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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
- --------------------------------------------------------------------------------
000-32503 PSEG ENERGY HOLDINGS INC. 22-2983750
(A New Jersey Corporation)
80 Park Plaza-T22
Newark, New Jersey 07102-4194
973-456-3581
http://www.pseg.com
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Registrant is a wholly-owned subsidiary of Public Service Enterprise Group
Incorporated. Registrant meets the conditions set forth in General Instruction H
(1) (a) and (b) of Form 10-Q and is filing this Quarterly Report on Form 10-Q
with the reduced disclosure format authorized by General Instruction H.
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PSEG ENERGY HOLDINGS INC.
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 44
Item 5. Other Information .............................................. 44
Item 6. Exhibits and Reports on Form 8-K................................ 45
Signature............................................................... 45
i
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PSEG ENERGY HOLDINGS INC.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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PSEG ENERGY HOLDINGS INC.
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PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions of Dollars)
(Unaudited)
For the Six
For the Quarter Ended Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
----- ----- ----- -----
OPERATING REVENUES
Electric Generation and Distribution Revenues ................... $ 61 $ -- $ 132 $ --
Income from Capital and Operating Leases ........................ 58 51 116 98
Gain on Withdrawal from Partnership Interest .................... 39 -- 47 51
Income From Joint Ventures and Partnerships ..................... 18 27 38 60
Interest and Dividend Income .................................... 15 9 24 14
Net Losses on Investments ....................................... (33) (1) (38) (15)
Other ........................................................... 2 2 1 2
----- ----- ----- -----
Total Operating Revenues .................................... 160 88 320 210
----- ----- ----- -----
OPERATING EXPENSES
Electric Energy Costs ........................................... 28 -- 58 --
Operation and Maintenance ....................................... 4 1 10 2
Depreciation and Amortization ................................... 6 2 13 3
Write-down of Project Investments ............................... 506 -- 506 --
Administrative and General ...................................... 29 18 46 35
----- ----- ----- -----
Total Operating Expenses .................................... 573 21 633 40
----- ----- ----- -----
OPERATING (LOSS) INCOME ............................................ (413) 67 (313) 170
OTHER (LOSS) INCOME
Foreign Currency Transaction Loss ............................... (17) -- (69) --
Change in Fair Value of Derivative Financial Instruments ........ (8) -- 2 1
Other ........................................................... -- (1) -- --
----- ----- ----- -----
Total Other (Loss) Income ................................... (25) (1) (67) 1
----- ----- ----- -----
INTEREST EXPENSE
Interest Expense ................................................ (55) (41) (112) (82)
Capitalized Interest ............................................ 2 5 5 10
----- ----- ----- -----
Total Interest Expense--Net ................................. (53) (36) (107) (72)
----- ----- ----- -----
(LOSS) INCOME BEFORE INCOME TAXES, MINORITY INTERESTS,
DISCONTINUED OPERATIONS EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ........... (491) 30 (487) 99
INCOME TAXES ....................................................... 177 (5) 177 (18)
MINORITY INTERESTS ................................................. 4 -- 5 --
----- ----- ----- -----
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS,
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE .................................. (310) 25 (305) 81
DISCONTINUED OPERATIONS (Note 3)
Loss from Discontinued Operations (including loss
on disposal of $(34), net of tax benefit--$18) .................. (37) (8) (37) (11)
----- ----- ----- -----
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE ............................................ (347) 17 (342) 70
Extraordinary Loss on Early Retirement of Debt
(net of tax) .................................................... -- -- -- (2)
Cumulative Effect of a Change in Accounting Principle
(net of tax) .................................................... -- -- (120) 9
NET (LOSS) INCOME .................................................. (347) 17 (462) 77
----- ----- ----- -----
Preferred Stock Dividend Requirements .............................. (5) (5) (11) (11)
----- ----- ----- -----
(LOSS) EARNINGS AVAILABLE TO PUBLIC
SERVICE ENTERPRISE GROUP INCORPORATED ........................... $(352) $ 12 $(473) $ 66
===== ===== ===== =====
See Notes to Consolidated Financial Statements.
2
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PSEG ENERGY HOLDINGS INC.
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PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
June 30, December 31,
2002 2001
-------- ------------
CURRENT ASSETS
Cash and Cash Equivalents ....................... $ 38 $ 54
Accounts Receivable:
Trade ......................................... 101 104
Other ......................................... 19 19
Affiliated Companies .......................... 31 --
Notes Receivable ................................ 164 --
Interest Receivable ............................. 14 2
Assets Held for Sale ............................ 23 422
Inventory ....................................... 6 11
Prepayments ..................................... 5 3
Current Assets of Discontinued Operations ....... 422 543
------- -------
Total Current Assets ....................... 823 1,158
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PROPERTY, PLANT AND EQUIPMENT
Electric Generation and Distribution Assets ..... 677 669
Construction in Progress ........................ 248 345
Real Estate ..................................... 115 115
Property and Equipment .......................... 17 43
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Total ...................................... 1,057 1,172
Accumulated Depreciation and Amortization ....... (114) (155)
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Net Property, Plant and Equipment .......... 943 1,017
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INVESTMENTS
Capital Leases - Net ............................ 2,899 2,784
Corporate Joint Ventures ........................ 1,161 1,111
Partnerships Interests - Net .................... 571 659
Other Investments ............................... 9 9
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Total Investments .......................... 4,640 4,563
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OTHER ASSETS
Goodwill ........................................ 447 548
Deferred Costs .................................. 43 84
Other ........................................... 47 69
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Total Other Assets ......................... 537 701
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TOTAL ASSETS ....................................... $ 6,943 $ 7,439
======= =======
See Notes to Consolidated Financial Statements.
3
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PSEG ENERGY HOLDINGS INC.
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PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
June 30, December 31,
2002 2001
------- ------------
CURRENT LIABILITIES
Long-Term and Medium-Term Debt Due Within
One Year ...................................... $ 414 $ 242
Short-Term Borrowings Due to Public Service
Enterprise Group Incorporated ................. -- 38
Payables:
Trade Accounts ................................ 33 46
Taxes ......................................... 5 21
Interest ...................................... 52 49
Other ......................................... 27 48
Affiliated Companies .......................... -- 41
Borrowings Under Lines of Credit ................ 321 300
Non-Recourse Notes Payable ...................... 273 285
Current Liabilities of Discontinued Operations .. 280 261
------- -------
Total Current Liabilities ................... 1,405 1,331
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NONCURRENT LIABILITIES
Deferred Income Taxes and Investment and
Energy Tax Credits ............................ 1,044 1,211
Other Noncurrent Liabilities .................... 145 95
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Total Noncurrent Liabilities ................ 1,189 1,306
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES ............. -- --
------- -------
MINORITY INTERESTS ................................. 29 47
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CAPITALIZATION
Project Level, Non-Recourse Long-Term Debt ...... 628 635
Senior Notes .................................... 1,779 1,644
Medium-Term Notes ............................... -- 252
------- -------
Total Long-Term Debt ........................ 2,407 2,531
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STOCKHOLDER'S EQUITY
Common Stock, Issued: 100 Shares .............. -- --
Preferred Stock ............................... 509 509
Additional Paid-in Capital .................... 1,690 1,490
Retained Earnings ............................. 37 510
Accumulated Other Comprehensive Loss .......... (323) (285)
------- -------
Total Stockholder's Equity .................. 1,913 2,224
------- -------
TOTAL LIABILITIES AND CAPITALIZATION ............... $ 6,943 $ 7,439
======= =======
See Notes to Consolidated Financial Statements.
4
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PSEG ENERGY HOLDINGS INC.
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PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
For the Six
Months Ended
June 30,
----------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income ........................................ $(462) $ 77
Adjustments to Reconcile Net (Loss) Income to
Net Cash Flows from Operating Activities:
Depreciation and Amortization .......................... 20 5
Deferred Income Taxes (Other than Leases) .............. (177) (6)
Leveraged Lease Income, Adjusted for Rents
Received ............................................. 48 35
Investment Distributions ............................... 4 41
Undistributed Earnings from Affiliates ................. (17) (46)
Net Losses (Gains) on Investments/Partnership .......... 38 (36)
Foreign Currency Transaction Loss ...................... 69 --
Proceeds from Withdrawal from Partnership Interests .... -- 50
Write-down of Project Investments ...................... 506 --
Loss on Disposal of Discontinued Operations (net of tax) 34 --
Cumulative Effect of a Change in Accounting
Principle (net of tax) ............................... 120 (9)
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable .................................. (105) (47)
Taxes Payable ........................................ (16) 9
Accounts Payable ..................................... (38) 34
Interest Payable ..................................... 3 15
Other Current Assets and Liabilities ................. (12) 13
Other .................................................. 9 4
----- -----
Net Cash Provided by Operating Activities .............. 24 139
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Partnerships and Joint Ventures ........... (152) (79)
Investments in Capital Leases ............................ (31) (392)
Additions to Property, Plant and Equipment ............... (183) (62)
Return of Capital from Partnerships ...................... 90 --
Acquisitions, Net of Cash Acquired ....................... -- (112)
Other .................................................... (83) (87)
----- -----
Net Cash Used in Investing Activities .................. (359) (732)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Additional Paid-in Capital ................. 200 300
Net Increase (Decrease) in Short-Term Debt ............... 21 (346)
Net (Decrease) Increase in Short-Term Affiliate
Borrowings ............................................. (38) 230
Proceeds from Long-Term Debt ............................. 245 622
Repayment of Medium-Term and Long-Term Debt .............. (98) (195)
Cash Dividends Paid ...................................... (11) (15)
Other .................................................... 2 (1)
----- -----
Net Cash Provided by Financing Activities .............. 321 595
----- -----
Effect of Exchange Rate Changes on Cash and
Cash Equivalents ....................................... (2) --
Net Change in Cash and Cash Equivalents .................. (16) 2
Cash and Cash Equivalents at Beginning of Period ......... 54 22
----- -----
Cash and Cash Equivalents at End of Period ............... $ 38 $ 24
===== =====
Supplemental Disclosure of Cash Flow Information:
Cash Payments During the Period for:
Income Taxes ......................................... $ (14) $ (42)
Interest ............................................. $ 90 $ 57
Non-Cash Financing Activities:
Debt Assumed from Companies Acquired ................. $ -- $ 176
See Notes to Consolidated Financial Statements.
5
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
Basis of Presentation
PSEG Energy Holdings Inc. (Energy Holdings), incorporated under the laws of the
State of New Jersey with its principal executive offices located at 80 Park
Plaza, Newark, New Jersey 07102 is a direct wholly-owned subsidiary of Public
Service Enterprise Group Incorporated (PSEG). Unless the context otherwise
indicates, all references to "Energy Holdings", "we", "us" or "our" herein mean
PSEG Energy Holdings Inc. and its consolidated subsidiaries. We have three
principal direct wholly-owned subsidiaries; PSEG Global Inc. (Global), PSEG
Resources Inc. (Resources) and PSEG Energy Technologies Inc. (Energy
Technologies). Effective June 30, 2002, we announced our intention to exit the
businesses of Energy Technologies, and one of Global's investments, Tanir Bavi.
For additional information, see Note 3. Discontinued Operations.
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in the
opinion of management, the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements and Notes to
Consolidated Financial Statements (Notes) should be read in conjunction with our
Notes contained in the 2001 Annual Report on Form 10-K and the first quarter
2002 Quarterly Report on Form 10-Q. These Notes update and supplement matters
discussed in the 2001 Annual Report on Form 10-K and the first quarter 2002
Quarterly Report on Form 10-Q.
The unaudited financial information furnished reflects all adjustments which
are, in the opinion of management, necessary to fairly state the results for the
interim periods presented. All such adjustments are of a normal recurring
nature. The year-end Consolidated Balance Sheet was derived from the audited
consolidated financial statements included in the 2001 Annual Report on Form
10-K. Certain reclassifications of prior period data have been made to conform
with the current period presentation.
Note 2. Recent Accounting Pronouncements
On January 1, 2002 we adopted the Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). Under SFAS 142, goodwill is a nonamortizable
asset, and is subject to an annual review for impairment, and an interim review
when certain events or circumstances occur that indicate the carrying value may
not be recoverable. Under SFAS 142 we had a transitional period of six months
from the date of adoption to complete our goodwill impairment testing, which was
completed as of June 30, 2002. We have evaluated the recoverability of the
recorded amount of goodwill based on certain operating and financial factors.
Such impairment testing included cash flow tests which require broad assumptions
and significant judgement to be exercised by management. We have completed this
impairment analysis and have recorded after-tax charges of $120 million,
retroactive to January 1, 2002, and such amount has been recognized as a
Cumulative Effect of a Change in Accounting Principle in accordance with the new
standard. For further analysis of the impairment of goodwill see Note 3.
Discontinued Operations and Note 4. Asset Impairments.
On January 1, 2002 we adopted SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" (SFAS 144). Under SFAS 144 long-lived assets to
be disposed of are measured at the lower of carrying amount or fair value less
costs to sell, whether reported in continuing operations or in discontinued
operations. Discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. A
long-lived asset must be tested for impairment whenever events or changes in
circumstances indicate that its carrying amount may be impaired. For additional
information relating to asset impairments, see Note 3. Discontinued Operations
and Note 7. Commitments and Contingencies.
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 if the settled
amount differs from the liability recorded. SFAS 143 is effective for fiscal
years beginning
6
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
after June 15, 2002. We are currently evaluating this guidance and cannot
determine the impact on our financial position, results of operations, or net
cash flows, however, such impact could be material.
Note 3. Discontinued Operations
Energy Technologies' Investments
Energy Technologies is comprised of 11 heating, ventilating and air conditioning
(HVAC) operating companies and an asset management group which includes various
Demand Side Management (DSM) investments. DSM investments in long-term contracts
represent expenditures made by Energy Technologies to share DSM customers' costs
associated with the installation of energy efficient equipment. DSM revenues are
earned principally from monthly payments received from utilities, which
represent shared electricity savings from the installation of the energy
efficient equipment.
During the second quarter of 2002, we completed our impairment testing of all
recorded goodwill in accordance with guidance set forth in SFAS 142 including
the goodwill associated with the 11 HVAC operating companies acquired by Energy
Technologies. Such analysis indicated that the entire $53 million of goodwill
associated with the HVAC companies was impaired, which resulted in a $32 million
(after-tax) charge (net of $20 million in taxes). In accordance with SFAS 142,
this charge was recorded as of January 1, 2002 as a Cumulative Effect of a
Change in Accounting Principle, reflected in our results of operations for the
six months ended June 30, 2002.
In June 2002, we adopted a plan to sell our interests in the HVAC operating
companies. The sale of the HVAC operating companies is expected to be completed
by December 31, 2002. We have retained the services of an investment-banking
firm which is marketing the HVAC operating companies to interested parties and
has completed an analysis of the fair market value of the operating companies.
