Procedures for Tendering Original Notes". Therefore, holders
of original notes who wish to exchange them for exchange notes should allow
sufficient time for timely completion of the exchange procedure. We are not
obligated to notify you of any failure to follow the proper procedure.
If you are a broker-dealer, your ability to transfer the notes may be restricted
A broker-dealer that purchased original notes for its own account as part
of market-making or trading activities must deliver a prospectus when it sells
the exchange notes. Our obligation to make this prospectus available to
broker-dealers is limited. Consequently, we cannot guarantee that a proper
prospectus will be available to broker-dealers wishing to resell their exchange
notes.
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements, other
than statements of historical facts, included in this prospectus that address
activities, events or developments that we expect or anticipate will or may
occur in the future, including such matters as our projections, future capital
expenditures, business strategy, competitive strengths, goals, expansion, market
and industry developments and the growth of our businesses and operations, are
forward-looking statements. These statements are based on assumptions and
analyses made by us in light of our experience and our perception of historical
trends, current conditions and expected future developments as well as other
factors we believe are appropriate under the circumstances. However, actual
results and developments may differ materially from our expectations and
predictions due to a number of risks and uncertainties, many of which are beyond
our control. These risks and uncertainties include:
o the significant considerations and risks discussed in this
prospectus;
o general and local economic, market or business conditions;
o demand (or lack thereof) for electricity, capacity and ancillary
services in the markets served by our generation units;
o increasing competition from other companies;
o the acquisition and development opportunities (or lack thereof) that
may be presented to and pursued by us;
o changes in laws or regulations that are applicable to us;
o environmental constraints on construction and operation;
o the rapidly changing market for energy products; and
o access to capital.
21
Consequently, all of the forward-looking statements made in this
prospectus are qualified by these cautionary statements and we cannot assure you
that the results or developments anticipated by us will be realized or, even if
realized, will have the expected consequences to or effects on us or our
business prospects, financial condition or results of operations. You should not
place undue reliance on these forward-looking statements in making your
investment decision. We expressly disclaim any obligation or undertaking to
release publicly any updates or revisions to these forward-looking statements to
reflect events or circumstances that occur or arise or are anticipated to occur
or arise after the date hereof. In making an investment decision regarding the
exchange notes, we are not making, and you should not infer, any representation
about the likely existence of any particular future set of facts or
circumstances.
USE OF PROCEEDS
The exchange offer is intended to satisfy some of our obligations under
the registration rights agreement. We will not receive any cash proceeds from
the issuance of the exchange notes in the exchange offer. In exchange for
issuing the exchange notes as described in this prospectus, we will receive an
equal principal amount of original notes, which will be canceled.
The net proceeds from the sale of the original notes were used to repay
the $1.620 billion demand notes payable to PSEG which enabled us to repay the
note we issued to PSE&G for the purchase of the generation units and other
assets we acquired from PSE&G and for other general company purposes. $1.084
billion of these demand notes carried a per annum interest rate of 14.23%. The
balance carried a commercial paper rate.
CAPITALIZATION
The following table sets forth our historical consolidated capitalization
as of June 30, 2001 and as of December 31, 2000 which reflects equity and loans
from PSEG used to repay our promissory note to PSE&G.
As of 6/30/01 As of 12/31/00
------------- --------------
(in millions)
Notes Payable-due to Affiliates .............. $ -- $ 2,786
Long-term Debt:
67/8% Senior Notes due 2006 ................. 498 --
73/4% Senior Notes due 2011 ................. 798 --
85/8% Senior Notes due 2031 ................. 495 --
------- -------
Total Debt .................................. $ 1,791 $ 2,786
------- -------
Total Common Equity(1) ....................... 1,637 254
Basis Adjustment ............................. (986) (986)
------- -------
Total Capitalization ......................... $ 2,442 $ 2,054
======= =======
- ----------
(1) We are a limited liability company of which PSEG is the sole owner and
member.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Corporate Structure
We are a wholly-owned subsidiary of PSEG formed in June 1999 to acquire,
own and operate the electric generation-related assets of PSE&G pursuant to the
Final Order issued by the BPU under the New Jersey Energy Master Plan
Proceedings. We, in turn, have three principal direct wholly-owned operating
subsidiaries: Fossil, which operates our fossil generation facilities; Nuclear,
which operates our nuclear generation facilities; and ER&T, which conducts our
wholesale marketing and trading activities. We acquired PSE&G's
generation-related assets on August 21, 2000. Through our subsidiaries, we
provide energy and capacity to PSE&G under the BGS contract and market and trade
electricity, capacity and ancillary services throughout the eastern United
States. In addition, we provide corporate support and managerial and
administrative services to our subsidiaries and are responsible for financing
their operations. We also have a finance company subsidiary, PSEG Power Capital
Investment Co. ("Power Capital"), which provides certain financing for our other
subsidiaries.
Overview and Future Outlook
We currently operate as an independent power generation and wholesale
marketing and trading company in the eastern United States. As of June 30, 2001,
we owned 11,490 MW of generation capacity. (This total includes the generation
capacity (298 MW) related to our pending acquisition of ACE's share of co-owned
nuclear generation facilities.) We derive our revenue and cash flows principally
from the sale of electricity, capacity and ancillary services.
The regulatory structure that has historically governed the electric power
industry in the United States and in many of the states is in transition. Recent
federal and state legislative and regulatory initiatives have been designed to
promote competition in the electric power industry. Deregulation is underway
throughout the United States and is at a relatively advanced stage in the
Northeast, where certain of the markets in which we compete are located. The
resulting restructuring of energy markets provides us with new opportunities and
exposes us to new risks.
In August 1999, as part of New Jersey's deregulation and restructuring of
its electric power industry, the BPU issued its Final Order in PSE&G's rate
unbundling, stranded costs and restructuring proceedings which directed, among
other things, the sale by PSE&G of its generation related property, plant and
equipment and all associated rights and liabilities to a separate, unregulated
affiliate. In October and November 1999, appeals were filed challenging the
validity of this order and the BPU's related financing order. In April 2000, the
Appellate Division of the New Jersey Superior Court unanimously affirmed the BPU
orders. In May 2000, the appellants requested the New Jersey Supreme Court to
review certain aspects of the Appellate Division decision and, in July 2000, the
New Jersey Supreme Court granted the requests of the New Jersey Business User's
Coalition and of the New Jersey Ratepayer Advocate (the "RPA"), while denying
the request of Co-Steel Raritan ("Co-Steel"), an individual PSE&G industrial
customer. On December 6, 2000, the New Jersey Supreme Court issued a final order
affirming the judgment of the Appellate Division. The New Jersey Supreme Court's
written opinion in this matter was issued on May 18, 2001.
On March 6, 2001, Co-Steel filed a Petition for Writ of Certiorari (the
"Petition") with the United States Supreme Court seeking limited review of the
New Jersey Supreme Court decision, the granting of which is entirely
discretionary with the Court. Briefs in opposition to the Petition have been
filed. The outcome of this petition cannot be predicted.
Prior to the execution of PSE&G's transfer of its generation business to
us, we and PSE&G obtained all necessary regulatory approvals. On August 21,
2000, PSE&G transferred its electric generation facilities and wholesale power
contracts to us and our subsidiaries in exchange for a promissory note from us
to PSE&G in an amount equal to the total purchase price of $2.786 billion. We
settled the promissory note on January 31, 2001 with funds provided by PSEG in
the form of loans and equity at which time the transferred assets were released
from the lien of PSE&G's first and refunding mortgage.
23
Prior to the issuance of the Final Order, substantially all of the output
of PSE&G's electric generation assets was sold to PSE&G's retail customers. To
ensure that PSE&G's retail customers who choose not to select or who are not
otherwise served by a different supplier continue to receive energy services,
the Final Order also requires PSE&G to provide BGS through July 31, 2002. PSE&G
has entered into a contract with us to supply the energy, capacity and ancillary
services required to meet this obligation. As a result, since August 1, 1999, we
have been selling substantially all of our output to PSE&G and will continue to
do so until July 31, 2002.
Under the BGS contract, we charge the BGS retail tariff rate on file with
the BPU. In addition, PSE&G pays us a price stability charge to compensate us
for ensuring the reliability of BGS service and assuming the risk of price
volatility. The price stability charge is equal to the full amount collected by
PSE&G for its unsecuritized generation-related stranded costs per billing
period. The Final Order also provides that rate reductions of up to 13.9% be
phased in by PSE&G to its retail customers through August 1, 2002. These
reductions are reflected in the Market Transition Charge ("MTC") revenue of up
to $540 million, net of tax, that we are entitled to receive from PSE&G through
July 31, 2003.
To the extent that we are unable to generate the energy or supply the
capacity to meet our BGS contract obligations, we will be required to purchase
necessary energy and capacity in the competitive wholesale electricity market.
During the term of the BGS contract, to the extent that we are required to
purchase energy and/or capacity in the competitive wholesale electricity markets
or generate energy to meet our obligations to supply power to PSE&G under the
BGS contract, earnings or cash flow may be negatively impacted if market prices
or costs approach or exceed the BGS contract rate. We attempt to mitigate the
risks associated with our long-term contracts through the use of derivative
financial instruments that conform to our comprehensive risk management policy.
PSE&G is required to issue a request for proposals ("RFP") for supply of
its BGS obligation for the period beginning August 1, 2002. We can submit a bid
to renew the BGS contract in response to PSE&G's RFP, or we can sell our energy
and capacity into the spot market, enter into other bilateral agreements or a
combination thereof. Our goal is to realize a majority of our generation
revenues from bilateral agreements. In addition, we will continue to sell
additional energy and capacity into the spot market and will continue to be
subject to the risks and rewards associated with the competitive wholesale
electricity market to the extent that the price at which we sell our energy and
capacity differs from our production or purchased power costs.
Our financial position, results of operations and net cash flows will be
significantly impacted by: our ability to successfully manage production and
purchased power costs; sell energy and capacity at favorable prices; and
effectively control our centralized generation, fuel procurement, power
purchases and wholesale energy marketing and trading operations.
We currently sell approximately 5% of the output from our generation
facilities to customers in the competitive wholesale (spot) market and the
remaining 95% under longer-term contracts. Within the spot market, we sell into
the energy, capacity and ancillary services markets. Ancillary services include
operating reserves and area regulation. Through ER&T, we are active in the spot,
forward and futures markets throughout the surrounding region. However, our
trading revenue is currently earned primarily within PJM, which in 2000
comprised nearly 85% of our trading activity.
By centrally managing our portfolio of generation assets, we are able to
take advantage of synergies and market knowledge to maximize our profitability.
Fossil and Nuclear sell all of their generation output to ER&T which centrally
controls all of our wholly-owned generation assets, fossil fuel procurement and
power purchases and provides a competitive wholesale energy marketing and
trading function that actively participates in all aspects of the markets in the
Super Region. This central management provides us the opportunity to optimize
the mix of financial and physical assets and mitigate the effects of adverse
movements in the fuel and electricity markets.
We participate primarily in the PJM market, where the pricing of energy
was recently modified. Prior to April 1999, the price of energy was based upon
the variable cost of production. As of April 1, 1999, FERC lifted the
requirement that limited the bid prices for electric energy offered for sale in
the
24
PJM market to the variable cost of producing such energy. However, transmission
constraints have and will continue to affect energy pricing in PJM. All power
providers are now paid the locational marginal price ("LMP") set through power
providers' bids. The LMP will be higher in congested areas reflecting the bid
prices of the higher cost units that are dispatched to supply demand and
alleviate the transmission constraint. Under most circumstances, these bids are
capped at $1,000 per megawatt hour. In the event that available generation
within PJM is insufficient to satisfy demand, PJM may institute emergency
purchases from adjoining regions for which there is no price cap.
With a majority of our generation assets located in the most densely
populated and demand intensive areas of PJM, and positioned in close proximity
to areas of the transmission grid that typically experience congestion, we
receive premium prices when transmission congestion occurs. Our fully integrated
generation and wholesale marketing and trading organization employs proprietary
simulation tools and state-of-the art trading floor technology in an ongoing
effort to anticipate grid congestion and ensure timely response to emerging
demand requirements and their resulting pricing opportunities.
As an unregulated company, we are now exposed to the risk associated with
fuel and purchased power price changes. Prior to August 1, 1999, all of our
fuel, fuel related costs, purchased power costs and other expenses flowed
through the LEAC. The LEAC mechanism compensated either the utility or its
electric consumers for unpredicted fuel and purchased power price fluctuations
by allowing for adjustments to future electric rates on a periodic basis. Any
underrecoveries or overrecoveries of fuel costs were deferred and included in
expense in the period in which they were reflected in rates. As of August 1,
1999, the LEAC was eliminated.
To the extent that the following discussion reports on business conducted
under full monopoly regulation of the generation business, it must be understood
that such business has evolved due to the deregulation of that business. Past
results are not an indication of future business prospects or financial results.
Results of Operations
The discussion of Results of Operations herein has been developed using a
number of assumptions to separate our operations from those of our affiliate,
PSE&G, which previously operated together as a vertically integrated utility
company. See Note 1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies of Notes to Consolidated Financial Statements
for a discussion of these assumptions and the methodologies used to prepare our
financial statements.
As a line of business within PSE&G, we were subject to regulation by the
BPU and FERC. As a result, we prepared our financial statements in accordance
with the requirements of Statement of Financial Accounting Standards ("SFAS")
71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"),
which differed in certain respects from generally accepted accounting principles
("GAAP") for non-regulated businesses. See Note 1. Organization, Basis of
Presentation and Summary of Significant Accounting Policies of Notes to
Consolidated Financial Statements for a further discussion.
As a result of the BPU's orders issued under the Energy Master Plan
Proceedings, we concluded that we no longer met the requirements of SFAS 71 for
the electric generation business. As a result, in 1999, an extraordinary charge
to earnings of $3.204 billion, net of tax, was recorded which reflects the
impairment of electric generation-related assets 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"). In addition to the impairment of
electric generation 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
related primarily to materials and supplies, general plant items and liabilities
for certain contractual and environmental obligations.
Prior to August 1, 1999, revenue was calculated by unbundling the
generation component of revenue from PSE&G's historical bundled rate for the
generation, transmission and distribution of energy and adding any
generation-related revenues, such as wholesale activities that include ancillary
services, trading and capacity sales. Subsequent to August 1, 1999, revenues are
being earned from
25
the BGS contract with PSE&G, wholesale energy sales, sales of capacity and
ancillary services and energy trading revenues. During the three years ending
July 31, 2002, we will provide energy to supply PSE&G's BGS obligations as
determined by the BPU's Final Order. With the opening of retail choice in New
Jersey, customer electricity demands upon PSE&G are changing. This affects the
amount of generation capacity required to meet PSE&G's BGS obligations and,
based upon this demand, the sources of our revenue stream and net cash flow
could change from generation capacity to meet the BGS contracts to sales to the
wholesale market.
Energy costs consist primarily of the costs associated with burning
nuclear fuel, gas, oil and coal to generate energy, as well as energy purchases
from the wholesale marketplace. Deregulation of the energy market could impact
our energy costs in several ways. In the event that demand from the BGS contract
exceeds our capacity, we will have to purchase wholesale power to meet this
sales commitment. High purchase prices in the wholesale market, whether hedged
or not, could increase energy costs and affect earnings and net cash flow.
Prior to August 1, 1999, fuel revenue and expense flowed through the LEAC
mechanism. Variances in base fuel revenues and expenses offset and thus had no
direct effect on earnings. On August 1, 1999, the LEAC was eliminated as a
result of the Energy Master Plan Proceedings. This has increased the risk of
earnings volatility since we now bear the full risks and rewards of changes in
generation fuel costs and replacement power costs. See Note 1. Organization,
Basis of Presentation and Summary of Significant Accounting Policies of Notes to
Consolidated Financial Statements.
Modification of energy pricing in PJM from variable cost of production to
LMP, the capping of power providers' bids at $1,000 per megawatt hour ("mWh")
(see "Business -- Products and Services -- Energy") and the absence of caps in
situations involving emergency purchases, may also have a material impact on our
financial condition, results of operations or net cash flows. For a discussion
of market risks, see "-- Qualitative and Quantitative Disclosures About Market
Risk", below.
With an increasingly competitive energy market, the composition and level
of Operation and Maintenance expense is likely to change. Historically, to
separate the Operation and Maintenance expense of the generation-related portion
of the PSE&G's business, expenses were either specifically identified by
function and reported accordingly or various allocations were used to
disaggregate common expenses. It should be noted that some allocations and
assumptions might not hold true in the future in a deregulated market.
Additionally, under a revised capitalization policy, we will only capitalize
costs that increase the capacity or extend the life of an existing asset,
represent a newly acquired or constructed asset or replacement of a retired
asset.
Prior to April 1, 1999, we had certain regulatory assets resulting from
the use of a level of depreciation expense in the ratemaking process that
differs from the amount that is recorded under GAAP for non-regulated companies.
Effective April 1, 1999, we changed our depreciation policy to calculate
depreciation consistent with new asset lives determined by our policy rather
than using depreciation rates prescribed by the BPU in rate proceedings (see
Note 1. Organization, Basis of Presentation and Summary of Significant
Accounting Policies of Notes to Consolidated Financial Statements).
Results of Operations -- For the Six Months Ended June 30, 2001 compared to the
Six Months Ended June 30, 2000
Operating Revenues
Generation
Generation Revenues increased $89 million or 8% for the six months ended
June 30, 2001 from the comparable period in 2000, primarily due to increased
load served under the BGS contract with PSE&G. This increased load results from
customers returning to PSE&G from TPS as wholesale market prices have typically
exceeded fixed BGS rates. As of June 30, 2001, TPS were serving approximately
1.5% of the customer load traditionally served by PSE&G as compared to the June
30, 2000 level of 8%. Also contributing to the increase for the six months ended
June 30, 2001, was a $17 million gain on a sale of a fixed asset at the Kearny
Generation Station and output from new operating generation
26
projects placed in service subsequent to the first quarter of 2000. These
increases were partially offset by reduced MTC revenues of $28 million from
PSE&G as a result of an additional 2% rate reduction PSE&G gave to customers as
part of its deregulation plan, effective on February 7, 2001.
Trading
Trading revenues decreased $142 million or 11% for the six months ended
June 30, 2001 from the comparable period in 2000, due to lower trading volumes
resulting from increased market volatility. However, as these decreased revenues
were more than offset by decreased trading costs (discussed below in Trading
Costs), trading margins increased from $43 million to $78 million for the six
month period ended June 30, 2001.
Operating Expenses
Energy Costs
Energy Costs increased $44 million or 13% for the six months ended June
30, 2001 from the comparable period in 2000, primarily due to increased load
served under the BGS contract and higher fuel costs for fossil generation
resulting from higher natural gas prices, partially offset by increased low-cost
nuclear generation compared to last year.
Trading Costs
Trading Costs decreased $177 million or 14% for the six months ended June
30, 2001 from the comparable period in 2000, primarily due to lower trading
volumes resulting from increased market volatility.
Operation and Maintenance
Operation and Maintenance expense increased $24 million or 7% for six
months ended June 30, 2001, primarily due to planned outage work in the second
quarter of 2001 and higher expenses relating to projects going into operation
subsequent to the first quarter of 2000.
Depreciation and Amortization
Depreciation and Amortization expense decreased $13 million or 19% for the
six months ended June 30, 2001 from the comparable period in 2000. The decrease
was primarily due to a reduction in the accrual for the estimated cost of
removal of certain generating stations.
Interest Expense
Interest Expense increased $46 million or 107% for the six months ended
June 30, 2001 from the comparable period in 2000. Prior to the generation
business transfer in August 2000, our Interest Expense was calculated based upon
an allocation methodology that charged us with financing costs from PSE&G in
proportion to the generation business' share of total net property, plant and
equipment, materials and supplies and deferred income taxes. The increase in
Interest Expense resulted from our $2.786 billion 14.23% promissory note to
PSE&G to finance the acquisition of the generation business. This loan was
repaid on January 31, 2001 and was replaced on an interim basis by a $1.084
billion 14.23% loan and a $536 million 7.11% loan from January 2001 to April
2001. These loans were repaid with the proceeds from the issuance of our Senior
Notes. For the six months ended June 30, 2001, Interest Expense relating to the
interim financing discussed above was $40 million.
Results of Operations -- For the Year Ended December 31, 2000 compared to the
Year Ended December 31, 1999
Excluding the extraordinary charge, our earnings for the year ended
December 31, 2000 decreased $200 million from the comparable 1999 period. This
decrease primarily resulted from the effects of the 5% rate reduction which
commenced on August 1, 1999 and a $115 million reduction in MTC revenues which
resulted primarily from an $88 million charge to net income in the third quarter
of
27
2000 for the cumulative effect of estimated collections in excess of the allowed
unsecuritized stranded costs from August 1, 1999 through September 30, 2000.
Also contributing to this decrease was higher interest expense associated with
the $2.786 billion promissory note to PSE&G.
Operating Revenues
Generation
Generation revenues decreased $449 million or 17% for the year ended
December 31, 2000 from the comparable period in 1999 primarily due to the 5%
rate reduction, which decreased revenues by approximately $120 million, a $115
million deferral of MTC revenues and reduced retail demand as PSE&G lost retail
customers to third party suppliers ("TPS") which amounted to approximately $182
million.
Trading
Trading revenues increased $882 million or 48% for the year ended December
31, 2000 from the comparable period in 1999 primarily due to increased trading
volumes. These increased revenues were largely offset by the related increase in
trading costs discussed below.
Operating Expenses
Energy Costs
Energy Costs decreased $112 million or 13% for the year ended December 31,
2000 from the comparable 1999 period due to lower prices for power purchases
beginning in August 1999 and lower generation costs that were a result of high
capacity factors of our nuclear units. Prior to August 1999, Energy Costs
included amounts paid under various non-utility generation ("NUG") contracts
which are above market prices. Beginning in August 1999, PSE&G purchases the
energy and capacity under these NUG contracts and sells the energy and capacity
to us at market prices.
Trading Costs
Trading Costs increased $847 million or 47% for the year ended December
31, 2000 from the comparable 1999 period primarily due to higher trading costs
associated with increased trading volumes.
Depreciation and Amortization
Depreciation and Amortization expense decreased $88 million or 39% for the
year ended December 31, 2000 from the comparable 1999 period. The decrease was
primarily due to lower net book value balances of PSE&G's generation-related
assets that were reduced as of April 1, 1999 as a result of the impairment
recorded pursuant to SFAS 121.
Interest Expense
Interest Expense increased $86 million or 77% for the year ended December
31, 2000 from the comparable 1999 period. As discussed previously, prior to the
generation business transfer in August 2000, our Interest Expense was calculated
based upon an allocation methodology that charged us with financing from PSE&G
in proportion to our share of total net property, plant and equipment. Following
the transfer of the generation business in August 2000, we paid interest on our
$2.786 billion promissory note to PSE&G at an annual rate of 14.23%.
Results of Operations -- For the Year Ended December 31, 1999 compared to the
Year Ended December 31, 1998
Excluding the extraordinary charge of $3.204 billion, our earnings for the
year ended December 31, 1999 increased $281 million from the comparable 1998
period. This growth primarily resulted from a rise in sales of electricity due
to increased demand from PSE&G's retail customers resulting from favorable
weather conditions in 1999 and economic factors in New Jersey and profits
realized from wholesale energy activities. In addition, although
generation-related depreciation expense was lower for
28
a portion of 1999 as a result of the SFAS 121 impairment write-down, this
reduction was partially offset by changes in depreciation and capitalization
policies stemming from the discontinuation of SFAS 71. The increase in earnings
was also partially offset by the 5% rate reduction, coupled with higher
operating and maintenance expenses, including higher wholesale energy costs,
than those incurred in 1998. See "-- Qualitative and Quantitative Disclosures
About Market Risk", below.
Operating Revenues
Generation
Generation revenues increased $101 million or 4% for the year ended
December 31, 1999 from the comparable 1998 period. The increase was primarily
due to increased sales of electricity under the BGS contract due to favorable
weather conditions in 1999 and economic factors in New Jersey. These increases
were partially offset by the 5% rate reduction beginning August 1, 1999 that
decreased revenues by approximately $80 million.
Trading
Trading revenues decreased $35 million or 2% for the year ended December
31, 1999 from the comparable 1998 period resulting from decreased trading
volumes.
Operating Expenses
Energy Costs
Energy Costs decreased $114 million or 12% for the year ended December 31,
1999, from the comparable 1998 period due to lower prices for power purchases
beginning in August 1999 relating to the NUG contracts discussed above.
Trading Costs
Trading Costs decreased $54 million or 3% for the year ended December 31,
1999 from the comparable 1998 period primarily due to lower costs associated
with decreased trading volumes.
Operation and Maintenance
Operation and Maintenance expense increased $105 million or 18% for the
year ended December 31, 1999 from the comparable 1998 period. The increase was
primarily due to a change in the capitalization policy for the generation
business that resulted in a $57 million increase in 1999 to Operation and
Maintenance expense. Also contributing to the increase were higher costs related
to wholesale power activities and higher material and outside services and
information technology costs, including costs related to Year 2000 readiness in
1999 and increased PJM restructuring expenses.
Depreciation and Amortization
Depreciation and Amortization expense decreased $157 million or 41% for
the year ended December 31, 1999 from the comparable 1998 period. The decreases
were due to lower net book value balances of our assets. This decrease was
partially offset by higher depreciation rates being used in 1999 due to the
change in depreciation policy. Despite the higher depreciation rates, the
decrease in expense will be ongoing due to the reduced asset balances.
Interest Expense
Interest Expense decreased $104 million or 48% for the year ended December
31, 1999 from the comparable 1998 period primarily due to a reduced allocation
percentage. Our Interest Expense for these periods was calculated based upon an
allocation methodology that charged us with financing from PSE&G in proportion
to our share of total net property, plant and equipment. The decreased
allocation percentage resulted from the lower net book value due to the
impairment writedown in the second quarter of 1999.
29
Liquidity and Capital Resources
As directed by the BPU's Final Order, on August 21, 2000, we purchased
PSE&G's generation property, plant and equipment for $2.443 billion and we also
purchased the other generation-related assets and liabilities for $343 million,
their net book value at the date of purchase.
Operating Activities
Cash generated from operations is expected to provide the major source of
funds for our operating needs. Our primary customer until July 31, 2002 will be
PSE&G under the BGS contract. Prior to the Final Order and the BGS contract,
cash generated from operations was based on rate regulated cost recovery
pursuant to BPU ratemaking.
Investing Activities
Our purchase of the generation-related assets of PSE&G are being financed
on a permanent basis through the senior notes (including the exchange notes
covered by this prospectus) and equity contributions from PSEG. Future
development or purchases of generation assets will be subject to periodic review
and may vary significantly depending upon the opportunities presented. Factors
affecting actual expenditures and investments include availability of capital
and suitable investment opportunities, market volatility and economic trends.
The anticipated sources of funds for such growth opportunities are additional
equity contributions from PSEG, cash flow from operations and external
financings.
Financing Activities
As previously discussed, we purchased the generation-related assets of
PSE&G on August 21, 2000. The purchase was financed through a promissory note of
$2.786 billion to PSE&G. The promissory note was settled on January 31, 2001
with funds received from PSEG as equity and intercompany loans. In April 2001,
we issued $1.8 billion of our senior notes, the proceeds of which were used
primarily to replace our interim financing from PSEG. It is expected that our
future capital needs will be funded with cash generated from operations and may
be supplemented with external financings, equity infusions from PSEG and other
project financing alternatives as dictated by our growth strategy. Any inability
to obtain required additional external capital at reasonable interest rates may
affect our financial condition, results of operations and net cash flows.
Capital resources and investment requirements may be affected by the
requirements of the 1992 Focused Audit of PSEG's non-utility businesses
("Focused Audit"), and by the final outcome of the BPU's Energy Master Plan
Proceedings, including the Affiliate Relationships Standards. As a result of the
Focused Audit, the BPU approved a plan that, among other things, provides that
PSEG will not permit its non-utility investments to exceed 20% of its
consolidated assets without prior notice to the BPU.
As a result of the final outcome of the proceedings and the accounting
impacts resulting from the deregulation of the generation of electricity and the
unbundling of the utility business in New Jersey, we 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, noting that PSEG's non-regulated assets would likely exceed 20% of total
PSEG assets once the generation assets were sold to us 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. The Final Order also
recognized 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. In March 2000, PSE&G submitted
a letter to the BPU as its initial compliance with this filing requirement in
which it notified the BPU of its intention to make a filing to modify the terms
of the Focused Audit within 120 days after the Final Order becomes final and
non-appealable.
The BPU is expected to continue to provide regulatory oversight to ensure
that there is no harm to utility ratepayers from PSEG's non-utility investments.
PSEG believes that these issues will be satisfactorily resolved, although no
assurance can be given. In addition, if we or PSEG were no longer to be exempt
under the Public Utility Holding Company Act ("PUHCA"), we would be subject to
additional regulation by the SEC with respect to financing and investing
activities, including the amount
30
and type of non-utility investments. Inability to achieve satisfactory
resolution of these matters could impact our and our subsidiaries' future
relative size and financing activities and, accordingly, our future prospects.
Consequently, this could have a material adverse impact on our financial
condition, results of operations or net cash flows. We do not believe that our
ability to service our debt, including the exchange notes, would be impaired in
such circumstances, although no assurance can be given.
On March 15, 2000, the BPU issued a written order, Affiliate Relations,
Fair Competition and Accounting Standards and Related Reporting Requirements
("Affiliate Standards"), that applies only to PSE&G and its affiliates that
offer competitive retail services in New Jersey. PSE&G filed a compliance plan
with the BPU on June 15, 2000 describing its internal policy and procedures to
ensure compliance with such Affiliate Standards. Since we do not offer
competitive retail services in New Jersey, the standards do not apply and are,
therefore, not expected to have any material impact on our operations. However,
the Energy Competition Act requires that the BPU conduct an audit of PSEG and
its affiliates. The audit commenced July 2000 and a final report from the
auditors was submitted to the BPU in October 2000. We do not expect the
recommendations of the audit to materially impact our operations, financial
condition, results of operations or net cash flows, although no assurances can
be given.
Capital Requirements
We expect that the majority of our construction and capital requirements
over the next five years will come from internally generated funds, with the
balance to be provided by the issuance of debt and equity contributions from
PSEG. Our capital needs will be dictated by our strategy to become a profitable,
growth-oriented supplier in the wholesale power market. We will size our fleet
of generation assets to take advantage of market opportunities, while seeking to
increase its value and manage commodity price risk through our wholesale trading
activity. Growth will be driven by expanding both the portfolio of generation
assets and trading volume, including expanding into regional trading markets. To
accomplish this, we will require cash generated from operations, external
financings and equity contributions from PSEG.
We have substantial commitments as part of our ongoing construction
programs. These programs are continuously reviewed and periodically revised as a
result of changes in economic conditions, revised load forecasts, business
strategies, site changes, cost escalations under construction contracts,
requirements of regulatory authorities and laws and our ability to raise
necessary capital.
For the six months ended June 30, 2001, we had net plant additions of $741
million, excluding capitalized interest. For the years ended December 31, 2000
and 1999, we had net plant additions of $479 million and $92 million,
respectively, excluding Allowance for Funds Used During Construction (AFDC) and
capitalized interest.
Construction expenditures were related to our acquisitions and
improvements in our existing power plants. Our projected construction and
investment expenditures are approximately $1.4 billion in 2001, $1.1 billion in
2002, $830 million in 2003 and range from $250 million to $300 million per year
for 2004 and 2005 (which includes an aggregate of $1.2 billion associated with
the Waterford, Ohio and Lawrenceburg, Indiana projects through 2003).
In September 2000, we announced that we had assumed responsibility of two
Midwest generation projects then being developed by PSEG Global Inc. ("Global"),
an affiliate and a subsidiary of Energy Holdings, and will be the sole PSEG
subsidiary responsible for future generation projects and development in the
United States. The two projects (the Waterford and Lawrenceburg projects
discussed under "Business -- The Company") will have a combined generation
capacity of 2,000 MW.
Also in 2000, we installed four new combustion turbines at Burlington
Generation Station and two new combustion turbines at Linden Generation Station,
adding 168 MW and 164 MW, respectively, of electric generating capacity, at a
cost of approximately $155 million. The new combustion turbines were all
operational as of July 2000. We also announced that we will construct a 500 MW
natural gas-fired, combined cycle electric generation plant at Bergen Generation
Station at a cost of approximately $290 million with completion expected in June
2002. We are also constructing an 1,186 MW combined cycle generation plant at
Linden for approximately $590 million expected to be completed in May 2003 and
are installing 168 MW of peaking units at Kearny for an approximate cost of $100
million.
31
On May 16, 2000, we purchased, through an indirect wholly-owned
subsidiary, PSEG Power New York, Inc., a 380 MW oil and gas-fired electric
generation station in Albany, New York (the "Albany Steam Station") from Niagara
Mohawk Power Corporation ("NIMO") for $49.9 million. Under a transition power
contract in place through September 2003, we will sell electricity to NIMO at
prices consistent with those established in NIMO's regulatory agreement with the
New York Public Service Commission. The acquisition of Albany Steam Station
provides us with entry into the New York ISO. Under the terms of the acquisition
agreement, NIMO could also receive up to an additional $9 million if we choose
to pursue redevelopment of the Albany Steam Station.
In September 1999, we announced that we had signed an agreement to acquire
all of Conectiv's interests in the Salem Nuclear Generation Station ("Salem")
and the Hope Creek Nuclear Generation Station ("Hope Creek") and half of
Conectiv's interest in the Peach Bottom Atomic Power Station ("Peach Bottom"),
totaling 544 MW for an aggregate purchase price of $15.4 million plus the net
book value of nuclear fuel at closing. In December 2000, our acquisition of
Delmarva's portion of Conectiv's interests in Salem (7.41%) and Peach Bottom
(7.51%, split equally between us and Exelon Generation LLC ("Exelon"), the other
co-owner of the plants) was completed. For further information and a discussion
of the wholesale transaction confirmation letter agreements between us and
Conectiv, see Note 7. Commitments and Contingent Liabilities of Notes to
Consolidated Financial Statements.
External Financings
The changes in the utility industry are attracting increased attention
from bond rating agencies which regularly assess business and financial matters,
including how utility companies are addressing the increasingly competitive
environment. Given the changes in the industry, attention and scrutiny of our
competitive strategies by rating agencies will likely continue. These changes in
the competitive environment could affect the bond ratings, cost of capital and
the market prices of securities issued by utilities and generation companies.
On April 16, 2001, in a private placement, we issued $500 million of
6.875% Senior Notes due 2006, $800 million of 7.75% Senior Notes due 2011 and
$500 million 8.625% Senior Notes due 2031. The net proceeds from the sale of the
senior notes were used primarily for the repayment of loans from PSEG. This
prospectus relates to an exchange offer for these senior notes. Each series of
senior notes received investment grade ratings from Moody's Investors Service,
Fitch, Inc. and Standard & Poor's Rating Services.
We also have various lines of credit extended by banks to support the
issuance of letters of credit. As of June 30, 2001, letters of credit were
issued in the amount of approximately $90 million.
Our short term financing needs will be met using PSEG's commercial paper
program or lines of credit. PSEG has an $850 million commercial paper program to
provide funds for general corporate purposes. On June 30, 2001, PSEG had
commercial paper of $521 million outstanding. To provide liquidity for its
commercial paper program, PSEG has a $570 million revolving credit facility
expiring in March 2002 and a $280 million revolving credit facility expiring in
March 2005. These agreements are with a group of banks and provide for
borrowings with maturities of up to one year. As of June 30, 2001, there were no
borrowings outstanding under these facilities.
PSE&G Fuel Corporation ("Fuelco"), which was a subsidiary of PSE&G, had a
$125 million commercial paper program to finance a 42.49% share of Peach Bottom
nuclear fuel. This commercial paper program was supported by a $125 million
revolving credit facility with a group of banks. As a result of the transfer of
generation assets from PSE&G to us, the Fuelco commercial paper program has been
discontinued. All commercial paper outstanding under this program was paid down
on August 21, 2000. The credit facility supporting this program was terminated
on September 11, 2000.
The availability and cost of external capital could be affected by our
performance as well as by the performance of our subsidiaries and affiliates.
This could include the degree of structural or regulatory separation between
PSE&G and its non-utility affiliates and the potential impact of affiliate
ratings on our consolidated credit quality. Additionally, compliance with
applicable financial covenants will depend upon our future financial position
and levels of earnings and net cash flows, as to which no assurances can be
given.
32
Over the next several years, we will be required to refinance our maturing
debt and to raise 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 at reasonable interest
rates may affect our financial condition, results of operations or net cash
flows.
Qualitative and Quantitative Disclosures About Market Risk
The risk inherent in our market risk sensitive instruments and positions
is the potential loss arising from adverse changes in commodity prices,
pollution credits, equity security prices and interest rates as discussed below.
Our policy is to use derivatives to manage risk consistent with our business
plans and prudent practices. PSEG has a Risk Management Committee comprised of
executive officers and reporting to the Audit Committee of PSEG's Board of
Directors that utilizes an independent risk oversight function to ensure
compliance with corporate policies and prudent risk management practices.
We are exposed to credit losses in the event of non-performance or
non-payment by counterparties. We also have a credit management process which is
used to assess, monitor and mitigate counterparty exposure. In the event of
non-performance or non-payment by a major counterparty, there may be a material
adverse impact on our financial condition, results of operations or net cash
flows.
Commodity-Related Instruments
The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
supply and demand, state and federal regulatory policies and other events. To
reduce price risk caused by market fluctuations, we enter into derivative
contracts, including forwards, futures, swaps and options with approved
counterparties, to hedge our anticipated demand. These contracts, in conjunction
with owned electric generation capacity, are designed to cover estimated
electric customer commitments.
We use a value-at-risk ("VAR") model to assess the market risk of our
commodity business. This model includes fixed price sales commitments, owned
generation, native load requirements, physical contracts and financial
derivative instruments. VAR represents the potential gains or losses for
instruments or portfolios due to changes in market factors, for a specified time
period and confidence level. PSEG estimates VAR across its commodity business
using a model with historical volatilities and correlations.
The measured VAR using a variance/co-variance model with a 95% confidence
level and assuming a one-week time horizon as of June 30, 2001 was approximately
$7 million and as of December 31, 2000 was approximately $19 million, compared
to the December 31, 1999 level of $3 million. Our calculated VAR represents an
estimate of the potential change in the value of our portfolio of physical and
financial derivate 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.
In the first quarter of 2000, the measured VAR fluctuated between $3
million and $10 million. The first quarter, compared to the rest of the year,
was characterized by low price volatility. Starting in the second quarter of
2000 several different factors caused the VAR to fluctuate above $10 million,
reaching a peak of $21.2 million in December 2000, which exceeded our alert
limit of $16.5 million. The first was the inclusion into the VAR calculation of
some additional non-trading exposures, such as fuel for generation and emission
allowances held in inventory. The second and most important factor was the
capacity, power and natural gas price volatilities, which continued to rise
throughout the balance of the year. Finally, since we are in the commodity
business, we face seasonal increases in our power, capacity and natural gas
exposures, which cause the VAR to peak in the summer and in the winter. In
February 2001, prices and volatilities decreased and the VAR moved below the
alert limit.
As discussed in Results of Operations, our wholesale power activities
positively impacted our results of operations each year, since its inception in
1997. Certain other generators and power marketers have experienced significant
losses in their wholesale power operations during that period. These losses were
primarily attributable to extreme market volatility, counterparty defaults and
unavailability of generation.
33
Given the absence of a PJM price cap in situations involving emergency
purchases and the potential for plant outages, extreme price movements, which
have occurred, could have a material adverse impact on our financial condition,
results of operations and net cash flows.
Nuclear Decommissioning Trust Funds
Contributions made into the Nuclear Decommissioning Trust Funds are
invested in debt and equity securities. These marketable debt and equity
securities had a market value of $723 million at June 30, 2001. The potential
change in fair value resulting from a hypothetical 10% change in quoted market
prices of these securities amounts to approximately $72 million. Gains and
losses on the Nuclear Decommissioning Trust Funds do not affect earnings. As a
result of the Energy Master Plan Proceedings, the recovery of these investments
will be continued as part of the societal benefits charge ("SBC") levied by
PSE&G on its customers. PSE&G will continue to collect this $29.6 million charge
and remit it to us.
With the purchase of Delmarva's interests in Salem and Peach Bottom, we
received a transfer of $49.7 million representing its Nuclear Decommissioning
Trust Funds related to those stations.
Accounting Matters
For a discussion of Emerging Issues Task Force ("EITF") 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent" ("EITF 99-19"), SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
("SFAS 133") and related Derivative Implementation Group ("DIG") issues, SFAS
No. 141, "Business Combinations" ("SFAS 141"), SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142") and SFAS No. 143, "Accounting for Asset
Retirement Obligations ("SFAS 143"), see Note 3. Accounting Matters, and Note 5.
Financial Instruments and Risk Management, of Notes to Consolidated Financial
Statements.
Site Restorations and Other Environmental Costs
For discussion of potential environmental and other remediation costs, see
Note 7. Commitments and Contingent Liabilities of Notes to Consolidated
Financial Statements.
34
Business
The Company
We are one of the largest independent electric generating and wholesale
energy marketing and trading companies in the United States. Through our three
principal operating subsidiaries, we generate and market electricity, capacity,
ancillary services and natural gas products on a wholesale basis. Our generation
portfolio consists of 11,490 MW of installed capacity owned or under contract.
Our target market, which we refer to as the Super Region, extends from Maine to
the Carolinas and the Atlantic Coast to Indiana, encompassing 37% of the
nation's power consumption. With 20% of installed capacity, we are the single
largest power supplier in our primary market, PJM, which is one of the nation's
largest and well-developed energy markets. We are and each of the Subsidiary
Guarantors is a limited liability company established in Delaware on June 16,
1999 and have our principal place of business at 80 Park Plaza, Newark, New
Jersey 07102.
We expect to continue to increase our generation capacity in our target
market, and we believe that we are favorably positioned to do so through site
expansions, strategic acquisitions and new generation development. We seek to
continually maximize the value of our generation portfolio through the
centralized control of its operations and its integration with our trading, fuel
procurement, marketing and risk management expertise. Our electric generation
portfolio is diversified by fuel source and market segment and we have
demonstrated expertise in natural gas procurement.
We began operating as a deregulated energy supplier in 1999. On August 21,
2000, we acquired ownership of the electric generation portfolio of our utility
affiliate, PSE&G, New Jersey's largest public utility. This portfolio included
more than 10,200 megawatts of nuclear and fossil capacity which we acquired at a
cost of $239/kW. Through June 30, 2001, we:
o acquired 544 MW of nuclear capacity in Pennsylvania and New Jersey;
o acquired 380 MW of steam capacity in New York;
o completed construction and began operation of 332 MW of combustion
turbines in New Jersey;
o began construction of:
o 1,854 MW of combined cycle and combustion turbine units in New
Jersey;
o 1,150 MW of combined cycle units in Indiana; and
o 850 MW combined cycle units in Ohio; and
o are in advanced development of 750 MW of combined cycle units in New
York.
We expect that the new generating assets currently under construction,
which will add 4,604 MW to our generation portfolio, will be completed by the
end of the second quarter of 2003. This new capacity will expand our generation
portfolio to three contiguous reliability regions.
As a result of New Jersey's deregulation and restructuring of the electric
power industry, PSE&G was required by the BPU to transfer its generation
facilities and related assets to an unregulated affiliate. We and our three
principal operating subsidiaries, Fossil, which operates our fossil generating
facilities; Nuclear, which operates our nuclear generating facilities; and ER&T,
which conducts our wholesale energy marketing and trading activities, were
therefore formed to own and operate what were formerly PSE&G's electric
generation assets and business. As an EWG, we do not directly serve any retail
customers and we use our generation facilities exclusively for the production of
electricity for sale at the wholesale level. We have contracted with PSE&G to
provide its energy, capacity and ancillary services required to fulfill its
BPU-mandated BGS obligation through July 2002. As part of our 380 MW asset
purchase from NIMO, we have contracted to provide NIMO with energy and capacity
at prices consistent with its regulatory agreement through September 2003.
35
We are a wholly-owned subsidiary of PSEG which is an exempt public utility
holding company and one of the leading providers of energy and energy related
services in the nation. PSEG has three other direct, wholly-owned subsidiaries:
PSE&G, Energy Holdings and Services. PSE&G is New Jersey's largest public
utility and is engaged principally in the transmission, distribution and sale of
electric energy and gas service in New Jersey. Energy Holdings participates
nationally and internationally in energy-related lines of business through its
subsidiaries. Services provides corporate support and managerial and
administrative services to PSEG and its affiliates.
THE SUPER REGION
[Chart omitted]
Industry Overview
The regulatory structure that has historically governed the electric power
industry in the United States is in transition. Recent federal and state
legislative and regulatory initiatives have been designed to promote competition
in the electric power industry (see "Competition" and "Energy Markets"). These
initiatives have led to statutorily mandated unbundling of the services
traditionally provided by vertically integrated utilities, such as PSE&G, and
the rapid growth of independent generation, energy trading and marketing. In
addition, new technology and interest in self-generation and cogeneration have
provided end-users with alternative sources and supplies of energy. Companies
that have been engaged in providing generation, transmission, distribution and
ancillary services are responding to the challenges and opportunities embodied
in these changes. The challenges of open market competition, together with
legislative and regulatory initiatives, are driving many utilities across the
country to divest all or part of their generation assets. Other utilities and
independent companies are acquiring generation assets and/or transferring their
generation assets to independent affiliates to seize the opportunities in the
wholesale power market. The independent companies are also launching or
enhancing their wholesale energy trading operations to add value to their own
generation asset portfolios.
36
Deregulation
Since the target markets in which we operate are deregulated at the
wholesale level, continued deregulation of the retail markets within these
regions is likely to bring new purchasers of electricity into the wholesale
markets, thus increasing the volume of transactions. This should continue to
strengthen the efficient operation and liquidity of those markets. Liquidity is
essential for efficiency as it provides a ready market for our generation output
and marketing and trading activities.
We believe that deregulation will continue in the regions in which we
compete. In our target market, 13 of the 19 states and the District of Columbia
have enacted restructuring legislation, while six of the remaining states have
either issued a regulatory order relating to restructuring or are in the process
of investigating restructuring. Retail competition has already begun in 12 of
the states and the District of Columbia with two additional states scheduled to
begin competition in 2001 and 2002. Three of the five wholesale marketplaces in
our Super Region are operated by ISOs, and the other two markets are expected to
develop similar governance structures in the near future.
Competitive Strengths
We believe that we are well positioned to build upon our successful
history and existing asset base to remain one of the largest independent
electric generating and wholesale energy marketing and trading companies in the
Unites States. Our significant competitive strengths include the following:
Scale and Diversity of Assets. With 11,490 MW of installed capacity
(including the pending acquisition from ACE) and 58 generation units, we have
one of the largest and most diversified unregulated generation portfolios in PJM
and the Eastern United States. Our portfolio of generation assets is well
diversified by fuel type (42% Gas, 29% Nuclear, 18% Coal, 9% Oil and 2% Pumped
Storage) and technology (35% Steam, 29% Nuclear, 26% Combustion Turbine, 8%
Combined Cycle and 2% Pumped Storage). Our portfolio is also well distributed
among the three energy market segments: base load (36% of our total capacity),
load following (36% of our total capacity) and peaking (28% of our total
capacity). Generation units are typically characterized as serving one or more
of these market segments based upon their size, operating capability and
performance. The scale and diversity of our portfolio provides us with the
flexibility to offer a wide variety of products and services to the market and
to mitigate the risks associated with fuel price volatility and market demand
cycles.
Favorable Location of Assets. Many of our assets are strategically located
within densely populated and demand intensive regions in PJM. In addition, the
majority of our fossil generation stations are concentrated in the heavily
industrialized and populated northeast quadrant of New Jersey where we can
capitalize on a well-developed fuel supply infrastructure.
Quality of Assets. Our portfolio consists of 52 fossil-fueled units, one
pumped storage hydroelectric unit and five nuclear power generation units.
According to station operating statistics, our base load fossil units, which are
coal units, achieved an average capacity factor of 82.4% in 2000 versus the
latest available (1998) industry average for coal units of 69% (source: Energy
Information Administration ("EIA")). From 1996 to 2000, the performance of our
load following units has improved significantly. The average equivalent
availability factor (the percentage of time that a unit is available to operate)
("EAF") for these units was 89% in 2000, up from 81% in 1996. By comparison, our
peer group has performed at an average EAF of approximately 83% between 1996 and
1999 (the latest year for which peer group data is available). In addition, our
peaking units had an average EAF ranging from 81% to 87% between 1996 and 2000
which compares favorably to the average EAF for our peer group which ranged from
79% to 84% between 1996 and 1999.
Our portfolio also includes nuclear assets that are performing at or above
industry standards. According to station operating statistics for 2000, the
average capacity factor for our nuclear units was 87.6%, as compared to the
latest available (1999) US industry average of 86.8% (source: NEI). Our nuclear
units have also benefited from substantial investments. From 1994 to 1999, we
spent approximately $2.3 billion to maintain or enhance the operating efficiency
and performance of our nuclear units.
37
Integrated Generation and Wholesale Marketing and Trading Functions. In
addition to our fleet of generation assets, we have an established wholesale
energy marketing and trading operation with significant technical capabilities,
market expertise and a state-of-the-art trading floor. This group, which has
been in operation since 1997 and has been continuously profitable and growing,
centrally controls all of our wholly-owned generation assets and fossil fuel
procurement and provides a competitive wholesale marketing, trading and risk
management function that actively participates in all aspects of the energy
markets. While we trade with over 100 credit-approved counterparties in the
spot, forward and futures markets throughout the surrounding regions, nearly 85%
of our trading activity during 2000 was within PJM, currently our primary
marketplace and the location of most of our generation assets. The integration
of our generation operations, fossil fuel procurement and wholesale marketing,
trading and risk management capabilities enables us to obtain the optimal mix of
financial and physical assets and mitigate the effects of adverse movements in
the fuel and electricity markets. We also provide effective management of the
spark spread which is the difference between the cost of fuel and the price of
electricity.
Conservative Risk Management Framework. We have developed our risk
management framework from the Group of Thirty recommendations, which are
considered best practices for the use of derivative instruments. We established
a Risk Management Committee ("RMC") that reports to the PSEG Board of Directors.
On a monthly basis, we report our risk exposure using VAR related to our
electricity and natural gas exposures. PSEG's Board of Directors approved our
corporate financial risk management policy that empowers the RMC to manage risk,
and set an overall corporate limit for VAR. The RMC sets risk VAR limits, alert
limits and portfolio loss limits for us. These limits are contained in the
procedures and guidelines that detail the actions for implementation of our
corporate policy. The Chief Financial Officer ("CFO") of PSEG chairs the RMC.
The RMC formally meets quarterly to discuss risk matters, but is also convened
on demand when more immediate risk issues arise. We also established an
independent corporate risk management group that reports to the CFO of PSEG and
to the RMC. The corporate risk management group is charged with measuring,
monitoring and reporting both market and credit risk. Our VAR is computed and
reported weekly using a 95% confidence level and one-week holding period. We
also mark all positions to market daily. Our portfolio is stress tested daily by
ER&T and monthly by our corporate risk group. These stress tests identify
potential risks to our portfolio of non-normal events.
We also have a credit policy, which defines our control environment for
credit. Prior to engaging in any transactions with a new counterparty, we
perform a thorough analysis of the creditworthiness of that counterparty. The
corporate risk management group also participates in approving credit limits for
counterparties with whom we trade. If necessary, we will request additional
security from the counterparty, which could take the form of a parent guaranty
or letter of credit. Once approved, we monitor the exposure to the counterparty
using current net receivables and mark-to-market gains. Counterparties exceeding
their credit limit and unapproved counterparties are placed on a restricted
list, which precludes our traders from transacting with them. Violations of
credit policies are reported to the RMC.
In-Depth Knowledge of the Region. Our extensive experience within PJM and
surrounding regions provides us with in-depth knowledge and insight about the
market rules, assets and transmission constraints within the region. In
addition, our continuous involvement in the formation and operation of PJM as
the first centrally dispatched energy market in the United States provides us
with a significant competitive advantage in this market and in surrounding
regions as these regions move towards similar market structures.
Continuity of Experienced Management. Our management team is comprised of
seasoned individuals with substantial industry experience within our targeted
regions. In addition to their understanding of our existing portfolio of
generation assets, local market conditions and labor relations, our management
includes individuals with: proven success in the generation development
business; risk management expertise; substantial influence in the development of
centralized electricity markets; and diverse experience in related business
areas of transmission, distribution and retail customer service. This experience
provides us with an in-depth knowledge and insight about the market's assets,
market rules and transmission constraints. We believe our management team has an
exceptionally
38
strong skill set in these areas because, unlike many of our competitors, we have
operated all of our generation assets (other than the Albany Steam Station which
was acquired in May 2000) since their original construction.
Environmental Leadership. We have led the industry as an advocate for a
comprehensive system of uniform national standards that would substantially
reduce power plant emissions of nitrogen oxide, sulfur dioxide and mercury. We
also advocate for the start of prudent action toward addressing carbon dioxide
emissions related to global warming. We are a founding member of the Clean
Energy Group, a coalition of progressive energy companies that is working with
the U.S. Congress, the environmental community and state and federal regulators
to establish a common sense program to improve the environment without
compromising fuel diversity or the reliability and affordability of the nation's
electric energy supply. To set the standard, we have reduced emissions of
nitrogen oxides by 80% and are currently pursuing additional reductions through
the installation of additional emissions controls at our coal-fired power plants
and are investing in new, state-of-the-art facilities. Further, we were the
first to commit to -- and achieve -- stabilization of carbon dioxide emissions
at 1990 levels by the year 2000.
Business Strategy
Our objective is to continue to profitably build our multi-regional
generating and wholesale energy marketing and trading company based upon our
successful formula of integrating generating asset operations with our wholesale
energy, fuel supply, trading and risk management expertise. To implement our
strategy we plan to:
Maintain a Stable Stream of Revenues and Cash Flow. Our principal source
of revenue is the sale of energy through long-term contracts and, to a lesser
extent, into the spot market. Through July 31, 2002, we have an exclusive
full-requirements contract to supply PSE&G with the energy, capacity and
ancillary services needed to fulfill its BGS obligations. In addition, we have
several other contracts to supply LSEs. We anticipate that approximately 75% of
our generation output will continue to be dedicated to supplying similar
long-term (typically 2-3 years) contracts with LSEs. The relatively stable
energy revenues from such contracts are supported primarily by the output of our
base load generation units. Base load units are characterized by large size,
high efficiency and low fuel and other operating costs and, therefore, have the
opportunity to supply power economically in most energy market conditions
throughout the year. We will continue to maximize the energy output of our base
load units through ongoing improvement programs designed to upgrade capacity,
shorten unit outages and enhance reliability.
Realize the Value of Possessing Assets Across the Entire Market Spectrum.
In addition to energy sales, we have historically produced revenues and cash
flows through the sale of products and services other than energy.
Energy-related products and services consist primarily of capacity sales and
ancillary services.
(i) Capacity Sales. In order to ensure that there is sufficient generation
capacity available to meet peak demand, in PJM, LSEs are required to secure
enough capacity to meet the projected demand of their retail customers, plus an
additional amount as a reserve margin. As an owner of generation plants, we are
able to sell "capacity" to LSEs or other wholesale market participants to meet
this need. Subject to certain exceptions, a contract for capacity commits us to
make a generation unit available so that it can be dispatched if its output is
needed to satisfy total system demand. If the unit is actually dispatched,
compensation for the resulting energy output is settled in the energy market in
a separate transaction. Capacity sales are supported by all of our generation
units and contribute additional cash flows. Since the operating expenses
associated with providing capacity from our load following and peaking units are
very low relative to the price of energy in the market, this market is an
attractive source of profits for us. Hence, we will continue to serve this
market by ensuring maximum availability through continual reliability
improvements.
(ii) Ancillary Services. In order to assure safe and reliable transmission
system performance, the PJM ISO established a market for ancillary services,
many of which are provided by generation units. These ancillary services, which
include area regulation service and operating reserves, permit the ISO to place
certain units under its direct control and ensure that other units are able to
provide electricity
39
within a certain time frame when their output is needed. Area regulation service
allows the ISO to control the output of a unit to match fluctuating system
demand. Operating reserves allow the ISO to compensate for sudden changes in
supply or unforeseen increases in demand that can occur due to generation or
transmission line problems or imbalances between forecasted demand and actual
load. Generally, this results in those units running at reduced or, in some
cases, minimum levels of output. We will continue to participate in this
attractive market, particularly when prices for these services adequately
compensate us for the opportunity cost of forgone energy sales and for
associated wear on equipment. Ancillary services are supported by our load
following and peaking units. We will also continue to optimize the balance of
ancillary services and energy sales to maximize profit opportunities.
Continue to Reduce Costs. In order to increase margins, we continue to
concentrate on effective cost management. Over the last several years, we have
streamlined our operations by instituting flexible job specifications and
creating mobile work teams. This has allowed us to seasonally reposition
operating personnel in order to optimize unit profits as energy demand
fluctuations occur. These improvements also allow us to add additional
generation capacity at our existing sites without large increases in the size of
associated workforces. The implementation of an enterprise resource planning
system throughout our organization has also helped us to identify cost reduction
opportunities and manage individual cost centers which should result in
continued savings over the next several years. Since January 1, 2000, we have
utilized Services to provide us with corporate support and managerial and
administrative services, which we believe has lowered our corporate expenses. In
addition, we expect that effective inventory management, strategic alliances and
economies of scale resulting from the growth of our generation asset portfolio
will help to further reduce costs.
Capitalize on Favorable Location of Assets. Many of our assets are
strategically located within densely populated and demand intensive regions in
PJM. In addition, the majority of our fossil generating stations are
concentrated in the heavily industrialized and populated northeast quadrant of
New Jersey where we will capitalize on a well-developed fuel supply
infrastructure.
Capitalize on Additional Energy Revenue Opportunities through Integrated
Generation, Marketing and Trading Functions. Our load following and peaking
units allow us to capture additional energy revenue opportunities. In contrast
to the larger and more efficient base load units, peaking units have lower fixed
costs and relatively higher operating costs (mainly fuel expenses). The cost
profile of load following units bridges the gap between base load and peaking
units. As a result of these characteristics, some load following and all peaking
units operate less frequently under most market conditions. However, the smaller
size and operating flexibility of peaking units in particular allows us to
respond quickly when energy prices are high. To sustain our ability to
capitalize on these additional energy revenue opportunities, we will continue to
improve the reliability and operational flexibility of these units and, through
coordination with our wholesale energy marketing and trading operation, ensure
that the units will be available during likely periods of high energy prices.
Our wholesale energy marketing and trading operation actively manages the
dispatch of our generation units to optimize the overall portfolio of generation
and trading based on market opportunities. By centralizing the dispatch of our
assets with fuel management and electricity trading, we have the ability to
create additional revenue opportunities in the marketplace and extract full
value from our existing contracts.
Maintain Prudent Risk Management Policies. We seek to limit the financial
exposure associated with market risk, credit risk and operational risk of our
portfolio of generation assets and contracts through a comprehensive risk
management organization. Our team of marketing and trading professionals
utilizes its in-depth knowledge of the markets, assets and complex rules in the
regions in which we operate to maintain the optimal mix of physical and
financial assets and to maximize the value of our portfolio. Sophisticated
systems employed by our wholesale energy marketing and trading operation monitor
market exposure, credit exposure and VAR of the entire portfolio. This
information provides our marketing and trading, risk management and back office
personnel with the up-to-date information necessary to manage both our physical
and financial assets. In addition, we are subject to oversight by the RMC, an
oversight committee that is independent of the trading operation and that
reports directly to PSEG's Board of Directors, whose goal is to actively manage
the financial risk exposure associated with the operations of PSEG's
subsidiaries. We will continue to maintain a strong control environment and
continue to watch for evolution of best practices.
40
Pursue Site Expansion Opportunities in PJM. We are favorably positioned to
pursue growth opportunities through expansion of our installed capacity within
PJM. We expect to utilize our significant development experience to expand
capacity at our existing locations that are connected to transmission systems
through existing interconnections and are located adjacent to existing gas
transmission pipelines. Given these advantages, we believe site expansion will
result in significantly lower associated costs and more timely receipt of
required licenses and regulatory approvals than greenfield development. In
addition, at many of our existing sites, we have been awarded favorable queue
positions that provide us with priority rights to use existing transmission
capability for delivering the power output of our planned generation capacity
expansion projects.
Pursue Attractive Growth Opportunities in the Super Region. We also expect
to grow by acquiring, in whole or in part, existing fossil plants and forming
partnerships with independent power producers within the Super Region. We plan
to concentrate on attractive opportunities and employ a disciplined approach to
growth. For example, in May 2000, we acquired the Albany Steam Station, a 380 MW
generation station which is well located within the New York market and offers
significant expansion potential. In addition, in December 2000, we acquired 246
MW of jointly owned nuclear assets from Delmarva at Peach Bottom and Salem
nuclear stations and we are under contract to acquire ACE's 298 MW share of
Peach Bottom, Salem and Hope Creek.
We are expanding our PJM asset base with the addition of combined cycle
units at Bergen (500 MW) and Linden (1,186 MW) and peaking units equaling 168 MW
in the period 2001-2003. We are currently developing two planned combined cycle
plants in the East Central Area Reliability Council ("ECAR"), an 850 MW plant in
Waterford, Ohio and a 1,150 MW plant in Lawrenceburg, Indiana. As we continue to
acquire generation capacity in the region, we intend to utilize our wholesale
marketing, trading and risk management capabilities, together with our growing
asset base, to expand our wholesale marketing and trading volume in PJM and
other markets.
Maintain Our Commitment to the Environment. We will continue to seek ways
for improving our performance and continue to advocate a uniform set of
stringent but achievable air pollution standards for all U.S. power plants. This
includes our goal of achieving a 90% reduction of nitrogen oxide emissions in
our New Jersey facilities.
Products and Services
Wholesale energy markets increasingly consist of centralized power pools
run by ISOs. The ISO is responsible for maintaining system reliability, ensuring
the competitiveness and efficiency of the market, establishing various products
to be offered for sale in the market and managing the spot market for those
products. Three primary products traded in these markets include energy,
capacity and ancillary services. While the following descriptions relate
specifically to products and services offered in PJM, our principal market,
similar products and services exist in most of the other markets in which we
actively participate.
Energy
Electrical energy is produced by generation plants and is ultimately
delivered to customers for use in lighting, heating and air conditioning and
operation of other electrical equipment. Energy is our principal product and is
priced on a usage basis, typically in cents per thousand Watt-hours ("kWh") or
dollars per million Watt-hours ("mWh").
In a bid-based energy market such as PJM, owners of power plants specify
prices at which they are prepared to generate and sell energy for the next day.
Plant operators generally establish hourly bid prices at a level that
approximates the marginal cost of generating energy from each individual unit at
that plant. Marginal costs consist of fuel costs, variable operations and
maintenance costs and other variable costs including air emission allowances.
Within PJM, bid prices are typically capped at $1,000 per mWh, unless all
available generation within the PJM control area is insufficient to satisfy
demand. Under this condition, PJM may institute emergency purchases from
adjoining regions that are not subject to a price cap.
41
The bid price for each plant is submitted to the ISO. Based upon bids
received, the ISO instructs the units as to when they are to generate power,
generally calling on the lowest cost units first. Typically, progressively
higher bid units are called on (also referred to as "dispatched"), up until the
point that the entire system demand for power (known as the system "load") is
satisfied. The bid price of the last unit dispatched by the ISO establishes the
energy market-clearing price, known as the locational marginal price ("LMP")
within PJM. All units that are dispatched are paid the LMP for each mWh of
energy produced, regardless of their specific bid prices. Since bids generally
approximate the marginal cost of production, units with lower marginal costs
generally run more hours over the course of a year and generate higher operating
profits than units with relatively higher marginal costs.
At times, however, the transmission system becomes constrained when one or
more parts of the transmission grid are at their full capability. During periods
of transmission congestion, it is not possible to dispatch units in merit order
without violating transmission reliability standards. Under such circumstances,
the ISO will dispatch higher cost generation out of merit order within the
congested area and power suppliers will be paid a LMP that is higher in the
congested areas reflecting the price bids of those higher-cost generation units.
In addition to bidding into the market, owners of power plants sell energy
on a wholesale basis under contract to power marketers and to LSEs, such as
investor-owned and municipal utilities, and aggregators who resell energy to
retail consumers. Our BGS contract with PSE&G is an example of such a contract.
Capacity
Capacity, as a product that is distinct from energy, is a commitment to
the ISO that a given unit will be available for dispatch if it is needed to meet
system demand. Capacity is typically priced in dollars per MW for a given sale
period (e.g., mW-day or mW-year). Capacity generally refers to the power output
rating of a generation plant, measured on an instantaneous basis. Thus, a
generation plant that can produce 20 mWh of energy in one hour is said to have a
capacity of 20 million Watts ("MW").
The PJM and New York ISOs maintain a separate capacity market as a means
of ensuring power reliability and managing the energy market. Each LSE is
required to secure enough capacity to meet the peak demand of its retail
customers, plus an additional amount as a reserve margin. This reserve margin
attempts to ensure that unpredicted peak demand increases or equipment
unavailability does not cause a major system or market disruption. Owners of
generation plants can sell their capacity to LSEs or to other wholesale market
participants for resale. Subject to certain characteristics, a contract for
capacity only commits the provider to make a generation unit available for
dispatch by the ISO if it is needed. Should the unit actually be dispatched by
the ISO, compensation for the resulting energy produced is settled in the energy
market.
Buyers and sellers may either negotiate bilateral contracts or rely upon a
bid-based system. The primary function of the bid-based capacity market is to
facilitate capacity transactions where the capacity bid price of buyers and the
offer price of sellers are matched through an ISO-sponsored auction process.
Ancillary Services
Ancillary services constitute another category of energy-related
activities supplied by generation unit owners to the ISO. The ISO requires such
services to ensure the safe and reliable operation of the bulk power system. The
market for ancillary services exists solely on a wholesale level. Owners of
generation units may bid units into the ancillary services market and, in turn,
receive compensatory payment from the ISO. The ISO recovers the cost of paying
generators for ancillary services through charges imposed on market
participants. The two principal ancillary services in which we participate are
area regulation and operating reserves. We will continue to participate in this
attractive market, particularly when prices for these services adequately
compensate us for the opportunity cost of forgone energy sales and for
associated wear on equipment. We will also continue to optimize the balance of
ancillary services and energy sales to maximize profit opportunities.
42
Area regulation service entails allowing the ISO to control the output of
a unit to match the constantly fluctuating system demand. Generally, this
results in the unit operating at less than full output. The ISO pays the
provider of area regulation services a rate which compensates it for the
opportunity cost of operating at less than full output (i.e., the market price
of energy which could have been produced and sold during this period) plus an
incentive amount to compensate for any additional equipment wear.
Operating reserves allow the ISO to compensate for sudden changes in
supply or unforeseen increases in demand that occur when there is a sudden loss
of a large generation unit, a problem with a transmission line or a mismatch
between forecast and actual load. By operating steam units that otherwise would
not be dispatched, and synchronizing combustion turbines to the bulk power
system, generators are able to provide these ancillary services to the ISO.
Synchronizing a combustion turbine to the system involves starting a unit and
adjusting it so that the ISO can quickly bring the unit up to full power if it
is needed. Once the unit is synchronized, it is spinning at normal rotational
speed but does not generate electric output until directed to do so by the ISO.
The ISO pays generators operating reserve payments that reflect their bid price
for providing these services.
Energy Markets
In the Eastern United States, there are three centralized electricity
markets now being operated by ISO organizations: PJM (operated by the PJM ISO),
New York (operated by the New York ISO) and New England (operated by ISO New
England). In addition to our involvement in the formation and ongoing operation
of all three organizations, we actively trade in their wholesale markets. We are
also active in other major electricity markets in the midwestern and southern
United States, principally in the Virginia Carolina Reliability Group ("VACAR")
area and the ECAR area. Although these markets are not yet centrally dispatched
or operated by an ISO, they do have wholesale markets in which we are able to
actively participate.
Together, these markets define a Super Region which spans part or all of
19 states plus the District of Columbia. With approximately 300,000 MWs of
installed capacity, the Super Region constitutes over 37% of the total load in
the United States (Resource Data International PowerDAT Database) and serves
approximately 40% of the total U.S. population (U.S. Census Bureau, 1999
estimates).
Our centralized asset base within PJM and our extensive knowledge of the
surrounding markets provide us with an advantage in the markets throughout the
Super Region. The majority of our generation assets are located within PJM,
which is the geographic center of the Super Region. While nearly 85% of our
trading activity during 2000 was within PJM, the central concentration of assets
allows us to effectively trade in the broader Super Region. As other markets
continue to evolve, we will use our centralized asset base within PJM and our
regional knowledge and experience to pursue expansion opportunities and increase
trading volume throughout the Super Region.
In addition, the markets of the Super Region are relatively advanced in
terms of restructuring which has created an area with relatively liquid and
active wholesale trading markets. Three of the five markets are operated by ISO
organizations and the other two markets (ECAR and VACAR) are expected to develop
similar governance structures within the near future. Thirteen of the nineteen
states within the Super Region and the District of Columbia have enacted
restructuring legislation, while six of the remaining states have either issued
a regulatory order on restructuring or are in the process of investigating
restructuring (source: EIA). Furthermore, retail competition has already begun
in twelve of the states and the District of Columbia with an additional one
state scheduled to begin competition by 2002.
The following table sets forth certain characteristics of each of these
markets. Installed capacity and peak demand data were obtained from the NERC's
2000 Electric Supply and Demand Database.
43
Approximate 2000 Summer
Super Region Relevant 2000 Installed Peak Demand
Markets Market Operator States/Districts Capacity (MW) (MW)
----------- -------------- ------------- --------------- -----------
PJM PJM ISO PA, NJ, MD, 57,828 51,206
DE, VA and
Wash D.C.
New York New York ISO NY 34,699 30,200
New England ISO New England CT, MA, ME, 25,619 23,250
NH, RI, and VT
ECAR N/A IN, KY, MD, 107,287 97,557
MI, OH,
PA, VA and WV
VACAR N/A NC, SC,VA 55,653 53,441
and WV
PJM
The PJM ISO conducts the largest centrally dispatched energy market in
North America with over 200 market participants and 540 generation sources. It
serves nearly 9% of the total U.S. population. As part of the restructuring of
the energy markets within PJM, some investor-owned utilities have divested their
generation assets. As of December 31, 2000, approximately 14,000 MW, or 24% of
the total installed capacity within PJM, had been sold or was awaiting final
regulatory approval for sale.
Peak demand in PJM is forecasted to grow at a rate of 1.5% per year
through 2010, while energy supply is also expected to increase at an annual rate
of 1.5% (NERC 2000 Electric Supply and Demand Database). There has been
significant merchant plant activity in the region. Over 5,700 MW of new capacity
is expected to come online in PJM between January 1, 2001 and December 31, 2003.
Plans for development of approximately 17,000 MW of additional new capacity have
been reported.
There are a number of factors that distinguish PJM from the state of
California, where electric industry deregulation has received significant
attention in recent months. We believe these factors significantly reduce the
likelihood of us experiencing the types of problems encountered by various
utilities and power generators in California. The most prominent difference is
the extent to which there is adequate generation capacity to meet demand in the
region. In 1999, PJM's reserve margin (installed capacity less peak demand) was
15%, which is considerably higher than that of California's where reserve
margins have slipped below 6%. In PJM, reserve margins are required of all LSEs,
whereas in California, no such requirements exist. The two markets have also
operated differently. Initially, California utilities were required to buy their
energy in the day-ahead, or spot, market. While longer-term forward contracts
have been permitted more recently, the initial rules resulted in utilities with
considerable price risk. In contrast, in PJM utilities have been permitted to
lock in prices through long-term contracts and to mitigate risk with use of
other hedging instruments. Finally, California is considerably more dependent on
gas-fired generation and hydro (51% and 26%, respectively). In contrast, PJM has
a more diverse fuel mix, including a substantial base of coal and nuclear
generators, whose cost structures have remained more stable.
New York
The New York ISO officially began operations as the market coordinator for
New York in November 1999. The New York ISO is now responsible for managing the
power pool and for administering the energy marketplace. Through 2010, peak
demand within the New York market is expected to grow at approximately 0.9% per
year (NERC 2000 Electric Supply and Demand Database). As part of the
restructuring of New York's utility industry, the New York State Public Service
Commission has ordered investor-owned utilities to divest their generation
assets. As of December 31, 2000, generation units with capacity totaling
approximately 18,000 MW, representing approximately 53% of the State's total
44
capacity, had been sold or were awaiting final regulatory approval for sale to
new market participants. These sales are helping to create a more active
wholesale energy market, similar to the market in PJM. It is anticipated that
reserve capacity margins in New York will be insufficient to meet the NPCC
criterion of a one-day in ten years loss-of-load expectation. Excluding New York
City and Long Island, approximately 2,700 MW of new capacity is expected to come
online in New York between January 1, 2001 and December 31, 2003. Plans for
development of approximately 16,000 MW of additional new capacity have been
announced.
New England
ISO New England was established on July 1, 1997 and immediately assumed
responsibility for managing the New England Power Pool which covers the six New
England states and has over 130 members operating 330 generation units. In June
1999, ISO New England also began administering the restructured wholesale energy
market. As in PJM and New York, the restructuring of the utility industry in New
England has also resulted in divestiture of generation assets. As of December
31, 2000, generation units of investor-owned utilities with approximately 17,500
MW of capacity, representing approximately 69% of the total generation
capability in New England, either had been sold to new owners or were awaiting
final regulatory approval for sale. As in New York, these sales are increasing
trading activity in the wholesale markets. Approximately 8,700 MW of new
capacity is expected to come online in New England between January 1, 2001 and
December 31, 2003. Plans for development of approximately 16,000 MWs of
additional new capacity have been announced.
ECAR
The ECAR region is made up of Ohio, Indiana, most of Michigan and West
Virginia and parts of Virginia, Kentucky, Maryland and Pennsylvania. Unlike the
ISO-operated markets, ECAR does not have a centrally managed energy market or a
regional open access transmission tariff. Instead, within ECAR, each utility
operates its own control area that, collectively, forms an interconnected
electrical system covering eight states and 29 major utilities. However, it
appears likely that federal initiatives (see "Federal Laws and Regulations")
will result in the creation of an ISO organization within or including the ECAR
region within several years that will likely increase trading activity within
the region. At present, the demand in the ECAR region is growing at
approximately 1.7% annually. Projections indicate potential capacity
deficiencies by 2005 (NERC Reliability Assessment 2000-2009). To serve these
loads, the region will likely have to rely on supplemental resources to meet
peak summer demand. Approximately 6,500 MW of new capacity is expected to come
online in ECAR between January 1, 2001 and December 31, 2003. Plans for
development of approximately 44,000 MWs of additional new capacity have been
announced.