The fair value was lower than our carrying value of these companies, resulting
in an impairment loss recognized for the quarter and six months ended June 30,
2002 (as noted below). Additionally, we have initiated a process for the sale of
Energy Technologies' asset management group, which we expect to sell by June 30,
2003. Based on our assessments, we believe the fair market value of these assets
approximates their carrying value as of June 30, 2002. The HVAC operating
companies and the asset management group meet the criteria for classification as
components of discontinued operations and all prior periods have been
reclassified to conform to the current year's presentation.
In addition to the goodwill impairment, we have further reduced the carrying
value of the investments in the 11 HVAC operating companies to their fair value
less costs to sell, and recorded a loss on disposal for the quarter and six
months ended June 30, 2002 of $20 million, net of $11 million in taxes. Our
remaining investment position in Energy Technologies is approximately $135
million, of which approximately $35 million relates to deferred tax assets, for
which no valuation allowance is deemed necessary. Excluding the deferred tax
assets, approximately 70% of our remaining investment balance relates to the
asset management group and 30% relates to the HVAC companies. Although we
believe that we will be able to sell the HVAC and asset management businesses,
we can give no assurances that we will be able to realize their total carrying
values.
Operating results of Energy Technologies, less certain allocated costs from
Energy Holdings, have been reclassified into discontinued operations in our
Consolidated Statements of Operations. The results of operations of these
discontinued operations for the quarter and six months ended June 30, 2002,
yielded additional losses of $5 million (after-tax) and $8 million (after-tax),
respectively, and are disclosed below:
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quarter Ended Six Months Ended
June 30, June 30,
---------------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
(Millions of Dollars) (Millions of Dollars)
Operating Revenues ......... $ 97 $111 $198 $213
Pre-Tax Operating Loss ..... (6) (13) (10) (17)
Loss Before Income Taxes ... (7) (13) (11) (18)
The carrying amounts of the assets and liabilities of Energy Technologies'
investments, as of June 30, 2002 and December 31, 2001, have been reclassified
into Current Assets of Discontinued Operations and Current Liabilities of
Discontinued Operations, respectively, on our Consolidated Balance Sheets. The
carrying amounts of the major classes of assets and liabilities of Energy
Technologies' investments, as of June 30, 2002 and December 31, 2001, are
summarized in the following table:
June 30, December 31,
2002 2001
-------- ------------
(Millions of Dollars)
CURRENT ASSETS
Accounts Receivable:
Trade (net of allowance for
doubtful accounts) ........................ $ 79 $ 114
Notes Receivable .............................. 21 21
Costs and Estimated Earnings
in Excess of Billings
on Uncompleted Contracts .................... 14 19
Other ......................................... 4 4
----- -----
Total Current Assets ...................... 118 158
----- -----
PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment ................. 50 45
Accumulated Depreciation
and Amortization ............................ (33) (31)
----- -----
Net Property, Plant and Equipment ......... 17 14
----- -----
INVESTMENTS ...................................... 47 54
----- -----
OTHER ASSETS
Goodwill ...................................... -- 53
Other ......................................... 10 11
----- -----
Total Other Assets ........................ 10 64
----- -----
TOTAL ASSETS ..................................... $ 192 $ 290
===== =====
8
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, December 31,
2002 2001
-------- -----------
(Millions of Dollars)
CURRENT LIABILITIES
Accounts Payable:
Trade ..................................... $33 $38
Other ..................................... 16 17
Affiliated Companies ...................... 3 8
Non-Recourse Notes Payable .................. 6 --
Billing in Excess of Costs and
Estimated Earnings on
Uncompleted Contracts ..................... 25 19
--- ---
Total Current Liabilities ............... 83 82
NONCURRENT LIABILITIES ......................... 3 6
LONG-TERM DEBT ................................. 6 1
--- ---
TOTAL LIABILITIES .............................. $92 $89
=== ===
Tanir Bavi
Global owns a 74% interest in Tanir Bavi Power Company Private Ltd. (Tanir
Bavi), which owns and operates a 220 MW barge mounted, combined-cycle generating
facility in India. The plant commenced combined-cycle commercial operation in
2001. Power from the plant is being sold under a seven-year fixed price Power
Purchase Agreement (PPA) with the Karnataka Power Transmission Company Limited
(KPTCL), a state affiliated entity, formerly known as Karnataka Electricity
Board.
Our impairment testing of the goodwill associated with Global's acquisition of
Tanir Bavi indicated that the entire $27 million of goodwill recorded in
connection with our investment in Tanir Bavi was impaired and resulted in an $18
million charge, net of $9 million in taxes. In accordance with SFAS 142, this
charge was recorded as of January 1, 2002 as a component of the cumulative
effect of a change in accounting principle, reflected in our results of
operations for the six months ended June 30, 2002. For additional information
see Note 2. Recent Accounting Pronouncements and Note 4. Asset Impairments.
Tanir Bavi has been in dispute with KPTCL regarding the terms of payment
specified in the PPA relating to the fixed portion of the tariff, which is
approximately US $0.04 per kilowatt-hour. The amount of the dispute is
approximately half of this fixed amount. During the first quarter of 2002, KPTCL
referred the dispute to the government of Karnataka, which directed KPTCL to
accept Tanir Bavi's position. Prior to KPTCL's acceptance of such direction,
however, the Karnataka Electricity Regulatory Commission (KERC) exercised
jurisdiction over the matter and requested that KPTCL not comply with the
requests of the government of Karnataka until KERC had reviewed the matter. A
hearing was held in May 2002, at which KERC determined that the disputed amounts
could not be paid until the parties complied with the dispute resolution process
called for in the PPA. The dispute resolution process and certain other legal
remedies could take an extended period of time before a result is known. While
pursuing legal recourse, it is likely we will need to make additional equity
contributions in the plant to maintain liquidity. We believe the delays in the
process have greatly diminished our expectations of a satisfactory resolution
and in June 2002, we adopted a plan to exit Tanir Bavi.
Global and its partner in this venture, GMR Vasavi Group, a local Indian
company, are in negotiations for the sale of Global's majority interest in Tanir
Bavi to the GMR Vasavi Group. The final negotiations and completion of sale are
expected to occur in the third quarter of 2002. Should this sale not be
consummated, we will seek another buyer for
9
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
this facility. In such an event, we can give no assurances that we will be able
to realize the amount of our adjusted carrying value. Tanir Bavi meets the
criteria for classification as a component of discontinued operations and all
prior periods have been reclassified to conform to the current year's
presentation. We have reduced the carrying value of Tanir Bavi to its fair value
less costs to sell and recorded a loss on disposal for the quarter and six
months ended June 30, 2002 of $14 million (after-tax). The operating results of
Tanir Bavi for the quarter and six months ended June 30, 2002 yielded income of
$2 million (after-tax) and $5 million (after-tax), respectively. The respective
income from discontinued operations partially offsets the loss on disposal.
Our share of operating results of this discontinued operation are summarized in
the following table:
Quarter Ended Six Months Ended
June 30, June 30,
------------- ----------------
2002 2001* 2002 2001*
---- ----- ---- -----
(Millions of Dollars)
Operating Revenues ............. $32 $ 1 $61 $ 1
Operating Income ............... 11 1 23 1
Income Before Income Taxes ..... 3 1 9 1
* Operating results for Tanir Bavi were recorded in accordance with the
equity method of accounting for the quarter and six months ended June 30,
2001.
10
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The carrying amounts of the assets and liabilities of Tanir Bavi, as of June 30,
2002 and December 31, 2001, have been reclassified into Current Assets of
Discontinued Operations And Current Liabilities of Discontinued Operations,
respectively, in our Consolidated Balance Sheets. The carrying amounts of the
major classes of assets and liabilities of Tanir Bavi, as of June 30, 2002 and
December 31, 2001, are summarized in the following tables:
June 30, December 31,
2002 2001
-------- -----------
ASSETS (Millions of Dollars)
Cash ........................................ $ 3 $ 2
Accounts Receivable:
Trade (net of allowance for
doubtful accounts) ...................... 17 26
Notes Receivable ............................ 9 5
Inventory ................................... 3 3
----- -----
Total Current Assets ...................... 32 36
----- -----
PROPERTY, PLANT AND EQUIPMENT
Electric Generation and
Distribution Assets ....................... 197 194
Accumulated Depreciation .................... (14) (4)
----- -----
Net Property, Plant and Equipment ......... 183 190
----- -----
OTHER ASSETS
Goodwill .................................... -- 27
Other ....................................... 15 --
----- -----
Total Other Assets ........................ 15 27
----- -----
OTHER ASSETS
TOTAL ASSETS ............................ $ 230 $ 253
===== =====
LIABILITIES
Long-Term Debt Due Within One Year .......... $ 28 $ 28
Accounts Payable--Trade ..................... 21 16
Accounts Payable--Other ..................... 3 1
----- -----
Total Current Liabilities ................. 52 45
LONG-TERM DEBT ................................. 117 108
MINORITY INTEREST .............................. 19 19
----- -----
TOTAL LIABILITIES .............................. $ 188 $ 172
===== =====
Note 4. Asset Impairments
As of December 31, 2001, our aggregate investment exposure in Argentina was $632
million, including certain loss contingencies. These investments included a 90%
owned distribution company, Empresa Distribuidora de Electricidad de Entre Rios
S.A. (EDEERSA); and minority interests in three distribution companies, Empresa
Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur
S.A. (EDES), and Empresa Distribuidora La Plata S.A. (EDELAP) and two generating
companies, Central Termica San Nicolas (CTSN), and Parana which are under
contract for sale to certain subsidiaries of The AES Corporation (AES). As of
June 30,
11
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2002, we have determined that the carrying value of our Argentine investments
was impaired. The combination of the year-to-date operating losses, goodwill
impairment at EDEERSA, write-down of $506 million for all Argentine assets, and
certain loss contingencies resulted in a pre-tax charge to earnings of $632
million ($410 million after-tax) for the six months ended June 30, 2002. In
connection with the write-down of our Argentine assets, we recorded a deferred
tax asset of $220 million. We believe that we will have sufficient future
capital gains to realize this deferred tax asset. For a discussion of certain
contingencies related to our Argentine investments, see Note 7. Commitments and
Contingencies.
The tables below provide pre-tax and after-tax impacts of the various impairment
charges, results of operations, and accruals of loss contingencies recorded with
respect to our investments in Argentina for the quarter and six months ended
June 30, 2002 and June 30, 2001.
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
----- ----- ----- -----
(Millions of Dollars)
(pre-tax)
(Losses) Earnings Before Local Taxes-EDEERSA ................. $ (14) $ 2 $ (59) $ 5
Write-down of EDEERSA ........................................ (94) -- (94) --
Write-down of Assets Held for Sale to AES .................... (412) -- (412) --
Loss Contingencies and Other ................................. (8) -- (11) --
Goodwill Impairment-EDEERSA .................................. -- -- (56) --
----- ----- ----- -----
Total .................................................... $(528) $ 2 $(632) $ 5
----- ----- ----- -----
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
----- ----- ----- -----
(Millions of Dollars)
(after-tax)
(Losses) Earnings-EDEERSA .................................... $ (9) $ 1 $ (40) $ 3
Write-down of EDEERSA ........................................ (61) -- (61) --
Write-down of Assets Held for Sale to AES .................... (268) -- (268) --
Loss Contingencies and Other ................................. (5) -- (5) --
Goodwill Impairment-EDEERSA .................................. -- -- (36) --
----- ----- ----- -----
Total .................................................... $(343) $ 1 $(410) $ 3
----- ----- ----- -----
EDEERSA
Given the year-to-date and projected operating losses at EDEERSA and the
continued economic uncertainty in Argentina, we determined that it was necessary
to test these assets for impairment. As a result of this analysis, we determined
that these assets are completely impaired under SFAS 144. We recorded total
charges and losses of $213 million, pre-tax, related to this investment for the
six months ended June 30, 2002. These pre-tax charges consisted of goodwill
impairment charges of $56 million, six month operating losses of $59 million, of
which $45 million was recorded in the first quarter, writing off the remaining
$94 million net asset balance pursuant to our SFAS 144 impairment analysis and
loss contingencies and other items of $4 million. The total after-tax charges
and losses related to this investment were $139 million, for the six months
ended June 30, 2002.
In addition, we have developed an exit strategy to dispose of our equity
interest in EDEERSA. This exit is expected to be complete by June 30, 2003, and
we intend to operate EDEERSA while carrying out our exit plans. However, due to
uncertainties related to the timing and method of disposal of our investment in
EDEERSA, the impairment charges and results of EDEERSA's operations will not be
reported as a discontinued operation until EDEERSA has
12
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
been disposed of or a sale is probable. During the second quarter of 2002,
EDEERSA defaulted on its debt, which is nonrecourse to Global and us.
As of January 1, 2002, goodwill related to our investment in EDEERSA was
approximately $56 million and was included in our previously disclosed
investment exposure. As part of the adoption of SFAS 142, we have determined
that this goodwill was impaired and all of the goodwill has been written-down as
a cumulative effect of a change in accounting principle as of January 1, 2002
and is reflected in our Consolidated Statement of Operations for the six months
ended June 30, 2002. See below, Goodwill Impairment Analysis, for a further
discussion of our goodwill analysis.
Our share of the (Losses) Earnings for EDEERSA were included in our Consolidated
Statement of Operations as indicated in the following table:
Quarter Ended Six Months Ended
June 30, June 30,
---------------- ----------------
2002 2001* 2002 2001*
---- ----- ---- -----
Operating Revenues ................. $ 5 $ 2 $ 19 $ 5
Operating Expenses ................. 4 -- 14 --
---- ---- ---- ----
Operating Income ................... 1 2 5 5
Other Losses - Foreign Currency
Transaction Loss ................. (15) -- (68) --
----
Minority Interest and Other ........ -- -- 4 --
---- ---- ---- ----
(Loss) Earnings before Taxes ....... $(14) $ 2 $(59) $ 5
==== ==== ==== ====
* Operating results for EDEERSA were recorded in accordance with the equity
method of accounting for the quarter and six months ended June 30, 2001.
Stock Purchase Agreement
On August 24, 2001, Global entered into a Stock Purchase Agreement with AES to
sell its minority interests in EDEN, EDES, EDELAP, CTSN and Parana, to certain
subsidiaries of AES. On February 6, 2002, AES notified Global that it was
terminating the Stock Purchase Agreement. In the Notice of Termination, AES
alleged that a Political Risk Event, within the meaning of the Stock Purchase
Agreement, had occurred, by virtue of certain decrees of the Government of
Argentina, thereby giving AES the right to terminate the Stock Purchase
Agreement. Global disagreed that a Political Risk Event as defined in the Stock
Purchase Agreement, which is limited to expropriation of assets, had occurred
and has so notified AES. Global's position is that the risk of a change to
currency policy and the related events in Argentina were acknowledged by the
parties and reflected in the purchase price. Global maintains that the
"Political Risk Event" contemplated as a basis for termination was narrowly
defined and limited to expropriation or similar circumstances. There has been no
expropriation to date. In April 2002, Global filed a lawsuit in New York State
Supreme Court for New York County against AES to enforce its rights under the
Stock Purchase Agreement, which it is pursuing.