VACAR
VACAR encompasses a portion of West Virginia, most of Virginia and all of
North and South Carolina. Like ECAR, VACAR does not have a centrally managed
competitive electricity market but, instead, is an interconnected grid of
individual utility control areas. Although it has not yet committed to the
establishment of an ISO or other open access, non-discriminatory organization,
VACAR is expected to move in that direction in the next several years which will
likely increase trading activity within the region. Due to their proximity to
our generation assets, we are primarily focused on West Virginia and Virginia in
Northern VACAR. Approximately 3,200 MW of new capacity is expected to come
online in VACAR between January 1, 2001 and December 31, 2003. Plans for
development of approximately 7,000 MW of additional new capacity have been
announced.
FERC Regional Transmission Organization Orders
In a series of orders issued in July, FERC called for the creation of four
large regional transmission organizations ("RTOs") to facilitate competitive
regional markets in the U.S. FERC rejected several smaller RTO proposals and
directed transmission owners and ISOs to combine into much larger RTOs,
dramatically altering their proposed geographic size and configuration.
45
In the Northeast region, FERC conditionally approved a PJM RTO proposal
(subject to several modifications and compliance filings) and rejected alternate
proposals advanced by the New York ISO and ISO New England. FERC directed that
the three existing ISOs for PJM, New York and New England, as well as the
systems involved in PJM West, form a single Northeast RTO, based on the "PJM
platform". FERC directed that the parties in the region engage in mediation
(with FERC oversight) to prepare a proposal and timetable for the merger of the
ISOs into a single RTO. At the end of a 45-day mediation period, the
Administrative Law Judge assigned to the matter will submit a report to FERC.
In the Southeast region, FERC rejected a separate RTO proposal made by the
Southern Companies and another submitted jointly by Entergy and the Southwest
Power Pool. FERC directed that a single Southeast RTO be created, using the Grid
South platform. As in the Northeast, FERC directed the Southeast parties to
engage in mediation under supervision of an Administrative Law Judge.
Lower-cost generation should benefit from having better access to a larger
regional market. While specific impacts on us are uncertain because specific
rules will not be known for some time, we generally expect that the elimination
of seams issues and the creation of a single wholesale market in the Northeast
will have a positive impact on our competitive position.
Generation Assets
As of June 30, 2001, our portfolio of generation assets consisted of
11,490 MW of installed capacity. Of this total, approximately 11,110 MW are
located within PJM, which equates to approximately 20% of PJM's installed
capacity as of that date. These assets are well diversified in terms of fuel
type, technology and energy market segment. The portfolio's diversity represents
a balance that helps to mitigate risks associated with fuel price volatility and
market demand cycles. The following charts provide a breakdown of our installed
generation assets by market segments, fuel type and technology.
[Chart omitted]
Distribution Among Market Segments
There are generally three energy market segments: base load, load
following (also referred to as mid-merit) and peaking. Generation units are
typically characterized as serving one or more of these markets based on their
operating capability and performance. On a capacity basis, our portfolio of
generation assets consists of 36% base load, 36% load following and 28% peaking.
This balanced distribution among market segments reduces our risk associated
with market demand cycles and allows us to participate in the market at each
segment of the dispatch curve.
Base Load Units: Base load units are the largest and most efficient units
that we operate. These units are typically greater than 500 MW in capacity and
are characterized by high construction (capital) costs, high fixed costs
(primarily labor) and low operating costs (primarily fuel). Operating costs are
low due to the combination of high efficiency and the use of coal and nuclear
fuels, which are generally lower in cost per unit of output relative to oil or
natural gas. Base load units are the primary source of our energy revenues and
the capacity of these units supports revenues from capacity sales.
46
Because of their size and operating characteristics, base load plants are
most suited to run for long periods at maximum output. Performance of these
units is generally measured by "capacity factor," or the ratio of the actual
output of the unit to the theoretical maximum output of the unit if it ran
continuously over a given period. Base load units tend to be profitable to
operate in most energy market conditions throughout the year and, therefore,
typically have capacity factors above 60%. During 2000, our base load fossil and
nuclear units achieved average capacity factors of 82.4% and 87.6%,
respectively.
Load Following Units: Load following units are smaller and more flexible,
but somewhat less efficient than base load units. They generally range in size
from 100 MW to 500 MW. The construction costs of these units are typically lower
than that of base load plants, but the operating costs are higher per unit of
output due to lower efficiency and/or the use of higher cost fuels such as oil
and natural gas. Load following units are designed to operate less frequently
than base load units (i.e., during those periods when system demand exceeds the
base load capacity of the system) and, therefore, typically have capacity
factors that range from 20% to 60%. These units generally support revenues from
capacity sales and area regulation, as well as energy revenues during periods of
higher energy prices.
Due to the less frequent operation of load following units relative to
base load units, a more relevant measure of performance for these units is EAF,
the percentage of time a unit is available to operate during the year, whether
or not it actually operates. In 2000, the weighted average EAF of our load
following units was 89%.
Peaking Units: Peaking units, which normally have capacities of 10 MW to
100 MW, represent the smallest and most flexible units in our fleet. The capital
costs and fixed costs of these units are low relative to base load plants.
Peaking units are the least efficient plants in our portfolio and utilize higher
cost fuels such as oil and natural gas. As a result, operating costs per unit of
output tend to be much higher than that of base load units. For this reason,
peaking units are operated during times of peak demand and derive the majority
of their revenues from capacity and ancillary services sales. However, the
operating flexibility and rapid startup characteristics of these units enable
them to capture energy revenues during periods of high energy prices, which may
occur during times of peak demand or as a result of transmission congestion. As
with load following units, the relevant measure of performance is EAF. In 2000,
the weighted average EAF of our peaking units was 87%.
One special class of peaking unit technology is pumped storage
hydroelectric. These units utilize electric power during low cost periods (e.g.,
early morning hours when demand is generally low) to pump water to an elevated
reservoir. When energy prices are high, the water is allowed to flow through the
turbine to operate the generators and the resulting energy output is sold to the
market. We are the co-owner of one pumped storage facility.
Diversity of Fuel Types and Technologies
Our portfolio consists of generation assets that are powered by a variety
of fuel types. Coal, natural gas and oil power our 14 fossil generation stations
and our ownership interest in these stations represent a total of 7,873 MW, or
69% of our current installed capacity. We also have an ownership interest in a
pumped storage hydroelectric station, which adds additional diversity and 200 MW
to our generation fleet. We have ownership interests in five nuclear units that
are currently licensed to operate for 40 years, with the first unit's license
expiring in August 2013. Our share of the nuclear units in which we have an
ownership interest represents a current net capacity of 3,417 MW that accounts
for 29% of our current installed capacity. This includes a recent transaction
wherein we contracted to purchase Conectiv's ownership interests in the Salem,
Hope Creek and Peach Bottom units, increasing our respective ownership share of
those units to 57.4%, 100.0% and 50.0% (a total of 544 MW). The Delmarva portion
of that transaction (246 MW) was closed in December 2000. The ACE portion (298
MW) awaits regulatory approval.
Our portfolio is also diverse in terms of generation technologies
employed. The range of fossil-fueled technologies includes conventional steam
units, combined cycle units and combustion turbine units. In addition, our
nuclear and pumped storage hydroelectric generation units represent entirely
different generation technologies that serve as a strategic complement to those
of the fossil fleet.
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Power Production Breakdown
The following figure shows our output by energy source in the twelve
months ended June 30, 2001 relative to installed capacity. Our coal and nuclear
fueled units, represent 18% and 29%, respectively, of our installed capacity,
yet accounted for 28% and 63%, respectively, of our total energy output for the
period. In contrast, our gas, oil and pumped storage load following and peaking
units, which represent 53% of our installed capacity, accounted for 9% of our
total energy output for the period.
Energy and Capacity by Fuel Type
[Chart omitted]
The following table provides summary profiles of our fossil and nuclear
generation stations and the units that comprise them:
Generation Unit Primary Total Capacity Owned
Station Unit # Type(1) Fuel Type Plant Mission(2) (MW) Capacity (MW) Plant Operator
----------- ------ ----- --------- ------------- ------------ ------------- -------------
Conemaugh 1&2 ST Coal Base Load 1,700 382 Reliant
3 IC Oil Peaking 11 2
Keystone 1&2 ST Coal Base Load 1,700 388 Reliant
3 IC Oil Peaking 11 3
Albany 1-4 ST Gas/Oil Load Following 380 380 Power
Hudson 1&2 ST Coal/Gas Load Following 991 991 Power
3 CT Oil Peaking 129 129
Kearny 7&8 ST Oil Load Following 300 300 Power
9 CT Gas Peaking 21 21
10-12 CT Gas/Oil Peaking 443 443
Linden 1&2 ST Oil Load Following 430 430 Power
3 CT Gas Peaking 21 21
5-8 CT Gas/Oil Peaking 316 316
Mercer 1&2 ST Coal/Gas Load Following 648 648 Power
3 CT Oil Peaking 129 129
Sewaren 1-4 ST Gas/Oil Load Following 453 453 Power
6 CT Oil Peaking 129 129
Bergen 1 CC Gas Load Following 675 675 Power
3 CT Gas Peaking 21 21
48
Generation Unit Primary Total Capacity Owned
Station Unit # Type(1) Fuel Type Plant Mission(2) (MW) Capacity (MW) Plant Operator
----------- ------ ----- --------- ------------- ------------ ------------- -------------
Burlington 10 CC Gas Load Following 245 245 Power
1,2 8, CT Oil Peaking 561 561
9&11 CT
Bayonne 1&2 CT Oil Peaking 42 42 Power
Edison 1-3 CT Gas/Oil Peaking 504 504 Power
Essex 9-12 CT Gas/Oil Peaking 617 617 Power
National Park 1 CT Oil Peaking 21 21 Power
Yards Creek 1 PS Pumped Storage Peaking 400 200 GPU
Salem 1&2 NU Nuclear Base Load 2,223 1,2813 Power
3 CT Oil Peaking 38 22
Hope Creek 1 NU Nuclear Base Load 1,042 1,0423 Power
Peach Bottom 2&3 NU Nuclear Base Load 2,186 1,0943 Exelon
- ----------
1 ST = Steam; CC = Combined Cycle; CT = Combustion Turbine; IC = Internal
Combustion; PS = Pumped Storage; NU = Nuclear
2 We classify certain units based upon their historic operating
characteristics.
3 Includes ACE's ownership interests under contract.
As of June 30, 2001, we had 4,604 MW of generation capacity in
construction or advanced development as shown in the following table:
Total Principal
Name and Location and Capacity Fuel
Expected Completion Date (MW) Used Missions
- ------------------------ -------- --------- --------
Single Cycle:
Kearny, NJ Unit 121 168 Gas/Oil Peaking
Waterford (Phase I), Ohio (June 2002) 500 Gas Load Following
Combined Cycle:
Bergen, Ridgefield, NJ (June 2002) 500 Gas Load Following
Lawrenceburg, Indiana (May 2003) 1,150 Gas Load Following
Waterford (Phase II), Ohio (May 2003) 350 Gas Load Following
Linden, NJ (June 2003) 1,186 Gas Load Following
Bethlehem, NY (June 2004) 750 Gas/Oil Load Following
-----
Total Construction or Advanced
Development 4,604
=====
- ----------
1 This unit commenced full commercial operation on August 1, 2001.
Development/Growth Plans
We believe that we are well positioned to grow by acquiring new plants,
developing greenfield and brownfield sites and forming partnerships with
independent power producers. We plan to concentrate on attractive opportunities
and employ a disciplined approach to growth. We are expanding our PJM asset base
with the addition of combined cycle units at Bergen (500 MW) and Linden (1,186
MW) and peaking units equaling 168 MW in the period 2001-2003. In addition, we
are currently developing two combined cycle plants in ECAR, an 850 MW plant in
Waterford, Ohio and a 1,150 MW plant in
49
Lawrenceburg, Indiana. As we continue to acquire generation capacity in the
Super Region, we will utilize our wholesale marketing, trading and risk
management capabilities, together with our growing asset base, to expand our
wholesale marketing and trading volume in PJM and other markets.
Energy Marketing and Trading
We have been engaged in energy trading and marketing operations for a
number of years. We utilize our significant industry expertise and capability to
provide comprehensive energy portfolio and risk management services to achieve
the greatest overall return on our portfolio of assets. During each of the last
three years, we completed wholesale transactions relating to more than 100
million mWh of electricity annually with trading partners in the Super Region.
In the future, we expect to continue to successfully participate in the Super
Region to further enhance the value of our assets.
We engage in physical and financial transactions in the electricity
wholesale markets and execute an overall risk management strategy to mitigate
the effects of adverse movements in the fuel and electricity markets. In
addition to bidding the output of our generation assets into the day-ahead PJM
energy market, we actively trade energy, capacity, fixed transmission rights,
fuel and emission allowances in the spot, forward and futures markets primarily
within PJM, but also throughout the Super Region. We are also involved in
financial transactions that include swaps, options and futures in the
electricity markets.
In addition to participating in each of the major electricity supply and
capacity markets in the Super Region, we also market and trade a broad spectrum
of other energy and energy-related products. These products include coal, oil,
natural gas, sulfur dioxide and nitrous oxide emissions allowances and financial
instruments including fixed transmission rights. Our marketing and trading
activity for these products extends throughout the United States and involves
physical and financially settled transactions, futures, options, swaps and basis
contracts.
We perform stress tests to identify risks in the portfolio that may not be
apparent in normal market conditions. ER&T's risk management group performs
stress tests on a daily basis to test market positions against adverse price
movements and to identify potential risks in its entire portfolio. The corporate
risk group also performs independent stress tests on a weekly basis using
standardized scenarios and on a monthly basis using data that will attempt to
identify weaknesses in the portfolio. The corporate risk group reports the
results of these stress tests to the RMC.
We have developed a hedging and overall risk management strategy to limit
our risk exposure and to track our positions in the wholesale markets. Hedging
is used as the primary method for protecting against adverse price fluctuations
and involves taking a position in a related financial instrument that is
designed to offset the risk associated with the original position. We only use
hedging instruments that correspond to the generation, purchase or sale of
electricity and the purchase or sale of fuel.
Our corporate financial risk management policy, developed in 1997, uses
the Group of Thirty recommendations, which are considered best practices for the
prudent use of derivatives. The policy was approved by the PSEG Board of
Directors and empowers an executive-level RMC chaired by the CFO of PSEG to
monitor, measure and mitigate risk taking activities of the company. The RMC
created an independent corporate risk group to manage the daily activities
related to risk measurement and monitoring. Our corporate risk group, which
functionally reports directly to the CFO of PSEG, monitors, measures and
aggregates the financial risk of all trading operations. The RMC sets overall
commodity portfolio risk limits, and specific trading limits for each trading
area, to ensure that risk parameters are not exceeded. Specifically, we use a
VAR model that measures the potential gains or losses that could be sustained
due to changes in market factors. Based on this model, VAR limits for certain
time periods are established to limit our exposure. Currently, the VAR limit for
ER&T is set at $25 million with a $16.5 million alert level. In the event that
the alert level is reached, the portfolio is examined and the root causes of the
change in the value of the portfolio are assessed.
50
As previously discussed, on December 20, 2000, our portfolio exceeded the
alert limit of $16.5 million in VAR. The RMC convened to discuss the reasons for
the increase in the VAR, which were increasing natural gas and electricity
prices and the corresponding volatility in the commodity prices. The RMC
determined that no immediate action should be taken by ER&T but that the
corporate risk management group would report VAR levels twice in a week and more
frequently, if necessary to monitor the portfolio. In February 2001, prices and
volatilities decreased and the VAR moved below the alert limit.
To further enhance trading activity, we have a comprehensive portfolio
management system. Traders trade from one consolidated portfolio and we maintain
a trading "book" that is continuously marked to market. All trades are
immediately entered into the portfolio management system, where trading
managers, the risk manager and the corporate risk group review and monitor the
status of the portfolio and evaluate the VAR of the forward positions.
Each trading counterparty must pass a thorough credit analysis before
being approved as a trading partner. The credit analysis results in an internal
credit rating with a credit line that is closely monitored. Credit enhancements,
including guarantees, performance bonds, prepayment and letters of credit, may
also be required and are actively managed. New trading counterparties are
approved on a regular basis and performance of existing trading partners is
monitored. Counterparties can be removed from the approved list due to
deteriorating business conditions or as our evaluation of our risk changes.
One example of how we intend to maximize the value of our generation
portfolio is effective management of the "spark spread", or the difference
between the cost of fuel and the price of power. This "spark spread" represents
the margin we are able to realize on the sale of each unit of electricity we
generate. By using our trading expertise, we can enhance our revenues by taking
advantage of the volatility inherent in the "spark spread". For example, through
ER&T we may enter into a "forward sale" in which we (a) contract to deliver our
electricity to a purchaser at a future date at a fixed price and (b) contract
for the delivery of the amount of fuel we will require to fulfill our contracted
electricity delivery requirements at a fixed price. By entering into a forward
sale, we reduce our level of risk by locking in the margin we receive for the
electricity we generate. In addition, if the market price of fuel rises relative
to the market price of electricity, we are able to sell the fuel that we
previously contracted to buy and purchase electricity from the market to cover
our obligation to deliver electricity. Through these transactions, we realize a
profit on the sale of the fuel we had contracted to purchase in the future while
also ensuring that we do not leave an unhedged trading position by covering our
obligation to supply power in the future through the purchase of replacement
power. On a daily basis, we are currently arbitraging the spark spread for about
1,200 MW of gas-fired generation assets. As the overall scale and diversity of
our portfolio continues to grow, to the extent that we experience reduced BGS
requirements as a result of PSE&G's customer attrition, the level of
transactions that we can engage in will increase, creating the potential for
additional value creation.
Our team of marketing and trading professionals utilizes its in-depth
knowledge of the markets, assets and complex rules in the region in which we
operate to maintain the optimal mix of physical and financial assets and to
maximize the value of our portfolio. All marketing and trading activities are
performed by a staff of experts with experience in commodity trading, financial
institutions and the electric industry. A fully integrated "back-office"
operation performs contract management, scheduling, billing, cash management,
credit analysis and monitoring, and regulatory and legal support functions.
Fuel Management
Our diverse generation portfolio of nuclear, fossil and hydroelectric
facilities utilizes several different types of fuels in the production of
electricity. Coal and uranium are the primary fuels for the base load units,
while natural gas is the primary fuel for the majority of the load following and
peaking units. The remainder of the load following and peaking units run on fuel
oil. Natural gas and fuel oil are also used as alternate fuels for some coal and
gas fired units, respectively. Approximately 5,269 MW, or 46% of our generation
portfolio has dual fuel capability.
51
Our wholesale marketing and trading operation manages the procurement of
all fossil fuels (coal, oil and natural gas) for the operation of our fossil
generation stations. By integrating fuel procurement, control of our generation
units and responsibility for wholesale energy supply and trade, we are able to
more effectively hedge our positions in the market and take advantage of
arbitrage opportunities that are present across the full spectrum of the energy
and emissions markets. This represents another facet of our wholesale marketing
and trading operation's integration with our generation operations that
substantially benefits our profitability.
We are actively managing our fuel supply to lower transportation and
commodity costs and improve fuel quality. Our efforts involve leveraging our
size as a buyer, improving our transfer and handling capabilities and purchasing
from a more diverse range of suppliers from around the world. We have also
expanded off-site storage to leverage purchasing power and to support arbitrage
transaction opportunities.
Coal
Coal is the primary fuel for seven of our base load and load following
steam turbine units: Hudson 2, Mercer 1 and 2, Keystone 1 and 2 and Conemaugh 1
and 2. Coal is purchased through spot market transactions, as well as annual and
medium-term contracts from numerous suppliers, primarily in Northern, Central
and Southern Appalachia. Coal is delivered to our New Jersey units through a
combination of rail and barge movements and to our Pennsylvania units by rail
and truck.
Natural Gas
Natural gas is the primary fuel for the bulk of our load following and
peaking fleet, including the combined cycle units at Bergen and Burlington, the
load following steam turbine units at Albany, Hudson and Sewaren and the
combustion turbine peaking units at Bergen, Burlington, Edison, Essex, Kearny
and Linden. Natural gas is also the alternate fuel for the primarily coal-fired
units at Hudson and Mercer. Natural gas is delivered to stations via pipeline to
all sites with gas-fired units and is purchased via supplier contracts and in
the spot market.
Fuel Oil
No. 2 (Kerosene) and No. 6 Oil are used as primary fuels by two load
following steam units and nine combustion turbine peaking units. No. 2 and No. 6
Oil are also used as alternate fuels by several load following and peaking units
that have dual-fuel capability and burn natural gas as their primary fuel. Fuel
deliveries to sites with oil-fired units are made by truck, barge, or pipeline.
Fuel oil for all oil-fired units is purchased on the spot market.
Uranium
Uranium is the fuel for our five nuclear units. The supply of fuel for
these base load units involves the mining of uranium ore that is processed and
fabricated into fuel assemblies. We have several long-term contracts with
uranium ore processors to meet the currently projected requirements for Salem
and Hope Creek stations. Exelon, the operator of the Peach Bottom units, has
similar contracts to satisfy the fuel requirements of Peach Bottom. Currently,
there is an adequate supply of nuclear fuel for Salem, Hope Creek and Peach
Bottom.
Our nuclear fuel supply strategy has also emphasized the reduction of fuel
costs. Through global sourcing, renegotiated contracts and improved fuel design,
we have reduced our nuclear fuel costs (for Salem and Hope Creek) by
approximately $0.06 per kWh since 1997 when fuel costs were $0.58 per kWh. We
are continuing to focus on reducing these costs below $0.48 per kWh by 2002,
which would place our fuel costs within the top quartile of fuel cost efficient
U.S. nuclear plants.
52
Customers
Current Customers
PSE&G, pursuant to the BGS contract, will be the primary customer for our
generation business through July 31, 2002. PSE&G, under the terms of the BPU
Final Order, will provide basic generation service to all retail customers in
its service area that either do not choose to buy their power from alternative
suppliers or are not being served by their alternative energy supplier for any
reason. As of December 31, 2000, PSE&G provided service to approximately 1.9
million electric customers. For the year ended December 31, 2000, electric
operating revenues associated with this customer base aggregated approximately
$1.8 billion. PSE&G's peak load during the summer of 2000 was 9,369 MW.
PSE&G will pay us the full amount charged to BGS customers, or the retail
tariff rate on file at the BPU, less any sales and use taxes. In addition, PSE&G
will pay us a price stability charge to compensate us for ensuring the
reliability of BGS service and removing from PSE&G price volatility risk. The
charge will be equal to the full amount collected by PSE&G for its unsecuritized
generation stranded costs per billing period.
In addition to the BGS contract, we will continue to supply four municipal
and electric cooperative customers and one public utility a total of 489 MW of
capacity, including some other obligations, such as energy, under the terms of
existing contracts for the remaining one to five years of those contracts.
Wholesale energy and related product trading have been growing business
opportunities throughout the Super Region over the last ten years and we and our
predecessors and affiliates have been in the forefront as an active participant.
Trading relationships have been developed with most of the larger and more
successful power marketers and existing trading relationships have been
strengthened with the region's utilities. More recently, new relationships have
developed with companies that are focused on aggregating retail customers in
states that have restructured. We currently have over 100 active trading
counterparties, which have passed a rigorous credit analysis and contracting
process. These include investor owned utilities, retail aggregators and
marketers.
Potential New Customers
Customer growth will come from the many opportunities that are a result of
regulatory changes providing open access to new markets and the opportunity to
offer many wholesale energy and related products in new innovative delivery
methods. Many of these new customers are subsidiaries of existing energy-based
companies that meet our contract and credit requirements and which have
established trading relationships with us. Other new customers are newly formed
companies that are looking for opportunities in the new energy markets and are
able to meet our contract and credit requirements. During the remainder of the
BGS contract period ending July 31, 2002, we will market excess generation
capacity as PSE&G's retail market is expected to moderately erode during the
outset of retail competition. We currently have several contracts to supply
retail aggregators and, following the completion of the BGS contract period, we
anticipate that the majority of our generation output will continue to be
dedicated to supplying similar long-term contracts.
Insurance
We carry insurance coverage consistent with companies engaged in similar
commercial operation with similar properties. Our insurance coverage includes
risk insurance as well as commercial general public liability insurance,
covering liabilities to third parties for bodily injury and property damage
resulting from our operations; automobile liability insurance, for all owned,
non-owned and hired vehicles, covering liabilities to third parties for bodily
injury and property damage, and all risk property insurance, covering the
replacement value of all real and personal property, including coverage for
boiler and machinery breakdowns and earthquake and flood damage, subject to
certain sublimits. We also maintain substantial excess liability insurance
coverage above the established primary limits for commercial general liability
and automobile liability insurance. Limits and deductibles are comparable to
those carried by other electric generation companies of similar size. For a
discussion of liability and other insurance related to our nuclear generation
facilities, see Note 7. Commitments and Contingent Liabilities of Notes to
Consolidated Financial Statements.
53
Competition
The National Energy Policy Act of 1992 ("Energy Policy Act") (see "--
Regulation -- Federal Laws and Regulations") laid the groundwork for competition
in the wholesale electricity markets in the United States. This legislation
expanded the FERC's authority to order electric utilities to open their
transmission systems to allow third-party suppliers to transmit, or "wheel,"
electricity over their lines. In 1996, FERC issued an order that resulted in
expanded open access to transmission lines, providing eligible third-party
wholesale marketers comparable transmission access. These actions have enabled
power marketers, independent power producers, EWGs and utilities to compete
actively in wholesale markets, consumers to have the right to choose their
energy suppliers and competition to set the price of the generation component of
electricity bills in deregulated areas.
During the last several years, additional legislation has been introduced
to further encourage competition at the retail level (often referred to as
customer choice or retail access). While no legislative proposal has yet
coalesced at the federal level, it is expected that efforts to restructure the
nation's electricity industry, encourage competition and greater industry
flexibility and allow retail customer choice will continue. At present, the
timing and effect of federal restructuring legislation cannot be predicted with
any degree of certainty. Nevertheless, an increasing number of states have
enacted legislation to open their markets to customer choice and retail
competition. As a result, the highly regulated market structure of the past is
giving way to one where electricity consumers have the right to choose their
electricity supplier and competition is setting the price of the generation
component of electricity bills.
In the regions where we are the most active, most states have already
begun the process of restructuring their electricity markets. Retail power
markets opened to competition in New York, Massachusetts and Rhode Island in
1998. Pennsylvania began opening its markets in January 1999. New Jersey's
electricity market opened to full competition late in 1999, while Delaware and
Michigan markets began phasing in competition at virtually the same time. In
2000, Connecticut (January), Maine (March) and Maryland (July) began
competition. Ohio and the District of Columbia began opening to competition in
January 2001. New Hampshire and Virginia are scheduled to begin phasing in
competition in 2001 and 2002.
As markets continue to evolve, several types of competitors have or will
emerge in the markets in which we participate. These competitors include
independent power producers with or without trading capabilities, other utility
affiliates that have formed generation and/or trading affiliates, aggregators,
wholesale power marketers or some combination thereof. These participants will
compete with one another buying and selling in wholesale power pools, entering
into bilateral contracts and/or selling to aggregated retail customers.
We expect to compete as a large, diverse supplier of wholesale electricity
and related products and services. In this market segment, defined to include
large companies with fully integrated trading and generation functions, we
anticipate that our primary competitors will include companies like Enron Corp.,
Duke Energy Corporation, Mirant Corp. and Exelon Corp. While these companies are
formidable competitors, we believe that our asset size and location, regional
market knowledge and integrated functions will provide us with a competitive
edge in our selected markets.
Properties
In addition to our generation assets, we own or lease several other
properties associated with our business activities. We sublease approximately
70,000 square feet of office space in an office tower and other office
facilities in Newark, New Jersey. We also lease approximately 19,600 square feet
of space in the Hadley Road Training Center in South Plainfield, New Jersey from
PSE&G. This space is used for fossil system maintenance, procurement and
materials management staffs.
Through a subsidiary, we own a 50.0% interest in about 20,000 acres of
restored wetlands and conservation facilities in the Delaware Estuary. This
subsidiary was formed to acquire and own lands and other conservation facilities
required to satisfy the condition of the New Jersey Pollutant Discharge
Elimination System ("NJPDES") permit issued for the Salem Generating Station.
These lands and
54
conservation facilities are the only assets of The Francis
Corporation, our wholly-owned subsidiary. We also own several other facilities
including the on-site Nuclear Administration and Processing Center buildings.
We have an ownership interest in the 650-acre Merrill Creek Reservoir in
Warren County, New Jersey. The reservoir was constructed to store water for
release to the Delaware River during periods of low flow. Merrill Creek is
jointly owned by seven entities that have generation facilities along the
Delaware River and use the river water in their operations. We also own the
Maplewood Test Center in Maplewood, New Jersey and the Central Maintenance Shop
at Sewaren, New Jersey.
Employees and Labor Relations
As of December 31, 2000, we had a total of 3,124 employees, of whom 1,154
were dedicated to Fossil, 1,835 to Nuclear, 60 to ER&T and 75 in corporate
functions. Collective bargaining agreements, which expire on April 30, 2002, are
in place with three union groups, representing 1,662 employees (802 employees,
or approximately 69% of the workforce in Fossil and 860 employees, or
approximately 47% of the workforce in Nuclear). In the last 15 years, we have
not experienced any labor problems resulting in significant work stoppage and we
believe that we maintain satisfactory relationships with our employees.
Legal Proceedings
We are involved in the following environmental related matters involving
governmental authorities. Based on current information, we do not expect
expenditures for any such site, individually or all such current sites in the
aggregate, to have a material effect on their financial condition, results of
operations and net cash flows.
(1) Claim made in 1985 by U.S. Department of the Interior under CERCLA
with respect to the Pennsylvania Avenue and Fountain Avenue
municipal landfills in Brooklyn, New York, for damages to natural
resources. The U.S. Government alleges damages of approximately $200
million. To our knowledge there has been no action on this matter
since 1988.
(2) Duane Marine Salvage Corporation Superfund Site is in Perth Amboy,
Middlesex County, New Jersey. We were named as one of several
potentially responsible parties ("PRPs") with regard to
contamination of this site.
(3) Various Spill Act directives were issued by NJDEP to PRPs, including
us with respect to the PJP Landfill in Jersey City, Hudson County,
New Jersey, ordering payment of costs associated with operating and
maintenance expenses, interim remedial measures and a Remedial
Investigation and Feasibility Study ("RI/FS") in excess of $25
million. The directives also sought reimbursement of NJDEP's past
and future oversight costs and the costs of any future remedial
action.
(4) In 1991, the NJDEP issued Directive and Notice to Insurers Number
Two ("Directive Two") to 24 Insurers and 52 Respondents, including
PSE&G, in connection with an investigation and remediation of the
Global Landfill Site in Old Bridge Township, Middlesex County, New
Jersey seeking recovery of past and anticipated future NJDEP
response costs ($37 million). We and other participating PRPs have
agreed with NJDEP to a partial settlement of such costs and to
perform the remedial design and remedial action. In 1996, 13 of the
Directive Two Respondents, including PSE&G, filed a contribution
action pursuant to CERCLA and the Spill Act against approximately
190 parties seeking contribution for an equitable share of all
liability for response costs incurred and to be incurred in
connection with the site. In September 1997, the NJDEP issued a
Superfund record of decision with estimated cost of $3.7 million.
(5) The NJDEP assumed control of a former petroleum products blending
and mixing operation and waste oil recycling facility in Elizabeth,
Union County, New Jersey (Borne Chemical Co. site) and issued
various directives to a number of entities including us requiring
performance of
55
various remedial actions including: establishment of security at the
site; removal and off-site disposal of containerized wastes at the
site; and conduct of a remedial investigation of the site. Our nexus
to the site is based upon the shipment of certain waste oils to the
site for recycling. We and certain of the other entities named in
NJDEP directives are members of a PRP group that have been working
together to satisfy NJDEP requirements including: funding of the
site security program; containerized waste removal; and a site
remedial investigation program.
Regulation
Energy Regulatory Matters
We generate, sell and transmit electric power under the jurisdiction of
several federal agencies. We are subject to regulation by FERC with respect to
the interstate sale and exchange of electric capacity and energy. The
construction and operation of nuclear generation facilities are subject to
comprehensive regulation by the NRC. Such regulation may include our providing
parental guarantees to Nuclear for the broad financial assurances required by
the NRC. In addition, the Federal Emergency Management Agency is responsible for
the review, in conjunction with the NRC, of certain aspects of emergency
planning relating to the operation of nuclear plants.
We are also subject to the regulation by the EPA, the U.S. Department of
Transportation ("USDOT") and the U.S. Department of Energy ("DOE") with respect
to the construction and operation of our generation stations.
Federal Laws and Regulations
FERC Order 888 ("Order No. 888"). The Energy Policy Act eased restrictions
on independent power producers ("IPPs") in an effort to increase competition in
the wholesale electric generation market. Order No. 888, issued in April 1996,
required all public utilities that own, control or operate electric transmission
lines to offer nondiscriminatory open access to their transmission systems.
Intra-pool transactions for power pools were also required to be conducted under
a nondiscriminatory, pool-wide open access tariff. FERC Orders No. 888-A and
888-B clarified and largely reaffirmed the legal and policy bases on which Order
No. 888 was grounded and also provided a process for recovery of stranded costs
from wholesale customers. While Order 888 has been significant in opening up
competition in the electric power industry, it is not directly applicable to us
because we do not operate an electric transmission system.
Federal Power Act ("FPA"). The FPA gives FERC exclusive ratemaking
jurisdiction over the wholesale marketing and transmission of electricity in
interstate commerce. All public utilities under FERC jurisdiction are required
to file rate schedules with FERC prior to commencing with wholesale marketing or
transmission. Because we will be selling power into the wholesale market, we are
considered a public utility under the FPA. We have filed, and FERC has accepted,
a rate schedule that grants us authority to sell electricity, capacity and
ancillary services at market-based rates.
Public Utility Holding Company Act ("PUHCA"). PUHCA provides that any
corporation, partnership or other entity or organized group that owns, controls
or holds power to vote 10% or more of the outstanding voting securities of a
"public utility company" or a company that is a "holding company" of a public
utility company is subject to pervasive regulation under PUHCA as a registered
holding company, unless an exemption is established or an order is issued by the
SEC declaring it not to be a holding company. Registered holding companies under
PUHCA are required to limit their utility operations to a single integrated
utility system and to divest any other operations not functionally related to
the operation of the utility system. In addition, a public utility company that
is a subsidiary of a registered holding company under PUHCA is subject to
financial and organizational regulation, including the requirement for SEC
approval of certain of its financing transactions. However, under the Energy
Policy Act, a company engaged exclusively in the business of owning and/or
operating facilities used for the generation of electric energy exclusively for
sale at wholesale may be exempted from
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PUHCA regulation as an EWG. With the exception of a section relating to the
acquisition of 5% or more of the voting securities of an electric or gas utility
company, PSEG and we have each claimed exemptions from regulation by the SEC as
a registered holding company under PUHCA. Fossil and Nuclear have also been
designated as EWGs under PUHCA.
State Regulatory Bodies
Neither PSEG nor we are subject to direct regulation by the BPU. However,
because of PSEG's ownership of PSE&G, the BPU may potentially assert regulation
with respect to certain transfers of control and reporting requirements. The BPU
may also impose certain requirements with respect to affiliate transactions
between PSE&G and PSEG and/or PSEG's non-regulated subsidiaries, including us.
The BPU Order authorizing the transfer of PSE&G's generation assets to us
requires that, should any of those assets be sold to a third party within five
years from August 24, 1999, any gains on such sale would have to be shared on a
50/50 basis with PSE&G's retail customers.
As a participant in the ownership of generation facilities in
Pennsylvania, we are subject to regulation by the PPUC in limited respects in
regard to such facilities.
We are also subject to the rules and regulations of the New Jersey
Department of Environmental Protection ("NJDEP") and Department of
Transportation ("NJDOT") with respect to the construction and operation of our
generation stations.
State Laws and Regulations
New Jersey Energy Master Plan Proceedings and Related Orders. Following
the enactment of the New Jersey Electric Discount and Energy Competition Act
("Energy Competition Act"), the BPU rendered its Final Order relating to PSE&G's
rate unbundling, stranded costs and restructuring proceedings providing, among
other things, for the transfer to an affiliate of all of PSE&G's electric
generation facilities, plant and equipment for $2.443 billion and all other
related property, including materials, supplies and fuel at the net book value
thereof, together with associated rights and liabilities. Pursuant to the Final
Order, we acquired all of PSE&G's electric generation facilities and wholesale
power contracts on August 21, 2000 in exchange for a promissory note in an
amount equal to the purchase price. Such note was repaid, and the acquired
assets were released from the lien of PSE&G's First and Refunding Mortgage, on
January 31, 2001.
The Energy Competition Act, the BPU's Final Order and the related BPU
proceedings, referred to as the Energy Master Plan Proceedings, opened the New
Jersey energy markets to competition by allowing all New Jersey retail electric
and gas customers to select their suppliers.
Securitization Filing and Finance Order. Also in the Final Order, the BPU
concluded that PSE&G should recover up to $2.94 billion (net of tax) of its
generation-related stranded costs, through securitization of $2.4 billion and an
opportunity to recover up to $540 million (net of tax) of its unsecuritized
generation-related stranded costs on a net present value basis. The $540 million
is subject to recovery by various means, including an explicit market transition
charge, the MTC. Following the issuance of the Final Order, the BPU issued its
order approving PSE&G's petition relating to the proposed securitization
transaction ("Finance Order") which authorized, among other things, the
imposition of a non-bypassable transition bond charge on PSE&G's customers; the
sale of PSE&G's property right in such charge to a bankruptcy-remote financing
entity; the issuance and sale of $2.525 billion of transition bonds by such
entity as consideration for such property right, including an estimated $125
million of transaction costs; and the application by PSE&G of the transition
bond proceeds to retire outstanding debt and/or equity.
PSE&G Transition Funding LLC, a wholly-owned subsidiary of PSE&G, issued
such transition bonds on January 31, 2001.
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Basic Generation Service. Under the BPU Final Order, PSE&G is obligated to
provide basic generation service to customers who do not choose another electric
supplier or who, for any reason, are not being supplied by another electric
supplier. PSE&G has contracted with us to provide the energy and capacity
necessary to meet its BGS and Off-Tariff Rate Agreements ("OTRA") obligations
through July 31, 2002. The Final Order prohibits PSE&G and us from promoting
such service as a competitive alternative to other electricity suppliers and
marketers. BGS will be competitively bid for the year beginning August 1, 2002
and annually thereafter. Any payments to PSE&G resulting from BGS being bid out
will be credited to the deferred societal benefit costs balance for purposes of
establishing its societal benefit clause rate for the year beginning August 1,
2003, and may not be retained by PSE&G or otherwise utilized to recover
unsecuritized generation-related stranded costs.
Affiliate Standards. In February 2000, the BPU approved affiliate
standards and fair competition standards which apply to transactions between a
public utility and its affiliates which provide, or offer, competitive services
to retail customers in New Jersey. These regulations are set to expire in March
2002 and, at that time, will be subject to BPU review and public comment. As
currently formulated, these standards have limited applicability to transactions
between us and PSE&G since we do not serve retail customers in New Jersey.
Environmental Regulatory Matters
Federal, regional, state and local authorities regulate the environmental
impacts of our operations. Areas of regulation include air quality, water
quality, site remediation, land use, waste disposal, aesthetics and other
matters. Generators of hazardous substances potentially face joint and several
liability, without regard to fault, when they fail to manage these materials
properly and when they are required to clean up property affected by the
production and discharge of such substances.
Compliance with environmental requirements has caused us to modify the
day-to-day operations of our facilities, to participate in the cleanup of
various properties that have been contaminated and to modify, supplement and
replace existing equipment and facilities. During 2000, we expended
approximately $9.0 million for capital related expenditures to improve the
environment and comply with environmental-related laws and regulations. Our
estimates are that we will expend approximately $15.0, $24.0 and $12.0 million
in the years 2001 through 2003, respectively, for such purposes. Such amounts
are included in estimates of construction expenditures (see "MD&A -- Liquidity
and Capital Resources").
Air Pollution Control. Federal, state and local air pollution laws (such
as the Federal Clean Air Act ("CAA") and the New Jersey Air Pollution Control
Act), and the regulations implementing those laws, require controls of emissions
from sources of air pollution, as well as record keeping, reporting and permit
requirements. Our approximate 23% ownership interest in Conemaugh and Keystone
subjects us to state regulation in Pennsylvania governing compliance with, and
maintenance of, air quality standards in Pennsylvania. Our ownership of Albany
Steam Station subjects us to similar regulation in New York.
To reduce emissions of sulfur dioxide ("SO2"), the CAA sets a cap on total
SO2 emissions from affected units and allocates SO2 "allowances" (each allowance
authorizes the emission of one ton of SO2) to those units. Generation units
needing to cover emissions above their allocations can buy allowances from
sources that have excess allowances. Similarly, to reduce emissions of nitrogen
oxides ("NOx"), which contribute to the formation of smog, Northeastern states
and the District of Columbia have set a cap on total emissions of NOx from
affected units, and allocated NOx allowances (with each allowance authorizing
the emission of one ton of NOx) to those units. The NOx allowances can be bought
and sold through a regional trading program similar to the trading of SO2
allowances. In 2003, the cap will be reduced to limit NOx emissions further.
To comply with the SO2 and NOx requirements, affected units may choose one
or more strategies, including installing air pollution control technologies,
changing or limiting operations, changing fuels or obtaining additional
allowances. At this time, we do not expect that we will incur material
expenditures
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to continue complying with the SO2 program. Our current analysis leads us to
believe that the potential costs for purchasing additional NOx allowances will
also not be material through December 31, 2002. In 2003, when the NOx cap is
reduced, the cost of complying with the cap may increase significantly. Whether
the cost will increase or decrease will depend upon whether we will be a net
purchaser or seller of NOx allowances. The extent of any increase or decrease
will depend upon a number of factors that may increase or decrease total NOx
emissions from affected units, thus increasing or decreasing demand for a fixed
supply of allowances. We have been implementing measures to reduce NOx emissions
at several of our units, which will reduce the cost of purchasing allowances.
In 1998, EPA issued regulations (commonly known as the "SIP Call")
requiring the 22 states in the eastern half of the United States to make
significant NOx emission reductions by 2003 and to subsequently cap these
emissions. The NOx reduction requirements are consistent with requirements
already in place in New Jersey, New York and Pennsylvania and thus are not
likely to have an additional impact on nor change the capacity available from
our facilities. On March 3, 2000, a federal court upheld nearly all of the
provisions of the SIP Call, regulations.
In December 1999, the EPA proposed to approve plans by several states
(including New Jersey and certain other Northern states) to attain the ozone
National Ambient Air Quality Standards. That approval is contingent on these
states implementing new programs to further reduce emissions of smog-forming
chemicals (including NOx). The affected Northeastern states have committed to
make these reductions, and by October 1, 2001, must select measures that could
affect the operation of our electric generation units and other
generation-related equipment. Measures currently under consideration may
increase demand for NOx allowances and, thus, increase their prices.
EPA adopted a new air quality standard in 1997 for fine particulate
matter. To attain the fine particulate matter standard, states may require
further reductions in NOx and SO2. However, under the time schedule announced by
EPA when the new standard was adopted, non-attainment areas will not be
designated until 2002 and control measures to meet this standard will not be
identified until 2005. The timing of these actions is uncertain due to a federal
court decision that overturned the new standard. That decision was appealed to
the United States Supreme Court, which, in a recent decision, upheld the EPA's
new standards for fine particulate matter. Additionally, similar NOx and SO2
reductions may be required to satisfy requirements of an EPA rule protecting
visibility in 156 of the nation's scenic areas, including some areas near our
facilities.
Under the CAA, states must require each major facility to obtain a
facility-wide operating permit. Operating permits for certain of our facilities
may require changes to facility operations or technology, installation of
additional air pollution controls and performance of supplemental emissions
monitoring. Capital costs of complying with these and other air pollution
control requirements through 2004 are included in our estimate of construction
expenditures (see Capital Requirements of MD&A).
In November 1999, the federal government announced the filing of lawsuits
by several states against seven companies operating power plants in the Midwest
and Southeast, charging that 32 coal-fired plants in ten states violated the
Prevention of Significant Deterioration ("PSD")/New Source Review requirements
of the CAA. Generally, these regulations require major sources of certain air
pollutants to obtain permits, install pollution control technology and obtain
offsets in some circumstances when those sources undergo a "major modification,"
as defined in the regulations. Various environmental and public interest
organizations have given notice of their intent to file similar lawsuits. The
Federal government is seeking to order these companies to install the best
available air pollution control technology at the affected plants and to pay
monetary penalties of up to $27,500 for each day of continued violation.
The EPA and NJDEP issued a demand in March 2000 under section 114 of the
CAA requiring information to assess whether projects completed since 1978 at the
Hudson and Mercer coal burning units were implemented in accordance with
applicable PSD/New Source Review regulations. We completed our response to the
section 114 information request in November 2000. Based upon the information
provided to the EPA it is likely that the EPA will seek to enforce the
requirements of the New Source Review program at Hudson 2 and Mercer 1 and 2. We
are currently in discussions with the EPA and NJDEP to resolve the matter.
However, it is uncertain whether these discussions will be successful and
capital costs of compliance could approximate $300 million.
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Subsequent to December 31, 2000, EPA indicated that it is considering
enforcement action under its PSD rules relating to the construction that is
currently in progress for Bergen 2, scheduled for operation in 2002. EPA
maintained that PSD requirements are applicable to Bergen 2, thereby requiring
us to obtain a permit prior to the commencement of construction. To obtain such
a permit, an applicant must demonstrate that the addition of the additional
emission source will not cause significant deterioration of the air shed in the
vicinity of the plant. The time required to obtain such a permit is estimated at
6-12 months. We vigorously dispute that PSD requirements are applicable to
Bergen 2, and we are continuing construction. NJDEP has informally indicated it
agrees with our position, but has also advised that the ultimate authority to
decide PSD applicability resides with EPA. Discussions to resolve this matter
are underway with EPA and NJDEP. At June 30, 2001, we had expended approximately
$179 million in the construction of Bergen 2.
Water Pollution Control. The Federal Water Pollution Control Act ("FWPCA")
authorizes the imposition of technology and water-quality based effluent
limitations to regulate the discharge of pollutants into surface waters through
the issuance of National Pollutant Discharge Elimination System ("NPDES")
permits. The New Jersey Water Pollution Control Act ("NJWPCA") and implementing
regulations were adopted to regulate discharges to New Jersey's surface waters
and ground waters through the New Jersey Pollutant Discharge Elimination System
("NJPDES") permits. EPA has delegated to New Jersey authority to administer the
NPDES program through the NJWPCA and to implement regulations with EPA
oversight. The NJDEP administers the NPDES/NJPDES permit program. Certain of our
facilities are directly regulated by NJPDES permits issued by NJDEP pursuant to
FWPCA and the NJWPCA. In addition, Pennsylvania also has a state PDES program
that impacts the operation of our jointly owned Keystone and Conemaugh plants.
The NJPDES permit renewal application for our Hudson Station, is in the
process of being reviewed by the NJDEP. As part of that renewal, the NJDEP has
requested updated information in part, to address issues identified by a
consultant hired by NJDEP. The consultant recommended that Hudson Station be
retrofitted to operate with closed cycle cooling to address alleged adverse
impacts associated with the thermal discharge and intake structure. We proposed
certain modifications to the intake structure and submitted these demonstrations
to NJDEP in the fourth quarter of 1998. While we believe that these
demonstrations address the issues identified by the NJDEP's consultant and
provide an adequate basis for favorable determinations under the FWPCA without
the imposition of closed cycle cooling, it is impossible to predict the outcome
of the agency's review at the present time. We presently estimate that the cost
of retrofitting Hudson Station to operate with closed cycle cooling, if
required, would be approximately $100 million. Such amount is not included in
our estimate of construction expenditures (see Liquidity and Capital Resources
of MD&A).
NJDEP has advised us that it is reviewing a renewal application for Mercer
Station, and in connection with that renewal, will be reexamining the effects of
Mercer Station's cooling water system pursuant to FWPCA. We are preparing
updated demonstrations to the NJDEP. It is not possible to predict the outcome
of such review.
On June 29, 2001, the NJDEP issued a renewal permit (the "2001 Permit")
for Salem, with an effective date of August 1, 2001, allowing for the continued
operation of Salem with its existing cooling water system. This 2001 Permit
renews Salem's variance from applicable thermal water quality standards under
Section 316(a) of the federal Clean Water Act ("CWA"), determines that the
existing intake structure represents best technology available under Section
316(b) of the CWA, requires that we continue to implement the wetlands
restoration and fish ladder programs established under the prior Permit and
imposes requirements for additional analyses of data and studies to determine if
other intake technologies are available for application at Salem that are
biologically effective. The 2001 Permit also requires us to install up to two
additional fish ladders in New Jersey and fund a $500,000 escrow account for the
construction of artificial reefs by NJDEP. The 2001 Permit expires on July 31,
2006.
We have also reached a settlement with the Delaware Department of Natural
Resources and Environmental Control (the "DNREC") providing that we will fund
additional habitat restoration and enhancement activities as well as fisheries
monitoring and that we and DNREC will work cooperatively
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on the finalization of other regulatory approvals required for implementation of
the 2001 Permit. As part of this agreement, we deposited approximately $5.8
million into an escrow account to be used for future costs related to this
settlement.
If the NJDEP or the EPA were to impose a requirement at Salem, Hudson,
Mercer or any other of our generation stations that closed cycle cooling be
implemented, or that material operating restrictions be imposed, the continued
operation of the station would need to be reassessed. We believe that the
current operations of our stations are in compliance with FWPCA and will
vigorously pursue our applications to continue operations of our generation
stations with present cooling water intake structures. The EPA, as a result of
litigation by environmental groups, is conducting a rulemaking under the CWA
that may result in the establishment of regulatory guidance on material issues
with respect to permitting decisions, such as guidance on determinations of
adverse environmental impacts and best technology available. The rulemaking may
impact NJDEP determinations with respect to our pending permit renewal
applications.
The Delaware River Basin Commission (the "DRBC") issued a Revised Docket
for Salem in 1995 ("Revised Docket") approving a modification to the 1970 Salem
Docket that approved the construction and operation of the station's cooling
water system and the continued operation of the station's cooling water system
for an additional five years. The Revised Docket provided that the authorization
would expire September 27, 2000 absent review of the Docket on or before August
31, 1999 and renewal by the DRBC. We filed a preliminary information submission
with DRBC during April 1999 and the DRBC commenced its review of the matter in
the second quarter of 1999. The DRBC modified the Revised Docket to provide that
it shall remain in effect until December 29, 2001 (six months after the NJDEP
acts on our application for renewal of Salem's NJPDES Permit), or at a later
date established by the DRBC. The matter is currently scheduled for
consideration by DRBC on September 13, 2001. We cannot predict the timing or
outcome of this matter.
While it is impossible to predict the timing and/or outcome of the review
of these applications in respect of the Hudson, Mercer and Salem Generation
Stations, an unfavorable determination could have a material adverse effect on
PSEG's and our financial position, results of operations and net cash flows.
Control of Hazardous Substances. Certain Federal and state laws authorize
the 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
our business, various by-products and substances are or were produced or handled
which contain constituents classified as hazardous. For a discussion of these
hazardous waste issues, see Note 7. Commitments and Contingent Liabilities, of
Notes to Consolidated Financial Statements.
Other liabilities associated with environmental remediation include
natural resource damages. The Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA") and the New Jersey Spill
Compensation and Control Act ("Spill Act") authorize Federal and state trustees
for natural resources to assess "damages" against persons who have discharged a
hazardous substance, which discharge resulted in an "injury" to natural
resources. Until recently, the state trustee in New Jersey, NJDEP, has not
aggressively pursued natural resource damages. In 1997, the NJDEP adopted
changes to the technical requirements for site remediation pursuant to the Spill
Act. Among these changes was a new provision requiring all persons conducting
remediation to characterize "injuries" to natural resources. Further, these
changes required persons to address those injuries through restoration or
damages. The New Jersey program is still developing and we cannot assess the
magnitude of the potential impact of this regulatory change. Although currently
not estimable, costs associated with these requirements could be material.
A preliminary review of possible mercury contamination at the Kearny
Station, concluded that an additional study and investigations are required. In
1996, we entered into an agreement with NJDEP for the Kearny Station that
required a Remedial Investigation ("RI") of the site to be conducted. An RI
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Report was submitted to the NJDEP in September 1997 and is currently under its
technical review. As currently issued, the RI Report found that the mercury at
the site is stable and immobile and should be addressed at the time the Kearny
Station is retired.
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
CERCLA and that, to date, at least thirteen corporations, including PSE&G and
us, may be potentially liable for performing required remedial actions to
address potential environmental pollution at the Passaic River "facility." Our
Essex Station is within the Passaic River "facility". We cannot predict what
action, if any, the EPA or any third party may take against us with respect to
these matters, or in such event, what costs we may incur to address any such
claims. However, such costs may be material.
The EPA conducted an inspection of Spill Prevention Control and
Countermeasure ("SPCC") Plan compliance at three of our electric generation
facilities in 1997. The EPA identified certain procedural and substantive
deficiencies in the SPCC Plans for these sites. We have submitted revised SPCC
Plans to the EPA for these sites and are currently working with the EPA to
finalize these SPCC Plans. In 1998, we evaluated SPCC Plan compliance at all of
our electric generation facilities and identified deficiencies. The necessary
upgrades are now in progress of being made. It is anticipated that these
upgrades will take several years to complete.
Nuclear Fuel Disposal. After spent fuel is removed from a nuclear reactor,
it is placed in temporary storage for cooling in a spent fuel pool at the
nuclear station site. Under the Nuclear Waste Policy Act of 1982 ("NWPA"), as
amended, the Federal government has entered into contracts with the operators of
nuclear power plants for transportation and ultimate disposal of the spent fuel
and the nuclear plant operators were required to contribute to a Nuclear Waste
Fund at a rate of one mil per kWh of nuclear generation, subject to such
escalation as may be required to assure full cost recovery by the Federal
government. These costs are being recovered through the BGS contract. In
addition, a one-time payment was made to the DOE for permanently discharged
spent fuels irradiated prior to 1983. Payments made to the DOE for disposal
costs are based on nuclear generation and are included in Energy Costs in the
Consolidated Statements of Income.
Under the NWPA, DOE was required to begin taking possession of all spent
nuclear fuel generated by Power's nuclear units for disposal by no later than
1998. DOE construction of a permanent disposal facility has not begun and DOE
has announced that it does not expect a facility to be available earlier than
2010. Exelon has advised us that it had signed an agreement with the DOE
applicable to Peach Bottom under which Exelon would be reimbursed for costs
resulting from the DOE's delay in accepting spent nuclear fuel. The agreement
allows Exelon to reduce the charges paid to the Nuclear Waste Fund to reflect
costs reasonably incurred due to the DOE's delay. Past and future expenditures
associated with Peach Bottom's recently completed on-site dry storage facility
would be eligible for this reduction in future DOE fees. On November 22, 2000 a
group of eight nuclear plant operators filed a petition against DOE in the
Eleventh Circuit U.S. Court of Appeals seeking to set aside the receipt of
credits out of the Nuclear Waste Fund, as stipulated in the Peach Bottom
agreement. No assurances can be given as to any damage recovery or the ultimate
availability of a disposal facility.
Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be
stored in reactor facility storage pools or in independent spent fuel storage
installations located at reactor or away-from-reactor sites for at least 30
years beyond the licensed life for reactor operation (which may include the term
of a revised or renewed license). The availability of adequate spent fuel
storage capacity is estimated through 2011 for Salem 1, 2015 for Salem 2 and
2007 for Hope Creek. We presently expect to construct an on-site storage
facility that would satisfy the spent fuel storage needs of both Salem and Hope
Creek. This construction will require certain regulatory approvals, the timely
receipt of which cannot be assured. Exelon has advised us that it has
constructed an on-site dry storage facility at Peach Bottom that is now licensed
and operational and can provide storage capacity through the end of the current
licenses for the two Peach Bottom units.
Low Level Radioactive Waste ("LLRW"). As a by-product of their operations,
nuclear generation units produce LLRW. Such wastes include paper, plastics,
protective clothing, water purification materials and other materials. LLRW
materials are accumulated on site and disposed of at licensed
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permanent disposal facilities. On July 1, 2000, New Jersey, Connecticut and
South Carolina formed the Atlantic Compact. This arrangement gives New Jersey
nuclear generators, including us, continued access to the Barnwell LLRW disposal
facility which is owned by South Carolina. We believe that the formation of the
Atlantic Compact will provide for adequate LLRW disposal for Salem and Hope
Creek through the end of their current licenses, although no assurances can be
given. Both we and Exelon have on-site LLRW storage facilities for Peach Bottom,
Salem and Hope Creek which have the capacity for at least five years of
temporary storage for each facility.
MANAGEMENT
PSEG is the sole member of our limited liability company and, as such, has
the power to control the election of our board of directors and all other
matters submitted for member approval and has control over our management and
affairs. Currently, all of our directors are officers and employees of or
consultants to PSEG or one of its subsidiaries.
Our executive officers and members of our board of directors and their
ages as of June 30, 2001 are as follows:
Name Age Position
----- --- -------
Executive Officers
E. James Ferland 59 Chairman of the Board and Chief Executive
Officer
Frank Cassidy 54 President, Chief Operating Officer and Director
Thomas R. Smith 41 Executive Vice President-- Operations and
Development
Harold W. Keiser 58 President and Chief Nuclear Officer of Nuclear
Steven R. Teitelman 53 President of ER&T
Elbert C. Simpson 52 Senior Vice President-- Chief Administrative
Officer of Nuclear
Harold W. Borden, Jr. 57 Vice President and General Counsel
Patricia A. Rado 59 Vice President and Controller
Morton A. Plawner 54 Vice President and Treasurer
Directors
Robert E. Busch 54 President, PSEG Services Corporation
Robert J. Dougherty, Jr. 49 President, PSEG Energy Holdings Inc.
Robert C. Murray 55 Consultant-- PSEG
Thomas M. O'Flynn 41 Executive Vice President and Chief Financial
Officer-- PSEG
R. Edwin Selover 55 Vice President and General Counsel-- PSEG
Michael J. Thomson 42 President, PSEG Global Inc.
Mr. Ferland has been Chairman of the Board and Chief Executive Officer of
Power since its formation. He has been Chairman of the Board, President and
Chief Executive Officer of Public Service Enterprise Group Incorporated since
July 1986, Chairman of the Board and Chief Executive Officer of PSEG Energy
Holdings Inc. since June 1989 and Chairman of the Board and Chief Executive
Officer of Public Service Electric and Gas Company since September 1991.
Mr. Cassidy has been President, Chief Operating Officer and a director of
Power since its formation. He is also a member of the board of directors of
Fossil, Nuclear and ER&T. He served as President and Chief Operating Officer of
PSEG Energy Technologies Inc. from November 1996 to July 1999. Mr. Cassidy was
Senior Vice President -- Fossil Generation of Public Service Electric and Gas
Company from February 1995 to November 1996 and Vice President -- Transmission
Systems of Public Service Electric and Gas Company from November 1989 to
February 1995.
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Mr. Smith has been Executive Vice President -- Operations and Development
of Power since October 2000. He also serves as President of Fossil and is a
member of the board of directors of Fossil, Nuclear and ER&T. He had been
Executive Vice President and Chief Operating Officer of PSEG Global Inc. from
January 2000. Prior to that, he was President of PSEG Americas, a subsidiary of
Global, from November 1996. Before that, he was Senior Vice President and
Regional Executive for Latin America for the International Generating Company.
Mr. Keiser has been President and Chief Nuclear Officer and a director of
PSEG Nuclear LLC since its formation. He is also a member of the board of
directors of Fossil and ER&T. He was Chief Nuclear Officer and President --
Nuclear Business Unit of Public Service Electric and Gas Company from May 1998
to July 1999. Prior to that time, he was Executive Vice President of the Nuclear
Business Unit of Public Service Electric and Gas Company. From October 1997 to
January 1998, he was a private consultant to the electric industry. From March
1996 to October 1997, Mr. Keiser was Vice President and Chief Nuclear Operating
Officer of Commonwealth Edison Company. From December 1995 to March 1996, he was
Vice President, Pressurized Water Reactor of Commonwealth Edison Company. From
April 1993 to December 1995, Mr. Keiser was Executive Vice President and Chief
Operating Officer of Entergy Operations Incorporated.
Mr. Teitelman has been President and a director of ER&T since its
formation. He is also a member of the board of directors of Fossil and Nuclear.
He had been Vice President -- Energy Resources and Trade of Public Service
Electric and Gas Company from September 1997 to July 1999. From 1993 to 1997,
Mr. Teitelman was the President of Penn Resources Inc., an energy consulting and
project development company. From 1987 to 1993, he was the President of Penn
International Trading Co., a subsidiary of Marubeni Corporation. Penn Trading
was an international petroleum products trading company and a clearing member of
the New York Mercantile Exchange.
Mr. Simpson has been Senior Vice President -- Chief Administrative Officer
of PSEG Nuclear LLC since its formation. Mr. Simpson was Senior Vice President
- -- Nuclear Engineering of Public Service Electric and Gas Company from June 1995
to July 1999. From 1993 to 1995, Mr. Simpson was Vice President of Nuclear
Support for Arizona Public Service Company, which operates the three unit Palo
Verde Nuclear Generating Station. From 1990 to 1993, he was Vice President of
Nuclear Engineering for all three Palo Verde Units.
Mr. Borden has been Vice President and General Counsel of Power since its
formation and is also General Counsel of Fossil, Nuclear and ER&T. Mr. Borden
had been Vice President -- Law of Public Service Electric and Gas Company from
April 1995 to July 1999.
Ms. Rado has been Vice President and Controller of Power since its
formation. She is also Controller of Fossil, Nuclear and ER&T. Ms. Rado has been
Vice President and Controller of Public Service Enterprise Group and Public
Service Electric and Gas Company since April 1993.
Mr. Plawner has been Vice President and Treasurer of Power since its
formation. He is also Treasurer of Fossil, Nuclear and ER&T. Mr. Plawner has
been Treasurer of Public Service Enterprise Group and Vice President and
Treasurer of Public Service Electric and Gas Company since January 1, 1998.
Prior to that, Mr. Plawner had been General Manager -- Property and Risk
Management of Public Service Electric and Gas Company since 1994 and Risk
Manager since 1989.
Mr. Busch has been a director of Power since December 2000. He has been
President of PSEG Services Corporation since April 2001 and Senior Vice
President and Chief Financial Officer of Public Service Electric and Gas Company
since March 1998. From 1997, he was the National Director of the Hay Group
Utility Consulting Practice. From 1996 to 1997, he was a Senior Consultant for
Cambridge Energy Research Associates. Prior to that time, he was President of
the Energy Resources Group of Northeast Utilities.
Mr. Dougherty has been a director of Power since its formation. He has
been President and Chief Operating Officer of PSEG Energy Holdings Inc. since
January 1997. Prior to that, Mr. Dougherty was president of Enterprise Ventures
and Services Corporation.
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Mr. Murray has been a director of Power since its formation. He is a
consultant to Public Service Enterprise Group Incorporated and had been Vice
President and Chief Financial Officer of Public Service Enterprise Group
Incorporated from January 1992 through June 2001. Mr. Murray was Executive Vice
President -- Finance of Public Service Electric and Gas Company from June 1997
to June 2000. Mr. Murray was Senior Vice President and Chief Financial Officer
of Public Service Electric and Gas Company from January 1992 to June 1997.
Mr. O'Flynn has been a director of Power since July 2001. He has been
Executive Vice President Finance and Chief Financial Officer of Public Service
Enterprise Group Incorporated since July 1, 2001. From December 1997 to May
2001, Mr. O'Flynn was a Managing Director of Morgan Stanley's Global Power and
Utility Investment Banking Division Group. From January 1994 through December
1997, he was a Principal of Morgan Stanley's Global Power and Utility Investment
Banking Division Group.
Mr. Selover has been a director of Power since its formation. He has been
Vice President and General Counsel of Public Service Enterprise Group since
April 1988. Mr. Selover has also been Senior Vice President and General Counsel
of Public Service Electric and Gas Company since January 1988.
Mr. Thomson has been a director of Power since January 2000. He has been
President and Chief Executive Officer of PSEG Global Inc. since January 1997.
Prior to that time he was Senior Vice President, from July 1993, and Chief
Operating Officer, from February 1994, of PSEG Global Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transfer of Assets
Pursuant to the BPU Final Order in the Energy Master Plan Proceedings (see
"Business -- Regulation -- Energy Regulatory Matters -- State Laws and
Regulations -- New Jersey Energy Master Plan Proceedings and Related Orders"),
we acquired all of PSE&G's existing generation related assets. We acquired all
land (except that Nuclear acquired the land associated with nuclear generation
stations), as well as PSE&G's interests in the Merrill Creek reservoir facility.
Such transfer was at full-value, consistent with the BPU's determination of
PSE&G's recoverable stranded costs. Other generation-related assets, including
materials, supplies, fuel and land, were transferred at book value.
PSE&G transferred to Fossil all of the fossil generation assets, equipment
and associated assets (excluding land), including PSE&G's interests in those
assets in which it has a partial ownership. In addition, PSE&G's interest in the
Yards Creek pumped-storage facility was also transferred to Fossil.
All of PSE&G's nuclear generation assets, equipment and associated assets,
including those assets in which PSE&G only has partial ownership, were
transferred from PSE&G to Nuclear. In addition, all land associated with nuclear
generation was transferred to Nuclear.
In December 2000, we purchased from Global two Midwest generation projects
with a combined projected generation capacity of 2,000 MW.
Power Purchase Agreements
Fossil, Nuclear, ER&T and PSE&G are parties to several wholesale contracts
that govern the transactions between and among them. Power Purchase Agreements
("PPAs") between ER&T and each of Fossil and Nuclear stipulate that ER&T will
purchase all capacity and energy from their respective facilities. ER&T is our
sole marketer of energy and energy services. ER&T purchases all of the capacity
and energy from Fossil and Nuclear facilities and is responsible for marketing
that power on a portfolio basis together with power that it may acquire in the
open market. Fossil and Nuclear are responsible for supplying energy and
ancillary services as arranged by ER&T. The pricing under these contracts is
designed to provide for the recovery of Fossil's and Nuclear's respective
operating costs. ER&T reimburses Fossil and Nuclear for all costs incurred in
operating and maintaining the generation units. ER&T also arranges for
acquisition of the fuel supply for Fossil's plants. In addition, ER&T is
obligated through the BGS Contract with PSE&G (see "Business -- Customers") to
fully supply the requirements of PSE&G's aggregate retail load for a period of
three years that began on July 31, 1999.
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Services Agreement
Traditionally, the fossil, trading and nuclear business units of PSE&G
relied on its corporate offices and other business units, such as transmission
and distribution, to provide various services. Generally, transmission and
distribution business units provided more technical services, while the
corporate offices of PSE&G performed administrative and general functions, such
as accounting and human resources. We continue to need many of these services
and rely on our affiliates (PSE&G and Services) to provide them in accordance
with Affiliate Standards and FERC requirements (See "-- Statement of Policy &
Code of Conduct" below).
We have signed a service agreement with our affiliate, Services, for
administrative services. This contract generally articulates the terms upon
which services are provided.
The interconnection agreements between PSE&G and Fossil and Nuclear serve
as the foundation for services to be provided with respect to transmission and
distribution.
Tax Sharing Agreement
We are a single member limited liability company, wholly-owned by PSEG.
PSEG files a consolidated Federal income tax return with its affiliated
companies. A tax allocation agreement exists between PSEG and us and between
PSEG and each of our subsidiaries. The general operation of these agreements is
that the subsidiary company will compute its taxable income on a stand-alone
basis. If the result is a net tax liability, such amount shall be paid to PSEG.
If there are net operating losses and/or tax credits, the subsidiary shall
receive payment for the tax savings from PSEG to the extent that PSEG is able to
utilize those benefits.
Statement of Policy & Code of Conduct
We abide by the standards imposed by FERC Order 889 governing the
relationship and transactions between wholesale power marketers and their
affiliate transmission organizations. These standards of conduct were developed
to ensure that trading and transmission organizations function as entirely
separate business units. Prior to our formation, the standards applied to
PSE&G's trading and transmission departments. Our relationship with PSE&G's
transmission organization is subject to the same standards.
In addition, we and PSE&G have agreed to a standard of conduct as part of
FERC's approval under the FPA Sections 203 and 205. Such standards provide that
employees will operate separately and that all market information shared between
employees will be simultaneously disclosed to the public. In addition, the
standards provide that the price of all sales of non-power goods and services by
PSE&G to us will be at the higher of cost or market price and that such sales by
us to PSE&G will be at market price or below.
The BPU has adopted standards governing the relationship between all
regulated New Jersey electric and gas utilities, including PSE&G, and all of
their respective affiliates providing competitive services to retail customers
in New Jersey (see "Business -- Regulation -- Energy Regulatory Matters -- State
Laws and Regulations -- New Jersey Energy Master Plan and Related Orders.")
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
In connection with the sale of the original notes, we and the subsidiary
guarantors entered into a registration rights agreement with the initial
purchasers. Under the registration rights agreement, we agreed to use our
reasonable best efforts to complete the exchange offer and to file and cause to
become effective with the SEC a registration statement for the exchange of the
original notes for exchange notes.
The terms of the exchange notes of each series are the same as the terms
of the corresponding series of original notes except that the exchange notes
have been registered under the Securities Act and will not be subject to some
restrictions on transfer that apply to the original notes. In that regard, the
original notes provide, among other things, that if the exchange offer has not
been consummated within the period specified in the original notes, the interest
rate on the original notes will increase by 0.50% per annum, until the exchange
offer is consummated.
Upon completion of the exchange offer, holders of original notes will not
be entitled to any further registration rights under the registration rights
agreement, except under limited circumstances. See "Risk Factors -- Consequences
of failure to exchange original notes" and "Description of the Exchange Notes".
The exchange offer is not being made to holders of original notes in any
jurisdiction in which the exchange offer or the acceptance of the notes would
not comply with securities or blue sky laws. Unless the context requires
otherwise, the term "holder" with respect to the exchange offer means any person
who has obtained a properly completed bond power from the registered holder, or
any person whose original notes are held of record by The Depository Trust
Company (DTC) who desires to deliver such original notes by book-entry transfer
at DTC. We will exchange as soon as practicable after the expiration date of the
exchange offer the original notes for a like aggregate principal amount of the
exchange notes of each series.
Completion of the exchange offer is subject to the conditions that the
exchange offer not violate any applicable law or interpretation of the staff of
the Division of Corporate Finance of the SEC and that no injunction, order or
decree has been issued which would prohibit, prevent or materially impair our
ability to proceed with the exchange offer. The exchange offer is also subject
to various procedural requirements discussed below with which holders must
comply. We reserve the right, in our absolute discretion, to waive compliance
with these requirements subject to applicable law.
Terms of the Exchange Offer
We are offering, upon the terms and subject to the conditions described in
this prospectus and in the accompanying letter of transmittal, to exchange up to
$1,800,000,000 aggregate principal amount of exchange notes in three series for
a like aggregate principal amount of original notes of the same series properly
tendered on or before the expiration date of the exchange offer and not properly
withdrawn in accordance with the procedures described below. We will issue,
promptly after the expiration date of the exchange offer, an aggregate principal
amount of up to $1,800,000,000 of exchange notes in exchange for a like
principal amount of outstanding original notes of the same series tendered and
accepted in connection with the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the exchange offer. See "-- Fees and Expenses".
Holders may tender their original notes in whole or in part in minimum
denominations of $100,000 and integral multiples of $1,000 in excess thereof.
The exchange offer is not conditioned upon any minimum principal amount of
original notes being tendered. As of the date of this prospectus, $1,800,000,000
aggregate principal amount of the original notes ($500,000,000 aggregate
principal amount of the 67/8% Senior Notes due 2006, $800,000,000 aggregate
principal amount of the 73/4% Senior Notes due 2011 and $500,000,000 aggregate
principal amount of the 85/8% Senior Notes due 2031) is outstanding. (Holders of
original notes do not have any appraisal or dissenters' rights in connection
with the exchange offer. Original notes which are not tendered for or are
tendered but not accepted in connection with the exchange offer will remain
outstanding and be entitled to the benefits
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of the indenture, but will not be entitled to any further registration rights
under the registration rights agreement, except under limited circumstances. See
"Risk Factors -- Consequences of failure to exchange original notes" and
"Description of the Exchange Notes". If any tendered original notes are not
accepted for exchange because of an invalid tender, the occurrence of other
events described in this prospectus or otherwise, appropriate book-entry
transfer will be made, without expense, to the tendering holder of the notes
promptly after the expiration date of the exchange offer. Holders who tender
original notes in connection with the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of original notes in
connection with the exchange offer.
Neither we nor our Board of Directors make any recommendation to holders
of original notes as to whether to tender or refrain from tendering all or any
portion of their original notes in the exchange offer. In addition, no one has
been authorized to make any recommendation as to whether holders should tender
notes in the exchange offer. Holders of original notes must make their own
decisions whether to tender original notes in the exchange offer and, if so, the
aggregate amount of original notes to tender based on the holders' own financial
positions and requirements.
Expiration Date; Extensions; Amendments
The term "expiration date" means 5:00 p.m., Eastern Time, on , 2001.
However, if the exchange offer is extended by us, the term "expiration date"
will mean the latest date and time to which we extend the exchange offer.
We expressly reserve the right in our sole and absolute discretion,
subject to applicable law, at any time and from time to time:
o to delay the acceptance of the original notes for exchange,
o to extend the expiration date of the exchange offer and retain all
original notes tendered in the exchange offer, subject, however, to the
right of holders of original notes to withdraw their tendered original
notes as described under "-- Withdrawal Rights", and
o to waive any condition or otherwise amend the terms of the exchange offer
in any respect.
If the exchange offer is amended in a manner determined by us to
constitute a material change, we will promptly
o disclose the amendment in a prospectus supplement that will be distributed
to the registered holders of the original notes,
o we will file a post-effective amendment to the registration statement
filed with the SEC with regard to the exchange notes and the exchange
offer, and
o we will extend the exchange offer to the extent required by Rule 14e-1
under the Exchange Act.