A motion is pending before the court seeking an expedited trial of Global's
claim for specific performance. We cannot predict the ultimate outcome of this
matter.
Since AES is disputing its obligation to close and we cannot predict the outcome
of the litigation, we determined it was necessary to test these assets for
impairment. As a result of this analysis, it was determined that these assets
are fully impaired and we recorded a write-down in the amount of $412 million
(pre-tax) and $268 million (after-tax) for the quarter and six months ended June
30, 2002 and loss contingencies and other items of $7 million (pre-tax) and $3
million (after-tax) for the quarter and six months ended June 30, 2002,
respectively. In connection with the terms of the Stock Purchase Agreement,
Global has accrued interest and other receivables of $17 million through
February 6, 2002, which are direct obligations of AES and represent the total
remaining exposure associated with these investments on our Consolidated Balance
Sheets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Goodwill Impairment Analysis
We have finalized our evaluation of the effect of adopting SFAS 142 on the
recorded amount of goodwill. The total amount of goodwill impairments is $120
million, net of tax of $66 million and is comprised of $36 million (after-tax)
at EDEERSA, $34 million (after-tax) at Rio Grande Energia (RGE), $32 million
(after-tax) at Energy Technologies and $18 million (after-tax) at Tanir Bavi.
All of the goodwill on these companies, other than RGE, is fully impaired. As
noted above, this impairment charge has been recorded as of January 1, 2002 as a
component of the Cumulative Effect of a Change in Accounting Principle and is
reflected in Consolidated Statement of Operations for the six months ended June
30, 2002. The $53 million of goodwill at Energy Technologies and the $27 million
of goodwill at Tanir Bavi as of December 31, 2001 has been reclassified into
Current Assets of Discontinued Operations on our Consolidated Balance Sheets.
For further detail regarding the goodwill impairments at Energy Technologies and
Tanir Bavi, see Note 3. Discontinued Operations.
As of June 30, 2002, the remaining carrying value of goodwill was $447 million,
of which $441 million was recorded in connection with Global's acquisitions of
Sociedad Austral de Electricidad S.A. (SAESA) and Empresa de Electricidad de los
Andes S.A. (Electroandes) in Chile and Peru in August and December of 2001,
respectively. For the year ended December 31, 2001, the amortization expense
related to goodwill was $3 million.
As of June 30, 2002, our pro-rata share of the remaining goodwill included in
equity method investees totaled $300 million. In accordance with generally
accepted accounting principles, such goodwill is not consolidated on our balance
sheet. Our share of the amortization expense related to such goodwill was $8
million for the year-ended December 31, 2001.
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of June 30, 2002 and December 31, 2001, our goodwill and pro-rata share of
goodwill in equity method investees was as follows:
As of
June 30, 2002 December 31, 2001
------------- -----------------
Global (Millions of Dollars)
SAESA ................................. $315 $315
EDEERSA(1) ............................ -- 63
Electroandes (2) ...................... 126 164
ELCHO ................................. 6 6
-----------------------
Total Consolidated Goodwill ..... 447 548
Global
RGE (3) ............................... 75 142
Chilquinta (4) ........................ 166 174
Luz del Sur ........................... 34 34
Kalaeloa .............................. 25 25
-----------------------
Pro-Rata Share of Equity
Investment Goodwill ............... 300 375
-----------------------
Total Goodwill .................. $747 $923
=======================
(1) The decrease at EDEERSA relates to an impairment of $56 million under SFAS
142 and to purchase price adjustments of $7 million made subsequent to
December 31, 2001 that resulted in reduction in the carrying value of
goodwill from $63 million to $56 million.
(2) The decrease at Electroandes relates to purchase price adjustments made
subsequent to December 31, 2001 which resulted in higher value allocated
to Property, Plant and Equipment.
(3) The decrease at RGE relates to an impairment of $50 million under SFAS 142
and $17 million for the devaluation of the Brazilian Real.
(4) The decrease at Chilquinta relates to the devaluation of the Chilean Peso.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 5. Income Taxes
We file a consolidated Federal income tax return with PSEG. We have entered into
tax allocation agreements with PSEG which provide that we will record our tax
liabilities as though we were filing separate returns and will record tax
benefits to the extent that PSEG is able to receive those benefits. Deferred
income taxes are provided for the temporary differences between book and taxable
income, resulting primarily from the use of revenue recognition under the equity
method of accounting for book purposes, as well as the use of accelerated
depreciation for tax purposes and the recognition of fair value accounting for
book purposes. We defer and amortize investment and energy tax credits over the
lives of the related properties. Our effective tax rate differs from the
statutory Federal income tax rate of 35% primarily due to the imposition of
state taxes and the fact that Global accounts for many of its foreign
investments using the equity method of accounting. Under such accounting method,
Global reflects in revenues its pro-rata share of the investment's net income
and the foreign income taxes are a component of our equity in earnings rather
than included as a component of our income tax provision.
A tax (benefit) expense has been recorded for the results of continuing
operations. An analysis of that (benefit) expense is as follows:
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
--------------------------------------------------------
(Millions of Dollars)
Pre-Tax (Loss) Income .......................................... $(491) $ 30 $(487) $ 99
Tax Computed at the Federal Statutory Rate @ 35% ............... (172) 11 (170) 35
Increases (decreases) from Federal statutory
rate attributable to:
State Income Taxes after Federal Benefit ................... -- 2 1 4
Rate Differential of Foreign Operations .................... (6) (5) (8) (17)
Other ...................................................... 1 (3) -- (4)
--------------------------------------------------------
Total Income Tax (Benefit) Expense ............................. $(177) $ 5 $(177) $ 18
--------------------------------------------------------
Effective Income Tax Rate ................................ (36.0)% 15.0% (36.4)% 17.8%
In connection with the write-down of our Argentine assets, certain goodwill
impairments, and impairment charges associated with our decision to exit Tanir
Bavi and the businesses of Energy Technologies, we recorded a deferred tax asset
of $269 million. The deferred tax asset is reflected as a reduction of deferred
tax liability on our Consolidated Balance Sheets. We reviewed the deferred tax
asset for recoverability, and determined a valuation allowance was not required.
Note 6. Financial Instruments and Risk Management
Our operations are exposed to market risks from changes in commodity prices,
foreign currency exchange rates, interest rates and equity prices that could
affect our results of operations and financial condition. We manage our exposure
to these market risks through our regular operating and financing activities
and, when deemed appropriate, hedge these risks through the use of derivative
financial instruments. We use the term "hedge" to mean a strategy designed to
manage risks of volatility in prices or rate movements on certain assets,
liabilities or anticipated transactions and by creating a relationship in which
gains or losses on derivative instruments are expected to counterbalance the
losses or gains on the assets, liabilities or anticipated transactions exposed
to such market risks.
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We use derivative financial instruments as risk management tools which are
consistent with our business plans and prudent business practices and not for
speculative purposes.
The notional amounts of derivatives do not represent amounts exchanged by the
parties and, thus, are not a measure of our exposure through our use of
derivatives.
Equity Securities
Resources has investments in equity securities and limited partnerships.
Resources carries its partnership investments in certain capital and leveraged
buyout funds investing in securities at fair value where market quotations and
an established liquid market of underlying securities in the portfolio are
available. Consequently, the carrying value of these investments is affected by
changes in the fair value of the underlying securities. Fair value is determined
by adjusting the market value of the securities for liquidity and market
volatility factors, where appropriate. For investments where there is not a
liquid market, Resources relies on the investment fund manager to determine if
the fund has experienced an other than temporary impairment for which a loss
would need to be recorded. During the three month period ended June 30, 2002,
Resources recognized such a loss of approximately $26 million pre-tax which is
included in Net Losses on Investments. As of June 30, 2002, Resources had
investments in leveraged buyout funds of approximately $90 million, of which $21
million was comprised of public securities with available market prices and $69
million were private investments. Comparably, as of December 31, 2001, Resources
had investments in leveraged buyout funds of approximately $130 million, of
which $35 million was comprised of public securities with available market
prices and $95 million were private investments.
Foreign Currencies
We conduct our business on a multinational basis in a wide variety of foreign
currencies. Our objective for foreign currency risk management policy is to
preserve the economic value of cash flows in currencies other than the US
Dollar. Our policy is to hedge significant probable future cash flows identified
as subject to significant foreign currency variability. In addition, we
typically hedge a portion of our exposure resulting from identified anticipated
cash flows, providing the flexibility to deal with the variability of
longer-term forecasts as well as changing market conditions, in which the cost
of hedging may be excessive relative to the level of risk involved. Our foreign
currency hedging activities to date include hedges of US Dollar debt
arrangements in operating companies that conduct business in currencies other
than the US Dollar and purchase of options to limit downside on earnings
translation.
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of June 30, 2002, Global and Resources had international assets of
approximately $2.870 billion and $1.425 billion, respectively. For further
analysis of our international assets, see Note 8. Financial Information by
Business Segments.
Resources' international investments are primarily leveraged leases of assets
located in Austria, Australia, Belgium, China, Germany, the Netherlands, New
Zealand and the United Kingdom with associated revenues denominated in US
Dollars and therefore, not subject to foreign currency risk.
Global's international investments are primarily in projects that presently, or
are expected to, generate or distribute electricity in, Brazil, Chile, China,
India, Italy, Oman, Peru, Poland, Taiwan, Tunisia and Venezuela. Investing in
foreign countries involves certain additional risks. Economic conditions that
result in higher comparative rates of inflation in foreign countries are likely
to result in declining values in such countries' currencies. As currencies
fluctuate against the US Dollar, there is a corresponding change in Global's
investment value in terms of the US Dollar. Such change is reflected as an
increase or decrease in the investment value and Other Comprehensive (Loss)
Income (OCI), as part of the cumulative translation adjustment, a separate
component of Stockholder's Equity. As of June 30, 2002, net foreign currency
devaluations have reduced the reported amount of our total Stockholder's Equity
by $276 million, of which $184 million and $84 million were caused by the
devaluation of the Brazilian Real and the Chilean Peso, respectively. For the
net foreign currency devaluations for the quarter and six months ended June 30,
2002 and 2001, see Note 9. Comprehensive Income.
In May 2002, Energy Holdings purchased foreign currency call options in order to
hedge its average 2002 earnings denominated in Brazilian Reais and in Peruvian
Nuevo Sols for the remainder of 2002. As of June 30, 2002, there were six call
options outstanding on the Brazilian Real, one expiring in each month through
December 2002. The aggregate notional value of these contracts was approximately
$17 million as of June 30, 2002. The fair value of those options as of June 30,
2002 was $1 million. In addition, there were six call options outstanding on the
Peruvian Nuevo Sol, one expiring in each month through December 2002. The
aggregate notional value of these contracts was approximately $48 million as of
June 30, 2002. The fair value of those options as of June 30, 2002 was
negligible. These options are not considered hedges for accounting purposes and,
as a result, changes in their fair value are recorded directly to earnings.
The fair value of foreign currency derivatives, designated and effective as cash
flow hedges, are initially recorded in OCI. Reclassification of unrealized gains
or losses on cash flow hedges of variable-rate debt instruments from OCI into
earnings occurs as payments are made on the derivative instruments and generally
offsets the change in the value of the hedged item. We estimate reclassifying $1
million of foreign exchange gains from foreign currency cash flow hedges,
including our pro-rata share from our equity method investees, from OCI to our
Consolidated Statements of Operations over the next 12 months. For the quarter
and six months ended June 30, 2002, losses of less than $1 million were
transferred from OCI to our Consolidated Statements of Operations.
Interest Rates
We are subject to the risk of fluctuating interest rates in the normal course of
business. Our policy is to manage interest rate risk through the use of fixed
rate debt, floating rate debt and interest rate swaps. As of June 30, 2002, a
hypothetical 10% change in market interest rates would result in a $4 million
change in annual interest costs related to our short-term and floating rate
debt.
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We construct a hypothetical swap to mirror all the critical terms of the
underlying debt and utilize regression analysis to assess the effectiveness of
the actual swap at inception and on an ongoing basis. The assessment will be
done periodically to ensure the swaps continue to be effective. PSEG determines
the fair value of interest rate swaps through counterparty valuations, internal
valuations and the Bloomberg swap valuation function. There have been no
material changes in the techniques or models used in the valuation of interest
rate swaps during the periods presented. There is minimal impact of counterparty
credit risk the fair value of the hedges since our policies require that our
counterparties have investment grade credit ratings.
We have entered into interest rate swaps to lock in fixed interest rates on
certain of our construction loans to hedge forecasted future interest payments.
We have elected to use the Hypothetical Derivative Method to measure
ineffectiveness of the hedges as described under Derivative Implementation Group
(DIG) Issue No. G7.
Ineffectiveness may occur if the actual draw down of the debt and the notional
amount of the swap during the construction phase are different. The amount of
ineffectiveness, if any, is recorded in earnings at the end of the reporting
period. The impact of ineffectiveness on net income should be minimal because
the interest rate swaps and the underlying debt are indexed to the same
benchmark interest rate. Therefore, interest rate fluctuations should be offset.
Global is constructing electric generation facilities in Oman, Poland and
Tunisia. The operating companies of these facilities have entered into interest
rate swaps to lock in fixed interest rates on up to $650 million of its
construction loans. Such interest rate swaps hedge the value of the cash flows
of future interest payments. The gross notional amounts, interest rates, fair
values and impacts to Accumulated OCI as of June 30, 2002 are listed below.
Global currently owns 81%, 55%, and 60% of the Oman, Polish, and Tunisian
investments, respectively:
Oman Poland Tunisia
-------- --------------------------- -----------------------
US $ US $ Polish Zloty US $ Euro
Tranche Tranche Tranche Tranche Tranche
-------- ------- ------------ ------- -------
(Millions of Dollars, where applicable)
Notional Amount .......................... $ 70 $ 127 $ 57 $ 57 $ 72
Pay Rate ................................. 6.3% 8.4% 13.2% 7.0% 5.2%
Receive Rate ............................. LIBOR LIBOR WIBOR* LIBOR EURIBOR**
Fair Value ............................... $ (11) $ (38) $ (30) $ (5) $ (2)
Balance in Accumulated OCI ............... $ 6 $ 13 $ 10 $ 2 $ 1
Percent Ownership ........................ 81% 55% 55% 60% 60%
Maturity ................................. 2018 2010 2010 2009 2009
* WIBOR- Warsaw Inter-Bank Offered Rate
** EURIBOR-Euro Area Inter-Bank Offered Rate
The ineffective portion of these interest rate swaps is recorded in our
Consolidated Statements of Operations. During the quarter and six months ended
June 30, 2002, Global recorded a loss and a gain of less than $1 million,
respectively, after taxes and minority interest, due to the ineffectiveness of
such interest rate swaps.
Global holds investments in various generation facilities in the United States
that are accounted for under the equity method of accounting and, therefore, are
not consolidated in Global's financial statements. Global holds a 50% indirect
ownership in two investments located in Texas and a 50% direct ownership in one
investment in Hawaii (collectively the investees), which hold US Dollar
denominated debt with variable interest payments tied to LIBOR rates. In order
to lock in fixed interest rates on such debt, the investees each entered into
interest rate swaps to hedge the value of the cash flows of their future
interest payments. As of June 30, 2002, the aggregate notional balance of these
swaps was $312 million (Global's share was $156 million), the weighted average
fixed interest rate paid was 6.9% and Global's share of the aggregate fair value
of these swaps was a liability of $12 million. These swaps were designated as
hedges for accounting purposes and, as a result, changes in the fair value of
the hedge were recorded in OCI.
The fair value of interest rate swaps, designated and effective as cash flow
hedges, are initially recorded in OCI. Reclassification of unrealized gains or
losses on cash flow hedges of variable-rate debt instruments from OCI into
earnings occurs as interest payments are accrued on the debt instrument and
generally offsets the change in the interest accrued on the underlying variable
rate debt. We estimate reclassifying $7 million of losses from cash flow hedges,
including our pro-rata share from our equity method investees, from OCI to our
Consolidated Statements of Operations over the next 12 months. For the quarter
and six months ended June 30, 2002, losses of $1 million and $3 million were
reclassified from OCI to our Consolidated Statements of Operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Valuation of Senior Notes
Based on the borrowing rates currently available to us for debt with similar
terms and remaining maturities, the fair value of our long-term debt was as
follows:
June 30, 2002
------------------------------
Carrying Amount Fair Value
--------------- ----------
(Millions of Dollars)
Senior Notes -- Energy Holdings......... $1,779 $1,670
As of July 22, 2002, the fair value of the Senior Notes of Energy Holdings had
further declined in value to an estimated fair value of $1.247 billion. The fair
value of the Senior Notes is based on information obtained from market sources.
Energy Technologies
In April 2002, Energy Technologies entered into two interest rate caps with an
aggregate notional of approximately $5 million to hedge project related floating
rate financings entered into in the second quarter of 2002. These caps were
entered into to protect against benchmark interest rate fluctuations in
accordance with its risk management policy guidelines. As of June 30, 2002, the
fair value of the caps was immaterial.
Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of
nonperformance by counterparties, pursuant to the terms of their contractual
obligations. We have established credit policies that we believe significantly
minimize our exposure to credit risk. These policies include an evaluation of
potential counterparties' financial condition, including credit ratings.
Note 7. Commitments and Contingencies
Argentine Economic Crisis
Global has certain contingent obligations that are likely to occur if certain
projects in Argentina continue to default on their debt and performance
obligations. The estimated amount to cover this exposure is $7 million and has
been recorded as a component of general and administrative operating expenses.
For EDELAP, Global has a standby equity agreement to contribute equity in
support of unpaid interest and US tax liabilities to its borrower subsidiary.
Global's obligation and reimbursement of payments made on its behalf could
amount to $2 million related to this project loan. Global's Chilean distribution
company, SAESA, has guaranteed performance obligations of its subsidiary which
operates in Argentina in the amount of approximately $4 million. Finally,
Global's contingency includes $1 million of likely costs related to defense of
anticipated legal actions which may be taken against PSEG companies or directors
and officers of its Argentine operations.
Under certain circumstances, Global could be obligated to settle its share
(approximately $26 million) of a project loan for EDELAP should it or the
majority owner of the project, take certain actions including forcing or
permitting certain loan parties to declare bankruptcy. In addition, the
guarantee can be triggered by transferring the shares of certain loan parties
without lender consent. Breach of this transfer covenant can be cured by
delivering certain pledge agreements relating to the ownership of loan parties
to the lenders. Global could also be liable for any incremental direct damages
arising from the breach of these covenants. Given the likely cure of any breach
by the project sponsors, such a contingent obligation has a low probability of
being triggered, and therefore no provision has been made in our Consolidated
Financial Statements.
20
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SAESA has guaranteed its share of a $35 million debt obligation for a 50% owned
affiliate in Argentina, Edersa. This obligation was recorded on our Consolidated
Balance Sheets as it was considered in the valuation of SAESA at the date of
purchase in August 2001. SAESA needs a waiver from lenders in existing financing
agreements to invest the funds to repay the obligation. We believe such waivers
are likely to be secured. In the event SAESA is not able to obtain the required
waiver and could not raise the necessary funds, Global may be required to make a
$35 million equity contribution to SAESA to repay the obligation. Since this
obligation has been previously recorded, there will be no impact to our
Consolidated Statement of Operations if the transaction is funded.
Default in non-recourse project finance does not cross-default to any other
credit agreements of Energy Holdings. In cases where Energy Holdings or Global
has guaranteed obligations, default under the project finance agreements may be
accelerated if the project is in default. In June 2002 the Administrative Agent
for the EDELAP project loan notified Global that the loan was in default and
Global paid $2 million in Sponsor guarantees that were due. This amount is
included in the $632 million of Argentine investment exposure that was impaired
and recorded in the Consolidated Statement of Operations.
Global
As of June 30, 2002, Energy Holdings had $50 million, or less than 1%, of our
assets invested in the Turboven generation facilities, located in Venezuela.
Recently, Venezuela has been subject to a loss of capital as the country's debt
has been subject to a credit rating downgrade. In February 2002, the government
of Venezuela abandoned its crawling currency peg and allowed the Venezuelan
Bolivar to float freely with the US Dollar. The Bolivar devalued approximately
45% since year-end 2001 from 758 Bolivars to 1 US Dollar to 1,386 Bolivars to 1
US Dollar as of June 30, 2002. The Turboven power purchase contracts are indexed
to the US Dollar as are the fuel supply costs. This implies that, with respect
to power purchase contracts, a devaluation will not impact the level of US
Dollar revenues realized. Our near term income statement exposure relates to our
net monetary position in Bolivars. Since Turboven is a US Dollar functional
entity, any receivables and payables that are not indexed to the US Dollar must
be re-measured to the US Dollar. The impact of the re-measurement is recorded as
a loss or gain to our Consolidated Statements of Operations. The recent
devaluation of the Bolivar did not have a material adverse impact on our
financial position, results of operations or net cash flows.
In May 2001, GWF Energy LLC (GWF Energy), a 50/50 joint venture between Global
and Harbinger GWF LLC, entered into a ten year power purchase agreement (PPA)
with the California Department of Water Resources (CDWR) to provide 340 MW of
electric capacity to California from three new natural gas-fired peaking plants,
the Hanford, Henrietta and Tracy Peaking Plants. Total project cost is estimated
at approximately $335 million. The Hanford Peaking Plant, a 95 MW facility, was
completed and began operation in August 2001. The Henrietta Peaking Plant, also
a 95 MW facility, was completed and began operation in June 2002, and the Tracy
Peaking Plant, a 160 MW facility, received the permits necessary to allow the
start of construction on July 17, 2002 following significant delays in the
permitting process. This late receipt of the Tracy Peaking Plant's permits does
not allow sufficient time to complete construction before the commercial
operations date deadline of October 31, 2002 under the PPA. On February 28,
2002, GWF Energy asserted a force majeure claim under the provisions of the PPA
for an appropriate extension of the deadline.
On April 24, 2002, GWF Energy received notice from the CDWR rejecting GWF
Energy's force majeure claim. GWF Energy is in substantive negotiations with the
CDWR over this matter. We and Global are evaluating the appropriate course of
action to protect GWF Energy's rights under the CDWR PPA. Global's permanent
equity investment in these plants, including contingencies, is not expected to
exceed $100 million after completion of project financing, which is currently
expected to occur in late 2002 or in 2003. In the event financing does not
occur, our investment in this facility could increase to the full amount of the
project costs, noted above. For a description of turbine loans and working
capital loans from Global to GWF Energy pending completion of project financing,
see Note 10. Related-Party Transactions.
On February 25, 2002, the Public Utilities Commission of the State of California
(CPUC) and the State of California Electricity Oversight Board filed complaints
with FERC under Section 206 of the Federal Power Act against certain
21
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
sellers of electricity, which, pursuant to long-term FERC authorized contracts,
provide power to the CDWR. GWF Energy is a named respondent in these
proceedings. The complaints allege that, collectively, the specified long-term
wholesale power contracts are priced at unjust and unreasonable levels and
request FERC to abrogate the contracts to enable the State of California to
obtain replacement contracts as necessary or in the alternative, to reform the
contracts to provide for just and reasonable pricing, reduce the length of the
contracts and strike from the contracts the specific non-price conditions found
to be unjust and unreasonable. On April 25, 2002, FERC consolidated the matters
and set the contracts of GWF Energy and certain other respondents, including the
ten-year PPA, for hearing. FERC determined that the GWF contract, among others,
was entitled to presumption of validity, requiring the CPUC to prove it was
"against the public interest." FERC also strongly encouraged the parties to
negotiate settlements and directed a settlement judge to be appointed to oversee
such negotiations. GWF Energy has entered into, and continues to engage in,
substantive negotiations with representatives of the State of California, under
oversight of the FERC settlement judge, in an attempt to resolve differences
between the parties. We cannot predict the outcome of this matter or its impact
on our financial position, results of operations and net cash flows.
In January 2002, Global completed negotiations to buy a 35% interest in the 590
MW (electric) and 618 MW (thermal) coal-fired Skawina CHP Plant (Skawina),
located in Poland and in June 2002 completed negotiations to increase its
ownership interest to approximately 50%. The transaction includes the obligation
to purchase additional shares in 2003 that will bring Global's aggregate
interest in Skawina to approximately 75%. Skawina supplies electricity to three
local distribution companies and heat mainly to the city of Krakow, under annual
one-year contracts. The sale is part of the Polish Government's energy
privatization program. Global has expended $31 million during 2002 for its
approximately 50% ownership interest and the total equity investment is expected
to be approximately $44 million.
Global owns a 60% interest in Carthage Power Company (CPC), a 471 MW gas-fired
combined-cycle electric generation facility located in Rades, Tunisia. CPC has
entered into a 20-year power purchase contract for the sale of 100% of the
output to Societe Tunisienne de l' Electricite et du Gaz (STEG). The contract
called for the plant to be operational by November 24, 2001, however, due to
delays in construction, this deadline was not met. STEG has declared that it is
entitled to liquidated damages at the rate of $67 thousand a day since November
24, 2001 in accordance with the terms of the power purchase contract. CPC is
contesting STEG's claim and the two parties are currently under negotiation to
settle this dispute. The facility was built by Alstom Centrales Energetiques SA,
(Alstom) an independent contractor, who was also obligated to complete
construction by November 24, 2001. CPC believes it is entitled to reimbursement
from Alstom for damages owed to STEG resulting from construction delays,
however, no assurances can be given.
We, and/or Global have guaranteed certain obligations of Global's affiliates,
including the successful completion, performance or other obligations related to
certain of the projects in an aggregate amount of approximately $190 million as
of June 30, 2002. The guarantees consist of a $61 million equity commitment for
Elektrocieplownia Chorzow Sp. Z o.o. (ELCHO) in Poland, $56 million of various
guarantees for Dhofar Power Company in Oman, a $25 million guarantee related to
bond payment obligations of Chilquinta Energia Finance Co. LLC in connection
with electric distribution companies in Chile and Peru, and various other
guarantees comprising the remaining $48 million. A substantial portion of such
guarantees is cancelled upon successful completion, performance and/or
refinancing of construction debt with non-recourse project debt.
We and our equity method investees are involved in various legal actions arising
in the normal course of business. We do not expect that there will be a material
adverse effect on our financial condition, results of operations and net cash
flows as a result of these proceedings, although no assurances can be given.
Energy Technologies
In the normal course of business, Energy Technologies secures construction
obligations with performance bonds issued by insurance companies. In the event
that Energy Technologies' tangible equity falls below $100 million, we would be
required to provide additional support for the performance bonds. Tangible
equity is defined as net equity less goodwill. As of June 30, 2002, Energy
Technologies' tangible equity was $106 million. Energy Holdings is in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
the process of negotiating alternate support arrangements with bond issuers,
including an indemnification agreement, which is likely to be executed in the
near future. As of June 30, 2002, Energy Technologies had $206 million of such
bonds outstanding, of which $71 million was at risk in ongoing construction
projects. Energy Holdings expects to reduce this amount over time as part of its
exit from this business. The performance bonds are not included in the $190
million of guaranteed obligations, discussed above. No assurances can be given
that Energy Holdings will be successful in extinguishing these obligations.
23
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 8. Financial Information by Business Segments
Information related to the segments of Energy Holdings' business is detailed
below:
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Consolidated
Global Resources Technologies Other (A) Total
------ --------- ------------ --------- ------------
(Millions of Dollars)
For the Quarter Ended
June 30, 2002:
Total Operating Revenues ...................... $ 134 $ 26 $ -- $ -- $ 160
Loss from Discontinued Operations
(including loss on disposal) ................ $ (12) $ -- $ (25) $ -- $ (37)
Segment (Loss) Earnings Available
to PSEG ..................................... $ (321) $ (5) $ (26) $ -- $ (352)
- ------------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
June 30, 2001:
Total Operating Revenues ...................... $ 37 $ 51 $ -- $ -- $ 88
Loss from Discontinued Operations
(including loss on disposal) ................ $ 1 $ -- $ (9) $ -- $ (8)
Segment Earnings (Loss) Available
to PSEG ..................................... $ 4 $ 14 $ (9) $ 3 $ 12
- ------------------------------------------------------------------------------------------------------------------------------------
For the Six Months Ended
June 30, 2002:
Total Operating Revenues ...................... $ 241 $ 78 $ -- $ 1 $ 320
Loss from Discontinued Operations
(including loss on disposal) ................ $ (9) $ -- $ (28) $ -- $ (37)
Cumulative Effect of a Change in
Accounting Principle ........................ $ (88) $ -- $ (32) $ -- $ (120)
Segment (Loss) Earnings Available
to PSEG ..................................... $ (419) $ 9 $ (61) $ (2) $ (473)
- ------------------------------------------------------------------------------------------------------------------------------------
For the Six Months Ended
June 30, 2001:
Total Operating Revenues ...................... $ 126 $ 84 $ -- $ -- $ 210
Loss from Discontinued Operations
(including loss on disposal) ................ $ -- $ -- $ (11) $ -- $ (11)
Extraordinary Loss on
Early Retirement of Debt .................... $ (2) $ -- $ -- $ -- $ (2)
Cumulative Effect of a Change in
Accounting Principle ........................ $ 9 $ -- $ -- $ -- $ 9
Segment Earnings (Loss) Available
to PSEG ..................................... $ 59 $ 17 $ (12) $ 2 $ 66
- ------------------------------------------------------------------------------------------------------------------------------------
As of June 30, 2002:
Total Assets .................................. $ 3,567 $ 3,144 $ 227 $ 5 $ 6,943
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2001:
Total Assets .................................. $ 4,074 $ 3,026 $ 290 $ 49 $ 7,439
- ------------------------------------------------------------------------------------------------------------------------------------
(A) Other activities include amounts applicable to Energy Holdings (parent
corporation), Enterprise Group Development Corporation, PSEG Capital
Corporation and intercompany eliminations.