We will promptly notify the exchange agent by making an oral or written
public announcement of any delay in acceptance, extension, termination or
amendment. This announcement in the case of an extension will be made no later
than 9:00 a.m., Eastern Time, on the next business day after the previously
scheduled expiration date. Without limiting the manner in which we may choose to
make any public announcement and, subject to applicable law, we will have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
Acceptance for Exchange and Issuance of Exchange Notes
Upon the terms and subject to the conditions of the exchange offer, we
will exchange and issue to the exchange agent, exchange notes for original notes
of each series validly tendered and not withdrawn promptly after the expiration
date. In all cases, delivery of exchange notes in exchange for original notes
tendered and accepted for exchange pursuant to the exchange offer will be made
only after timely receipt by the exchange agent of:
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- original notes or a book-entry confirmation of a book-entry transfer of
original notes into the exchange agent's account at DTC, including an
agent's message (as defined below) if the tendering holder has not
delivered a letter of transmittal,
- the letter of transmittal (or facsimile thereof), properly completed and
duly executed, with any required signature guarantees or (in the case of a
book-entry transfer) an agent's message instead of the letter of
transmittal, and
- any other documents required by the letter of transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of original notes into the exchange agent's account at DTC.
The term "agent's message" means a message, transmitted by DTC to and received
by the exchange agent and forming a part of a book-entry confirmation, which
states that DTC has received an express acknowledgment from the tendering DTC
participant. This acknowledgment states that the participant has received and
agrees to be bound by the letter of transmittal and that we may enforce the
letter of transmittal against the participant.
Subject to the terms and conditions of the exchange offer, we will be
deemed to have accepted for exchange, and therefore exchanged, original notes
validly tendered and not withdrawn as, if and when we give oral or written
notice to the exchange agent of our acceptance of such original notes for
exchange pursuant to the exchange offer. The exchange agent will act as agent
for us for the purpose of receiving tenders of original notes, letters of
transmittal and related documents, and as agent for tendering holders for the
purpose of receiving original notes, letters of transmittal and related
documents and transmitting exchange notes to validly tendering holders. This
exchange will be made promptly after the expiration date.
If, for any reason whatsoever, acceptance for exchange or the exchange of
any tendered original notes is delayed, whether before or after our acceptance
for exchange of original notes, or we extend the exchange offer or are unable to
accept for exchange or exchange tendered original notes, then, without prejudice
to the rights we have in the exchange offer, the exchange agent may,
nevertheless, on our behalf and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered original notes. These original notes may not be withdrawn except
to the extent tendering holders are entitled to withdrawal rights as described
under "-- Withdrawal Rights".
Under the letter of transmittal or agent's message, a holder of original
notes will warrant and agree that it has full power and authority to tender,
exchange, sell, assign and transfer original notes, that we will acquire good,
marketable and unencumbered title to the tendered original notes, free and clear
of all liens, restrictions, charges and encumbrances, and the original notes
tendered for exchange are not subject to any adverse claims or proxies. The
holder also will warrant and agree that it will, upon request, execute and
deliver any additional documents deemed by us or the exchange agent to be
necessary or desirable to complete the exchange, sale, assignment, and transfer
of the original notes tendered in the exchange offer.
Procedures for Tendering Original Notes
Valid Tender. Except as indicated below, in order for original notes to be
validly tendered in the exchange offer, an original copy or facsimile of a
properly completed and duly executed letter of transmittal, with any required
signature guarantees, or, in the case of a book-entry tender, an agent's message
instead of the letter of transmittal, and any other required documents, must be
received by the exchange agent at one of its addresses listed under "-- Exchange
Agent". In addition, either:
- tendered original notes must be received by the exchange agent,
- the tender of original notes must follow the procedures for book-entry
transfer described below and a book-entry confirmation, including an
agent's message if the tendering holder has not delivered a letter of
transmittal, must be received by the exchange agent, in each case on or
before the expiration date, or
- the guaranteed delivery procedures described below must be complied with.
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If less than all of the original notes of each series are tendered, a
tendering holder should fill in the amount of original notes of such series
being tendered in the appropriate box on the letter of transmittal. The entire
amount of original notes delivered to the exchange agent will be deemed to have
been tendered unless otherwise indicated.
The method of delivery of certificates, the letter of transmittal and all
other required documents is at the option and sole risk of the tendering holder.
Delivery will be deemed made only when actually received by the exchange agent.
If delivery is by mail, we recommend properly insured registered mail, return
receipt requested, or an overnight delivery service. In all cases, you should
allow sufficient time to ensure timely delivery.
Book-Entry Transfer. The exchange agent will establish an account with
respect to the original notes at DTC for purposes of the exchange offer within
two business days after the date of this prospectus. Any financial institution
that is a participant in DTC's book-entry transfer facility system may make a
book-entry delivery of the original notes by causing DTC to transfer such
Original Notes into the exchange agent's account at DTC in accordance with DTC's
procedures for transfers. However, although delivery of original notes may be
effected through book-entry transfer into the exchange agent's account at DTC,
the letter of transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees, or an agent's message instead
of the letter of transmittal, and any other required documents, must in any case
be delivered to and received by the exchange agent at its address listed under
"-- Exchange Agent" on or before the expiration date. Alternatively, the
guaranteed delivery procedure described below must be complied with.
Delivery of documents to DTC in accordance with DTC's procedures does not
constitute delivery to the exchange agent.
Signature Guarantees. Certificates for the original notes need not be
endorsed and signature guarantees on the letter of transmittal are unnecessary
unless
(1) a certificate for the original notes is registered in a name other
than that of the person surrendering the certificate or (2) such holder
completes the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" in the letter of transmittal. In the case of (1) or (2) above, the
certificates for original notes must be duly endorsed or accompanied by a
properly executed bond power, with the endorsement or signature on the bond
power and on the letter of transmittal guaranteed by a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as an "eligible guarantor
institution," including (as such terms are defined therein):
- a bank;
- a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer;
- a credit union;
- a national securities exchange, registered securities association or
clearing agency; or
- a savings association that is a participant in a Securities Transfer
Association (an "Eligible Institution"), unless surrendered on behalf of
that Eligible Institution. See Instruction 1 to the letter of transmittal.
Guaranteed Delivery. If a holder desires to tender original notes in the
exchange offer and the certificates for the original notes are not immediately
available or time will not permit all required documents to reach the exchange
agent on or before the expiration date, or the procedures for book-entry
transfer cannot be completed on a timely basis, the original notes may
nevertheless be tendered, provided that all of the following guaranteed delivery
procedures are complied with:
(1) the tenders are made by or through an Eligible Institution;
(2) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying the letter of transmittal, is received by
the exchange agent, as provided below, on or before the expiration date; and
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(3) the certificates (or a book-entry confirmation) representing all
tendered original notes, in proper form for transfer, together with a properly
completed and duly executed letter of transmittal (or facsimile thereof), with
any required signature guarantees, or an agent's message instead of the letter
of transmittal, and any other documents required by the letter of transmittal,
are received by the exchange agent within three New York Stock Exchange trading
days after the date of execution of the Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the exchange agent and must include a guarantee by an
Eligible Institution in the form shown in the notice. Regardless of any other
provision in this prospectus, the delivery of exchange notes in exchange for
original notes tendered and accepted for exchange in the exchange offer will in
all cases be made only after timely receipt by the exchange agent of original
notes of the corresponding series, or of a book-entry confirmation with respect
to those original notes, and an original copy or facsimile of a properly
completed and duly executed letter of transmittal, together with any required
signature guarantees, or an agent's message instead of the letter of
transmittal, and any other documents required by the letter of transmittal.
Accordingly, the delivery of exchange notes might not be made to all tendering
holders at the same time, and will depend upon when original notes, book-entry
confirmations with respect to original notes and other required documents are
received by the exchange agent. Our acceptance for exchange of original notes
tendered under any of the procedures described above will constitute a binding
agreement between the tendering holder and us upon the terms and subject to the
conditions of the exchange offer.
Determination of Validity. All questions as to the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange of
any tendered original notes will be determined by us, in our sole discretion.
The interpretation by us of the terms and conditions of the exchange offer,
including the letter of transmittal and the accompanying instructions, will be
final and binding.
We reserve the absolute right, in our sole and absolute discretion, to
reject any and all tenders determined by us not to be in proper form or the
acceptance of which, or exchange for, may, in the opinion of our counsel, be
unlawful. We also reserve the absolute right, subject to applicable law, to
waive any condition or irregularity in any tender of original notes of any
particular holder whether or not similar conditions or irregularities are waived
in the case of other holders. No tender of original notes will be deemed to have
been validly made until all irregularities with respect to such tender have been
cured or waived. Neither we, any of our affiliates or assigns, the exchange
agent nor any other person will be under any duty to give any notification of
any irregularities in tenders or incur any liability for failure to give any
notification.
If any letter of transmittal, endorsement, bond power, power of attorney,
or any other document required by the letter of transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
that person should so indicate when signing, and unless waived by us, proper
evidence satisfactory to us, in our sole discretion, of that person's authority
must be submitted. A beneficial owner of original notes that are held by or
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or custodian is urged to contact that entity promptly if that
beneficial holder wishes to participate in the exchange offer.
Resales of Exchange Notes
We are making the exchange offer for the exchange notes in reliance on the
position of the staff of the Division of Corporation Finance of the SEC as
defined in certain interpretive letters addressed to third parties in other
transactions. However, we did not seek our own interpretive letter and we cannot
assure that the staff of the Division of Corporation Finance of the SEC would
make a similar determination with respect to the exchange offer as it has in
other interpretive letters to third parties. Based on these interpretations by
the staff of the Division of Corporation Finance of the SEC, and subject to the
two immediately following sentences, we believe that exchange notes issued
pursuant to this exchange offer in exchange for original notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
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exchange notes are acquired in the ordinary course of the holder's business and
that the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of the exchange notes.
However, any holder of original notes who is an "affiliate" of ours or who
intends to participate in the exchange offer for the purpose of distributing
exchange notes, or any broker-dealer who purchased original notes from us to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act,
(a) will not be able to rely on the interpretations of the staff of the
Division of Corporation Finance of the SEC defined in the above-mentioned
interpretive letters,
(b) will not be permitted or entitled to tender such original notes in the
exchange offer and
(c) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or other transfer of such
original notes unless such sale is made pursuant to an exemption from such
requirements.
In addition, as described below, if any broker-dealer holds original notes
acquired for its own account as a result of market-making or other trading
activities and exchanges those original notes for exchange notes, then that
broker-dealer must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of those exchange notes. Each
holder of original notes who wishes to exchange original notes for exchange
notes in the exchange offer will be required to represent that:
- it is not an "affiliate" of ours,
- any exchange notes to be received by it are being acquired in the ordinary
course of its business,
- it has no arrangement or understanding with any person to participate in a
distribution (within the meaning of the Securities Act) of such exchange
notes, and
- if the tendering holder is not a broker-dealer, that holder is not engaged
in, and does not intend to engage in, a distribution (within the meaning
of the Securities Act) of its exchange notes.
In addition, we may require the holder, as a condition to that holder's
eligibility to participate in the exchange offer, to furnish to us (or an agent
of ours) in writing, information as to the number of "beneficial owners" (within
the meaning of Rule 13d-3 under the Exchange Act) on behalf of whom that holder
holds the original notes to be exchanged in the exchange offer.
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it acquired the original notes for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of those exchange notes. The letter
of transmittal states that by making that acknowledgement and delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the staff of the Division of Corporation Finance of the SEC in the
interpretive letters referred to above, we believe that participating
broker-dealers who acquired original notes for their own accounts as a result of
market-making activities or other trading activities may fulfill their
prospectus delivery requirements with respect to the exchange notes received
upon exchange of original notes (other than original notes which represent an
unsold allotment from the initial sale of the original notes) with a prospectus
meeting the requirements of the Securities Act, which may be the prospectus
prepared for this exchange offer so long as it contains a description of the
plan of distribution regarding the resale of the exchange notes.
Accordingly, this prospectus, as it may be amended or supplemented from
time to time, may be used by a participating broker-dealer in connection with
resales of exchange notes received in exchange for original notes where the
original notes were acquired by the participating broker-dealer for its own
account as a result of market-making or other trading activities. See "Plan of
Distribution". Subject to certain provisions contained in the registration
rights agreement, we have agreed that this prospectus, as it may be amended or
supplemented from time to time, may be used by a participating broker-dealer in
connection with resales of exchange notes for a period not exceeding 90 days
after the expiration date. However, a participating
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broker-dealer who intends to use this prospectus in connection with the resale
of exchange notes received in exchange for original notes pursuant to the
exchange offer must notify us on or before the expiration date that it is a
participating broker-dealer. This notice may be given in the space provided for
that purpose in the letter of transmittal or may be delivered to the exchange
agent at one of the addresses set forth herein under "-- Exchange Agent".
Any participating broker-dealer who is an "affiliate" of ours may not rely
on these interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. In that regard, each participating broker-dealer who
surrenders original notes in the exchange offer will be deemed to have agreed,
by execution of the letter of transmittal or an agent's message, that upon
receipt of notice from us of the occurrence of any event or the discovery of:
(1) any fact which makes any statement contained or incorporated by
reference in this prospectus untrue in any material respect or
(2) any fact which causes this prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
in this prospectus, in light of the circumstances under which they were made,
not misleading, or
(3) the occurrence of other events specified in the registration rights
agreement,
that participating broker-dealer will suspend the sale of exchange notes under
this prospectus until we have amended or supplemented this prospectus to correct
the misstatement or omission and have furnished copies of the amended or
supplemented prospectus to the participating broker-dealer, or we have given
notice that the sale of the exchange notes may be resumed, as the case may be.
Withdrawal Rights
Except as otherwise provided in this prospectus, tenders of original notes
may be withdrawn at any time on or before the expiration date. In order for a
withdrawal to be effective a written, telegraphic, telex or facsimile
transmission of the notice of withdrawal must be timely received by the exchange
agent at its address listed under "-- Exchange Agent" on or before the
expiration date. Any notice of withdrawal must specify the name of the person
who tendered the original notes to be withdrawn, the aggregate principal amount
and series of original notes to be withdrawn, and, if certificates for the
original notes have been tendered, the name of the registered holder of the
original notes, if different from that of the person who tendered the original
notes.
If original notes have been delivered or otherwise identified to the
exchange agent, then before the physical release of the original notes, the
tendering holder must submit the serial numbers shown on the particular original
notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of original notes
tendered for the account of an Eligible Institution. For original notes tendered
under the procedures for book-entry transfer described in "-- Procedures for
Tendering Original Notes", the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of original
notes, in which case a notice of withdrawal will be effective if delivered to
the exchange agent by written, telegraphic, telex or facsimile transmission.
Withdrawals of tenders of original notes may not be rescinded. Original notes
properly withdrawn will not be deemed validly tendered for purposes of the
exchange offer, but may be retendered at any subsequent time on or before the
expiration date by following any of the procedures described above under "--
Procedures for Tendering Original Notes". All questions as to the validity, form
and eligibility, including time of receipt, of withdrawal notices will be
determined by us, in our sole discretion, whose determination shall be final and
binding on all parties. Neither we, the subsidiary guarantors, the exchange
agent nor any other person is under any duty to give any notification of any
irregularities in any notice of withdrawal nor will those parties incur any
liability for failure to give that notice. Any original notes which have been
tendered but which are withdrawn will be returned to the holder promptly after
withdrawal.
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Interest on Exchange Notes
Interest on the 67/8% Senior Notes due 2006 will accrue at the rate of
67/8% per annum and will be payable semi-annually in arrears on April 15 and
October 15 of each year, commencing October 15, 2001. Interest on the 73/4%
Senior Notes due 2011 will accrue at the rate of 73/4% per annum and will be
payable semi-annually in arrears on April 15 and October 15 of each year,
commencing October 15, 2001. Interest on the 85/8% Senior Notes due 2031 will
accrue at the rate of 85/8% per annum and will be payable semi-annually in
arrears on April 15 and October 15 of each year (each an "Interest Payment Date"
for each series) commencing October 15, 2001. We will make each interest payment
to the persons in whose names the exchange notes are registered at the close of
business on the 15th day immediately preceding the applicable Interest Payment
Date. The exchange notes will bear interest from and including the last interest
payment date on the original notes, or if one has not yet occurred, the date of
issuance of the original notes. Accordingly, holders of original notes that are
accepted for exchange will not receive accrued but unpaid interest on original
notes at the time of tender. Rather, that interest will be payable on the
exchange notes delivered in exchange for the original notes on the first
interest payment date after the expiration date.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the
original notes for which they are exchanged, which is the aggregate principal
amount of the original notes, as reflected in our accounting records on the date
of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized in connection with the exchange offer. The cost of the exchange offer
will be amortized over the term of the exchange notes.
Exchange Agent
The Bank of New York has been appointed as exchange agent for the exchange
offer. Delivery of the letters of transmittal and any other required documents,
questions, requests for assistance, and requests for additional copies of this
prospectus or of the letters of transmittal should be directed to the exchange
agent as follows:
By Registered or Certified Mail:
The Bank of New York
101 Barclay Street, 7 East
New York, NY 10286
Attention: William Buckley
Reorganization Section
By Hand or Overnight Delivery Service:
The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground Level
New York, NY 10286
Attention: William Buckley
Reorganization Section
By Facsimile Transmission (for Eligible Institutions only):
(212) 815-6339
Confirm by Telephone:
or (212) 815-5788
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
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Fees and Expenses
We have agreed to pay the exchange agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses. We
will also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this prospectus and related documents to the beneficial owners of original
notes, and in handling or tendering for their customers. Holders who tender
their original notes for exchange will not be obligated to pay any transfer
taxes in connection with the transfer. If, however, exchange notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the original notes tendered, or if a transfer tax is
imposed for any reason other than the exchange of original notes in connection
with the exchange offer, then the amount of any such transfer taxes, whether
imposed on the registered holder or any other persons, will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder. We will not
make any payment to brokers, dealers or other nominees soliciting acceptances of
the exchange offer.
DESCRIPTION OF THE EXCHANGE NOTES
General
We issued the original notes and will issue each series of the exchange
notes under the indenture dated as of April 16, 2001 (the "indenture") between
and among us, the Subsidiary Guarantors and The Bank of New York, as trustee
(the "trustee"). The terms of the exchange notes are stated in the indenture and
include terms made part of the indenture by reference to the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). You should refer to the
indenture and the Trust Indenture Act for a statement of these terms. The
indenture is governed by New York law. As used herein, "Senior Notes" means
original notes and/or exchange notes as the context requires.
The following summary of selected provisions of the indenture and the
registration rights agreement referred to below under "Registration Rights;
Additional Interest" is not complete. We recommend that you read the indenture
and the registration rights agreement, copies of which may be obtained from the
trustee. You can find the definitions of certain capitalized terms used in the
following summary under the subheading "-- Definitions."
Each series of the exchange notes will be our senior unsecured
obligations. They will rank equally in right of payment to all of our existing
and future senior unsecured indebtedness. Upon completion of the exchange, we
will have approximately $1,800,000,000 of senior indebtedness outstanding. The
exchange notes will rank junior to secured indebtedness to the extent of related
collateral. We currently do not have any outstanding secured indebtedness.
Each series of the exchange notes will be guaranteed, jointly and
severally, by the Subsidiary Guarantors as described below. The Subsidiary
Guaranties will rank equally in right of payment to all existing and future
senior unsecured indebtedness of the Subsidiary Guarantors. Other than
intercompany debt, the Subsidiary Guarantors currently have no indebtedness
outstanding.
Principal, Maturity and Interest
The indenture does not limit the aggregate principal amount of debt
securities that we may issue under it and provides that debt securities may be
issued under it up to the principal amount as we may authorize from time to
time. The debt securities may be issued from time to time in one or more series.
We may "reopen" any series of debt securities, including the 67/8% Senior Notes
due 2006, the 73/4% Senior Notes due 2011 and the 85/8% Senior Notes due 2031,
and issue additional debt securities of that series.
The 67/8% Senior Notes due 2006 were initially limited to $500,000,000,
the 73/4% Senior Notes due 2011 were initially limited to $800,000,000 and the
85/8% Senior Notes due 2031 were initially limited to $500,000,000. Each of
these series of Senior Notes were issued in registered form only, without
coupons, in minimum denominations of $100,000 and integral multiples of $1,000
in excess thereof. The 67/8% Senior Notes due 2006 will mature at par on April
15, 2006 (the "67/8% Senior Note Stated
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Maturity Date"), the 73/4% Senior Notes due 2011 will mature at par on April 15,
2011 (the "73/4% Senior Note Stated Maturity Date") and the 85/8% Senior Notes
due 2031 will mature at par on April 15, 2031 (the "85/8% Senior Note Stated
Maturity Date") unless we redeem them in accordance with their terms prior to
such date.
Interest on the 67/8% Senior Notes due 2006 accrues at the rate of 67/8%
per annum and is payable semi-annually in arrears on April 15 and October 15 of
each year, commencing October 15, 2001. Interest on the 73/4% Senior Notes due
2011 accrues at the rate of 73/4% per annum and is payable semi-annually in
arrears on April 15 and October 15 of each year, commencing October 15, 2001.
Interest on the 85/8% Senior Notes due 2031 accrues at the rate of 85/8% per
annum and is payable semi-annually in arrears on April 15 and October 15 of each
year (each, an "Interest Payment Date" for each series) commencing October 15,
2001. We will make each interest payment to the persons in whose names the
Senior Notes are registered at the close of business on the 15th day immediately
preceding the applicable Interest Payment Date.
Interest on the exchange notes will accrue from the date of original
issuance or, if interest has already been paid, from the most recent Interest
Payment Date to which interest was paid or duly provided for. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
If any Interest Payment Date or the Stated Maturity Date or date of
earlier redemption is not a Business Day, the required payment shall be made on
the next succeeding day that is a Business Day, without any interest or other
payment in respect of the payment subject to delay, with the same force and
effect as if made on the Interest Payment Date or Stated Maturity Date or date
of earlier redemption.
Payment and Paying Agents
Interest on the exchange notes will be payable at any office or agency
that we maintain for such purpose in West Paterson, New Jersey, The City of New
York and, for so long as any of the exchange notes are listed on the Luxembourg
Stock Exchange and the rules of the Luxembourg Stock Exchange so require, in
Luxembourg. At our option, however, interest may be paid (i) by check mailed to
the address of the person entitled to the interest payment at the address that
appears in the "security register" that we maintain for such purpose or (ii) by
wire transfer to an account maintained by the person entitled to the interest
payment as specified in the security register subject to the provisions
described under "-- Book Entry; Delivery and Form". (Sections 301, 1001 and 1002
of the indenture.)
Transfer and Exchange
Under the indenture, debt securities of any series, including each series
of the exchange notes, may be presented for registration of transfer and may be
presented for exchange (i) at each office or agency that we are required to
maintain for payment of such series as described in "-- Payment and Paying
Agents," above and (ii) at each other office or agency that we may designate
from time to time for such purposes. No service charge will be made for any
transfer or exchange of debt securities, including each series of the exchange
notes, but we may require payment of any tax or other governmental charge
payable in connection with the transfer or exchange.
(Section 305 of the indenture.)
The indenture does not require us to (i) issue, register the transfer of
or exchange debt securities during a period beginning at the opening of business
15 days before any selection of debt securities of that series to be redeemed
and ending at the close of business on the day of mailing of the relevant notice
of redemption; (ii) register the transfer of or exchange any debt security in
registered form, or portion thereof, called for redemption, except the
unredeemed portion of any debt security in registered form being redeemed in
part; or (iii) issue, register the transfer of or exchange any debt security
which has been surrendered for repayment at the option of the holder, except the
portion, if any, of such debt security not to be so repaid. (Section 305 of the
indenture.)
The registered holder of an exchange note of any series will be treated as
its owner for all purposes.
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Mandatory Redemption
We will not be required to make mandatory redemption or sinking fund
payments with respect to any series of the exchange notes.
Optional Redemption
We may redeem each series of the exchange notes at any time, in whole or
in part, upon not less than 30 nor more than 60 days' prior written notice, as
more fully described under "-- Selection and Notice" below, at a price equal to
the greater of:
(a) 100 percent of the principal amount of the exchange notes being
redeemed, or
(b) as determined by the calculation agent, the sum of the present
values of the remaining scheduled payments of principal and interest
on the exchange notes being redeemed not including any portion of
such payment of interest accrued on the date of redemption, from the
redemption date to the maturity date, discounted to the redemption
date on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the treasury rate plus 30 basis points for
the 67/8% Senior Notes due 2006, at the treasury rate plus 35 basis
points for the 73/4% Senior Notes due 2011 and at the treasury rate
plus 40 basis points for the 85/8% Senior Notes due 2031.
plus any accrued and unpaid interest to the date of redemption and liquidated
damages, if any, and additional amounts, if any.
"Treasury rate" means, with respect to any redemption date for any of the
notes being redeemed:
(a) the yield for the maturity corresponding to the comparable treasury
issue (as defined below), under the heading that represents the
average for the immediately preceding week, appearing in the most
recently published statistical release designated "H.15(519)" or any
successor publication that is published weekly by the Board of
Governors of the Federal Reserve System and that establishes yields
on actively traded United States Treasury securities adjusted to
constant maturity under the caption "Treasury Constant Maturities,"
provided, that if no maturity is within three months before or after
the maturity date for any series of notes being redeemed the yields
for the two published maturities most closely corresponding to the
comparable treasury issue will be determined and the treasury rate
shall be interpolated or extrapolated from those yields on a
straight line basis, rounding to the nearest month; or
(b) if the release referred to in (a) (or any successor release) is not
published during the week preceding the calculation date or does not
contain the yields referred to above, the rate per annum equal to
the semiannual equivalent yield to maturity of the comparable
treasury issue, calculated using a price for the comparable treasury
issue (expressed as a percentage of its principal amount) equal to
the comparable treasury price for that redemption date.
The treasury rate will be calculated on the third business day preceding
the redemption date.
"Comparable treasury issue" means, with respect to any redemption date for
any of the exchange notes being redeemed, the United States Treasury security
selected by an "independent investment banker" as having the maturity comparable
to the remaining term of the series of exchange notes to be redeemed that would
be utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of the series of exchange notes. "Independent
investment banker" means one of the reference treasury dealers appointed by the
trustee after consultation with us.
"Comparable treasury price" means with respect to any redemption date for
any of the exchange notes being redeemed:
(a) the average of four reference treasury dealer quotations (as defined
below) for the redemption date, after excluding the highest and
lowest of those reference treasury dealer quotations, or
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(b) if the calculation agent obtains fewer than four reference treasury
dealer quotations, the average of all reference treasury dealer
quotations obtained.
"Reference treasury dealer" means each of four primary U.S. Government
securities dealers in New York City selected by the trustee in consultation with
us and initially will include Morgan Stanley & Co. Incorporated and Salomon
Smith Barney, Inc. If any reference treasury dealer ceases to be a primary U.S.
government securities dealer, the trustee will substitute another primary U.S.
government securities dealer for that dealer.
"Reference treasury dealer quotations" means, with respect to any
redemption date, the average, as determined by the calculation agent, of the bid
and asked prices for the comparable treasury issue (expressed in each case as a
percentage of its principal amount) quoted to the calculation agent by that
reference treasury dealer at 5:00 p.m. New York time on the third business day
preceding the redemption date.
Unless we default in payment of the redemption price, on and after the
redemption date, interest will cease to accrue on the notes called for
redemption.
Selection and Notice
The trustee will select the exchange notes of any series for redemption on
a pro rata basis or in accordance with any other method the trustee considers
fair and appropriate. Exchange notes in denominations of $1,000 or less may not
be redeemed in part. Notices of redemption will be mailed by first class mail at
least 30 but not more than 60 days prior to the redemption date to each holder
of exchange notes to be redeemed at its registered address. The notice of
redemption will state the portion of the principal amount to be redeemed if the
exchange note is to be redeemed in part. An exchange note in principal amount
equal to the unredeemed portion will be issued in the name of the holder upon
cancellation of the original exchange note. On and after the redemption date,
interest will no longer accrue on those exchange notes or portions of exchange
notes called for redemption (unless we default in the payment of any amount
payable by us upon such redemption).
Notices to the holders of the exchange notes shall be given by first class
mail, postage prepaid, to the registered holders of such exchange notes at their
addresses appearing in the note register. In addition, for so long as any
exchange notes are listed on the Luxembourg Stock Exchange and so long as the
rules of such exchange so require, notices to the holders of such exchange notes
shall also be given by publication in an Authorized Newspaper in Luxembourg and
the Luxembourg Stock Exchange will be notified of the outstanding amount of
exchange notes following any redemption. Such Authorized Newspaper is expected
to be the Luxemburger Wort.
Selected Indenture Covenants
Limitations on Obligations
Restricted Subsidiaries. We will not permit any Restricted Subsidiary to,
directly or indirectly, Incur any Obligations (including, without limitation,
Acquired Obligations), except for (i) the Subsidiary Guaranties; (ii)
Obligations existing on the date of the indenture; (iii) Obligations of ER&T
related to the purchase and sale of fuel, capacity, energy (including, but not
limited to, electric power, natural gas and coal), environmental credits or
entitlements, utility services, fuel, water, related transportation services and
other similar or related products and services in the ordinary course; (iv)
Obligations of Nuclear related to the purchase and sale of fuel and related
transportation services in the ordinary course; (v) Permitted Hedging
Obligations; (vi) Obligations incurred in exchange for, or the net proceeds of
which are used to refund, refinance, or replace Obligations described under
"Limitations on Obligations", provided that the average life of the refinancing
Obligations shall not be shorter than the average life of the Obligations being
refinanced and the principal amount of the refinancing obligations shall not
exceed the principal amount of the Obligations being so refinanced; and (vii)
Obligations to us or any other Restricted Subsidiary which are subordinated to
the Subsidiary Guaranty with respect to the Senior Notes of the Restricted
Subsidiary incurring the Obligations.
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The foregoing notwithstanding, Restricted Subsidiaries may Incur
Obligations not otherwise permitted by the preceding paragraph in an aggregate
amount outstanding after giving effect to such Incurrence not to exceed at any
one time the greater of $250 million or 15% of Consolidated Net Tangible Assets
as of the last day of the preceding month.
Subsidiaries Other Than Restricted Subsidiaries. Except for parental
guaranties of debt service reserves, surety bonds, equity guarantees,
performance bonds and bid bonds entered into in the ordinary course of business
aggregating at any one time not more than $100 million, we shall not permit any
Subsidiary that is not a Restricted Subsidiary to, directly or indirectly, Incur
any Obligations (including, without limitation, Acquired Obligations) that are
recourse to us or any Restricted Subsidiary. (Section 1008 of the indenture.)
Limitation on Liens
We may not, and may not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume or permit to exist any Lien of any kind on or
with respect to any Property or interest in our Property or that of any of our
Restricted Subsidiaries or any income or profits therefrom (in each case,
whether the Property is owned at the date of the indenture or thereafter
acquired), unless the Senior Notes are secured equally and ratably with (or
prior to) any and all other Obligations secured by the Lien, provided, however,
that these restrictions shall not apply to or prevent the creation, incurrence,
assumption or existence of Permitted Liens.
Permitted Liens shall include:
o Liens existing on the date of the indenture;
o Liens to secure or provide for the payment of all or part of the purchase
price of any Property or the cost of construction or improvement thereof;
provided that no such Lien shall extend to or cover any other of our or
our Restricted Subsidiaries' Property;
o Liens existing on Property at the time such Property is acquired by us or
any Restricted Subsidiary; provided that such Liens (x) are not created,
Incurred or assumed in contemplation of such Property being acquired and
(y) do not extend to or cover any other of our or our Restricted
Subsidiaries' Property;
o Liens existing on Property of any entity at the time such entity is merged
with or into or consolidated with us or a Restricted Subsidiary; provided
that such Liens (x) are not created, Incurred or assumed in contemplation
of such merger or consolidation and (y) do not extend to any other of our
or our Restricted Subsidiaries' Property;
o Liens securing Permitted Hedging Obligations;
o Liens for taxes, assessments or governmental charges that are not yet
delinquent or that are being contested in good faith by any appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate reserve provision, if any, as is
required in conformity with GAAP shall have been made;
o Liens arising by reason of any judgment, decree or order of any court, so
long as any such Lien is being contested in good faith and is bonded or
such judgment, decree or order does not exceed $50 million, and any
appropriate legal proceedings that may have been duly initiated for the
review of such judgment, decree or order have not been finally terminated
or the period within which such proceedings may be initiated has not
expired;
o Liens to secure pledges or deposits made in the ordinary course of
business in connection with bids, tenders or contracts (other than for
payment of indebtedness) or to secure guarantees, statutory or regulatory
obligations or surety or performance bonds each made in the ordinary
course of business;
o Liens imposed by law such as carriers', warehousemen's and mechanics'
Liens, in each case arising in the ordinary course of business and with
respect to amounts not yet due or being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted
and for which a reserve or other appropriate provision, if any, as is
required in conformity with GAAP shall have been made;
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o Survey exceptions, encumbrances, easements or reservations of, or rights
of others for, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real properties incidental to the conduct of
the business or to the ownership of Properties which were not incurred in
connection with indebtedness or other extensions of credit and which do
not in the aggregate materially and adversely affect the value of the
Properties or materially impair their use in the operation of the
business;
o Liens securing letters of credit entered into in the ordinary course of
business;
o Liens to secure pollution control revenue bonds or industrial revenue
bonds;
o Liens securing Non-Recourse Obligations of Unrestricted Subsidiaries;
o Liens granted on the capital stock of Unrestricted Subsidiaries for the
purpose of securing the Obligations of such Unrestricted Subsidiaries;
o Liens pursuant to Capitalized Leases or Synthetic Leases permitted to be
entered into under the "Limitation on Obligations" covenant;
o Liens arising by reason of leases and subleases of Property pursuant to a
Sale/Leaseback Transaction allowed pursuant to the Sale of Assets covenant
that do not materially interfere with the ordinary conduct of our or any
of our Restricted Subsidiaries' business;
o Liens created in connection with worker's compensation, unemployment
insurance and other social security statutes or regulations;
o Liens by a Wholly-Owned Subsidiary to us or any Restricted Subsidiary;
o Liens on Property, other than Capital Stock of Restricted Subsidiaries, to
secure Obligations so long as the sum of the amount of outstanding
Obligations secured by Liens Incurred pursuant to this provision does not
exceed the greater of $250 million or 15% of Consolidated Net Tangible
Assets as of the end of the most recent fiscal quarter for which financial
statements are available; and
o The replacement, extension or renewal (or successive replacements,
extensions or renewals), as a whole or in part, of any Lien or of any
agreement referred to above or the replacement, extension or renewal (not
exceeding the outstanding principal amount of Indebtedness secured thereby
together with any premium, interest, fee or expense payable in connection
with any such replacement, extension or renewal) of Indebtedness secured
thereby; provided that such replacement, extension or renewal is limited
to all or part of the same Property that secured the Lien replaced,
extended or renewed (plus improvements thereon or additions or accessions
thereto).
Guaranty of Senior Notes
Each initial Subsidiary Guarantor (Fossil, Nuclear and ER&T) has executed
and any subsequent Subsidiary Guarantor at or before the time the definition of
Subsidiary Guarantor shall be applicable to it, shall execute, a Subsidiary
Guaranty of each series of the Senior Notes in substantially the form provided
for by the indenture. (Section 1601 of the indenture.)
Guaranty of ER&T Obligations
We have executed a guaranty of the Obligations of ER&T substantially in
the form provided for by the indenture.
Payment of Dividends by ER&T to Us
For so long as we continue to guarantee the Obligations of ER&T, we shall
cause ER&T, to the extent permitted by applicable law, to pay, at least
quarterly, dividends or distributions to us of the excess cash not then required
for its business operations. (Section 1010 of the indenture.)
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Limitation on Dividend and Other Payment Restrictions
Other than pursuant to the indenture or as otherwise may be required by
law, we will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create or cause to become, or as a result of the acquisition of any
Person or Property, or upon any Person becoming a Restricted Subsidiary, remain
subject to, any consensual encumbrance or consensual restriction of any kind on
the ability of any Restricted Subsidiary to:
(i) pay dividends or make any other distributions on its Capital Stock;
(ii) make payments on any Obligations owed to us or any of our Restricted
Subsidiaries;
(iii) make loans or advances to us or to any of our Restricted
Subsidiaries;
(iv) transfer any of its Property to us or to any of our Restricted
Subsidiaries; or
(v) make payments under a Subsidiary Guaranty with respect to the Senior
Notes.
The foregoing shall not prohibit:
(a) encumbrances and restrictions resulting from customary provisions
relating to (i) transfers of Property that restrict the subletting or
assignment of any lease or (ii) transfers of Property that are
contained in licenses and that relate to the Property covered
thereby, in each case entered into in the ordinary course of
business;
(b) encumbrances and restrictions on transfers of Property existing on
any assets at the time such assets are acquired (or the entity owning
such assets is acquired) by any Restricted Subsidiary, whether by
merger, consolidation, purchase of such assets or otherwise; provided
that such restrictions and encumbrances (i) are not created, Incurred
or assumed in contemplation of such assets or entity being acquired
by the Restricted Subsidiary and (ii) do not extend to any other
assets of the Restricted Subsidiary; and
(c) restrictions on transfers of Property created in connection with
sales or purchases of electricity, energy, capacity, natural gas,
coal, ancillary services, environmental credits and/or entitlements,
utility services, fuel, water, related transportation services and
other similar products and services, in each case, in the ordinary
course of business; provided that restrictions arising from any
transaction or series of related transactions pursuant to this clause
(c) shall not be materially more restrictive, taken as a whole, than
encumbrances and restrictions customarily accepted as industry
standard for similar transactions. (Section 1008 of the indenture.)