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PSEG ENERGY HOLDINGS INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Geographic information for Energy Holdings is disclosed below:
Revenues (1) Identifiable Assets (2)
--------------------------------------------------------- --------------------------
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------- June 30, December 31,
2002 2001 2002 2001 2002 2001
------ ------ ------ ------ -------- -----------
(Millions of Dollars)
United States ................ $ 48 $ 40 $ 82 $ 111 $2,648 $2,675
Foreign Countries ............ 112 48 238 99 4,295 4,764
------ ------ ------ ------ ------ ------
Total ................... $ 160 $ 88 $ 320 $ 210 $6,943 $7,439
------ ------ ------ ------ ------ ------
Assets in foreign countries include:
Chile ..................................................................................... $ 996 $ 880
Netherlands ............................................................................... 954 911
Argentina ................................................................................. -- 737
Peru ...................................................................................... 445 520
Tunisia ................................................................................... 277 245
India(3) .................................................................................. 271 288
Poland .................................................................................... 252 166
Brazil .................................................................................... 228 282
Other ..................................................................................... 872 735
------ ------
Total .................................................................................. $4,295 $4,764
====== ======
(1) Revenues are attributed to countries based on the locations of the
investments.
(2) Assets are comprised of investment in corporate joint ventures and
partnerships that are accounted for under the equity method and companies
in which we have a controlling interest for which the assets are
consolidated on our financial statements. Amount is net of pre-tax foreign
currency translation adjustment of $306 million and $283 million as of
June 30, 2002, and December 31, 2001, respectively.
(3) $230 million and $253 million relates to our Tanir Bavi operations, as of
June 30, 2002 and December 31, 2001, respectively. For description of the
discontinued operations of Tanir Bavi, see Note 3. Discontinued
Operations.
The table below reflects our investment exposure in Latin American countries,
through Global:
Investment Exposure
-------------------------
June 30, December 31,
2002 2001
-------- -----------
(Millions of Dollars)
Argentina ................................................................................. $ -- $632
Brazil .................................................................................... 430 467
Chile ..................................................................................... 536 542
Peru ...................................................................................... 431 387
Venezuela ................................................................................. 51 53
The investment exposure consists of invested equity plus equity commitment
guarantees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 9. Comprehensive (Loss) Income
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
----- ----- ----- -----
(Millions of Dollars)
Net (Loss) Income .......................................... $(347) $ 17 $(462) $ 77
Foreign currency translation adjustments (A) ............... (19) (36) (86) (38)
Reclassification adjustment for losses
included in net income ................................. 63 -- 69 --
Cumulative effect of a change in accounting
principle (net of tax of $14 and minority
interest of $12) ........................................ -- -- -- (15)
Current period declines in fair value of
derivative instruments-net (B) ........................... (12) -- (25) (1)
Reclassification adjustment for losses
included in net income ................................. 2 -- 4 --
----- ----- ----- -----
Comprehensive (Loss) Income ................................ $(313) $ (19) $(500) $ 23
===== ===== ===== =====
(A) Net of tax of $29 million and $4 million for the quarters ended June 30,
2002 and 2001, respectively, and $39 million and $4 million for the six
months ended June 30, 2002 and 2001, respectively.
(B) Net of tax and minority interest of $20 million and $26 million for the
quarter and six months ended June 30, 2002, respectively.
Note 10. Related-Party Transactions
Administrative Costs
PSEG Services Corporation (Services) provides and bills administrative services
to us on a monthly basis. Our costs related to such services amounted to $10
million for the six months ended June 30, 2002.
Additional Paid-in Capital
For the six months ended June 30, 2002, PSEG invested $200 million of additional
equity in us, the proceeds of which were used to repay short-term debt and fund
additional investments at Global.
Loans to TIE
In April 1999, Global and its partner, Panda Energy International, Inc.,
established Texas Independent Energy, L.P. (TIE), a 50/50 joint venture, to
develop, construct, own, and operate electric generation facilities in Texas. As
of June 30, 2002 and December 31, 2001, Global's investments in the TIE
partnership include $75 million and $165 million, respectively, of loans that
earn interest at an annual rate of 12% that are expected to be repaid over the
next 10 years.
Loans to GWF Energy
In May 2001, GWF Energy, a 50/50 joint venture between Global and Harbinger GWF
LLC, entered into a 10-year PPA with the DWR to provide 340 MW of electric
capacity to California from three new natural gas-fired peaking plants that GWF
Energy expects to build and operate in California. Total project cost is
estimated at approximately $335 million. Global's permanent equity investment in
these plants, including contingencies, is not expected to exceed $100 million
after completion of project financing, which is currently expected to occur in
late 2002 or early 2003. Pending completion of project financing, Global has
provided GWF Energy approximately $98 million of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
secured loans to finance the purchase of turbines. The turbine loans bear
interest at rates ranging from 12% to 15% per annum and are payable in
installments beginning May 31, 2002, with final maturity no later than December
31, 2002. Global has also provided GWF Energy $52 million of working capital
loans as of June 30, 2002, to fund construction costs pending completion of
project financing. Such loans earn interest at 20% per annum and are convertible
into equity at Global's option. For a discussion of the commercial dates of
operation and issues of the permitting process with respect to these three
plants, see Note 7. Commitments and Contingencies.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following are the significant changes in or additions to information reported in
our 2001 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002 affecting our consolidated financial condition and
the results of operations of us and those of our subsidiaries. This discussion
refers to our Consolidated Financial Statements (Statements) and related Notes
to Consolidated Financial Statements (Notes) and should be read in conjunction
with such Statements and Notes. Unless the context otherwise indicates, all
references to "Energy Holdings", "we", "us" or "our" herein mean PSEG Energy
Holdings Inc. and its consolidated subsidiaries.
Overview of the Quarter and Six Months Ended June 30, 2002
Losses to Public Service Enterprise Group Incorporated (PSEG) for the quarter
and six months ended June 30, 2002 were $352 million and $473 million,
respectively. These results include after-tax charges of $380 million and $531
million for the quarter and six months ended June 30, 2002, respectively,
related to the asset impairment of investments in Argentina and losses from
operations of those impaired assets, discontinued operations of Energy
Technologies and a generating facility in India and goodwill impairment charges.
For the six months ended June 30, 2002, as a result of adopting SFAS 142 on
January 1, 2002, an after-tax impairment loss of $120 million was recognized.
This was recorded as the Cumulative Effect of a Change in Accounting Principle
as of the date of adoption. The after-tax charges discussed above are summarized
in the following table:
Quarter Ended Six Months Ended
June 30, 2002 June 30, 2002
------------- ----------------
(Millions of (Millions of
Dollars) Dollars)
------------- ----------------
Global
Argentina - EDEERSA and Assets Held for Sale to AES
Write-down of Investment ........... $343 $374
Goodwill impairment ................ -- 36
---- ----
Total Argentina ............................. 343 410
---- ----
India - Tanir Bavi
Discontinued Operations ............ 12 9
Goodwill impairment ................ -- 18
---- ----
Total Tanir Bavi ............................ 12 27
---- ----
Brazil - RGE
Goodwill impairment ................ -- 34
---- ----
SubTotal for Global ............................... 355 471
---- ----
Energy Technologies
Discontinued Operations ............ 25 28
Goodwill impairment ................ -- 32
---- ----
SubTotal Energy Technologies ...................... 25 60
---- ----
Total ....................................... $380 $531
==== ====
For the quarter and six months ended June 30, 2002, excluding these charges,
Earnings Available to PSEG were $28 million and $58 million, respectively.
Comparable earnings for the quarter and six months ended June 30, 2001 were $20
million and $70 million, respectively. The increase in earnings for the quarter
ended June 30, 2002, excluding these charges, as compared to the same period in
2001 resulted primarily from a gain on withdrawal from Global's interest in
Eagle Point Cogeneration Partnership. This gain was partially offset by
unexpected losses in Resources' leveraged buyout portfolio. The decrease in
earnings for the six months ended June 30, 2002, excluding these charges, as
compared to the same period in 2001 resulted primarily from unexpected losses in
Resources' leveraged buyout portfolio.
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See Results of Operations for further analysis.
Future Outlook
We are a part of Public Service Enterprise Group Incorporated (PSEG's) growth
strategy. In order to achieve this strategy, PSEG Global Inc. (Global) will
selectively focus on generation and distribution investments within targeted
high-growth regions. PSEG Resources Inc. (Resources) will utilize its market
access, industry knowledge and transaction structuring capabilities to expand
its energy-related financial investment portfolio. Resources' assets generate
cash flow and earnings in the near term, while investments at Global generally
have a longer time horizon before achieving expected cash flow and earnings.
Also, Resources' passive lower-risk assets serve to balance the higher risk
associated with operating assets at Global.
While Global realized substantial growth in 2001, significant challenges
developed during the fourth quarter of 2001, and have continued into 2002. These
challenges include the Argentine economic, political and social crisis, the soft
power market in Texas and California (see Business Environment), recent
developments in India (see Note 3. Discontinued Operations of the Notes to
Consolidated Financial Statements) and the worldwide economic downturn. As a
result, Global has refocused its strategy from one of accelerated growth to one
that places emphasis on increasing the efficiency and returns of its existing
assets.
In August 2001, Global entered into a stock purchase agreement to sell its
minority interests in certain Argentine assets to its partner, the AES
Corporation (AES). As a result of the continuing difficulties in Argentina,
Global has initiated a plan to exit all of its operations located in Argentina
and has recorded a combined $632 million (pre-tax) charge to earnings for the
six months ended June 30, 2002 for the operating losses, asset impairments,
goodwill impairment and certain loss contingencies related to the Argentine
investments. We completed our analysis as part of the implementation of SFAS
142, and in addition to the $56 million (pre-tax) of goodwill impairment
recorded in connection with our investment in Empresa Distribuidora de
Electricidad de Entre Rios S.A (EDEERSA), we recorded an additional goodwill
impairment of $130 million (pre-tax) associated with Rio Grande Energia S.A.
(RGE), Energy Technologies and Tanir Bavi Power Company Private Ltd. (Tanir
Bavi). For further discussion of the Argentine economic crisis and the related
losses, goodwill impairments, discontinued operations and certain other
contingencies, see Note 3. Discontinued Operations, Note 4. Asset Impairments
and Note 7. Commitments and Contingencies of the Notes to Consolidated Financial
Statements.
In early 2002, we began to evaluate the future prospects of PSEG Energy
Technologies' (Energy Technologies) business model and its fit in our portfolio
given the slower pace of retail energy deregulation in the markets in which we
are active, as well as, the substandard performance of Energy Technologies since
its inception. In June 2002, we adopted a plan to sell our interests in the
businesses in which Energy Technologies had acquired or developed. For further
discussion of the discontinued operations of Energy Technologies, see Note 3.
Discontinued Operations of the Notes to Consolidated Financial Statements.
In 2002, we are expecting to earn $145 million to $155 million, excluding the
previously discussed charges. For 2003, we expect increases in earnings as
Global, with its major risks in Argentina and India behind it, significant
cost-cutting measures in place and limited spending planned over the next 18 to
24 months, expects improvements in earnings through its focus on increasing the
return on its existing assets; and Resources, with recent and planned
investments and less exposure to its investment in the KKR leveraged buyout
funds, expects to continue to be a steady contributor to earnings and cash
flows.
Access to sufficient capital from external sources and from PSEG as well as the
availability of cash flow and earnings from Global and Resources will be
essential to fund future investments. We continuously evaluate our plans and
capital structure in light of available investment opportunities and seek to
maintain the flexibility to pursue strategic growth investments. Depending upon
the level of investment activity, we anticipate obtaining additional equity
contributions from PSEG as necessary to maintain our growth objectives and
targeted capital structure. The availability of equity capital from PSEG cannot
be assured since it is dependent upon our performance and the needs of PSEG and
PSEG's other subsidiaries.
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PSEG ENERGY HOLDINGS INC.
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Factors Affecting Future Outlook
Our success will be dependent, in part, on our ability to mitigate risks
presented by our international strategy. The economic and political conditions
in certain countries where Global has investments present risks that may be
different than those found in the United States including: renegotiation or
nullification of existing contracts, changes in law or tax policy, interruption
of business, risks of nationalization, expropriation, war, and other factors.
Operations in foreign countries also present risks associated with currency
exchange and convertibility, inflation and repatriation of earnings. In some
countries in which Global has interests, economic and monetary conditions and
other factors could affect Global's ability to convert its cash distributions to
US Dollars or other freely convertible currencies, or to move funds offshore
from such countries. Furthermore, the central bank of any such country may have
the authority to suspend, restrict or otherwise impose conditions on foreign
exchange transactions or to approve distributions to foreign investors. Although
Global generally seeks to structure power purchase contracts and other project
revenue agreements to provide for payments to be made in, or indexed to, US
Dollars or a currency freely convertible into US Dollars, its ability to do so
in all cases may be limited.
The international risks discussed above can potentially be magnified due to the
volatility of foreign currencies. The foreign exchange rates of the Brazilian
Real, Chilean Peso and Peruvian Nuevo Sol have recently weakened due to various
political and economic factors. This could result in comparatively lower
contributions from our distribution investments in US Dollar terms. While we
still expect Latin America to contribute significantly to our earnings in the
future, the political and economic risks associated with this region could have
a material adverse impact on our remaining investments in the region.
Certain of Global's projects are also subject to the risk of changing future
energy prices, including its investment in two 1,000 MW facilities in Texas
which have performed below expectations due to lower energy prices than we had
anticipated, primarily resulting from the over-supply of energy in the Texas
power market. Global expects this trend to continue until the 2004-2005 time
frame when market prices are expected to increase, as older less efficient
plants in the Texas power market are expected to be retired and the demand for
electricity is expected to increase and has included these assumptions within
its business plans. However, no assurances can be given as to the accuracy of
these estimates and changes in these estimates could have a material impact on
its forecasted results of operations, financial position, or net cash flows.
Resources faces risks with regard to the creditworthiness of its counterparties,
as well as the risk of a change in the current tax treatment of its investments
in leveraged leases. The manifestation of either of these risks could cause a
materially adverse effect on its strategy and its forecasted results of
operations, financial position, or net cash flows.
In addition, we have exposure to the equity and debt markets through our
substantial use of short-term financing, the effect of lower assumed rate of
returns and lower fund balances on our pension and other postretirement benefit
plan (OPEB) expenses, the potential impact to Resources' investment in the KKR
leveraged buyout funds, and other equity and debt investments held by us. Also,
increases in the cost of capital, which could result from market and lender
concerns regarding us, our industry, Unites States and international economic
conditions and other factors, could make it more difficult for us to enter into
profitable investments. We are also subject to credit risk.
See Business Environment and Credit Risk for further discussion.
Results of Operations
Energy Holdings -- Revenues
Revenues increased $72 million or 82% and $110 million or 52% for the quarter
and six months ended June 30, 2002, respectively, from the comparable periods in
2001.
Revenues for the quarter ended June 30, 2002 were favorably impacted by
increased revenues of $97 million at Global of which $54 million was related to
the acquisitions in the second half of 2001 of Sociedad Austral de Electricidad
S.A., (SAESA), a Chilean distribution company and Empresa de Electricidad de los
Andes S.A. (Electroandes), a Peruvian generation company. An additional increase
in revenues of $39 million was realized from the gain on withdrawal from Eagle
Point Cogeneration Partnership (Eagle Point). In the first quarter of 2001,
Global withdrew from its interest in Eagle Point in exchange for a series of
payments through 2005, expected to total up to
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$290 million. Such payments will be made in each year until 2005, providing
certain operating contingencies are met. Partially offsetting the increased
revenues at Global was a decrease of $26 million of revenues at Resources. The
reduction in revenues at Resources was primarily related to a net change of $32
million in the carrying value of publicly traded and private securities held
within the KKR leveraged buyout funds. Partially offsetting the decrease in
revenues at Resources was an increase of $6 million in higher leveraged lease
income from continued investment in such financing transactions.
Revenues for the six months ended June 30, 2002 were favorably impacted by
increased revenues of $116 million at Global of which $101 million was related
to the acquisitions of SAESA and Electroandes. Revenues further increased by $13
million due to improved earnings from RGE as new regulatory changes allow RGE to
recover from customers prior tariff charges previously expensed. Partially
offsetting the increased revenues at Global was a decrease of $6 million in
revenues at Resources. The reduction in revenues at Resources was primarily
related to a net change of $23 million in the carrying value of publicly traded
and private securities held within the KKR leveraged buyout funds. Partially
offsetting the decrease in revenues at Resources was an increase of $17 million
in higher leveraged lease income from continued investment in such financing
transactions.
Energy Holdings -- Operating Expenses
Operating expenses increased $552 million and $593 million for the quarter and
six months ended June 30, 2002, respectively, from the comparable periods in
2001. The operating expenses for the quarter and six months ended June 30, 2002
include a $515 million charge associated with the write-down of all Argentine
investments and certain loss contingencies. Our investments in the Argentine
operations were deemed to be fully impaired and we recorded a $506 million
write-down of project investments. In connection with our plans to exit these
businesses in Argentina, we recorded loss contingencies of $7 million associated
with certain potential interest payment defaults at the project level and an
additional $2 million of legal fees for the quarter and six months ended June
30, 2002. The loss contingencies and legal fees were recorded as a component of
administrative and general expenses.
Operating expenses, less expenses associated with the $515 million impairment of
our Argentine investments, increased $37 million or 176% and $78 million or 195%
for the quarter and six months ended June 30, 2002, respectively, from the
comparable periods in 2001. The increases for the quarter and six months ended
June 30, 2002 were primarily due to operating expenses incurred at SAESA and
Electroandes, which were not included in the 2001 results for the comparable
periods.
Energy Holdings -- Interest Expense - Net and Preferred Stock Dividend
Requirements
Interest Expense - Net and Preferred Stock Dividend Requirements increased $17
million, or 41% and $35 million or 42% for the quarter and six months ended June
30, 2002, respectively, from the comparable periods in 2001. The increase was
primarily due to interest expense associated with the $550 million 8.5% Senior
Notes issued in June 2001 and the $400 million of 8.625% Senior Notes issued in
February 2001. The proceeds from the sale of Senior Notes were used for general
corporate purposes, including the funding of the aforementioned acquisitions. In
addition, interest expense increased from non-recourse financings at Tanir Bavi,
SAESA, EDEERSA and Electroandes. Partially offsetting these increases was
reduced interest expense associated with the repayments of $35 million PSEG
Capital Corporation (PSEG Capital) 6.73% Medium-Term Notes in June 2001, $135
million 6.74% Medium-Term Notes in October 2001 and $98 million variable rate
Medium-Term Notes in June 2002.
At June 30, 2002 and December 31, 2001, we had total debt outstanding of $3.415
billion and $3.396 billion, respectively, of which $933 million and $934
million, respectively, is non-recourse to us. At June 30, 2002, and December 31,
2001, we had non-recourse debt related to our discontinued operations of $157
million and $137 million, respectively and is excluded from total debt
outstanding. Such amounts are classified as a component of Current Liabilities
of Discontinued Operations and no longer classified as debt outstanding on our
Consolidated Balance Sheets.
Energy Holdings -- (Losses) Earnings Before Interest and Taxes (EBIT)
Contribution
EBIT includes operating income, other income and minority interest. The results
of operations for each of Energy Holdings' business segments are explained below
with reference to the EBIT contribution. Energy Holdings borrows on the basis of
a combined credit profile to finance the activities of its
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subsidiaries. As such, the capital structure of each of the businesses is
managed by Energy Holdings. Debt at each subsidiary is evidenced by demand notes
with Energy Holdings and PSEG Capital.
Information concerning EBIT is presented here as a measure of financial results,
including a measure of our ability to service debt. In addition, EBIT may not be
comparable to similarly titled measures by other companies. EBIT 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 EBIT 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.
(Losses) Earnings Before Interest and Taxes Contribution
--------------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----- ----- ----- -----
(Millions of Dollars)
EBIT:
Global .................................... $(452) $ 22 $(440) $ 99
Resources ................................. 21 48 70 77
Energy Technologies ....................... (1) (1) (1) (2)
Other ..................................... (2) (3) (4) (4)
----- ----- ----- -----
Total EBIT ..................................... $(434) $ 66 $(375) $ 170
===== ===== ===== =====
Global
Global develops, acquires, owns and operates electric generation and
distribution facilities and engages in power production and distribution,
including wholesale and retail sales of electricity, in selected domestic and
international markets.
Until the fourth quarter of 2000, Global's investments consisted primarily of
minority ownership positions in projects and joint ventures. Other than fees
collected for providing operations and maintenance services, Global's revenues
represented its pro-rata ownership share of net income generated by project
affiliates which are accounted for by the equity method of accounting. The
expenses in the table below were those required to develop projects and general
and administrative expenses required to operate the business as a whole.
In the fourth quarter of 2000, Global increased its interest in Carthage Power
Company, an electric generation facility under construction in Rades, Tunisia
from 35% to 60% and completed project financing for a 55% economic interest in
Elektrocieplownia Chorzow Sp. Z0.0. (ELCHO), a power plant in Poland with the
expectation of an increase to a 90% economic interest by 2003.
In the first quarter of 2001, Global increased its interest in Tanir Bavi, an
electric generation facility in India from 49% to 74%. (For a discussion of our
plan to exit Tanir Bavi, see Note 3. Discontinued Operations of the Notes to
Consolidated Financial Statements.) In the second quarter of 2001, Global
increased its interest in EDEERSA, an electric distribution facility in
Argentina from 41% to 90%. In the third quarter of 2001, Global purchased a 94%
interest and an additional 6% interest in the fourth quarter of 2001 in SAESA, a
group of companies consisting of four distribution companies and one
transmission company that provide electric service in Chile and a distribution
company in Argentina. In the fourth quarter of 2001, Global acquired
Electroandes, a hydroelectric generation and transmission company in Peru. The
accounts of Global include the assets, liabilities, revenues and expenses of
majority-owned subsidiaries over which Global exercises control and for which
control is other than temporary.
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Summary Results - Global
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
----- ----- ----- -----
(Millions of Dollars)
EBIT:
Revenues .................................................... $ 134 $ 37 $ 241 $ 125
Expenses .................................................... 565 14 619 27
----- ----- ----- -----
Operating Income ............................................ (431) 23 (378) 98
Other (Loss) Income and Minority Interests .................. (21) (1) (62) 1
----- ----- ----- -----
EBIT ........................................................ $(452) $ 22 $(440) $ 99
===== ===== ===== =====
Global's EBIT contribution decreased $474 million and $539 million for the
quarter and six months ended June 30, 2002, respectively, from the comparable
periods in 2001. The Global EBIT contribution decrease for the quarter and six
months ended June 30, 2002 was due primarily to the $515 million of operating
expenses associated with the write-down and certain loss contingencies
associated with our Argentine investments. Our investments in the Argentine
operations were deemed to be fully impaired and we recorded a $506 million
write-down of project investments. In connection with our plans to exit these
businesses, we recorded loss contingencies of $7 million associated with certain
potential interest payment defaults at the project level and an additional $2
million of legal fees for the quarter and six months ended June 30, 2002. The
loss contingencies and legal fees were recorded as a component of administrative
and general expenses.
The Global EBIT contribution, less the $515 million of operating expenses
associated with the asset impairments and loss contingencies in Argentina,
increased $41 million or 186% and decreased $24 million or 24% for the quarter
and six months ended June 30, 2002, respectively, as compared to the same
periods in 2001.
The Global EBIT contribution, adjusted for certain Argentine impacts, increased
$41 million for the quarter ended June 30, 2002 primarily related to the $39
million gain on withdrawal from Eagle Point. Earnings from SAESA and
Electroandes were largely offset by losses from marking the US Dollar
denominated debt at EDEERSA to a devaluing Argentine Peso and the decreased
earnings from our investments in the Texas and California generation facilities.
The Global EBIT contribution, adjusted for certain Argentine impacts, for the
six months ended June 30, 2002 decreased $24 million primarily due to losses
from marking the US Dollar denominated debt at EDEERSA to a devaluing Argentine
Peso and reduced earnings from our investments in the Texas and California
generation facilities. This decrease was partially offset by earnings from SAESA
and Electroandes and increased earnings from RGE.
Global investments include partnership interests in seven qualifying facilities
(QFs) in California that sell power under long-term energy and capacity
contracts to Pacific Gas & Electric Company (PG&E). These facilities realized
decreased operating earnings for the quarter and six months ended June 30, 2002
as compared to the same periods in 2001 due to lower energy prices in 2002. In
2001, certain of these generation facilities had benefited from the historically
high wholesale power prices in the California power market, as the contract
terms allowed for certain variable energy pricing. The energy output of these
facilities is currently under a fixed energy contract amendment for a period of
five years ending in July, 2006 to PG&E and earnings are likely to be less
volatile in future periods.
In May 2001, GWF Energy LLC (GWF Energy), a 50/50 joint venture between Global
and Harbinger GWF LLC, entered into a ten-year Power Purchase Agreement (PPA)
with the California Department of Water Resources (CDWR) to provide 340 MW of
electric capacity to California from three new natural gas-fired peaking plants,
the Hanford, Henrietta and Tracy Peaking Plants. The Hanford Peaking Plant, a 90
MW facility, was completed and began operation in August 2001. In early 2002,
the Hanford Peaking Plant was taken off-line for a scheduled environmental
upgrade for a period of three months. During the quarter and six months ended
June 30, 2002, the facility realized operating losses as no revenues were earned
during the outage. In May 2002, the plant completed the environmental upgrade
and it is anticipated to become profitable in the second half of 2002.
For a discussion of the Texas Power Market, see Business Environment.
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Resources
Resources earns its leveraged lease revenues (recorded as Income from Capital
and Operating Leases) primarily from rental payments and tax benefits associated
with such transactions. As a passive investor in limited partnership project
financing transactions, Resources recognizes revenue from its pro-rata share of
the income generated by these investments. As an owner of beneficial interests
in two leveraged buyout funds, Resources recognizes revenue as the share prices
of public companies in the leveraged buyout funds fluctuate. In addition,
revenue is recognized as companies in the fund distribute dividend income
through the fund to the investors and as the fund liquidates its holdings.
Summary Results - Resources
Quarter Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
(Millions of Dollars)
Revenues ...................... $26 $51 $78 $84
Expenses ...................... 5 3 8 7
--- --- --- ---
Operating Income and EBIT ..... $21 $48 $70 $77
=== === === ===
Resources' EBIT contribution decreased $27 million or 56% and $7 million or 9%
for the quarter and six months ended June 30, 2002, respectively, from the
comparable periods in 2001.
The Resources' EBIT contribution decrease for the quarter ended June 30, 2002
was primarily due to $34 million of lower Net Investment Gains (Losses) of which
$6 million resulted from a net decrease in the carrying value of publicly traded
and $26 million from private securities within its leveraged buyout funds.
Partially offsetting this decrease was an increase in revenues of $7 million
from higher leveraged lease income from continued investment by Resources in
such financing transactions.
The Resources' EBIT contribution decrease for the six months ended June 30, 2002
was primarily due to lower Net Investment Gains (Losses) of $23 million, of
which $26 million resulted from a net decrease in the carrying value of private
equity securities within certain leveraged buyout funds. This decrease was
partially offset by an increase of $17 million from higher leveraged lease
income from continued investment by Resources in such financing transactions.
Energy Technologies
Energy Technologies is comprised of 11 heating, ventilating and air conditioning
(HVAC) operating companies and an asset management group which include various
Demand Side Management (DSM) investments. DSM investments in long-term contracts
represent expenditures made by the Company to share DSM customers' costs
associated with the installation of energy efficient equipment.
During the second quarter of 2002, we completed our impairment testing of all
recorded goodwill as required by SFAS 142 including the goodwill associated with
the 11 HVAC operating companies acquired by Energy Technologies. Such analysis
indicated that the entire $53 million of goodwill recorded in connection with
the acquisitions of these HVAC companies was impaired and resulted in a $32
million (after-tax) charge to our Consolidated Statements of Operations. The $32
million (after-tax) goodwill impairment was recorded as a component of the
Cumulative Effect of a Change in Accounting Principle.
In June 2002, we formally executed a plan to sell our interests in the HVAC
operating companies. We have retained the services of an investment-banking firm
to market the HVAC operating companies to interested parties and they have
completed an analysis of the fair market value of the operating companies. The
sale of the HVAC operating companies is expected to be completed by December 31,
2002. Additionally, we have initiated a two-phase process for the sale of our
Asset Management Group, which includes the DSM investments. The first phase is
to finance the DSM assets through non-recourse financing and then sell off the
remaining equity. The HVAC operating companies and the DSM investments meet the
criteria for classification as components of discontinued operations and all
prior periods have been reclassified to conform to the current year's
presentation.