Limitation on Sale of Assets
Except for a sale of all or substantially all of our assets, as provided
in the "Merger, Consolidation or Sale of Assets" covenant, and other than (1)
assets required to be sold to conform with government regulations, laws or
impositions, (2) sales or dispositions of surplus, obsolete or worn out
equipment, (3) sales or dispositions of ownership interests in Unrestricted
Subsidiaries, or (4) any other sale or disposition so long as after giving
effect to such events, the Rating Agencies shall have confirmed their ratings on
our debt securities in effect immediately prior to such sale or disposition, we
may not, and may not permit any Restricted Subsidiary to, make any Asset Sale
(other than short-term, readily marketable investments purchased for cash
management purposes with funds not representing the proceeds of other Asset
Sales) if, on a pro forma basis, the aggregate net book value of all such Asset
Sales during the most recent 12-month period would exceed 15% of Consolidated
Net Tangible Assets computed as of the most recent quarter preceding such sale;
provided, however, that any such Asset Sale shall be disregarded for purposes of
this 15% limitation if the Net Cash Proceeds are within 270 days thereafter (i)
invested in a Permitted Business, (ii) used to purchase and retire Obligations
ranking equal in right of payment to the Senior Notes or (iii) used to redeem
the Senior Notes at a redemption price equal to 100% of the principal amount of
the Senior Notes to be redeemed, plus accrued and unpaid interest thereon up to
and including the applicable redemption date, plus a make-whole premium equal
to, with respect to any Senior Note, the excess of (a) the aggregate present
value as of the date of prepayment of the expected future cash flows of the
Senior Note (for the avoidance of doubt, these
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amounts shall include all principal and interest payable with respect to the
Senior Note) (exclusive of interest accrued to the date of prepayment) that, but
for the prepayment, would have been payable if the prepayment had not been made,
determined by discounting such amounts at a rate that is equal to the applicable
treasury rate (as defined under "-- Optional Redemption" above) plus 0.30% for
the 67/8% Senior Notes due 2006, 0.35% for the 73/4% Senior Notes due 2011 and
0.40% for the 85/8 Senior Notes due 2031 over (b) the aggregate principal amount
of the Senior Note then to be prepaid.
In addition, on a cumulative basis we may not sell or otherwise dispose of
more than 25% of the assets or Capital Stock in Fossil, unless Net Cash Proceeds
from such sale are invested in other non-nuclear generation assets or the
capital stock of entities engaged in fossil generation and related businesses.
Merger, Consolidation or Sale of Assets
We may not, directly or indirectly, consolidate or merge with or into
(whether or not we are the surviving entity), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of our assets, in one or
more related transactions, to another Person unless:
(i) the Person formed by the consolidation or surviving the merger or
the Person that acquires by sale, assignment, transfer, conveyance
or other disposition, or that leases, the assets (if other than us)
(in each such case, the "Successor Entity"), is a corporation or
limited liability company organized and existing under the laws of
the United States, any state thereof or the District of Columbia and
expressly assumes our obligations under the indenture and the Senior
Notes;
(ii) if any of our or a Restricted Subsidiary's Property or assets would
become subject to a Lien other than a Permitted Lien under the
"Limitations on Liens" covenant, the Senior Notes shall be equally
and ratably secured in accordance with such covenant;
(iii) immediately after such transaction no event exists that is or with
the passage of time or the giving of notice or both would be an
Event of Default under the indenture; and
(iv) each Subsidiary Guarantor shall have by amendment to its Subsidiary
Guaranty with respect to the Senior Notes confirmed that its
Subsidiary Guaranty shall apply to the obligations of the Successor
Entity under the indenture and each series of the Senior Notes.
(Section 801 of the indenture.)
Events of Default and Remedies
Each of the following is an Event of Default under the indenture with
respect to any series of the Senior Notes:
(i) default for five days in the payment when due of interest on any of
the exchange notes of such series;
(ii) default in the payment when due of the principal of, or premium, if
any, or make-whole amount, on, the exchange notes of such series;
(iii) failure by us or any Restricted Subsidiary to comply with the
provisions described under "Limitation on Sale of Assets" or
"Merger, Consolidation or Sale of Assets";
(iv) failure by us or any Restricted Subsidiary for 60 days after notice
by the trustee or to us and to the trustee by the holders of 25% or
more in aggregate principal amount of the Senior Notes of such
series to comply with any of our agreements in the indenture or the
Senior Notes of such series that are not otherwise covered in
clauses (i), (ii), (iii), (v), (vi) or (vii);
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced
any of our or any of our Subsidiaries; indebtedness (including
indebtedness represented by any other series of debt securities
under the indenture or the payment of which is guaranteed by us or
by any of our Subsidiaries) (but other than
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Non-Recourse Obligations) whether such indebtedness or guaranty now
exists or is created after the date of the indenture, which default
(a) is caused by a failure to pay the principal of such indebtedness
at the stated maturity of such indebtedness after the expiration of
grace periods provided in the indebtedness (a "Payment Default") or
(b) has resulted in the acceleration of the indebtedness prior to
its stated maturity; and, in each case the principal amount of the
indebtedness, together with the principal amount of any other
indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $50.0 million
or more;
(vi) failure by us or any of our Restricted Subsidiaries to pay one or
more final judgments not otherwise covered by insurance aggregating
in excess of $50.0 million, which judgments are not paid, discharged
or stayed for a period of 60 days; and
(vii) certain events of bankruptcy or insolvency with respect to us or any
of our Restricted Subsidiaries. (Section 501 of the indenture.)
Additional series of debt securities issued under the indenture may
specify other events of default for such series of debt securities.
We are required to file with the trustee, annually, an officer's
certificate as to our compliance with all conditions and covenants under the
indenture. (Section 1011 of the indenture.) The indenture provides that the
trustee may withhold notice to the holders of debt securities of a series,
including each series of the Senior Notes, of any default (except payment
defaults on the debt securities of that series) if it considers it in the
interest of the holders of debt securities of the series to do so. (Section 601
of the indenture.)
If an Event of Default (other than an Event of Default occasioned by our
or any of our Restricted Subsidiaries' bankruptcy or insolvency) with respect to
debt securities of a series, including any series of the Senior Notes, has
occurred and is continuing, the trustee or the holders of not less than 25% in
principal amount of outstanding debt securities of that series may declare the
principal (or, if the debt securities of that series are issued with original
issue discount or are "indexed debt securities" (i.e., debt securities, the
interest and principal payments on which are determined by reference to a
particular index, such as a foreign currency or commodity), such portion of the
principal as may be specified in the terms of those debt securities) of all of
the debt securities of that series to be due and payable immediately, by a
notice in writing to us.
(Section 502 of the indenture.)
If an Event of Default occasioned by our or any of our Restricted
Subsidiaries' bankruptcy or insolvency occurs, the principal of and interest on
all debt securities, including each series of the Senior Notes, shall, ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the trustee or any holders of debt securities.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default with respect to debt securities of any
series, including any series of the Senior Notes, has occurred and is
continuing, the trustee is under no obligation to exercise any of its rights or
powers under the indenture at the request, order or direction of the holders of
debt securities of that series, unless those holders have offered the trustee
indemnity satisfactory to the trustee against the expenses and liabilities which
might be incurred by it in compliance with such request. (Section 507 of the
indenture.)
Subject to such provisions for the indemnification of the trustee, the
holders of a majority in principal amount of the outstanding debt securities of
any series of debt securities, including each series of the Senior Notes, will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the trustee, or exercising any trust or power
conferred on the trustee with respect to the debt securities of that series.
(Section 512 of the indenture.)
The holders of a majority in principal amount of the outstanding debt
securities of a series, including each series of the Senior Notes, may, on
behalf of the holders of all debt securities of such series and any related
coupons, waive any past default under the indenture with respect to such series
and its consequences, except a default (i) in the payment of the principal of
(or premium, if any) or
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interest, if any, on or additional amounts payable in respect of any debt
security of such series or any related coupons or (ii) in respect of a covenant
or provision that cannot be modified or amended without the consent of the
holder of each outstanding debt security of such series affected thereby.
(Section 513 of the indenture.)
Definitions
"Acquired Obligations" means, with respect to any Person, (i) Obligations
of any other Person existing at the time the other Person is merged with or into
or became a Subsidiary of the Person, including, without limitation, Obligations
Incurred in connection with, or in contemplation of, the other Person merging
with or into or becoming a Subsidiary of the Person; and (ii) Obligations
secured by a Lien encumbering any asset acquired by the Person at the time the
asset is acquired by the Person.
"Asset Sale" means any sale, transfer, conveyance, lease or other
disposition (including by way of merger, consolidation or sale-leaseback) by us
or any of our Restricted Subsidiaries to any Person (other than to us or a
Restricted Subsidiary of ours and other than in the ordinary course of business)
of any Capital Stock or other Property of ours or of any of our Restricted
Subsidiaries (including Capital Stock of Subsidiaries). The term "Asset Sale"
will not include (i) any sale, transfer, conveyance, lease or other disposition
of Property governed by the "Merger, Consolidation or Sale of Assets" covenant
and (ii) any transaction or series of related transactions consisting of the
sale, transfer, conveyance, lease or other disposition of Capital Stock or other
Property with a Fair Market Value aggregating less than $50 million in any
fiscal year. The term "Asset Sale" also will not include (a) the grant of or
realization upon a Lien permitted under the "Limitation on Liens" covenant or
the exercise of remedies thereunder and (b) sales of fuel, capacity, energy
(including, but not limited to, electric power, natural gas and coal),
environmental credits or entitlements, related transportation services and other
related services by ER&T and its Permitted Hedging Obligations as permitted by
the "Limitation on Obligations" covenant.
"Attributable Debt" means with respect to any Sale/Leaseback Transaction,
at the time of determination, the present value (discounted at the interest rate
borne by the Senior Notes, compounded annually) of the total Obligations of the
lessee for rental payments during the remaining term of the lease included in
the Sale/Leaseback Transaction (including any period for which the lease has
been extended).
"Board of Directors" means either the Board of Directors of PSEG Power or
any duly authorized committee of such Board.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in Newark, New Jersey and The
City of New York are authorized or obligated by law or executive order to close.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Capitalized Lease" means as applied to any Person, any lease of any
Property of which the discounted present value of the rental obligations of such
Person as lessee, in conformity with GAAP, is required to be capitalized on the
balance sheet of such Person, and "Capitalized Lease Obligation" means the
rental obligations, as aforesaid, under such lease.
"Commodity Trading Obligations," with respect to any Person, means the
Obligations of such Person under (i) any commodity swap agreement, commodity
future agreement, commodity option agreement, commodity cap agreement, commodity
floor agreement, commodity collar agreement, commodity hedge agreement, and any
put, call or other agreement or arrangement, or combination thereof, designed to
protect such Person against fluctuations in commodity prices or (ii) any
commodity swap agreement, commodity future agreement, commodity option
agreement, commodity hedge agreement, and any put, call or other agreement or
arrangement, or combination thereof (including an
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agreement or arrangement to hedge foreign exchange risks) in respect of
commodities entered into by us pursuant to asset optimization and risk
management policies and procedures adopted in good faith by the Board of
Directors.
"Consolidated Current Liabilities," as of the date of determination, means
the aggregate amount of our and our Restricted Subsidiaries' liabilities on a
consolidated basis which may properly be classified as current liabilities
(including taxes accrued as estimated), after eliminating (i) all inter-company
items between us and any consolidated Restricted Subsidiary, (ii) all current
maturities of long-term indebtedness, all as determined in accordance with GAAP
and (iii) all liabilities attributable to Subsidiaries that are not Restricted
Subsidiaries.
"Consolidated Net Tangible Assets" means, as of any date of determination,
the total amount of assets (less accumulated depreciation or amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) of us and our Restricted Subsidiaries, determined on
a consolidated basis in accordance with GAAP, consistently applied, and after
giving effect to purchase accounting and after deducting therefrom, to the
extent otherwise included, the amounts of:
o Consolidated Current Liabilities;
o excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors;
o unamortized debt discount and expense and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items;
o treasury stock;
o any cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of Capital
Stock to the extent such obligation is not reflected in Consolidated
Current Liabilities; and
o all assets attributable to Subsidiaries that are not Restricted
Subsidiaries (including Capital Stock thereof), except to the extent of
dividends or distributions received from such Subsidiaries.
"Default" means any event, act or condition that is, or after notice or
the passage of time or both would be, an Event of Default.
"Event of Default" has the meaning specified in Section 501 of the
indenture.
"Fair Market Value" means the price that would be paid by a purchaser to a
seller in an arm's-length transaction.
"GAAP" means generally accepted accounting principles in the United States
applied on a basis consistent with the principles, methods, procedures and
practices employed in the preparation of our audited financial statements,
including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
approved by a significant segment of the accounting profession.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under any interest rate or currency swap agreement, interest rate
or currency future agreement, interest rate cap or collar agreement, interest
rate or currency hedge agreement, and any put, call or other agreement or
arrangement designed to protect such Person against fluctuations in interest
rates or currency exchange rates.
"Incur" means, with respect to any Obligation, to directly or indirectly
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable for or with respect to, or become responsible for payment of,
contingently or otherwise, such Obligation. The term "Incurrence" has a
corresponding meaning.
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"Lien" means any mortgage, pledge, hypothecation, charge, assignment,
deposit arrangement, encumbrance, security interest, lien (statutory or other),
or preference, priority, or other security or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
agreement to give or grant a Lien or any lease, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).
"Net Cash Proceeds" from an Asset Sale is defined to mean cash payments
received (including any cash payments received by way of a payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received (including any cash received upon sale or disposition of any such note
or receivable), excluding any other consideration received in the form of
assumption by the acquiring Person of Obligations relating to the Property
disposed of in such Asset Sale or received in any form other than cash)
therefrom, in each case, net of (i) all legal, title and recording tax expenses,
commissions and other fees and expenses of any kind (including consent and
waiver fees and any applicable premiums, earn-out or working interest payments
or payments in lieu or in termination thereof) Incurred, (ii) all federal,
state, provincial, foreign and local taxes and other governmental charges
required to be accrued as a liability under GAAP as a consequence of such Asset
Sale, (iii) a reasonable reserve for the after-tax cost of any indemnification
payments (fixed and contingent) attributable to seller's indemnities to the
purchaser undertaken by us or any of our Subsidiaries in connection with such
Asset Sale, (iv) all payments made on any Obligation that is secured by such
Property, in accordance with the terms of any Lien upon or with respect to such
Property, or that must by its terms or by applicable law or in order to obtain a
required consent or waiver be repaid out of the proceeds from or in connection
with such Asset Sale and (v) all distributions and other payments made to
holders of Capital Stock of Subsidiaries (other than us or our Restricted
Subsidiaries) as a result of such Asset Sale.
"Non-Recourse Obligation" means, with respect to any Person, any financing
that is or was Incurred with respect to the development, acquisition, design,
engineering, procurement, construction, operation, ownership, servicing or
management of one or more facilities used or useful in a Permitted Business in
respect of which such Person has a direct or indirect interest, provided that
such financing is without recourse to any Person or Property other than to (i)
the Property that constitutes such facilities together with contracts, permits,
licenses, reserves and other items related to such facilities, (ii) the income
from and proceeds of such facilities, (iii) the Capital Stock of, and other
investments in, the Person that owns the Property that constitutes any such
facilities and (iv) the Capital Stock of, and other investments in, any Person
obligated with respect to such financing and of any Subsidiary of such Person
that owns a direct or indirect interest in any such facilities.
"Obligations" of any Person shall mean at any date, without duplication,
(i) all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person arising under any conditional sale or other
title retention arrangement or otherwise to pay the deferred purchase price of
Property or services, (iv) all obligations of such Person Incurred in respect of
Attributable Debt associated with any Sale/Leaseback Transaction, Capitalized
Lease or Synthetic Lease, (v) all obligations of such Person under letters of
credit, (vi) all obligations of such Person under trade or bankers' acceptances,
(vii) all obligations of such Person under Hedging Obligations and Commodity
Trading Obligations, (viii) trade payables in respect of fuel, labor, supplies
or other materials or services or the obligation to provide power, (ix)
Preferred Stock and Redeemable Stock issued to any Person other than us or a
Restricted Subsidiary, (x) all obligations of others secured by a Lien on any
asset of such Person, whether or not such obligations are assumed by such Person
and (xi) all obligations of others to the extent guaranteed by such Person. The
amount of any obligation shall be deemed to be the amount equal to the stated or
determinable amount thereof or, if not stated or determinable, the maximum
probable liability thereunder as determined by us in good faith.
"Permitted Business" means any business in which we or any of our
Subsidiaries are engaged on the date of the indenture or any other power or
energy-related business, including the business of acquiring, developing, owning
or operating electric power or thermal energy generation or cogeneration
facilities, electric power transmission, fuel supply and fuel transportation
facilities, together with their related power supply, thermal energy and fuel
contracts and other facilities, services or goods that are
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ancillary, incidental, complementary or reasonably related to the marketing,
trading, development, construction or management servicing, ownership or
operation of the foregoing.
"Permitted Hedging Obligations" of any Person shall mean (i) Hedging
Obligations entered into in the ordinary course of business and in accordance
with such Person's established risk management policies that are designed to
protect such Person against, among other things, fluctuations in interest rates
or currency exchange rates and which in the case of agreements relating to
interest rates shall have a notional amount no greater than the payments due
with respect to the Obligations being hedged thereby and (ii) Commodity Trading
Obligations.
"Person" means an individual, a corporation, a limited liability company,
a partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) or preferred or preference stock of such Person that is
outstanding or issued on or after the date of original issuance of the original
notes.
"Property" of any Person is defined to mean all types of real, personal,
tangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person under GAAP.
"Rating Agencies" means Moody's Investors Service Inc., Standard & Poor's
Ratings Services, Fitch Inc. and any successor thereof.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of the Senior Notes, (ii) redeemable at the option
of the holder of such Capital Stock at any time prior to the Stated Maturity of
the Senior Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Obligations having a scheduled
maturity prior to the Stated Maturity of the Senior Notes.
"Restricted Subsidiary" means only PSEG Fossil LLC, PSEG Nuclear LLC, PSEG
Energy Resources & Trade LLC and each other of our Subsidiaries that executes a
Subsidiary Guaranty with respect to the Senior Notes and is subsequently
designated by the Board of Directors by written notice to the trustee as a
Restricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to Property now
owned or hereafter acquired whereby we or one of our Subsidiaries transfers the
Property to a Person and leases it back from that Person, other than leases for
a term of not more than 12 months or between us and one of our Wholly-Owned
Subsidiaries that is a Restricted Subsidiary or between Wholly-Owned
Subsidiaries that are Restricted Subsidiaries.
"Stated Maturity" means with respect to any Senior Note or any installment
of interest thereon, the date specified in such Senior Note as the fixed date on
which any principal of such Senior Note or any such installment of interest is
due and payable.
"Subsidiary" means, with respect to any Person, (i) any corporation,
limited liability company, association or other business entity of which more
than 50% of the total voting power of Voting Stock is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and (ii) any partnership
(a) the sole general partner or the managing general partner of which is such
Person or a Subsidiary of such Person or (b) the only general partners of which
are such Person or one or more Subsidiaries of such Person (or any combination
thereof).
"Subsidiary Guarantor" means all current and subsequently designated
Restricted Subsidiaries.
"Subsidiary Guaranty" means a guaranty of a Subsidiary Guarantor in favor
of the trustee for the benefit of the holders of the Senior Notes in
substantially the form provided for by the indenture or a guaranty of a
Subsidiary Guarantor of any other of our Obligations.
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"Synthetic Lease" means (i) a lease pursuant to which the lessee is
treated as the owner of the Property subject to the lease for tax purposes,
whether or not such lease is treated as an operating lease for accounting
purposes or (ii) a lease treated as an operating lease for accounting purposes
but having at least three of the following characteristics, (a) the term of the
lease, inclusive of all renewal periods at the lessee's option, is greater than
75% of the useful life of the Property subject to the lease as estimated at the
inception of the Lease, (b) the lessee has the right to purchase such Property
at a fixed price, (c) the lessee's payments under the lease are calculated to
amortize and service the debt of the lessor incurred in order to acquire the
asset and (d) the lessor obtains 80% or more of the cost of the asset from
borrowed funds.
"Unrestricted Subsidiary" means a Subsidiary that is not a Restricted
Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any Obligations
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Obligations into (ii) the total of the product obtained
by multiplying (a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (b) the numbers of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment.
"Wholly-Owned Subsidiary" means a Subsidiary all the Capital Stock of
which (other than directors' qualifying shares) is owned by us and/or one or
more of our Wholly-Owned Subsidiaries.
Reports and Rule 144A Information Requirement
We must file with the trustee, within 30 days of filing them with the SEC,
copies of the current, quarterly and annual reports and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) that we are required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If we are not
subject to the requirements of Section 13 or 15(d) of the Exchange Act, we must
nevertheless file with the SEC (if permitted) and the trustee, on the date upon
which we would have been required to file with the SEC, current, quarterly and
annual financial statements, including any notes thereto (and with respect to
annual reports, an auditor's report by a firm of established national
reputation, upon which the trustee may conclusively rely), and a "Management's
Discussion and Analysis of Financial Condition and Results of Operations," both
comparable to that which we would have been required to include in such current,
quarterly and annual reports, information, documents or other reports on Forms
8-K, 10-Q and 10-K if we were subject to the requirements of Section 13 or 15(d)
of the Exchange Act; provided that we will not be required to register under the
Exchange Act by virtue of this provision, if not otherwise required to do so.
We have agreed to furnish to the holders of the Senior Notes and
prospective purchasers of the Senior Notes designated by holders of the Senior
Notes, upon their request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act until such time as the Senior Notes are
no longer "restricted securities" within the meaning of Rule 144 under the
Securities Act (assuming such Senior Notes have not been owned by an affiliate
of ours).
No Personal Liability of Directors, Officers, Employees and Members
No past, present or future director, officer, employee, or member, as
such, shall have any liability for any of our obligations under the Senior Notes
and the indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder by accepting an exchange note
waives and releases all such liability as part of the consideration for issuance
of the exchange notes. This waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the SEC that such waiver
is against public policy. (Section 113 of the indenture.)
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Satisfaction and Discharge
According to the terms of the indenture, we may discharge certain
obligations to holders of any series of debt securities, including any series of
the exchange notes, that have not already been delivered to the trustee for
cancellation and that either have become due and payable or are by their terms
due and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the trustee, in trust, funds in an amount sufficient
to pay the entire indebtedness on such debt securities for principal (and
premium, if any) and interest, if any, and any additional amounts with respect
thereto, to the date of such deposit (if the debt securities have become due and
payable) or to the maturity date or redemption date, as the case may be.
(Section 401 of the indenture.)
Legal Defeasance and Covenant Defeasance
The indenture provides that, if the provisions of Article Fourteen of the
indenture are made applicable to the debt securities of or within any series,
including any series of the exchange notes, and any related coupons pursuant to
Section 301 thereunder, we may elect either (a) to defease and be discharged
from any and all obligations with respect to such debt securities and any
related coupons (except for the obligation to pay additional amounts, if any,
upon the occurrence of certain events of tax, assessment or governmental charge
with respect to payments on such debt securities and the obligations to register
the transfer or exchange of such debt securities and any related coupons, to
replace temporary or mutilated, destroyed, lost or stolen debt securities and
any related coupons, to maintain an office or agency in respect of such debt
securities and any related coupons, and to hold moneys for payment in trust)
(defeasance) (Section 1402 of the indenture) or (b) to be released from our
obligations under any covenant specified pursuant to Section 301 with respect to
such debt securities and any related coupons, and any omission to comply with
such obligations shall not constitute a default or an event of default with
respect to such debt securities and any related coupons (covenant defeasance)
(Section 1403 of the indenture), in either case upon the irrevocable deposit by
us with the trustee (or other qualifying trustee), in trust, of (i) an amount in
United States Dollars, (ii) Government Obligations (as defined below) applicable
to such debt securities and coupons that through the payment of principal and
interest in accordance with their terms will provide money in an amount, or
(iii) a combination thereof in an amount, sufficient to pay the principal of
(and premium, if any) and interest, if any, on such debt securities and any
related coupons, and any mandatory sinking fund or analogous payments thereon,
on the scheduled due dates therefor.
Such a trust may only be established if, among other things, we have
delivered to the trustee an opinion of counsel to the effect that the holders of
such debt securities and any related coupons will not recognize income, gain or
loss for United States federal income tax purposes as a result of such
defeasance or covenant defeasance and will be subject to United States federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance or covenant defeasance had not
occurred. The opinion of counsel in the case of defeasance under clause (a)
above must refer to and be based upon a ruling of the Internal Revenue Service
or a change in applicable United States federal income tax law occurring after
the date of the Indenture. (Section 1404 of the indenture.)
"Government Obligations" means securities which are (i) direct obligations
of the United States or (ii) obligations of a person controlled or supervised by
and acting as an agency or instrumentality of the United States, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States, which are not callable or redeemable at the option of the issuer
of that obligation. Government Obligations also include a depository receipt
issued by a bank or trust company as custodian with respect to any such
Government Obligation or a specific payment of interest on or principal of any
such Government Obligation held by such custodian for the account of the holder
of a depository receipt; provided that, except as required by law, such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from the amount received by the custodian in
respect of the Government Obligation or the specific payment of interest on or
principal of the Government Obligation evidenced by such depository receipt.
(Section 101 of the indenture.)
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In the event we effect covenant defeasance with respect to any debt
securities and any related coupons and such debt securities and coupons are
declared due and payable because of the occurrence of any event of default
(other than the events of default described in clause (iii) under "Events of
Default and Remedies" which provisions would no longer be applicable to such
debt securities and coupons), the amount of Government Obligations and funds on
deposit with the trustee will be sufficient to pay amounts due on such debt
securities and coupons at the time of their stated maturity but may not be
sufficient to pay amounts due on such debt securities and coupons at the time of
the acceleration resulting from such event of default. In such case, we would
remain liable to make payment of such amount due at the time of acceleration.
(Section 501 of the indenture.)
If the trustee or any paying agent is unable to apply any money in
accordance with the indenture by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then our obligations under the indenture and such debt securities
and any related coupons shall be revived and reinstated as though no deposit had
occurred pursuant to the indenture, until such time as such trustee or paying
agent is permitted to apply all such money in accordance with the Indenture;
provided, however, that if we make any payment of principal of (or premium, if
any) or interest, if any, on any such debt security or any related coupon
following the reinstatement of its obligations, we shall be subrogated to the
rights of the holders of such debt securities and any related coupons to receive
such payment from the money held by such trustee or paying agent.
Amendment, Supplement and Waiver
We and the trustee may modify and amend the indenture with the consent of
the holders of a majority in principal amount of all outstanding debt securities
that are affected by the modification or amendment; provided that no
modification or amendment may, without the consent of the holder of each
outstanding debt security affected thereby, among other things:
o change the stated maturity date of the principal of (or premium, if any,
on) or any installment of principal of or interest on any debt security;
o reduce the principal amount of, or the rate or amount of interest in
respect of, or any premium payable upon the redemption of, any debt
security;
o change the rate, or manner of calculating the rate, of interest;
o change any of our obligations to pay additional amounts in respect of any
debt security;
o reduce the portion of the principal of a debt security issued with the
original issue discount or an indexed debt security that would be due and
payable upon a declaration of acceleration of the maturity of the debt
security or provable in bankruptcy;
o adversely affect any right of repayment at the option of the holder of any
such debt security;
o change the Place of Payment of principal of, or any premium or interest
on, the debt security;
o impair the right to institute suit for the enforcement of any payment on
or after the stated maturity date of the debt security or on or after any
redemption date or repayment date for the debt security;
o adversely affect any right to convert or exchange any debt security;
o reduce the percentage in principal amount of such outstanding debt
securities, the consent of whose holders is required to amend or waive
compliance with certain provisions of the indenture or to waive certain
defaults under the indenture;
o reduce the requirements for voting or quorum described below; or
o modify any of the foregoing requirements or any of the provisions relating
to waiving past defaults or compliance with certain restrictive
provisions, except to increase the percentage of holders required to
effect waiver or to provide that certain other provisions of the indenture
cannot be modified or waived without the consent of the holder of each
debt security affected by the modification or waiver. (Section 902 of the
indenture.)
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The trustee and we may modify and amend the indenture without the consent
of any holder, for any of the following purposes:
o to evidence the succession of another person to us and the assumption by
any successor of our covenants under the indenture and the debt
securities;
o to add to our covenants for the benefit of the holders of all or any
series of debt securities issued under the indenture, including any series
of the exchange notes, and any related coupons or to surrender any right
or power conferred upon us by the indenture;
o to add events of default for the benefit of the holders of all or any
series of debt securities, including any series of the exchange notes,
issued under the indenture;
o to add to or change any provisions of the indenture to facilitate the
issuance of, or to liberalize the terms of, debt securities issued in
bearer form or to permit or facilitate the issuance of debt securities in
uncertificated form, provided that any such actions do not adversely
affect the interests of the holders of the debt securities issued under
the indenture or any related coupons in any material respect;
o to change or eliminate any provisions of the indenture, provided that any
change or elimination of this nature will become effective only when there
are no debt securities outstanding of any series created prior to the
change or elimination of the provisions which are entitled to the benefit
of the provisions;
o to secure the debt securities, including any series of the exchange notes,
under the indenture pursuant to the "Limitations on Liens" covenant of the
indenture, or otherwise;
o to establish the form or terms of debt securities of any series and any
related coupons;
o to evidence and provide for the acceptance of appointment by a successor
trustee or facilitate the administration of the trusts under the indenture
by more than one trustee;
o to cure an ambiguity, defect or inconsistency in the indenture, provided
such action does not adversely affect the interests of holders of debt
securities of a series, including any series of the exchange notes, issued
under the indenture or any related coupons in any material way; or
o to supplement any of the provisions of the indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series
of debt securities issued under the indenture, including any series of the
exchange notes, provided that the action does not adversely affect the
interests of the holders of the debt securities of that series, including
the applicable series of the exchange notes, and any related coupons in
any material way. (Section 901 of the indenture.)
In determining whether the holders of the requisite principal amount of
outstanding debt securities have given any request, demand, authorization,
direction, notice, consent or waiver under the Indenture or whether a
quorum is present at a meeting of holders of debt securities thereunder:
o the principal amount of a debt security issued with original issue
discount that will be deemed to be outstanding will be the amount of the
principal thereof that would be due and payable as of the date of such
determination upon acceleration of the maturity of the debt security;
o the principal amount of an indexed debt security that may be counted in
making the determination of calculation and that will be deemed
outstanding will be equal to the principal face amount of the indexed debt
security at original issuance, unless otherwise provided pursuant to
Section 301 of the indenture; and
o Debt securities owned by us or any other obligor upon the debt securities
or any affiliate of ours or of such other obligor shall be disregarded.
(Section 101 of the indenture.)
The indenture contains provisions for convening meetings of the holders of
debt securities of a series if debt securities of that series are issuable in
bearer form. (Section 1501 of the indenture.) A meeting may be called at any
time by the trustee, and also, upon request, by us or the holders of at
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least 10% in principal amount of the outstanding debt securities of that series,
in any such case upon notice given as provided in the indenture. (Section 1502
of the indenture.) Except for any consent that must be given by the holder of
each debt security, as described above, any resolution presented at a meeting
(or an adjourned meeting duly reconvened) at which a quorum is present may be
adopted by the affirmative vote of the holders of a majority in principal amount
of outstanding debt securities of that series; provided, however, that any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage which is less than a majority in principal
amount of outstanding debt securities of a series may be adopted at a meeting
(or an adjourned meeting duly reconvened) at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the outstanding debt securities of that series. Any resolution passed or
decision taken at any meeting of the holders of debt securities of a series duly
held in accordance with the Indenture will be binding on all holders of debt
securities of that series and any related coupons. The quorum at any meeting
called to adopt a resolution will be persons holding or representing a majority
in principal amount of the outstanding debt securities of a series; provided,
however, that, if any action is to be taken at a meeting with respect to a
consent or waiver which may be given by the holders of not less than a specified
percentage in principal amount of the outstanding debt securities of a series,
the persons holding or representing the specified percentage in principal amount
of the outstanding debt securities of that series will constitute a quorum.
(Section 1504 of the indenture.)
Notwithstanding the foregoing provisions, if any action is to be taken at
a meeting of holders of debt securities of a series, including any series of the
exchange notes, with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that the Indenture expressly provides
may be made, given or taken by the holders of a specified percentage in
principal amount of all outstanding debt securities affected by the action or of
the holders of that series and one or more additional series:
o there shall be no minimum quorum requirement for that meeting and
o the principal amount of the outstanding debt securities of the series that
vote in favor of request, demand, authorization, direction, notice,
consent, waiver or other action will be taken into account in determining
whether such request, demand, authorization, direction, notice, consent,
waiver or other action has been made, given or taken under the indenture.
(Section 1504 of the indenture.)
Concerning the Trustee
The Bank of New York is the trustee under the indenture.
The indenture provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set forth
in the indenture. During the existence of an Event of Default, the trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request of any Holder of Senior Notes, unless such
Holder will have offered to the trustee security and indemnity satisfactory to
it against any loss, liability or expense. The trustee may resign at any time
with respect to a series of securities by written notice in accordance with the
indenture. In addition, the trustee may be removed upon the happening of certain
events specified in the indenture. Following any resignation or removal of the
trustee, our Board of Directors will promptly appoint a successor trustee with
respect to the securities affected in accordance with the indenture.
Book-Entry, Delivery and Form
The certificates representing the exchange notes will be in fully
registered, global form without interest coupons.
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
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through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the exchange notes represented by such Global
Notes for all purposes under the indenture. No beneficial owner of an interest
in the Global Notes will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
indenture and, if applicable, Euroclear or Clearstream.
Payments of the principal of and interest on the Global Notes will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. None
of us, the trustee, or any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
We expect that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Notes will credit participants,
accounts with payments in amounts proportionate to their respective beneficial
ownership interests in the principal amount of such Global Notes, as shown on
the records of DTC or its nominee. We also expect that payments by participants
to owners of beneficial interests in such Global Notes held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers.
Such payments will be the responsibility of such participants.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of Senior Notes. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
Neither the trustee nor we will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed within 90 days, we
will issue definitive, certificated Senior Notes in exchange for the Global
Notes.
Euroclear has advised us as follows: Euroclear was created in 1968 to hold
securities for its participants and to clear and settle transactions between its
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash. Euroclear
provides various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries. Euroclear is operated by
Euroclear Bank S.A./N.V. (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear participants. Euroclear participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to others that clear through or maintain a custodial relationship
with a Euroclear participant, either directly or indirectly.
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The Euroclear Operator was granted a banking license by the Belgian
Banking and Finance Commission in 2000, authorizing it to carry out banking
activities on a global basis. It took over operation of Euroclear from the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York on
December 31, 2000.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear participants and has no record of or relationship with persons holding
through Euroclear participants.
Distributions with respect to exchange notes held beneficially through
Euroclear will be credited to the cash accounts of Euroclear participants in
accordance with the Terms and Conditions, to the extent received by Euroclear.
Clearstream has advised us as follows: Clearstream is incorporated under
the laws of The Grand Duchy of Luxembourg as a professional depositary.
Clearstream holds securities for its participants and facilitates the clearance
and settlement of securities transactions between its participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Clearstream provides
to its participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
markets in several countries. As a professional depositary, Clearstream is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
participants are financial institutions around the world, including securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Clearstream is also available to others
that clear through or maintain a custodial relationship with a Clearstream
participant either directly or indirectly.
Distributions with respect to exchange notes held beneficially through
Clearstream will be credited to cash accounts of Clearstream participants in
accordance with its rules and procedures, to the extent received by Clearstream.
FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of the material United States federal income
tax consequences resulting from the exchange offer and from the ownership of the
exchange notes. It deals only with exchange notes held as capital assets and not
with special classes of noteholders, such as dealers in securities or
currencies, life insurance companies, tax exempt entities, and persons that hold
an exchange note in connection with an arrangement that completely or partially
hedges the exchange note. The discussion is based upon the Internal Revenue Code
of 1986, as amended, and regulations, rulings and judicial decisions thereunder
as of the date hereof. Such authorities may be repealed, revoked or modified so
as to produce federal income tax consequences different from those discussed
below. The information contained in this section has been passed upon for us by
James T. Foran, Esquire, Associate General Counsel of PSEG. We have received an
opinion from Mr. Foran regarding the material federal income tax consequences of
the exchange offer.
Noteholders tendering their original notes or prospective purchasers of
exchange notes should consult their own tax advisors concerning the United
States federal income tax and any state or local income or franchise tax
consequences in their particular situations and any consequences under the laws
of any other taxing jurisdiction.
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Consequences of Tendering Original Notes
The exchange of original notes for the exchange notes pursuant to the
exchange offer will not be treated as an "exchange" for United States federal
income tax purposes because the exchange notes will not be considered to differ
materially in kind or extent from the original notes. Rather, the exchange notes
received by a noteholder will be treated as a continuation of the original notes
in the hands of such noteholder. As a result, there will be no United States
federal income tax consequences to noteholders exchanging the original notes for
the exchange notes pursuant to the exchange offer. The noteholder must continue
to include stated interest in income as if the exchange had not occurred. The
adjusted basis and holding period of the exchange notes for any noteholder will
be the same as the adjusted basis and holding period of the original notes.