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We have further reduced the carrying value of these related investments to their
estimated net realizable value, and incurred a loss on disposal for the quarter
and six months ended June 30, 2002 of $20 million (after-tax). The operating
results of these discontinued operations for the quarter and six months ended
June 30, 2002, yielded an additional loss of $5 million (after-tax) and $8
million (after-tax), respectively.
Liquidity and Capital Resources
The following discussion of our liquidity and capital resources is on a
consolidated basis, noting the uses and contributions of our three direct
operating subsidiaries, Global, Resources and Energy Technologies.
Financing Methodology
Our capital requirements and those of our subsidiaries are met and liquidity
provided by internally generated cash flow, external financings and equity
contributions from PSEG. We make equity contributions from time to time to our
subsidiaries to provide for part of their capital and cash requirements,
generally relating to long-term investments. At times, we utilize inter-company
dividends and inter-company loans to satisfy various subsidiary needs and
efficiently manage our and our subsidiaries' short-term cash needs. Any excess
funds are invested in accordance with guidelines adopted by our Board of
Directors.
External funding to meet our needs is comprised of corporate finance
transactions and bank credit agreements. The debt incurred is our direct
obligation. We use some of the proceeds of this debt to make equity investments
in our subsidiaries.
Depending on the particular company, external financing may consist of public
and private capital market debt and equity transactions, bank revolving credit
and term loan facilities, commercial paper and/or project financings. Some of
these transactions involve special purpose entities (SPEs), formed in accordance
with applicable tax, accounting and legal requirements in order to achieve
specified beneficial financial advantages, such as favorable tax, legal
liability or accounting treatment. All special purpose entities are consolidated
in our Consolidated Financial Statements, except for certain subsidiaries that
are less than majority owned by us and therefore are not permitted to be
consolidated in our financial statements under generally accepted accounting
principles.
The availability and cost of external capital could be affected by each
subsidiary's performance as well as by the performance of their respective
subsidiaries and affiliates. This could include the degree of structural or
regulatory separation between us and our subsidiaries and between Public Service
Electric and Gas Company and its non-utility affiliates and the potential impact
of affiliate ratings on consolidated and unconsolidated credit quality.
Additionally, compliance with applicable financial covenants will depend upon
future financial position and levels of earnings and net cash flows, as to which
no assurances can be given.
Financing for Global's projects and investments is generally provided by
non-recourse project financing transactions. These consist of loans from banks
and other lenders that are typically secured by project and special purpose
subsidiary assets and/or cash flows. Non-recourse transactions generally impose
no material obligation on the parent-level investor to repay any debt incurred
by the project borrower. However, in some cases, certain obligations relating to
the investment being financed, including additional equity commitments, are
guaranteed by Global, and/or us. Further, the consequences of permitting a
project-level default include loss of any invested equity by the parent.
Over the next several years, we and our subsidiaries will be required to
refinance maturing debt, and expect to incur additional debt and provide equity
to fund investment activity. Any inability to obtain required additional
external capital or to extend or replace maturing debt and/or existing
agreements at current levels and reasonable interest rates may adversely affect
our financial condition, results of operations and net cash flows.
Debt Covenants, Cross Default Provisions, Material Adverse Changes, and Ratings
Triggers
Our debt indenture and credit agreements and the credit agreements of our
subsidiaries and PSEG contain cross-default provisions under which a default by
us or by specified subsidiaries or by PSEG involving specified levels of
indebtedness in other agreements would result in a default and the potential
acceleration of payment under such indentures and credit agreements. For
example, a default with respect to specified indebtedness of us or Global of $5
million or more, including our or Global's equity contribution obligations in
subsidiaries' non-recourse transactions, as set forth in various credit
agreements, would cause a cross-default in one of our or our subsidiaries'
credit agreements and potential acceleration thereunder. A default with respect
to specified indebtedness in an aggregate amount of $50 million for each of
PSEG, PSEG Power, and Public Service Electric and Gas Company, and $5 million
for us, including relevant equity contribution obligations in subsidiaries'
non-recourse transactions would cause a cross-default in PSEG's credit
agreements and potential acceleration thereunder.
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If such a default were to occur, lenders, or the debt holders under our
indenture or any of our or our subsidiaries' credit agreements, after giving
effect to any applicable grace and/or cure periods, could determine that debt
payment obligations may be accelerated as a result of a cross-default. A
declaration of cross-default could severely limit our liquidity and restrict our
ability to meet our debt, capital and, in extreme cases, operational cash
requirements. Any inability to satisfy required covenants and/or borrowing
conditions could have a similar impact. In the event of any likely default or
failure to satisfy covenants or conditions, we, or the relevant subsidiary,
would seek to renegotiate terms of the agreements with the lenders. No
assurances can be given as to whether these efforts would be successful. This
would have a material adverse effect on our financial condition, results of
operations and net cash flows, and those of our subsidiaries.
In addition, our credit agreements and those of PSEG and our subsidiaries
generally contain provisions under which the lenders could refuse to advance
loans in the event of a material adverse change in the borrower's, and as may be
relevant, our, business or financial condition. In the event that we or the
lenders in any of our or our subsidiaries' credit agreements determine that a
material adverse change has occurred, advances of loan funds may be limited.
Some of these credit agreements also contain maximum debt to equity ratios,
minimum cash flow tests and other restrictive covenants and conditions to
borrowing. Compliance with applicable financial covenants will depend upon our
future financial position and the level of earnings and cash flow, as to which
no assurances can be given. As part of our financial planning forecast, we
perform stress tests on our financial covenants. These tests include a
consideration of the impacts of potential asset impairments, foreign currency
fluctuations, and other items. Our current analyses and projections indicate
that we will still be able to meet our financial covenants.
Our debt indenture and credit agreements and those of our subsidiaries do not
contain any material "ratings triggers" that would cause an acceleration of the
required interest and principal payments in the event of a ratings downgrade.
However, in the event of a downgrade we and/or our subsidiaries may be subject
to increased interest costs on certain bank debt. We and Global may have to
provide collateral for certain of our and their equity commitments if our
ratings should fall below investment grade. This would increase our costs of
doing business.
PSEG Capital has a $650 million Medium-Term Note (MTN) program which provides
for the private placement of MTNs. This MTN program is supported by a minimum
net worth maintenance agreement between PSEG Capital and PSEG which provides,
among other things, that PSEG (1) maintain its ownership, directly or
indirectly, of all outstanding common stock of PSEG Capital, (2) cause PSEG
Capital to have at all times a positive tangible net worth of at least $100,000
and (3) make sufficient contributions of liquid assets to PSEG Capital in order
to permit it to pay its debt obligations. At June 30, 2002 and December 31,
2001, total debt outstanding under the MTN program was $382 million and $480
million, respectively, maturing in 2002 and 2003. We expect to repay this debt
and eliminate this borrowing program by the second quarter of 2003.
Credit Ratings
All of our publicly traded debt has received investment grade ratings from each
of the three major credit rating agencies. Debt at PSEG Capital Corp. has
received investment grade ratings from two major credit rating agencies. The
changes in the energy industry and the bankruptcy of Enron Corp. are attracting
increased attention from the rating agencies, which regularly assess business
and financial matters. Given the changes in the industry, attention to and
scrutiny of our performance, capital structure and competitive strategies by
rating agencies will likely continue. These changes could affect the bond
ratings, cost of capital and market prices of our securities. We will continue
to evaluate our capital structure, financing requirements, competitive
strategies and future capital expenditures to maintain our current credit
ratings.
The current ratings of securities of us and PSEG Capital are shown below and
reflect the respective views of the rating agencies, from whom an explanation of
the significance of their ratings may be obtained. There is no assurance that
these ratings will continue for any given period of time or that they will not
be revised or withdrawn entirely by the rating agencies, if, in their respective
judgments, circumstances so warrant. Any downward revision or withdrawal may
adversely effect the market price of our securities or those of PSEG Capital and
serve to increase those companies' cost of capital.
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Moody's (1) Standard & Poor's(2) Fitch(1)
----------- -------------------- --------
Energy Holdings
- ---------------
Senior Notes Baa3 BBB- BBB-
PSEG Capital
- ------------
Medium Term Notes Baa2 BBB- Not Rated
(1) Recently affirmed in the second quarter of 2002 and noted an outlook of
Stable.
(2) Standard and Poor's has established an overall corporate credit rating of
BBB for us.
Short-Term Liquidity
We have the following credit facilities for various funding purposes and to
provide us liquidity. These agreements are with a group of banks and provide for
borrowings with maturities of up to one year. The following table summarizes our
various facilities as of June 30, 2002.
Expiration Total Primary Amount
Energy Holdings Date Facility Purpose Outstanding
---------- -------- ------- -----------
(Millions of Dollars)
364-day Revolving Credit Facility May 2003 $200 Funding $ --
Five-year Revolving Credit Facility May 2004 495 Funding 245
Uncommitted Bilateral Agreement N/A * Funding 76
---- ----
Total $695 $321
==== ====
* Availability varies based on current market conditions
The five-year facility also permits up to $250 million of letters of credit to
be issued of which $12 million were outstanding as of June 30, 2002.
Financial covenants contained in these facilities include the ratio of cash flow
available for debt service (CFADS) to fixed charges. At the end of any quarterly
financial period such ratio shall not be less than 1.50x for the 12-month period
then ending. As a condition of borrowing, the pro-forma CFADS to fixed charges
ratio shall not be less than 1.75x as of the quarterly financial period ending
immediately following the first anniversary of each borrowing or letter of
credit issuance. CFADS includes, but is not limited to, operating cash before
interest and taxes, depreciation and amortization, pre-tax cash distributions
from all asset liquidations and equity capital contributions from PSEG to the
extent not used to fund investing activity plus non-cash, non-recurring charges.
In addition, the ratio of consolidated recourse indebtedness to recourse
capitalization, at the end of any quarterly financial period, shall not be
greater than 0.60 to 1.00. This ratio is calculated by dividing the total
recourse indebtedness by the total recourse capitalization. This ratio excludes
the debt of PSEG Capital which is supported by PSEG. As of June 30, 2002, the
latest 12 months CFADS coverage ratio was 4.8 and the ratio of recourse
indebtedness to recourse capitalization was 0.50 to 1.00.
Compliance with applicable financial covenants will depend upon our future
financial position and the level of earnings and cash flow, as to which no
assurances can be given. In addition, our ability to continue to grow our
business will depend to a significant degree on PSEG's ability to access capital
and our ability to obtain additional financing beyond current levels.
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Capital Requirements
We plan to continue the growth of Resources. Global has refocused its strategy,
from accelerated growth to emphasis on increasing the efficiency and returns on
its existing assets. We are in the process of exiting the businesses of Energy
Technologies and expect to have liquidated all such assets by the end of 2002.
For the six months ended June 30, 2002, our subsidiaries made net investments
totaling approximately $359 million. These investments include an approximately
50% interest of a coal-fired generation facility, currently under construction
in Poland, and additional investments in existing generation and distribution
facilities and projects by Global and an investment in a capital lease by
Resources. Also included was an $88 million loan repayment from TIE. For a
discussion of the loans to TIE, see Note 10. Related-Party Transactions of the
Notes to Consolidated Financial Statements.
In January 2002, Global completed negotiations to buy a 35% interest in the 590
MW (electric) and 618 MW (thermal) coal-fired Skawina CHP Plant (Skawina),
located in Poland and in June 2002 completed negotiations to increase its
ownership interest to approximately 50%. Global has expended $31 million during
2002 for its approximately 50% ownership interest and the total equity
investment is expected to be approximately $44 million. The new facility is
expected to be operational in 2003. Global plans to increase its ownership
interest to 75% over the next few years.
As of June 30, 2002, Energy Holdings had $362 million available for borrowing
under its $695 million of bank lines. Additional amounts of up to $100 million
from an uncommitted bilateral agreement may be available dependent upon current
market conditions. PSEG has announced its intention to contribute in the second
half of 2002 an additional $200 million of equity into Energy Holdings as a
result of this quarter's asset impairments. Energy Holdings is in the process of
reviewing its cost structure and capital investment plans in light of the
increasingly risky environment for international investment. Current plans
anticipate a build out of Global commitments amounting to a net new investment
of $150 million over the next two years and additional investment of
approximately $300 million per year at Resources. The majority of the Resources
investment is discretionary and is dependent upon availability of potential
investments meeting certain profit thresholds. We have $414 million of long-term
debt due within one year, including $130 million of MTNs maturing in the second
half of 2002, of which $100 million matured in July 2002.
Financing Activities
In May 2002, Energy Holdings renewed its 364-day $200 million Revolving Credit
Facility with a group of banks. The new facility matures May 7, 2003. The new
facility has identical terms and conditions to the existing facility with the
exception of an increase in the pricing spread of .125% per annum for
borrowings.
In June 2002, $98 million of PSEG Capital Corp. Medium-Term Notes matured. These
Medium-Term Notes were refunded with proceeds from a private placement of $135
million which reopened the 8.625% Series of Senior Notes due February 2008.
In July 2002, an additional $100 million of PSEG Capital MTNs with an average
borrowing rate of 6.95% matured. These MTNs were refunded with proceeds from
borrowings under Energy Holdings' bank facilities.
Remaining maturities under the PSEG Capital Corp program are $30 million
maturing in October 2002 and $252 million maturing in May 2003. These issues are
expected to be refunded with proceeds of borrowings at Energy Holdings and cash
from operations. We have no other material debt maturities in recourse
transactions through the end of 2003.
Discussion of Critical Accounting Policies
The accounting policies listed below are policies that involve the use of both
objectively and subjectively derived information to record financial statement
transactions in accordance with Generally Accepted Accounting Principles (GAAP)
applied in the United States. The use of subjective judgment and estimates by
management is a critical element in the application of GAAP. The principles
below were determined to be most significant in the determination of our
financial statements for the years presented, and will impact our financial
statements prospectively.
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Accounting for Leveraged Leases
A leveraged lease is recorded by applying cash flows to lease income and
amortization on a constant return basis throughout the lease term. A key
assumption in our lease transactions is the residual value at the end of the
lease term. The residual value is estimated at the beginning of the lease term
and is reviewed annually for adequacy. If management were to determine that
there is a permanent impairment to the residual value of an asset subject to
lease, the reduction must be recorded immediately. Appreciation in residual
value is not booked immediately, but is deferred until termination of the lease
transaction normally through the purchase of the asset by the lessee.
Lease accounting also includes estimates of the likelihood of a borrower's
ability to pay the rent contractually derived in the transaction. If significant
uncertainty exists over the level of rent to be received, or rent is deferred to
future periods, the income accrual must be reduced to reflect lower estimates of
future lease income. In the event of default by a lessee, the leased asset may
be recorded on the balance sheet along with the related non-recourse debt.
Lease accounting also includes estimates of future tax rates. Changes in
statutory rates could affect the level of lease income recorded, as tax cash
flow is a key component of income in a lease transaction.
Measurement of Derivative Financial Instruments
We use derivative financial instruments to hedge floating interest rate and
foreign currency exposure in many markets where we invest. Derivative financial
instruments must be valued and recorded as assets or liabilities in the
financial statements. The derivation of value includes estimates of future
interest rates and exchange rates that are often quite volatile. For a
discussion of our derivative financial instruments, see Note 6. Financial
Instruments and Risk Management of the Notes to Consolidated Financial
Statements.
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Use of Fair Value Accounting
Resources applies fair value accounting for certain securities held in Limited
Partnership interests that have quotable market prices on liquid exchanges. For
other securities in the portfolio that do not trade on liquid exchanges,
securities are carried at cost unless a valuation report prepared by the fund
manager indicates a permanent impairment in value below cost. While objectively
derived, the volatility of securities markets over the past few years has caused
significant fluctuations in security prices. For example, we recorded net pretax
(losses)/gains from fair value adjustments or security sales totaling $(16)
million, $(4) million and $24 million for the three years ended, December 31,
2001, December 31, 2000 and December 31, 1999, respectively.
Accounting for the Effects of Goodwill
Our 2002 Consolidated Statements of Operations have been materially impacted by
the application of SFAS 142. This new standard, effective January 1, 2002,
requires the existence of any goodwill impairment be disclosed in the second
quarter and recorded by the fourth quarter of 2002, applied retroactively to the
first quarter. The basic difference between previous accounting guidance and
this new standard is that the new standard allows for certain valuation
methodologies to test for impairment, including a discounted cash flow method,
compared to an undiscounted cash flow method which was utilized under the
previous standard. The new test must be completed using data as of January 1,
2002. Any amounts impaired using data as of that date will be recorded as a
"Cumulative Effect of an Accounting Change". Any amounts impaired under the new
test using data after the initial adoption date will be recorded in Operating
Expenses. The discounted cash flow tests require broad assumptions and
significant judgment to be exercised by management. This includes projections of
future commodity prices, customer rates, customer demand, operating costs, rate
relief from regulators, customer growth and many other items. While we believe
that our assumptions are reasonable, actual results will likely differ from our
projections.
For an analysis of our existing goodwill as of June 30, 2002, see Note 4. Asset
Impairments of the Notes to Consolidated Financial Statements.
Accounting for Long-Lived Assets
SFAS 144, a new standard related to testing assets for impairment, was adopted
on January 1, 2002. Testing under SFAS 144 is essentially the same as the asset
impairment tests we performed under SFAS 121. This test consisted of an
undiscounted cash flow test to determine if an impairment existed, and, if an
impairment existed, a discounted cash flow test would be done to quantify it.
The new standard is broader in that it includes discontinued operations as part
of its scope. This test requires the same judgment to be employed by management
in building assumptions related to future earnings of individual assets or an
investment as was required in determining potential impairments of goodwill as
discussed above.
These tests are required whenever events or circumstances indicate an impairment
may exist. Examples of potential events which could require an impairment test
are when power prices become depressed for a prolonged period in a market, when
a foreign currency significantly devalues, or when an investment generates
negative operating cash flows. Any potential impairment of investments under
these circumstances is recorded as a component of operating expenses.
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Foreign Currency Accounting
Our financial statements are prepared using the US Dollar as the reporting
currency. In accordance with SFAS 52 "Foreign Currency Translation", foreign
operations whose functional currency is deemed to be the local (foreign)
currency, asset and liability accounts are translated into US Dollars at current
exchange rates and revenues and expenses are translated at average exchange
rates prevailing during the period. Translation gains and losses (net of
applicable deferred taxes) are not included in determining net income but are
reported in OCI. Gains and losses on transactions denominated in a currency
other than the functional currency are included in the results of operations as
incurred.
The determination of an entity's functional currency requires management's
judgment. It is based on an assessment of the primary currency in which
transactions in the local environment are conducted, and whether the local
currency can be relied upon as a stable currency in which to conduct business.
As economic and business conditions change, we are required to reassess the
economic environment and determine the appropriate functional currency. The
impact of foreign currency accounting could have a material adverse impact on
our financial condition, results of operation and net cash flows.
Environmental Matters
Global has ownership interests in facilities, including operating power plants
and distribution companies and power plants under construction or in
development, in numerous countries. These include the United States (California,
Hawaii, Maine, New Hampshire, Pennsylvania and Texas), Brazil, Chile, China,
India, Italy, Oman, Peru, Poland, Taiwan, Tunisia and Venezuela. These
operations are subject to compliance with environmental laws and regulations by
relevant authorities at each location, which may include air and water quality
control, land use, disposal of wastes, aesthetics and other matters. In order to
achieve compliance, expenditures may be needed for construction, continued
operation or remediation of new and existing facilities and sites.
As Global pursues new opportunities, it will be required to comply with
applicable environmental laws and regulations. Global attempts to take such
expenditures into consideration when considering an investment; however, there
can be no assurance that environmental laws and regulations will not change. If
environmental laws or regulations change in the future, there can be no
assurance that our financial condition, results of operations and net cash flows
will not be materially and adversely affected. We are committed to operating our
businesses cleanly, safely and reliably and strive to comply with all
environmental laws, regulations, permits and licenses. However, despite such
efforts, there have been instances of non-compliance, although no such instance
resulted in revocation of any permit or license or caused a materially adverse
effect on our financial condition, results of operations and net cash flows.
We do not anticipate any material capital expenditures for environmental control
facilities or in connection with compliance with federal, state or local
environmental laws and regulations in 2002 or in connection with the generation
projects currently in construction or advanced development. We do not believe
that compliance with federal, state and local environmental laws and regulations
will have a material adverse effect on our financial condition, results of
operations and net cash flows.
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Business Environment
We continue to evaluate the economic consequences of the September 11, 2001
terrorist attacks on the United States and subsequent developments, particularly
their impact on accelerating the continued economic slowdown in the United
States and worldwide. The consequences of a prolonged recession may include the
continued weakening of certain Latin American currencies, including the
Brazilian Real, the Chilean Peso, the Peruvian Nuevo Sol, and the Venezuelan
Bolivar, lower energy prices in power markets, including power markets where
Global invests in merchant generation assets, and further credit rating
downgrades of energy companies, sovereign ratings and certain airlines. As of
June 30, 2002, $1.720 billion or 25% of our assets were invested in Latin
America, specifically in Brazil, Chile, Peru and Venezuela, $1.219 billion of
leveraged leases to domestic energy companies, and $107 million or 1% of our
assets were comprised of leveraged leases of seven aircraft leased to five
separate lessees.
Global has $431 million invested in the electric generation and distribution
sector in Peru. Recent privatizations in this sector have been cancelled due to
pressure from local residents. Such political pressure and disruption may have a
negative impact on Global's investments in Peru.
As of December 31, 2001, Global had $281 million invested in two 1000 MW
gas-fired combined-cycle electric generating facilities in Texas, including
approximately $165 million of loans earning an annual rate of 12%. Of the $165
million outstanding at December 31, 2001, $88 million was repaid in February
2002. TIE's funding for these payments to Global were made from equity
contributions of $44 million from Global and $44 million from Panda Energy.
Earnings and cash distributions from TIE during 2001 of $15 million and $25
million, respectively, were below expectations due to lower energy prices,
resulting from the over-supply of energy in the Texas power market and mild
summer temperatures suppressing demand in the region. Global expects this trend
to continue until the 2004-2005 time frame when market prices are expected to
increase, as older less efficient plants in the Texas power market are expected
to be retired and the demand for electricity is expected to increase. However,
no assurances can be given as to the accuracy of these estimates. Current
projections of future cash flows for each plant, using independent market
studies for estimating gas and electricity prices, market heat rates and
capacity prices, do not indicate the investment to be impaired. We believe that
those independent market studies are the best available for estimating future
prices. This impairment test was completed as of June 30, 2002 in accordance
with SFAS 144 at the project level and no assurance can be given as to the
accuracy of the projections used in the analysis.
Continued weakness in the Texas power market will put pressure on the project's
ability to meet financial covenants in their loan documents. Discussions are
underway with the project lenders to improve flexibility in meeting these
covenants.
We cannot predict the impact of any further currency devaluations, continued
economic slowdown, lower energy prices and potential lessee payment defaults;
however, such impact could have a material adverse effect on our financial
condition, results of operations and net cash flows.
Credit Risk
Counterparties expose us to credit losses in the event of non-performance or
non-payment. We have a credit management process which is used to assess,
monitor and mitigate counterparty exposure for us and our subsidiaries. In the
event of non-performance or non-payment by a major counterparty, there may be a
material adverse impact on our and our subsidiaries' financial condition,
results of operations or net cash flows.
Credit risk relates to the risk of loss that we would incur as a result of
non-performance by counterparties pursuant to the terms of their contractual
obligations. We have established credit policies that we believe significantly
minimize 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.
Resources also has credit risk related to its investments in leveraged leases,
which totaled approximately $1.6 billion, net of deferred taxes of $1.3 billion,
as of June 30, 2002. These investments are significantly concentrated in the
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energy related industry and have some exposure to the airline industry. Although
86% of its investments are with investment grade counterparties, recent events
in the industry have pressured the credit ratings of several of the members of
the industry, including certain of our counterparties in these leveraged lease
investments. The largest non-investment grade lease in Resources' portfolio is
with Dynegy Inc., whose credit rating was recently downgraded to below
investment grade. As of June 30, 2002, the lease with Dynegy Inc. had a gross
investment balance of approximately $161 million. In many of these investments,
Resources has protected its equity investment by providing for the direct right
to assume the debt obligation in the event of default by the lessee. Debt
assumption would be at Resources' sole discretion, and normally only would occur
if an appraisal of the leased property yielded a value that exceeds the present
value of the debt outstanding. Should Resources ever directly assume a debt
obligation, the fair value of the underlying asset and the associated debt would
be recorded on the balance sheet instead of the net equity investment in the
lease. As of June 30, 2002, Resources determined that the collectibility of the
minimum lease payments under its leveraged lease investments is still reasonably
predictable and therefore continues to account for these investments as
leveraged leases.
Accounting Matters
For a discussion of SFAS 142, SFAS 143 and SFAS 144, see Note 2. Recent
Accounting Pronouncements of the Notes to Consolidated Financial Statements.
Forward-Looking Statements
Except for the historical information contained herein, certain of the matters
discussed in this report constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used herein, the words
"will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential", "forecast", "projections" variations of such words
and similar expressions are intended to identify forward-looking statements. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following review of factors should not be construed as exhaustive or as any
admission regarding the adequacy of our disclosures prior to the effective date
of the Private Securities Litigation Reform Act of 1995. In addition to any
assumptions and other factors referred to specifically in connection with such
forward-looking statements, factors that could cause actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following, some of which relate to Energy Holdings indirectly
as a result of their potential impact upon PSEG or Public Service Electric and
Gas Company:
o deregulation and the unbundling of energy supplies and services and
the establishment of a competitive energy marketplace for products
and services;
o managing rapidly changing wholesale energy trading operations in
conjunction with electricity and gas production, transmission and
distribution systems;
o managing foreign investments and electric generation and
distribution operations in locations outside of the traditional
utility service territory;
o political and foreign currency risks;
o sales retention and growth potential in a mature PSE&G service
territory;
o ability to complete development or acquisition of current and future
investments;
o partner and counterparty risk;
o exposure to market price fluctuations and volatility of fuel and
power supply, power output and marketable securities, among others;
o ability to obtain adequate and timely rate relief, cost recovery,
and other necessary regulatory approvals;
o federal, state and foreign regulatory actions;
o regulatory oversight with respect to utility and non-utility
affiliate relations and activities;
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o operating restrictions, increased costs and construction delays
attributable to environmental regulations;
o nuclear decommissioning and the availability of reprocessing and
storage facilities for spent nuclear fuel;
o licensing and regulatory approvals necessary for nuclear and other
operating stations;
o the ability to economically and safely operate nuclear facilities in
which PSEG has an interest in accordance with regulatory
requirements;
o environmental concerns; and
o market risk and debt and equity market concerns associated with
these issues.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
New Matter. See Page 14. AES termination of the Stock Purchase Agreement,
relating to the sale of certain Argentine assets. New York State Supreme Court
for New York County (Docket No. 60155/2002) PSEG Global, et al vs. The AES
Corporation, et al.
In addition, see information on the following proceeding at the pages indicated:
Form 10-K Page 25. See Page 23. Complaint filed with the FERC addressing
contract terms of certain Sellers of Energy and Capacity under Long-Term
Contracts with the California Department of Water Resources. Public
Utilities Commission of the State of California v. Sellers of Long Term
Contracts to the California Department of Water Resources FERC Docket No.
EL02-60-000. California Electricity Oversight Board v. Sellers of Energy
and Capacity Under Long-Term Contracts with the California Department of
Water Resources FERC Docket No. EL02-62-000.
ITEM 5. OTHER INFORMATION
Certain information reported under Energy Holdings' 2001 Annual Report on Form
10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 is
updated below.
Form 10-K Page 24. On July 31, 2002 the FERC issued a Notice of Proposed
Rulemaking (NOPR) to create a Standard Market Design for the wholesale
electricity markets in the United States. The NOPR seeks to improve the
consistency of market rules throughout the country, including issues related to
reliability, market power concerns, transmission, pricing, congestion,
governance and other issues. We cannot predict the outcome of this matter or its
impact upon us if adopted, which could significantly affect transmission and
generation in the various markets in which we operate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) A listing of exhibits being filed with this document is as follows:
Exhibit Number Document
- -------------- --------
10 Stock Purchase Agreement
12 Computation of Ratios of Earnings to Fixed
Charges
99 Certification by E. James Ferland, Chief Executive
Officer of Energy Holdings Pursuant to Section 1350
of Chapter 63 of Title 18 of the United States Code
99.1 Certification by Thomas M. O'Flynn, Chief Financial
Officer of Energy Holdings Pursuant to Section 1350
of Chapter 63 of Title 18 of the United States Code
(B) Reports on Form 8-K and 8-KA:
Date of Report Form Items Reported
- -------------- ---- --------------
April 16, 2002 8-K 5 and 7
July 17, 2002 8-K 5 and 7
July 29, 2002 8-K/A 5 and 7
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSEG ENERGY HOLDINGS INC.
(Registrant)
By: Derek DiRisio
-----------------------------
Derek DiRisio
Vice President and Controller
(Principal Accounting Officer)
Date: August 2, 2002
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