Similarly, there would be no United States federal income tax consequences to a
holder of original notes that does not participate in the exchange offer.
United States Holders
For purposes of this discussion, a "United States Holder" means:
(1) a citizen or resident of the United States;
(2) a partnership, corporation or other entity treated as a corporation or
partnership for United States federal income tax purposes, created or organized
in or under the law of the United States or of any State of the United States
including the District of Columbia;
(3) an estate the income of which is subject to United States federal
income tax regardless of its source;
(4) a trust, if either:
(a) a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more United
States persons have the authority to control all substantial decisions of
the trust; or
(b) the trust was in existence on August 20, 1996 and elected to be
treated as a United States person at all times thereafter;
(5) any other person that is subject to United States federal income tax
on interest income derived from a note as a result of such income being
effectively connected with the conduct by such person of a trade or business
within the United States; or
(6) certain former citizens of the United States whose income and gain on
the exchange notes will be subject to U.S. income tax.
Payments of Interest
Interest on an exchange note will be taxable to a United States Holder as
ordinary interest income at the time it is received or accrued, depending on the
noteholder's method of accounting for tax purposes.
Disposition of an Exchange Note
Upon the sale, exchange or retirement of an exchange note, a United States
Holder generally will recognize taxable gain or loss equal to the difference
between the amount realized on the sale, exchange or retirement (other than
amounts representing accrued and unpaid interest, which will be treated as
ordinary income) and such holder's adjusted basis in the exchange note. Such
gain or loss generally will be long-term capital gain or loss if the holder's
holding period in the exchange note was more than one year at the time of
disposition.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply with respect to
non-corporate United States Holders to payments of principal and interest on an
exchange note and the proceeds of the sale of an exchange note before maturity.
A 31% "backup withholding" tax will apply to such payments if the
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United States Holder fails to provide an accurate taxpayer identification number
or to report all interest and dividends required to be shown on its federal
income tax returns.
Payments to United States Aliens
As used herein, a "United States Alien" is a person or entity that, for
United States federal income tax purposes, is not a United States Holder (as
defined above).
Under current United States federal income and estate tax law:
(1) payments of principal and interest on an exchange note by us or any
paying agent to a noteholder that is a United States Alien will not be subject
to withholding of United States federal income tax, provided that the
noteholder:
(a) does not actually or constructively own 10% or more of the
combined voting power of our stock;
(b) is not a controlled foreign corporation related to us through
stock ownership;
(c) is not a bank receiving interest described in Section
881(c)(3)(A) of the Internal Revenue Code; and
(d) provides a statement, under penalties of perjury (such as Form
W-8BEN), to us that the holder is a United States Alien and provides its
name and address;
(2) a noteholder that is a United States Alien will not be subject to
United States federal income tax on gain realized on the sale, exchange or
redemption of such note, unless:
(a) the gain is effectively connected with the conduct of a trade or
business within the United States by the United States Alien; or
(b) in the case of a United States Alien who is a nonresident alien
individual and holds the exchange note as a capital asset, such holder is
present in the United States for 183 or more days in the taxable year and
certain other requirements are met; and
(3) an exchange note will not be subject to United States federal estate
tax as a result of the death of a noteholder who is not a citizen or resident of
the United States at the time of death, provided that: (a) such noteholder did
not at the time of death actually or constructively own 10% or more of the
combined voting power of all classes of our stock; and,
(b) at the time of such noteholder's death, payments of interest on
such exchange note would not have been effectively connected with the
conduct by such noteholder of a trade or business in the United States.
United States information reporting requirements and backup withholding
tax will not apply to payments on an exchange note made outside the United
States by us or any paying agent (acting in its capacity as such) to a
noteholder that is a United States Alien provided that a statement described
in(1)(c) above has been received and neither we nor our paying agent has actual
knowledge that the payee is not a United States Alien.
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of an exchange note effected
outside the United States by a foreign office of a "broker" (as defined in
applicable Treasury regulations), provided that such broker:
(1) is a United States Alien;
(2) derives less than 50% of its gross income for certain periods from the
conduct of a trade or business in the United States; and
(3) is not a controlled foreign corporation as to the United States (a
person described in (1), (2) and (3) above being hereinafter referred to as a
"foreign controlled person"). Payment of the proceeds of the sale of an exchange
note effected outside the United States by a foreign office of any broker that
is not a foreign controlled person will not be subject to backup withholding
tax, but will be subject to
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information reporting requirements unless such broker has documentary evidence
in its records that the beneficial owner is a United States Alien and certain
other conditions are met, or the beneficial owner otherwise establishes an
exemption.
PLAN OF DISTRIBUTION
We are making the exchange offer in reliance on the position of the staff
of the Division of Corporation Finance of the SEC as defined in certain
interpretive letters issued to third parties in other transactions.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for original notes where
such original notes were acquired as a result of market-making activities or
other trading activities. We have agreed that, for a period not to exceed 90
days after the exchange offer has been completed, we will make this prospectus,
as amended or supplemented, available to any broker-dealer that reasonably
requests such document for use in connection with any such resale. Broker
dealers who acquired original notes directly from us may not rely on the staff's
interpretations and must comply with the registration and prospectus delivery
requirements of the Securities Act, including being named as a selling security
holder, in order to resell the original notes or the exchange notes.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the exchange offer has been completed, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such document
in the letter of transmittal. We have agreed to pay certain expenses incident to
the exchange offer, other than commission or concessions of any brokers or
dealers, and will indemnify the holders of the exchange notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
By acceptance of this exchange offer, each broker-dealer that receives
exchange notes for its own account pursuant to the exchange offer agrees that,
upon receipt of notice from us of the happening of any event which makes any
statement in the prospectus untrue in any material respect or requires the
making of any changes in the prospectus in order to make the statements therein
not misleading (which notice we agree to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of the prospectus until we
have amended or supplemented the prospectus to correct such misstatement or
omission and have furnished copies of the amended or supplemental prospectus to
such broker-dealer.
LEGAL OPINIONS
The validity of the exchange notes will be passed upon for us by James T.
Foran, Esquire, Associate General Counsel of PSEG. The information contained in
"Federal Income Tax Considerations" has been passed upon for us by Mr. Foran.
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EXPERTS
The financial statements of PSEG Power LLC as of December 31, 2000 and
1999, and for each of the three years in the period ended December 31, 2000,
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
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Index to Financial Statements
Page
----
Independent Auditors' Report ........................................... F-2
Consolidated Statements of Income ...................................... F-3
Consolidated Balance Sheets ............................................ F-4
Consolidated Statements of Cash Flows .................................. F-6
Consolidated Statements of Capitalization and Member's Equity .......... F-7
Notes to Consolidated Financial Statements ............................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Member and Board of Directors of
PSEG Power LLC:
We have audited the accompanying consolidated balance sheets of PSEG Power
LLC (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of income, capitalization and member's equity and cash
flows for each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Parsippany, New Jersey
March 21, 2001
F-2
PSEG POWER LLC
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars)
For the Six Months For the Years Ended
Ended June 30, December 31,
------------------------ --------------------------------
2001 2000 2000 1999 1998
------ ------ ------ ------- ------
(unaudited)
OPERATING REVENUES
Generation .................................. $1,159 $1,070 $2,203 $ 2,652 $2,551
Trading ..................................... 1,161 1,303 2,724 1,842 1,877
------ ------ ------ ------- ------
Total Operating Revenues ................. 2,320 2,373 4,927 4,494 4,428
OPERATING EXPENSES
Energy Costs ................................ 385 341 719 831 945
Trading Costs ............................... 1,083 1,260 2,647 1,800 1,854
Operation and Maintenance ................... 349 325 686 689 584
Depreciation and Amortization ............... 55 68 136 224 381
Taxes Other Than Income Taxes ............... 11 9 27 19 30
------ ------ ------ ------- ------
Total Operating Expenses ................. 1,883 2,003 4,215 3,563 3,794
------ ------ ------ ------- ------
OPERATING INCOME .............................. 437 370 712 931 634
Other Income and Deductions ................... (2) 7 7 -- --
Interest Expense .............................. 89 43 198 112 216
Preferred Securities Dividend
Requirements of Subsidiaries -- -- -- 12 25
------ ------ ------ ------- ------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ...................... 346 334 521 807 393
INCOME TAXES .................................. 140 136 208 291 156
------ ------ ------ ------- ------
INCOME BEFORE EXTRAORDINARY
ITEM ........................................ 206 198 313 516 237
Extraordinary Item (Net of Tax
of $2,002) ................................. -- -- -- (3,204) --
------ ------ ------ ------- ------
NET INCOME (LOSS) ............................. 206 198 313 (2,688) 237
Preferred Stock Dividend
Requirements ............................... -- -- -- 3 5
------ ------ ------ ------- ------
EARNINGS (LOSS) AVAILABLE TO
PUBLIC SERVICE ENTERPRISE
GROUP INCORPORATED .......................... $ 206 $ 198 $ 313 $(2,691) $ 232
====== ====== ====== ======= ======
See Notes to Consolidated Financial Statements.
F-3
PSEG POWER LLC
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
December 31,
June 30, ------------------------
2001 2000 1999
------- ------- -------
(unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents ............................... $ 9 $ 20 $ 77
Accounts Receivable ..................................... 255 272 254
Accounts Receivable-Affiliated Companies ................ 186 159 179
Materials and Supplies, net of valuation
reserves (2001, $9, 2000 and 1999, $11) ................ 108 107 88
Fuel .................................................... 57 58 47
Prepayments ............................................. 15 10 18
Energy Trading Contracts ................................ 336 799 --
Other ................................................... 10 2 3
------ ------ ------
Total Current Assets ................................. 976 1,427 666
Property, Plant and Equipment ............................. 3,500 2,705 2,289
Less: Accumulated depreciation and amortization ......... (1,193) (1,070) (1,015)
------ ------ ------
Net Property, Plant & Equipment ...................... 2,307 1,635 1,274
------ ------ ------
Noncurrent Assets:
Nuclear Decommissioning Fund ............................ 723 716 631
Deferred Income Taxes ................................... 664 676 608
Other ................................................... 160 76 122
------ ------ ------
Total Noncurrent Assets ............................. 1,547 1,468 1,361
------ ------ ------
TOTAL ASSETS ............................................. $4,830 $4,530 $3,301
------ ------ ------
See Notes to Consolidated Financial Statements.
F-4
PSEG POWER LLC
CONSOLIDATED BALANCE SHEETS
LIABILITIES, CAPITALIZATION AND MEMBER'S EQUITY
(Millions of Dollars)
December 31,
June 30, -----------------------
2001 2000 1999
------ ------ ------
(unaudited)
LIABILITIES, CAPITALIZATION AND
MEMBER'S EQUITY
Current Liabilities:
Commercial Paper and Loans ................................. $ -- $ -- $ 685
Accounts Payable ........................................... 347 336 295
Accounts Payable - Affiliated Companies .................... 595 317 --
Energy Trading Contracts ................................... 307 730 --
Other ...................................................... 139 87 58
------ ------ ------
Total Current Liabilities ............................... 1,388 1,470 1,038
------ ------ ------
Noncurrent Liabilities:
Nuclear Decommissioning .................................... 723 716 631
Cost of Removal Liability .................................. 156 157 131
Environmental .............................................. 53 53 53
Other ...................................................... 68 80 176
------ ------ ------
Total Noncurrent Liabilities ............................ 1,000 1,006 991
------ ------ ------
Commitments and Contingent Liabilities ....................... -- -- --
Note Payable - Affiliated Company ............................ -- 2,786 --
Notes Payable ................................................ 1,791 -- --
Capitalization ............................................... -- -- 1,272
Member's Equity:
Contributed Capital ........................................ 1,350 150 --
Basis Adjustment ........................................... (986) (986) --
Retained Earnings .......................................... 310 104 --
Accumulated Other Comprehensive Loss ....................... (23) -- --
------ ------ ------
Total Member's Equity ................................... 651 (732) --
------ ------ ------
Total Capitalization and Member's Equity ................ 2,442 (732) 1,272
------ ------ ------
TOTAL LIABILITIES, CAPITALIZATION AND
MEMBER'S EQUITY ............................................ $4,830 $4,530 $3,301
====== ====== ======
See Notes to Consolidated Financial Statements.
F-5
PSEG POWER LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
For the Six Months For the Years Ended
Ended June 30, December 31,
-------------------- ---------------------------------
2001 2000 2000 1999 1998
-------- ------- -------- -------- --------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income/(Loss) ............................ $ 206 $ 198 $ 313 $(2,688) $ 237
------- ------- ------- ------- -------
Adjustments to reconcile net income/(loss)
to net cash flows from operating activities:
Extraordinary Item - net of tax .............. -- -- -- 3,204 --
Depreciation and Amortization ................ 55 68 136 224 381
Amortization of Nuclear Fuel ................. 27 45 130 92 94
Recovery of Electric Energy Costs ............ -- -- -- 20 130
Provision for Deferred Income Taxes
and ITC - net .............................. 12 (18) (69) (70) (35)
Demand Side Management ....................... -- -- -- (64) (29)
Net changes in certain current assets
and liabilities:
Materials and Supplies and Fuel .......... -- (25) (30) 51 (19)
Accounts Receivable ...................... (10) (144) 161 10 (41)
Accounts Payable ......................... 289 220 195 44 (29)
Other Current Assets and Liabilities ..... 79 (98) (89) (22) (28)
Other ........................................ (87) (26) (46) (31) 30
------- ------- ------- ------- -------
Net Cash Provided By Operating Activities ...... 571 220 701 770 691
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment ... (741) (177) (405) (92) (265)
Acquisition of Generation Businesses ......... -- -- (74) -- --
Contribution to Decommissioning Funds
and Other Special Funds ..................... (15) (15) (29) (115) (63)
Other ........................................ (31) (5) (34) (24) (5)
------- ------- ------- ------- -------
Net Cash Used In Investing Activities .......... (787) (197) (542) (231) (333)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt ................ -- (685) -- -- --
Net Change in Commercial Paper and Loans ..... -- -- (685) 262 (175)
Repayment of Note Payable due to
Affiliated Company ......................... (2,786) -- -- -- --
Issuance of Long-Term Debt ................... 1,791 -- -- -- --
Net Change in Capitalization Activity ........ -- 480 319 (746) (177)
Proceeds from Contributed Capital ............ 1,200 120 150 -- --
------- ------- ------- ------- -------
Net Cash Provided By (Used In)
Financing Activities .................... 205 (85) (216) (484) (352)
------- ------- ------- ------- -------
Net Change In Cash And Cash Equivalents ........ (11) (62) (57) 55 6
Cash And Cash Equivalents At Beginning
Of Period ..................................... 20 77 77 22 16
------- ------- ------- ------- -------
Cash And Cash Equivalents At End Of Period ..... $ 9 $ 15 $ 20 $ 77 $ 22
======= ======= ======= ======= =======
Income Taxes Paid .............................. $ 89 $ 190 $ 242 $ 306 $ 211
Interest Paid .................................. $ 113 $ 42 $ 159 $ 104 $ 212
See Notes to Consolidated Financial Statements.
F-6
PSEG POWER LLC
CONSOLIDATED STATEMENTS OF CAPITALIZATION AND MEMBER'S EQUITY
(Millions of Dollars)
Total
Accumulated Capitalization
Other Total and
Contributed Retained Comprehensive Basis Member's Member's
Capital Earnings Loss Adjustment Equity Capitalization Equity
------- -------- ---- ---------- ------ -------------- ------
Balance as of January 1, 1998 ... $ -- $ -- $ -- $ -- $ -- $ 5,124 $ 5,124
Net Income (1) ................ -- -- -- -- -- 237 237
Net Transfers to PSEG ......... -- -- -- -- -- (169) (169)
Cash Dividends Paid ........... -- -- -- -- -- (5) (5)
------ ---- ---- ----- ------- ------- -------
Balance as of December 31, 1998 . -- -- -- -- -- 5,187 5,187
------ ---- ---- ----- ------- ------- -------
Net Loss (1) .................. -- -- -- -- -- (2,688) (2,688)
Net Transfers to PSEG ......... -- -- -- -- -- (1,224) (1,224)
Cash Dividends Paid ........... -- -- -- -- -- (3) (3)
------ ---- ---- ----- ------- ------- -------
Balance as of December 31, 1999 . -- -- -- -- -- 1,272 1,272
------ ---- ---- ----- ------- ------- -------
Net Income (1) ................ -- 104 -- -- 104 209 313
Contributed Capital ........... 150 -- -- -- 150 -- 150
Net Transfers to PSEG ......... -- -- -- -- (1,481) (1,481)
Transfer of Generation Business -- -- -- (986) (986) -- (986)
------ ---- ---- ----- ------- ------- -------
Balance as of December 31, 2000 . $ 150 $104 -- $(986) $ (732) -- $ (732)
------ ---- ---- ----- ------- ------- -------
Net Income (1) ................ -- 206 -- -- 206 -- 206
Other Comprehensive Income
(Loss) ...................... -- -- (23) -- (23) -- (23)
Contributed Capital ........... 1,200 -- -- -- 1,200 -- 1,200
------ ---- ---- ----- ------- ------- -------
Balance as of June 30, 2001
(unaudited) .................... $1,350 $310 $(23) $(986) $ 651 $ -- $ 651
====== ==== ==== ===== ======= ======= =======
- ----------
(1) Net Income included in retained earnings reflects earnings from the
operations of PSEG Power LLC during 2000 and 2001. Net Income/Loss
included in Capitalization for 2000, 1999 and 1998 reflects the Net
Income/Loss allocated from Public Service Electric and Gas Company's
generation business.
See Notes to Consolidated Financial Statements.
F-7
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
PSEG Power LLC (Power) is a wholly-owned subsidiary of Public Service
Enterprise Group Incorporated (PSEG). Power has three principal direct
wholly-owned subsidiaries: PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil)
and PSEG Energy Resources & Trade LLC (ER&T). Power and its subsidiaries were
established to acquire, own and operate the electric generation-related business
of their affiliate, Public Service Electric and Gas Company (PSE&G), pursuant to
the Final Decision and Order (Final Order) issued by the New Jersey Board of
Public Utilities (BPU) under the New Jersey Electric Discount and Energy
Competition Act (Energy Competition Act) discussed below. Power is engaged in
generation, wholesale energy marketing and trading of energy. Power provides
energy and capacity to PSE&G under certain contracts and markets electricity,
natural gas, capacity and ancillary services throughout the Eastern United
States. Power also has a finance company subsidiary, PSEG Power Capital
Investment Co. (Power Capital), which provides certain financing for Power's
other subsidiaries.
Purchase of Generation-Related Business from PSE&G
In August 2000, pursuant to the Final Order, Power purchased PSE&G's
generation-related property, plant and equipment for $2.443 billion, as
specified in the Final Order, plus $343 million for other generation-related
assets and liabilities (the Transaction) in exchange for a $2.786 billion
promissory note with an interest rate of 14.23%, representing PSE&G's weighted
average cost of capital. Power repaid the promissory note on January 31, 2001,
with funds provided from PSEG in the form of equity and loans.
Because the assets were purchased from an affiliate, Power recorded the
assets at PSE&G's carrying value. The difference between the total purchase
price and the net book value of the generation-related assets and liabilities
was recorded as a Basis Adjustment reducing Power's equity.
Basis of Presentation
The consolidated financial statements of Power present the historical
financial position, results of operations and net cash flows of the
generation-related business of PSE&G prior to the Transaction in August 2000,
and are not necessarily indicative of the financial position, results of
operations or net cash flows that would have existed had the generation-related
business been an independent company during the periods presented. For periods
prior to the Transaction, any references to Power contained herein refer to
Power's business and the generation-related business of PSE&G prior to the
purchase of the generation-related business from PSE&G.
Certain information in these consolidated financial statements relating to
the results of operations and financial condition prior to the Transaction was
derived from the historical financial statements of PSE&G which have been
prepared in accordance with generally accepted accounting principles (GAAP).
Various allocation methodologies were employed to separate the results of
operations and financial condition of the generation-related portion of PSE&G's
business from PSE&G's historical financial statements prior to the Transaction.
Prior to the Transaction, revenues included the generation component of revenue
from PSE&G's operations and any generation-related revenues, such as ancillary
services and wholesale energy activity. Expenses, such as energy costs,
operations and maintenance and depreciation and amortization, and assets, such
as property, plant and equipment, materials and supplies and fuel, were
specifically identified by function and reported accordingly for Power's
operations. Various allocations were used to disaggregate other common expenses,
assets and liabilities between Power and PSE&G's regulated transmission and
distribution operations. Interest and preferred stock dividends were calculated
based upon an allocation methodology that charged Power with financing and
equity costs from PSE&G in proportion to its share of total net property, plant
F-8
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and equipment prior to the effects of deregulation discussed below. These
methodologies use the assumption that Power had operated as a separate,
regulated company prior to April 1, 1999. On the date of the Transaction,
certain of the assets and liabilities which were allocated in the historical
consolidated financial statements, such as other postretirement benefits (OPEB)
and working capital, remained with PSE&G.
Management believes that these allocation methodologies are reasonable.
Had Power actually existed as a separate company, its results could have
significantly differed from those presented herein. In addition, future results
of operations, financial position and net cash flows could materially differ
from the historical results presented.
The unaudited financial information included herein reflects all
adjustments which are, in the opinion of management, necessary to fairly state
the results for the interim periods presented.
Summary of Significant Accounting Policies
Accounting for the Effects of Regulation
Prior to April 1999, Power's financial statements were prepared in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) 71, "Accounting for the Effects of Certain Types of Regulation" (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. Under SFAS 71, a regulated entity must defer recognition of costs
(a regulatory asset) or recognize obligations (a regulatory liability) if it is
probable that, through the rate-making process, there will be a corresponding
increase or decrease in future revenues.
Effective April 1, 1999, Power discontinued the application of SFAS 71 and
recorded 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
extraordinary charge consisted primarily of the write-down of Power's nuclear
and fossil generating stations in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). A discounted cash flow analysis was performed 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 $3.1 billion (after-tax).
In addition to the impairment of Power's generating stations, the
extraordinary charge consisted of various accounting adjustments to reflect the
absence of cost of service regulation for electric generation in the future. The
adjustments related primarily 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.
Consolidation Policy
The consolidated statements include the accounts for Power and its
subsidiaries. Power and its subsidiaries consolidate those entities in which
they have a controlling interest.
Reclassifications
Certain reclassifications of prior period data have been made to conform
with the current presentation.
F-9
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property, Plant and Equipment
Prior to April 1999, additions to plant and replacement of units of
property were capitalized at original cost. The cost of maintenance, repair and
replacement of minor items of property was charged to the appropriate expense
accounts. Also prior to April 1999, the original cost less net salvage value of
units of depreciable property retired or otherwise disposed of was charged to
accumulated depreciation.
Beginning in April 1999, and in concert with the discontinuation of SFAS
71, Power changed its capitalization policy. Under its new capitalization
policy, Power only capitalizes costs to acquire new assets or costs which
increase either the capacity or the life of an asset or represent the
replacement of a retired asset. All other costs are expensed as incurred. Also,
under its revised policy, upon retirement of an asset, the portion of Power's
future retirements which have not been fully depreciated will impact earnings.
Depreciation and Amortization
Depreciation is computed under the straight-line method for each class of
depreciable property. Prior to April 1999, depreciation rates were reviewed
periodically and adjustments were made as approved by the BPU. Depreciation
rates stated in percentages of original cost of depreciable property in 1999
(prior to April 1, 1999) and 1998 were 3.52%. Prior to April 1999, Power had
certain regulatory assets embedded in property, plant and equipment as a result
of the use of a level of depreciation expense in the rate-making process that
differed from the amount that would have been recorded under GAAP for
non-regulated companies.
Beginning in April 1999, and in concert with the discontinuation of SFAS
71, Power calculates depreciation on generation-related assets based on the
assets' estimated useful lives determined by Power, rather than using
depreciation rates prescribed by the BPU in rate proceedings. The estimated
useful lives are from 3 to 20 years for general plant. The estimated useful
lives for buildings and generating stations are as follows:
Class of Property Estimated Useful Life (Years)
----------------- -----------------------------
Fossil Production 25-40 years
Nuclear Generation 30 years
Pumped Storage 40 years
Nuclear fuel burnup costs are charged to fuel expense on a
units-of-production basis over the estimated life of the fuel. Rates for the
recovery of fuel used at all nuclear units include a provision of one mill per
kilowatt-hour (kWh) of nuclear generation for spent fuel disposal costs.
Allowance for Funds Used During Construction (AFDC) and Interest
Capitalized During Construction (IDC)
AFDC represented the cost of debt and equity funds used to finance the
construction of new facilities. The amount of AFDC capitalized was reported in
the Consolidated Statements of Income as a reduction of interest charges. The
rates used for calculating AFDC in 1999 (prior to April 1, 1999) and 1998 were
5.29% and 6.06%, respectively. Effective April 1, 1999, Power no longer
calculates AFDC. Interest related to capital projects is now capitalized in
accordance with SFAS No. 34, "Capitalization of Interest Cost."
IDC represents the cost of debt used to finance the construction of
non-utility facilities. The amount of IDC capitalized is reported in the
Consolidated Statements of Income as a reduction of interest charges. The
weighted average rate used for calculating IDC in 2000 was 9.98%.
Revenues and Energy Costs
Revenues are recorded based on energy and capacity sold and services
rendered to customers during each accounting period. Prior to August 1, 1999,
revenue was calculated by unbundling the
F-10
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
generation component of revenue from PSE&G's bundled rate for the generation,
transmission and distribution of energy and adding any other generation-related
revenues, such as ancillary services and wholesale energy trading activity.
Also, prior to August 1, 1999, Power recorded unbilled revenues representing the
estimated amount customers would be billed for services rendered from the time
meters were last read to the end of the respective accounting period. Beginning
on August 1, 1999, electric rates charged to customers were unbundled and the
generation, transmission, distribution and other components of the total rate
became separate charges. Effective with that date, revenue represents the amount
recorded for the energy and capacity provided to meet the basic generation
service (BGS) requirements to PSE&G combined with other generation-related
revenues, such as ancillary services, wholesale energy trading activity and
amounts recorded for the market transition charge (MTC) (see Note 4. Regulatory
Issues and Accounting Impacts of Deregulation). Following the Transaction, Power
bills, and periodically settles with, PSE&G for BGS requirements and MTC.
Prior to August 1, 1999, fuel revenues and expenses and purchased power
costs flowed through the Electric Levelized Energy Adjustment Clause (LEAC)
mechanism and variances in fuel revenues and expenses and purchased power costs
were subject to deferral accounting and thus had no direct effect on earnings.
Any LEAC underrecoveries or overrecoveries, together with interest (in the case
of net overrecoveries), were deferred and included in the results of operations
in the period in which they were reflected in rates. Effective January 1, 1998,
the amount included for LEAC under/overrecovery represented the difference
between fuel-related revenues and fuel-related expenses which included
electricity purchases at the PJM Interconnection, LLC (PJM) market clearing
price. Effective April 1, 1998, PJM, as an independent system operator (ISO),
replaced the PJM uniform market clearing price with locational marginal pricing
(LMP) for determining the market clearing price to energy providers. Due to the
effects of congestion and constraints in the PJM market, LMP may be different
for the various delivery points in PJM. Due to the discontinuation of the LEAC
mechanism on August 1, 1999, earnings volatility increased since the unregulated
electric generation business ceased to follow deferral accounting. Power now
bears the full risks and rewards of managing the fixed price BGS contract and
the changes in nuclear and fossil generating fuel costs and purchased power
costs.
Materials and Supplies
The carrying value of the materials and supplies for Power and its
subsidiaries is valued at lower of cost or market.
Commodity-Related Contracts
Power engages in electricity and natural gas commodity forwards, futures,
swaps and option purchases and sales with counterparties to manage exposure to
electricity and natural gas price risk. Certain contracts, in conjunction with
owned electric generating capacity, are designed to manage price risk exposure
for electric customer commitments. Unrealized gains and losses on hedges of
existing assets or liabilities are included in the carrying amounts of those
assets and liabilities and are ultimately recognized in income when the related
asset or liability is realized or settled. Unrealized gains and losses related
to qualifying hedges of firm commitments or anticipated transactions are also
deferred and recognized in income when the hedged transaction occurs.
Power also enters into forwards, futures, swaps and options that are not
used to manage price risk exposure for commitments to customers. Effective
January 1, 1999, Power 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 current earnings.
Income Taxes
Power and its subsidiaries join in the filing of a consolidated federal
income tax return by PSEG. Power and its subsidiaries will record their tax
liabilities as though they were filing separate returns and will record tax
benefits to the extent that PSEG is able to receive those benefits. Deferred
income taxes
F-11
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
are provided for the temporary differences between book and taxable income,
resulting primarily from the use of accelerated depreciation for tax purposes
and the recognition of unrealized gains for book purposes. Power defers and
amortizes investment and energy tax credits over the lives of the related
properties.
Impairment of Long-Lived Assets
Power reviews for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Upon deregulation, Power evaluated the recoverability of its assets
and recorded an extraordinary, non-cash charge to earnings. For the impact of
the application of SFAS 121, see Note 4. Regulatory Issues and Accounting
Impacts of Deregulation.
Use of Estimates
The process of preparing financial statements in conformity with GAAP
requires the use of estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Also, such estimates relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts. In addition
to these estimates, see Basis of Presentation for a discussion of the estimates
used and methodologies employed to derive Power's historical financial
statements.
NOTE 2. CAPITALIZATION
Prior to the Transaction, PSE&G provided the necessary capital to finance
its generation-related business. PSE&G's capital structure consisted of 41.1%
Long-Term Debt, 49.8% Common Equity and 9.1% Preferred Securities as of December
31, 1999. Power had net capitalization of $1.272 billion as of December 31,
1999. This amount represents the amount of capital investments made by PSE&G for
its generation-related business and Power's allocated capitalization prior to
the formation of the separate entity. Interest and preferred stock dividends
were calculated based upon an allocation methodology that charged Power with
financing and equity costs from PSE&G in proportion to its share of total net
property, plant and equipment prior to the effects of deregulation. The $2.786
billion promissory note to PSE&G is classified as long term, due to the ability
and intent of Power to settle this note through equity infusions and the
anticipated issuance of long-term debt. On January 31, 2001, through equity
infusions of $1.2 billion from PSEG and demand loans of $1.586 billion from
PSEG, Power repaid the promissory note to PSE&G. Power's issuance of long-term
debt in 2001 was fully and unconditionally and jointly and severally guaranteed
by Fossil, Nuclear and ER&T. All other direct and indirect subsidiaries of Power
are minor and Power has no independent assets or operations.
PSE&G Fuel Corporation (Fuelco), a wholly-owned subsidiary of PSE&G, had a
$125 million commercial paper program to finance a 42.49% ownership share of the
Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom) nuclear fuel,
supported by a $125 million revolving credit facility with a group of banks.
PSE&G guaranteed repayment of Fuelco's respective obligations under this
program. Fuelco had commercial paper of $73 million outstanding as of December
31, 1999. As of December 31, 1999, there was no debt outstanding under the
revolving credit facility. As a result of the Transaction, Fuelco's commercial
paper program was discontinued and financing of Peach Bottom nuclear fuel is
being funded through Power. The revolving credit facility supporting this
program was terminated on September 11, 2000.
NOTE 3. ACCOUNTING MATTERS
In July 2000, EITF 99-19, "Reporting Revenue Gross as a Principal versus
Net as an Agent" (EITF 99-19), provided guidance on the issue of whether a
company should report revenue based on the gross amount billed to the customer
or the net amount retained. The guidance states that whether a company should
recognize revenue based on the gross amount billed or the net retained requires
significant judgement, which depends on the relevant facts and circumstances. In
the first quarter of
F-12
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2001, based on the analysis and interpretation of EITF 99-19, Power reported all
the revenues and cost of goods sold on a gross basis for the physical bilateral
energy sales and purchases and capacity sales and purchases. Power continues to
report swaps, futures, option premiums, firm transmission rights, transmission
congestion credits, and purchases and sales of emission allowances on a net
basis. The prior year financial statements have been reclassified accordingly.
On January 1, 2001, Power adopted Statement of Financial Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities", (SFAS
133) as amended. Power did not have a transition adjustment. Subsequent to
December 31, 2000, Power entered into certain derivative instruments, which have
been designated as cash flow hedges. As of June 30, 2001, the fair value of
Power's derivative liabilities was $34.2 million and has been recorded on the
consolidated balance sheet in Other Current Liabilities (unaudited). See Note 5.
Financial Instruments and Risk Management.
The Financial Accounting Standards Board's (FASB) Derivative
Implementation Group (DIG) has issued guidance, effective July 1, 2001,
regarding certain derivative contracts and the eligibility of those contracts
for the normal purchases and sales exceptions. Power is currently evaluating
this guidance and cannot predict the impact on its financial position or results
of operations, however, such impact could be material (unaudited).
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS
141). SFAS 141, was effective July 1, 2001 and requires that all business
combinations subsequent to that date be accounted for under the purchase method.
Power is currently evaluating this guidance and does not believe it will have a
substantial effect on its growth strategy. Power does not anticipate that there
will be a material impact on its financial position or results of operations
(unaudited).
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). Under SFAS 142, goodwill is considered a
nonamortizable asset and will be subject to an annual review for impairment and
an interim review when required by events or circumstances. SFAS 142 also
defines intangible assets, other than goodwill, that may arise in a purchase
combination. SFAS 142 is effective for all fiscal years beginning after December
15, 2001. Power is currently evaluating this guidance and does not believe it
will have a material impact on its financial position or results of operations
(unaudited).
Also in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under SFAS 143, the fair value of a
liability for an asset retirement obligation should be recorded in the period in
which it is incurred. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. Power is
currently evaluating this guidance and cannot predict the impact on its
financial position or results of operations, however, such impact could be
material (unaudited).
NOTE 4. REGULATORY ISSUES AND ACCOUNTING IMPACTS OF DEREGULATION
New Jersey Energy Master Plan Proceedings and Related Orders
In August 1999, following the enactment of the Energy Competition Act, the
BPU rendered a Final Order relating to PSE&G's rate unbundling, stranded costs
and restructuring proceedings providing, among other things, for the transfer to
Power of all of PSE&G's electric generation facilities, plant and equipment for
$2.443 billion and all other related property, including materials, supplies and
fuel at the net book value thereof, together with associated rights and
liabilities.
Also in the Final Order, the BPU concluded that PSE&G should recover up to
$2.94 billion (net of tax) of its generation-related stranded costs, through
securitization of $2.4 billion and an opportunity to recover up to $540 million
(net of tax) of its unsecuritized generation-related stranded costs on a net
present value basis. The $540 million is subject to recovery through a Market
Transition Charge (MTC)
F-13
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
which is to be collected over a four year period ending on July 31, 2003 and is
remitted to Power along with Basic Generation Service (BGS) revenues as part of
PSE&G's BGS contract with Power.
In October and November 1999, appeals were filed challenging the validity
of the Final Order. In April 2000, the Appellate Division of the New Jersey
Superior Court (Appellate Division) unanimously rejected the arguments made by
the New Jersey Business Users' Coalition, the New Jersey Ratepayer Advocate
(RPA) and Co-Steel Raritan (Co-Steel), an individual PSE&G customer (appellants)
and affirmed the Final Order. Thereafter, the appellants requested the New
Jersey Supreme Court to review certain aspects of the Appellate Division
decision. On December 6, 2000, the New Jersey Supreme Court affirmed the
Appellate Division's decision by a vote of 4 to 1. The New Jersey Supreme
Court's written opinion in the matter was issued on May 18, 2000.
On March 6, 2001, Co-Steel filed a Petition of Writ of Certiorari
(Petition) with the United States Supreme Court seeking limited review of the
New Jersey Supreme Court decision, the granting of which is entirely
discretionary with the Court. Briefs in opposition to the Petition have been
filed. The outcome of this action cannot be predicted.
As a result of this appellate review, PSE&G's securitization transaction
was delayed until the first quarter of 2001, causing a delay in the
implementation of the Securitization Transition Charge (STC) which would have
reduced the MTC. In order to properly recognize the recovery of the allowed
unsecuritized stranded costs over the transition period, Power recorded a charge
to net income of $88 million, pre-tax, or $52 million, after tax, in the third
quarter of 2000 for the cumulative amount of estimated collections in excess of
the allowed unsecuritized stranded costs from August 1, 1999 through September
30, 2000. As of June 30, 2001 (unaudited), the amount of estimated collections
in excess of the allowed unsecuritized stranded costs was $146 million.
NOTE 5. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Power's operations give rise to exposure to market risks from changes in
commodity prices, interest rates and securities prices. Power's policy is to use
derivative financial instruments for the purpose of managing market risk
consistent with its business plans and prudent business practices.
Commodity-Related Instruments
At December 31, 2000 and 1999, Power held or issued commodity and
financial instruments that reduce exposure to market fluctuations from factors
such as weather, environmental policies, changes in demand, changes in supply
and other events. These instruments, in conjunction with owned electric
generating capacity, are designed to cover estimated electric customer
commitments under BGS and other contracts. Power uses futures, forwards, swaps
and options to manage and hedge price risk related to these market exposures.
As of June 30, 2001 (unaudited), Power had entered into 18 million mWh of
electric physical forward contracts and 30 million MMBTU of gas futures and
swaps to hedge its forecasted BGS requirements and gas purchases requirements
for generation with a maximum term of approximately one year, which qualified
for hedge accounting treatment under SFAS 133. These commodity and financial
instruments are marked to market based on management's best estimates using
over-the-counter quotations, exchange prices, volatility factors and other
valuation methodology. For the quarter ended June 30, 2001 (unaudited), the
total negative mark to market valuation of $34 million was recorded as a
derivative liability offset by negative Other Comprehensive Income (OCI) and
deferred taxes of $21 million and $13 million, respectively.
As discussed in Note 1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies, Power implemented EITF 98-10 effective January
1, 1999. As a result, Power's energy trading contracts have been marked to
market and gains and losses from such contracts were included in earnings. Power
recorded $6 million of unrealized gains in the six months ended June 30,
F-14
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2001 and $55 million and $7 million of unrealized gains in the years ended
December 31, 2000 and 1999, respectively, related to these contracts.
The fair value of the financial instruments that are marked to market are
based on management's best estimates using over-the-counter quotations, exchange
prices, volatility factors and valuation methodology. The estimates presented
herein are not necessarily indicative of the amounts that Power could realize in
a current market exchange. The fair values as of June 30, 2001 and December 31,
2000 and 1999 and the average fair values for the periods then ended of Power's
significant financial instruments related to energy commodities are summarized
in the following table:
June 30, 2001 December 31, 2000
-------------------- ------------------
Average Average
Fair Fair Fair Fair
Value Value Value Value
----- --------- ----- --------
(Millions of Dollars) (Millions of Dollars)
(Unaudited)
Futures and Options -- NYMEX ........................... $(3) $ (1) $ 6 $(1)
Physical forwards ...................................... 25 15 13 14
Options -- OTC ......................................... (7) 66 184 68
Swaps .................................................. 31 (39) (138) 23
Emissions Allowances ................................... 28 23 6 9
Power routinely enters into exchange traded futures and options
transactions for electricity and natural gas as part of its wholesale trading
operations. Generally, exchange-traded futures contracts require deposit of
margin cash, the amount of which is subject to change based on market movement
and in accordance with exchange rules. The amount of the margin deposits at June
30, 2001 (unaudited) and December 31, 2000 and 1999 were approximately $4
million and $1 million, respectively.
Credit Risk
Credit risk relates to the risk of loss that Power would incur as a result
of non-performance by counterparties, pursuant to the terms of their contractual
obligations. Power has established credit policies that it believes
significantly minimize its exposure to credit risk. These policies include an
evaluation of potential counterparties' financial condition (including credit
rating), collateral requirements under certain circumstances and the use of
standardized agreements, which may allow for the netting of positive and
negative exposures associated with a single counterparty.
Two major California utilities, including Pacific Gas & Electric Company
(PG&E), have significantly underrecovered from customers costs paid for power.
As a consequence, these utilities have defaulted under a variety of contractual
obligations. On April 6, 2001, PG&E filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Affiliates of these California utilities have entered
into physical forward and swap contracts with ER&T for delivery in the PJM area.
Although these counterparties have met their obligations to date and are still
investment grade entities, ER&T has not entered into any additional contracts
with either counterparty since December 2000. ER&T's exposure to these entities
under these contracts is not material and management does not believe that any
reserve is presently necessary.
Interest Rate Swaps
In February 2001, Power entered into various forward-interest rate swaps,
with an aggregate notional amount of $400 million, to hedge the interest rate
risk related to the anticipated issuance of debt. On April 11, 2001, Power
issued $1.8 billion in fixed-rate Senior Notes and closed out the forward
starting interest rate swaps. The aggregate loss, net of tax, of $3.2 million
(unaudited) was classified as Accumulated Other Comprehensive Loss and is being
amortized and charged to interest expense over the life of the debt.
F-15
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Current Assets and Current Liabilities
The fair value of current assets and current liabilities approximate their
carrying amounts.
NOTE 6. CASH AND CASH EQUIVALENTS
The December 31, 2000 and 1999 balances consist primarily of working funds
and highly liquid marketable securities (commercial paper and money market
funds) with an original maturity of three months or less.
NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES
Nuclear Insurance Coverages and Assessments
At December 31, 2000, Power's insurance coverages and maximum
retrospective assessments for its nuclear operations are as follows:
Power Maximum
Type and Source of Coverages Total Site Coverage Assessments
-------------------------- ----------------- --------------
(Millions of Dollars)
Public and Nuclear Worker Liability (Primary Layer):
American Nuclear Insurers .......................................... $ 200.0(A) $ 9.1
Nuclear Liability (Excess Layer):
Price-Anderson Act ................................................. 9,338.1(B) 253.3
-------- ------
Nuclear Liability Total .......................................... $9,538.1(C) $262.4
======== ======
Property Damage (Primary Layer):
Nuclear Electric Insurance Limited (NEIL) Primary
(Salem/Hope Creek/Peach Bottom) .................................... $ 500.0 $ 7.4
Property Damage (Excess Layers):
NEIL II (Salem/Hope Creek/Peach Bottom) ............................ 1,250.0 5.5
NEIL Blanket Excess (Salem/Hope Creek/Peach Bottom) ................ 1,000.0(D) 0.9
-------- ------
Property Damage Total (Per Site) ................................... $2,750.0 $ 13.8
======== ======
Accidental Outage:
NEIL I (Salem and Peach Bottom) .................................... $ 210.0(E) $ 4.3
NEIL I (Hope Creek) ................................................ 465.5 $ 2.3
-------- ------
Replacement Power Total ......................................... $ 675.5 $ 6.6
======== ======
- ----------
(A) The primary limit for Public Liability is a per site aggregate limit with
no potential for assessment. The Nuclear Worker Liability represents the
potential liability from workers claiming exposure to the hazard of
nuclear radiation. This coverage is subject to an industry aggregate
limit, includes annual automatic reinstatement if the Industry Credit
Rating Plan (ICRP) Reserve Fund exceeds $400 million, and has an
assessment potential under former canceled policies.
(B) Retrospective premium program under the Price-Anderson liability
provisions of the Atomic Energy Act of 1954, as amended. Nuclear is
subject to retrospective assessment with respect to loss from an incident
at any licensed nuclear reactor in the United States. This retrospective
assessment can be adjusted for inflation every five years. The last
adjustment was effective as of August 20, 1998. This retrospective program
is in excess of the Public and Nuclear Worker Liability primary layers.
(C) Limit of liability under the Price-Anderson Act for each nuclear incident.
(D) For property limits in excess of $1.75 billion, Power participates in a
Blanket Limit policy where the $1 billion limit is shared by Amergen,
Exelon, and Power among the Clinton, Oyster Creek, TMI-1, Limerick, Peach
Bottom, Salem and Hope Creek sites. This limit is not subject to
reinstatement in the event of a loss. Participation in this program
significantly reduces Power's premium and the associated potential
assessment.
(E) Salem and Peach Bottom have an aggregate indemnity limit based on a weekly
indemnity of $1.5 million for 52 weeks followed by 80% of the weekly
indemnity for 110 weeks. Hope Creek has an aggregate indemnity limit based
on a weekly indemnity of $3.3 million for 52 weeks followed by 80% of the
weekly indemnity for 110 weeks.
F-16
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Price-Anderson Act sets the "limit of liability" for claims that could
arise from an incident involving any licensed nuclear facility in the nation.
The "limit of liability" is based on the number of licensed nuclear reactors and
is adjusted at least every five years based on the Consumer Price Index. The
current "limit of liability" is $9.5 billion. All utilities owning a nuclear
reactor, including Nuclear, have provided for this exposure through a
combination of private insurance and mandatory participation in a financial
protection pool as established by the Price-Anderson Act. Under the
Price-Anderson Act, each party with an ownership interest in a nuclear reactor
can be assessed its share of $88.1 million per reactor per incident, payable at
$10 million per reactor per incident per year. If the damages exceed the "limit
of liability," the President is to submit to Congress a plan for providing
additional compensation to the injured parties. Congress could impose further
revenue raising measures on the nuclear industry to pay claims. Nuclear's
maximum aggregate assessment per incident is $253.3 million (based on Nuclear's
ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum
aggregate annual assessment per incident is $28.8 million. This does not include
the $9.1 million that could be assessed under the nuclear worker policies.
Further, a decision by the U.S. Supreme Court, not involving Nuclear, has
held that the Price-Anderson Act did not preclude awards based on state law
claims for punitive damages.
Power is a member of an industry mutual insurance company, Nuclear
Electric Insurance Limited (NEIL). NEIL provides the primary property and
decontamination liability insurance at Salem/Hope Creek and Peach Bottom. NEIL
also provides excess property insurance through its decontamination liability,
decommissioning liability, and excess property policy and replacement power
coverage through its accidental outage policy. NEIL policies may make
retrospective premium assessments in case of adverse loss experience. Power's
maximum potential liabilities under these assessments are included in the table
and notes above. Certain provisions in the NEIL policies provide that the
insurer may suspend coverage with respect to all nuclear units on a site without
notice if the NRC suspends or revokes the operating license for any unit on a
site, issues a shutdown order with respect to such unit or issues a confirmatory
order keeping such unit down.
Pending Asset Purchases
Delmarva Power and Light Company (DP&L) and Atlantic City Electric Company
(ACE), subsidiaries of Conectiv, are co-owners of the Salem Nuclear Generating
Station (Salem) and the Peach Bottom Atomic Power Station (Peach Bottom) with
Power and Exelon Generation LLC (Exelon). Additionally, Power and ACE are
co-owners of the Hope Creek Generating Station (Hope Creek). In 1999, Power
entered into agreements with Conectiv, DP&L, ACE and Exelon pursuant to which
Power would acquire all of DP&L's and ACE's interests in Salem and Hope Creek
and half of DP&L's and ACE's interest in Peach Bottom (a total of 544 MW) for a
purchase price of $15.4 million plus the net book value of nuclear fuel at the
respective closing dates. In December 2000, the DP&L portion of the transaction
(246 MW) closed. In October 2000, Power entered into Wholesale Transaction
Confirmation letter agreements with ACE under which Power obtains 298 MW of
generation capacity and output representing the portion of ACE's interest in
Salem, Hope Creek and Peach Bottom to be acquired. Under this agreement, Power
receives all revenue and pays all expenses associated with this 298 MW of
generating capacity and output through the date that the purchase transaction
closes. Power has been advised by Conectiv that the Ratepayer Advocate, by
letter to the BPU dated October 26, 2000, has objected to and challenged this
financial transaction.
Hazardous Waste
The New Jersey Department of Environmental Protection (NJDEP) regulations
concerning site investigation and remediation require an ecological evaluation
of potential injuries to natural resources in connection with a remedial
investigation of contaminated sites. The NJDEP is presently working with
F-17
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
industry to develop procedures for implementing these regulations. These
regulations may substantially increase the costs of remedial investigations and
remediations, where necessary, particularly at sites situated on surface water
bodies. Power and predecessor companies owned and/or operated certain facilities
situated on surface water bodies, certain of which are currently the subject of
remedial activities. Power 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.
Passaic River Site
The Environmental Protection Agency (EPA) has determined that a six mile
stretch of the Passaic River in Newark, New Jersey is a "facility" within the
meaning of that term under the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA) and that, to date, at least
thirteen corporations, including Power, may be potentially liable for performing
required remedial actions to address potential environmental pollution at the
Passaic River "facility". In a separate matter, Power and certain of its
predecessors operated industrial facilities at properties within the Passaic
River "facility", including the Essex Generating Station. Power cannot predict
what action, if any, the EPA or any third party may take against Power with
respect to these matters, or in such event, what costs Power may incur to
address any such claims. However, such costs may be material.
New Source Review
The EPA and NJDEP issued a demand to PSE&G in March 2000 under Section 114
of the Clean Air Act requiring information to assess whether projects completed
since 1978 at the Hudson and Mercer coal burning units were implemented in
accordance with applicable New Source Review regulations. As a result of the
transfer of the generating assets by PSE&G to Power. The responsibility for
these environmental requirements rests with Power. Power completed its response
to the Section 114 information request in November 2000. Based upon the
information provided to the EPA it is likely that the EPA will seek to enforce
the requirements of the New Source Review regulations at Hudson 2 and Mercer 1
and 2. Power is currently in discussions with the EPA and NJDEP to resolve the
matter. However, it is uncertain whether these discussions will be successful
and capital costs of compliance could be material.
Subsequent to December 31, 2000, the EPA indicated that it is considering
enforcement action against Power under its PSD rules relating to the
construction that is currently in progress for Bergen 2, scheduled for operation
in 2002. The EPA maintains that PSD requirements are applicable to Bergen 2,
thereby requiring Power to obtain a permit prior to the commencement of
construction. To obtain such a permit, an applicant must demonstrate that
addition of the additional emission source will not cause significant
deterioration of the air shed in the vicinity of the plant. The time required to
obtain such a permit is estimated at 6 to 12 months. Power vigorously disputes
that PSD requirements are applicable to Bergen 2 and is continuing construction.
The NJDEP has informally indicated it agrees with Power's position but has also
advised that the ultimate authority to decide PSD applicability rests solely
with the EPA. Settlement discussions are underway with the EPA and NJDEP. At
June 30, 2001 (unaudited), Power had expended approximately $179 million in the
construction of Bergen 2.
NOTE 8. NUCLEAR DECOMMISSIONING TRUST
Power has an ownership interest in five nuclear units. In accordance with
rate orders received from the BPU, PSE&G had established an external master
nuclear decommissioning trust for all its nuclear units that were transferred to
Power. This trust now resides with Nuclear and contains two separate funds: a
qualified fund and a non-qualified fund. Section 468A of the Internal Revenue
Code limits the amount of money that can be contributed into a "qualified" fund.
Contributions made into a qualified fund
F-18
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
are tax deductible. PSE&G estimated the total cost of decommissioning its share
of these five nuclear units at $986 million in year end 1995 dollars (the year
that the most recent site specific estimates were prepared), excluding
contingencies.
Contributions made into the Nuclear Decommissioning Trust Funds are
invested in debt and equity securities. Gains and losses on the Nuclear
Decommissioning Trust Funds do not affect earnings. As a result of the Energy
Master Plan Proceedings, the recovery of these investments will be continued as
part of the societal benefits charge levied by PSE&G on its customers. PSE&G
will continue to collect this $29.6 million charge and remit it to Nuclear.
With the purchase of Conectiv's interests in Salem, Hope Creek and Peach
Bottom, Power received a transfer of $49.7 million representing Conectiv's
Nuclear Decommissioning Trust Funds and the related liabilities for those
stations.
NOTE 9. INCOME TAXES
The following are the components of income tax expense:
2000 1999 1998
---- ---- ----
(Millions of Dollars)
Income Taxes:
Current provision--Federal and State $ 209 $ 311 $ 206
Provision for deferred income taxes (1) 5 (35)
Purchased State Tax Benefits ....... -- (21) --
Investment tax credits--net ........ -- (4) (15)
----- ----- -----
Total income tax provision ......... $ 208 $ 291 $ 156
===== ===== =====
Reconciliation between total income tax provision and tax computed at the
statutory tax rate on pretax income follows:
2000 1999 1998
----- ----- -----
(Millions of Dollars)
Tax computed at Federal statutory rate of 35% .. $ 182 $ 282 $ 138
Increase (decrease) attributable to flow-through
of certain tax adjustments:
Depreciation--plant related .................. -- 16 21
Amortization of investment tax credits ....... -- (4) (15)
New Jersey Corporate Business Tax ............ 30 27 35
Other ........................................ (4) (30) (23)
----- ----- -----
Subtotal ................................... 26 9 18
----- ----- -----
Total income tax provision ................. $ 208 $ 291 $ 156
----- ----- -----
Effective income tax rate ...................... 39.92% 36.06% 39.69%
===== ===== =====
Power provides deferred taxes at the enacted statutory tax rate for all
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities irrespective of the treatment for
rate-making purposes.
F-19
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Income Taxes
2000 1999
---- ----
(Millions of Dollars)
Assets:
Nuclear Decommissioning ................................. $ 26 $ 26
Deferred Electric Energy Costs .......................... -- 25
New Jersey Corporate Business Tax ....................... 149 474
Plant Related Items ..................................... 407 125
Cost of Removal ......................................... 55 13
Contractual & Environmental Liabilities ................. 35 33
Other ................................................... 9 23
---- ----
Total Assets .......................................... $681 $719
==== ====
Liabilities:
Conservation Costs ...................................... $ -- $ 76
Unamortized Debt Expense ................................ -- 23
Other ................................................... 5 12
---- ----
Total Liabilities ..................................... 5 111
---- ----
Total Deferred Income Tax Asset/(Liability) ......... $676 $608
==== ====
NOTE 10. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS
Employees of Power participate in non-contributory pension plans sponsored
by PSEG and administered by PSEG Services Corporation. In addition, PSEG
sponsors two defined contribution plans. Represented employees of Power are
eligible for participation in the PSEG Employee Savings Plan (Savings Plan),
while non-represented employees of Power are eligible for participation in the
PSEG Thrift and Tax-Deferred Savings Plan (Thrift Plan). These plans are 401(k)
plans to which eligible employees may contribute up to 25% of their
compensation. Employee contributions up to 7% for Savings Plan participants and
up to 8% for Thrift Plan participants are matched with employer contributions of
cash or PSEG common stock equal to 50% of such employee contributions related to
employee contributions. Employer contributions, related to participant
contributions in excess of 5% and up to 7%, are made in shares of PSEG common
stock for Savings Plan participants. Employer contributions, related to
participant contributions in excess of 6% and up to 8%, are made in shares of
PSEG common stock for Thrift Plan participants. Pension costs amounted to $12
million, $24 million and $15 million for the years ended December 31, 2000, 1999
and 1998, respectively. Thrift and Savings Plan matching costs amounted to
approximately $8 million, $8 million and $5 million for the years ended December
31, 2000, 1999 and 1998, respectively.
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" (SFAS 106), which requires that the expected cost of employees'
postretirement health care and life insurance benefits, also referred to as
other postretirement benefits (OPEB), be charged to income during the years in
which employees render service. Such costs were deferred through December 31,
1997, pursuant to an order from the BPU. In concert with the discontinuance of
SFAS 71, the portion of the resulting regulatory asset allocated to Power prior
to the Transaction remained with PSE&G as recovery of these previously incurred
costs will be through PSE&G's regulated transmission and distribution
operations. OPEB costs amounted to $4 million, $30 million and $28 million for
the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 11. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
Generation
The generation segment of Power's business earns revenue by bidding the
energy, capacity and ancillary services of Fossil and Nuclear into the market.
In addition to bidding into the market, Power earns a substantial portion of its
generation revenue by selling energy on a wholesale basis under contract to
power marketers and to load serving entities ("LSEs") such as the BGS contract
with PSE&G.
F-20
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trading
The trading segment of Power's business earns revenues by trading energy,
capacity, fixed transmission rights, fuel and emission allowances in the spot,
forward and futures markets. Power's trading segment also earns revenues through
financial transactions, including swaps, options and futures in the electricity
markets.
Information related to the segments of Power's business is detailed below:
Consolidated
Generation Trading Total
---------- ------- ------------
(Millions of Dollars)
For the Six Months Ended June 30, 2001 (Unaudited):
Total Revenues .................................. $ 1,159 $ 1,161 $ 2,320
Depreciation and Amortization ................... 55 -- 55
Interest Income ................................. -- -- --
Interest Expense ................................ 89 -- 89
Income Before Income Taxes ...................... 268 78 346
Income Taxes .................................... 108 32 140
Net Income ...................................... 160 46 206
------- ------- -------
Gross Additions to Property, Plant and Equipment $ 741 $ -- $ 741
======= ======= =======
As of June 30, 2001 (Unaudited):
Total Assets .................................... $ 4,118 $ 712 $ 4,830
======= ======= =======
For the Six Months Ended June 30, 2000 (Unaudited):
Total Revenues .................................. $ 1,070 $ 1,303 $ 2,373
Depreciation and Amortization ................... 68 -- 68
Interest Income ................................. -- -- --
Interest Expense ................................ 43 -- 43
Income Before Income Taxes ...................... 291 43 334
Income Taxes .................................... 118 18 136
Net Income ...................................... 173 25 198
======= ======= =======
Gross Additions to Property, Plant and Equipment $ 177 $ -- $ 177
======= ======= =======
For the Year Ended December 31, 2000:
Total Revenues .................................. $ 2,203 $ 2,724 $ 4,927
Depreciation and Amortization ................... 136 -- 136
Interest Income ................................. 1 -- 1
Interest Expense ................................ 198 -- 198
Income Before Income Taxes ...................... 444 77 521
Income Taxes .................................... 177 31 208
Net Income ...................................... 267 46 313
======= ======= =======
Gross Additions to Property, Plant and Equipment $ 479 $ -- $ 479
======= ======= =======
As of December 31, 2000:
Total Assets .................................... $ 3,439 $ 1,091 $ 4,530
======= ======= =======
For the Year Ended December 31, 1999:
Total Revenues .................................. $ 2,652 $ 1,842 $ 4,494
Depreciation and Amortization ................... 224 -- 224
Interest Expense ................................ 112 -- 112
Income Before Income Taxes ...................... 765 42 807
Income Taxes .................................... 274 17 291
Income before Extraordinary Item ................ 491 25 516
Extraordinary Item (net of tax) ................. (3,204) -- (3,204)
Net Income (Loss) ............................... (2,713) 25 (2,688)
------- ------- -------
Gross Additions to Property, Plant and Equipment $ 92 $ -- $ 92
======= ======= =======
F-21
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated
Generation Trading Total
---------- ------- ------------
As of December 31, 1999:
Total Assets ................................ $3,055 $ 246 $3,301
====== ====== ======
For the Year Ended December 31, 1998:
Total Revenues .............................. $2,551 $1,877 $4,428
Depreciation and Amortization ............... 381 -- 381
Interest Expense ............................ 216 -- 216
Income Before Income Taxes .................. 370 23 393
Income Taxes ................................ 147 9 156
Net Income .................................. 223 14 237
------ ------ ------
Gross Additions to Property,
Plant and Equipment ........... $ 265 $ -- $ 265
====== ====== ======
Power does not have any foreign investments or operations.
Information related to Property, Plant and Equipment is detailed below:
December 31,
------------------
2000 1999
---- ----
(Millions of Dollars)
Property, Plant and Equipment
Electric Plant in Service:
Fossil Production ................................. $1,840 $1,628
Nuclear Production ................................ 130 110
------ ------
Total Electric Plant in Service ................. 1,970 1,738
------ ------
Nuclear Fuel in Service ............................. 417 466
Construction Work in Progress
Including Nuclear Fuel ............................ 311 78
Plant Held For Future Use ........................... 1 1
Other ............................................... 6 6
------ ------
Total ........................................... $2,705 $2,289
====== ======
NOTE 12. JOINTLY OWNED FACILITIES -- PROPERTY, PLANT AND EQUIPMENT
Power has ownership interests in and is responsible for providing its
share of the necessary financing for the following jointly owned facilities. All
amounts reflect the share of Power's jointly owned projects and the
corresponding direct expenses are included in Consolidated Statements of Income
as operating expenses.
Plant--December 31, 2000
---------------------------------------
Ownership Accumulated
Interest Plant Depreciation
--------- ----- -----------
(Millions of Dollars)
Coal Generating
Conemaugh ....................... 22.50% $198 $ 63
Keystone ........................ 22.84% 122 47
Nuclear Generating
Peach Bottom .................... 46.25% 88 10
Hope Creek ...................... 95.00% 606 508
Salem ........................... 50.00% 645 544
Nuclear Support Facilities ...... Various 5 1
Pumped Storage Facilities
Yards Creek ..................... 50.00% 28 11
Merrill Creek Reservoir ......... 13.91% 2 --
F-22
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED)
The information shown below, in the opinion of management, includes all
adjustments, consisting only of normal recurring accruals, necessary to a fair
presentation of such amounts. Due to the seasonal nature of the generation
business, quarterly amounts vary significantly during the year.
Calendar Quarter Ended
-----------------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- ----------- ------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
(Millions of Dollars)
Revenues .................................. $603 $575 $564 $746 $555 $ 697 $ 558 $676
Operating Income .......................... 199 184 143 300 134 251 236 196
Income before
Extraordinary Item ....................... 64 99 51 176 71 149 127 92
Extraordinary Item ........................ -- -- -- (14) -- (3,190) -- --
Net Income/(Loss) ......................... 64 99 51 162 71 (3,041) 127 92
Earnings/(Loss) Available
to PSEG .................................. 64 98 51 162 71 (3,041) 127 90
NOTE 14. RELATED PARTY TRANSACTIONS
PSE&G
PSE&G's transfer of its electric generating assets was in exchange for a
promissory note from Power in an amount equal to the total purchase price of
$2.786 billion. Interest on the note was payable at an annual rate of 14.23%,
which represented PSE&G's weighted average cost of capital. For the period from
August 21, 2000 to December 31, 2000, Power recorded interest expense of
approximately $143 million relating to the promissory note.
For the period from January 1, 2001 to January 31, 2001, Power recorded
interest expense of approximately $34 million relating to the promissory note.
Power settled the promissory note on January 31, 2001, with funds provided from
PSEG in the form of equity and loans. In addition, on January 31, 2001, PSEG
loaned $1.620 billion to Power at various rates for which Power recorded
interest expense of approximately $40 million for the six months ended June 30,
2001 (unaudited).
In April 2001 (unaudited), Power, in a private placement, issued $500
million of 6.875% Senior Notes due 2006, $800 million of 7.75% Senior Notes due
2011 and $500 million 8.625% Senior Notes due 2031. The net proceeds from the
sale of the Senior Notes were used primarily for the repayment of the loans from
PSEG. Each series of the Senior Notes is fully and unconditionally and jointly
and severally guaranteed by Fossil, Nuclear and ER&T. All other direct and
indirect subsidiaries of Power that are not guarantors of the Notes are minor
and Power has no independent assets or operations.
Effective with the asset transfer, Power charges PSE&G for MTC and the
energy and capacity provided to meet PSE&G's BGS requirements. For the six
months ended June 30, 2001 (unaudited), Power has charged PSE&G approximately
$938 million for MTC and BGS. As of June 30, 2001 (unaudited), Power's
receivable from PSE&G relating to these costs was approximately $186 million.
For the six months ended June 30, 2001 (unaudited), PSE&G sold energy and
capacity to Power at the market price of approximately $80 million, which PSE&G
purchased under various non-utility generation (NUG) contracts. As of June 30,
2001 (unaudited), Power's payable to PSE&G relating to these purchases was
approximately $14 million.
For the year ended December 31, 2000, Power has recorded approximately
$1.827 billion for MTC and BGS requirements. As of December 31, 2000, Power's
receivable from PSE&G relating to these costs was approximately $159 million.
Also through December 31, 2000, Power purchased energy and
F-23
PSEG POWER LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
capacity from PSE&G at the market price of approximately $152 million which
PSE&G purchased under various NUG contracts. As of December 31, 2000, Power's
payable to PSE&G relating to these purchases was approximately $17 million.
PSEG Global Inc. (Global)
In September 2000, Power announced that it will assume responsibility of
four Midwest generation projects being developed by Global and will be
responsible for all future generation projects and development in the United
States. The four projects will have a combined generating capacity of 2,830 MW.
As of December 31, 2000, Power owed Global $52 million related to these
projects, which was paid in 2001. In 2001, Power decided to continue development
on two of the four projects with a combined generation capacity of 2,000 MW.
PSEG Services Corporation (Services) (unaudited)
Services provides and bills administrative services to Power on a monthly
basis. Power's costs related to such services amounted to approximately $37
million and $81 million for the quarter and six months ended June 30, 2001. As
of June 30, 2001, Power's intercompany payable related to these costs was
approximately $19 million.
F-24
================================================================================
$1,800,000,000
[LOGO] PSEG POWER LLC
Offer to Exchange
$500,000,000 67/8% Senior Notes due 2006
$800,000,000 73/4% Senior Notes due 2011
$500,000,000 85/8% Senior Notes due 2031
Which have been registered under the Securities Act
For Any and All Outstanding
$500,000,000 67/8% Senior Notes due 2006
$800,000,000 73/4% Senior Notes due 2011
$500,000,000 85/8% Senior Notes due 2031
Which have not been so registered
================================================================================
Part II
Information not required in Prospectus
Item 20. Indemnification of Directors and Officers
Article 18 of each registrant's limited liability agreement provides, as
follows:
o No Member, Officer, Director, employee or agent of the Company and
no employee, representative, agent or Affiliate of the Member
(collectively, the "Covered Persons") shall be liable to the Company
or any other Person who has an interest in or claim against the
Company for any loss, damage or claim incurred by reason of any act
or omission performed or omitted by such Covered Person in good
faith on behalf of the Company and in a manner reasonably believed
to be within the scope of the authority conferred on such Covered
Person by this Agreement, except that a Covered Person shall be
liable for any such loss, damage or claim incurred by reason of such
Covered Person's willful misconduct.
Article 18 also provides as follows:
o To the fullest extent permitted by applicable law, a Covered Person
shall be entitled to indemnification from the Company for any loss,
damage or claim incurred by such Covered Person by reason of any act
or omission performed or omitted by such Covered Person in good
faith on behalf of the Company and in a manner reasonably believed
to be within the scope of the authority conferred on such Covered
Person by this Agreement, except that no Covered Person shall be
entitled to be indemnified in respect of any loss, damage or claim
incurred by such Covered Person by reason of such Covered Person's
willful misconduct with respect to such acts or omissions; provided,
however, that any indemnity under this Section 18 shall be provided
out of and to the extent of Company assets only, and no Member shall
have personal liability on account thereof.
The directors and officers of the registrants are insured under policies
of insurance, within the limits and subject to the limitations of the policies,
against claims made against them for acts in the discharge of their duties, and
each registrant is insured to the extent that it is required or permitted by law
to indemnify the directors and officers for such loss. The premiums for such
insurance are paid by the respective registrant.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
Exhibit
Number Description
- ------- -----------
3.1 -- Certificate of Formation of PSEG Power LLC.
3.2 -- PSEG Power LLC Limited Liability Company Agreement.
3.3 -- Certificate of Formation of PSEG Fossil LLC.
3.4 -- PSEG Fossil LLC Limited Liability Company Agreement.
3.5 -- Certificate of Formation of PSEG Nuclear LLC.
3.6 -- PSEG Nuclear LLC Limited Liability Company Agreement.
3.7 -- Certificate of Formation of PSEG Energy Resources & Trade LLC.
3.8 -- PSEG Energy Resources & Trade LLC Limited Liability Company
Agreement.
4.1 -- Indenture dated April 16, 2001 between Registrants and The Bank of
New York and form of Subsidiary Guaranty included therein.
4.2 -- Registration Rights Agreement dated April 9, 2001 between
Registrants and the purchasers named therein.
4.3 -- Form of 67/8% Exchange Note.
4.4 -- Form of 73/4% Exchange Note.
4.5 -- Form of 85/8% Exchange Note.
5 -- Opinion of James T. Foran, Esquire.
8 -- Opinion of James T. Foran, Esquire regarding tax matters.
II-1
Exhibit
Number Description
- ------- -----------
10 -- Basic Generation Service Contract with PSE&G.
12 -- Statement regarding computation of ratios of earnings.
21 -- Subsidiaries of the Registrants.
23.1 -- Consent of James T. Foran, Esquire (contained in Exhibits 5 and 8).
23.2 -- Independent Auditors' Consent.
24 -- Power of Attorney.
25 -- Statement of Eligibility of Trustee on Form T-1.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrants of expenses incurred
or paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrants hereby undertake to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
The undersigned registrants hereby undertake (a):
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change in such information in the
registration statement; provided, however, that the registrant
need not file a post-effective amendment to include the
information required to be included by subsection (a)(1)(i) or
(a)(l)(ii) if such information is contained in periodic
reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act that are
incorporated by reference in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, PSEG Fossil LLC, certifies that it has reasonable grounds to believe
it meets all of the requirements for filing on Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Newark, State of New Jersey, on this 10th day of
September, 2001.
PSEG Fossil LLC
By: /s/ THOMAS R. SMITH
---------------------------
Thomas R. Smith
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ THOMAS R. SMITH Principal Executive September 10, 2001
- ----------------------- Officer, Principal Financial
Thomas R. Smith Officer and Director
/s/ PATRICIA A. RADO Principal Accounting Officer September 10, 2001
- -----------------------
Patricia A. Rado
/s/ FRANK CASSIDY Director September 10, 2001
- -----------------------
Frank Cassidy
/s/ HAROLD W. KEISER Director September 10, 2001
- -----------------------
Harold W. Keiser
/s/ STEVEN R. Teitelman Director September 10, 2001
- -----------------------
Steven R. Teitelman
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, PSEG Nuclear LLC, certifies that it has reasonable grounds to
believe it meets all of the requirements for filing on Form S-4 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newark, State of New
Jersey, on this 10th day of September, 2001.
PSEG Nuclear LLC
By: /s/ HAROLD W. KEISER
-----------------------------
Harold W. Keiser
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ HAROLD W. KEISER Principal Executive September 10, 2001
- ------------------------ Officer, Principal Financial
Harold W. Keiser Officer and Director
/s/ PATRICIA A. RADO Principal Accounting Officer September 10, 2001
- ------------------------
Patricia A. Rado
/s/ FRANK CASSIDY Director September 10, 2001
- ------------------------
Frank Cassidy
/s/ THOMAS R. SMITH Director September 10, 2001
- ------------------------
Thomas R. Smith
/s/ STEVEN R. Teitelman Director September 10, 2001
- ------------------------
Steven R. Teitelman
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, PSEG Energy Resources & Trade LLC, certifies that it has reasonable
grounds to believe it meets all of the requirements for filing on Form S-4 and
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newark, State of New
Jersey, on this 10th day of September, 2001.
PSEG Energy Resources & Trade LLC
By: /s/ STEVEN R. Teitelman
--------------------------------
Steven R. Teitelman
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ STEVEN R. Teitelman Principal Executive September 10, 2001
- ----------------------- Officer, Principal Financial
Steven R. Teitelman Officer and Director
/s/ PATRICIA A. RADO Principal Accounting Officer September 10, 2001
- -----------------------
Patricia A. Rado
/s/ FRANK CASSIDY Director September 10, 2001
- -----------------------
Frank Cassidy
/s/ HAROLD W. KEISER Director September 10, 2001
- -----------------------
Harold W. Keiser
/s/ THOMAS R. SMITH Director September 10, 2001
- -----------------------
Thomas R. Smith
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, PSEG Power LLC, certifies that it has reasonable grounds to believe
it meets all of the requirements for filing on Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Newark, State of New Jersey, on this 10th day of
September, 2001.
PSEG POWER LLC
By: /s/ FRANK CASSIDY
-------------------------
Frank Cassidy
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ E. JAMES FERLAND Principal Executive September 10, 2001
- --------------------------- Officer and Director
E. James Ferland
/s/ FRANK CASSIDY Principal Financial September 10, 2001
- --------------------------- Officer and Director
Frank Cassidy
/s/ PATRICIA A. RADO Principal Accounting September 10, 2001
- --------------------------- Officer
Patricia A. Rado
Director
- ---------------------------
Robert E. Busch
/s/ ROBERT J. DOUGHERTY, JR. Director September 10, 2001
- ---------------------------
Robert J. Dougherty, Jr.
/s/ ROBERT C. MURRAY Director September 10, 2001
- ---------------------------
Robert C. Murray
/s/ THOMAS M. O'FLYNN Director September 10, 2001
- ---------------------------
Thomas M. O'Flynn
/s/ R. EDWIN SELOVER Director September 10, 2001
- ---------------------------
R. Edwin Selover
/s/ MICHAEL J. THOMSON Director September 10, 2001
- ---------------------------
Michael J. Thomson
II-6
Exhibit Index
Exhibit
Number Description
- ------- -----------
3.1 -- Certificate of Formation of PSEG Power LLC.
3.2 -- PSEG Power LLC Limited Liability Company Agreement.
3.3 -- Certificate of Formation of PSEG Fossil LLC.
3.4 -- PSEG Fossil LLC Limited Liability Company Agreement.
3.5 -- Certificate of Formation of PSEG Nuclear LLC.
3.6 -- PSEG Nuclear LLC Limited Liability Company Agreement.
3.7 -- Certificate of Formation of PSEG Energy Resources & Trade LLC.
3.8 -- PSEG Energy Resources & Trade LLC Limited Liability Company
Agreement.
4.1 -- Indenture dated April 16, 2001 between Registrants and The Bank of
New York and form of Subsidiary Guaranty included therein.
4.2 -- Registration Rights Agreement dated April 9, 2001 between
Registrants and the purchasers named therein.
4.3 -- Form of 6 7/8% Exchange Note.
4.4 -- Form of 7 3/4% Exchange Note.
4.5 -- Form of 8 5/8% Exchange Note.
5 -- Opinion of James T. Foran, Esquire.
8 -- Opinion of James T. Foran, Esquire regarding tax matters.
10 -- Basic Generation Service Contract with PSE&G.
12 -- Statement regarding computation of ratios of earnings.
21 -- Subsidiaries of the Registrants.
23.1 -- Consent of James T. Foran, Esquire (contained in Exhibits 5 and 8).
23.2 -- Independent Auditors' Consent.
24 -- Power of Attorney.
25 -- Statement of Eligibility of Trustee on Form T-1.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.