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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported) September 27, 2002
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
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Item 5. Other Events
This Current Report on Form 8-K ("Report") is limited to the
reclassification of financial statements of PSEG Energy Holdings, Inc to reflect
certain businesses as discontinued operations and its impacts upon management's
discussion and analysis, the financial statements and the related notes, and the
selected financial data as originally reported in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2001. NO ATTEMPT HAS BEEN MADE IN THIS
FORM 8-K TO MODIFY OR UPDATE OTHER DISCLOSURES AS PRESENTED IN THE ORIGINAL FORM
10-K EXCEPT AS REQUIRED TO REFLECT THE EFFECTS OF THE DISCONTINUED OPERATIONS
DESCRIBED BELOW.
As previously disclosed in our Form 10-Q for the quarter ended June 30,
2002, we intend to exit the businesses of PSEG Energy Technologies Inc. and PSEG
Global Inc.'s interest in Tanir Bavi, an electric generation facility in India.
Our second quarter Form 10-Q, previously filed with the Securities and Exchange
Commission, reflects such businesses as discontinued operations. This Report
updates our Annual Report on Form 10-K for the fiscal year ended December 31,
2001 to conform such filing to the presentation of discontinued operations
reported in our second quarter Form 10-Q. Accordingly, this Report revises
information previously reported in our 2001 Annual Report on Form 10-K in Item
6. Selected Financial Data, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, Item 8. Financial Statements and
Supplementary Data, and Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K to reflect the aforementioned businesses as discontinued
operations.
In conjunction with filing this Report, our Chief Executive Officer and
our Chief Financial Officer have performed the procedures necessary to evaluate
the effectiveness of our disclosure controls and procedures, as required by
Section 302(a)(4)(c) of the Sarbanes-Oxley Act of 2002. Based on this
evaluation, we believe that our disclosure controls and procedures to update our
2001 Form 10-K as described in Item 5 of this Report, are effective in that they
provide reasonable assurance that material information is made known so that it
may included in the Report.
Such Officers do no believe there have been significant changes in
internal controls or in other factors since September 27, 2002 that could
significantly affect internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
TABLE OF CONTENTS
Page
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UPDATES TO ORIGINAL FORM 10-K
PART II
Item 6. Selected Financial Data......................................... 1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 2
Overview and Future Outlook..................................... 2
Results of Operations........................................... 4
Liquidity and Capital Resources................................. 9
Capital Requirements............................................ 13
Disclosures about Contractual Obligations and
Commercial Obligations........................................ 14
Off-Balance Sheet Arrangements.................................. 15
Discussion of Critical Accounting Policies...................... 15
Environmental Matters........................................... 17
Accounting Issues............................................... 19
Forward Looking Statements...................................... 19
Item 7A. Qualitative and Quantitative Disclosures About Market Risk...... 20
Item 8. Financial Statements and Supplementary Data..................... 20
Consolidated Financial Statements............................... 21
Notes to Consolidated Financial Statements...................... 26
Financial Statement Responsibility.............................. 58
Independent Auditors' Report.................................... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................... 60
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth our summary selected historical
consolidated financial data. The historical consolidated financial data as of
December 31, 2001 and 2000 and for the three years ended December 31, 2001 have
been derived from our audited financial statements included herein. The
historical consolidated financial data as of December 31, 1999, 1998 and 1997
and for the two years ended December 1998, has been derived from audited
financial statements not included herein. The information set forth below should
be read in conjunction with Management's Discussion and Analysis of Financial
Conditional and Results of Operations (MD&A) and the Consolidated Financial
Statements and accompanying Notes to Consolidated Financial Statements.
Data in Millions except ratios Years Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Operating Data: (A)
Total Revenues ...................... $612 $444 $476 $362 $316
Total Operating Expenses ............ 181 142 212 167 163
Interest, Net of Capitalized Interest 180 134 94 90 70
Taxes ............................... 61 49 69 32 30
Loss from discontinued operations ... (9) (9) (2) (3) (7)
Loss on Early Extinguishment of Debt (2) -- -- -- --
Cumulative Effect of a Change in
Accounting Principle--(Loss) Gain (B) 9 -- -- -- --
Net Income (Loss) ................... 183 114 108 69 48
Preferred Stock Dividends (C) ....... 22 24 25 17 1
Earnings Available to PSEG .......... $161 $ 90 $ 83 $ 52 $ 47
Years Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Balance Sheet Data: (A)
Total Assets ........................ $7,440 $5,197 $4,116 $3,172 $3,024
Total Liabilities ................... 1,820 1,267 1,040 962 1,003
Total Capitalization
Debt (D) ......................... 3,396 2,181 1,701 968 1,236
Common Equity (C) ................ 1,715 1,240 866 733 710
Preferred Equity (C) ............. 509 509 509 509 75
------ ------ ------ ------ ------
Total Stockholder's Equity .......... 2,224 1,749 1,375 1,242 785
------ ------ ------ ------ ------
Total Capitalization ................ $5,620 $3,930 $3,076 $2,210 $2,021
Years Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Other Data: (A)
Earnings Before Interest and
Taxes (EBIT)(E) ..................... $ 426 $ 306 $ 273 $ 195 $ 155
Cash Flows from:
Operating ........................ $ 379 $ 240 $ 291 $ 205 $ 160
Investing ........................ (1,717) (855) (1,157) (313) (1,021)
Financing ........................ 1,376 589 902 105 723
Years Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Earnings to Fixed Charges (F) ......... 1.7x 2.0x 3.4x 2.6x 1.9x
EBIT to Interest Expense (E) (G) ...... 2.4x 2.3x 2.9x 2.2x 2.2x
EBITDA to Interest Expense (H) (G) .... 2.5x 2.5x 3.1x 2.5x 2.4x
Consolidated Debt to Capitalization (D) 60% 55% 55% 44% 61%
Consolidated Recourse Debt to Recourse
Capitalization (I) .................... 53% 50% 50% 38% 56%
(A) In the second quarter of 2002 we adopted a plan to sell our interests in
Tanir Bavi and Energy Technologies. The results of operations of these entities
are presented as discontinued operations for all periods in the summary
consolidated financial data.
(B) In 2001, we adopted SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities."
(C) All outstanding preferred and common stock is owned by PSEG.
(D) Includes all recourse debt and debt that is non-recourse to Global,
Resources, Energy Technologies and Energy Holdings which is consolidated on the
balance sheet.
(E) EBIT includes operating income plus other income less minority interest. For
this ratio, interest expense is net of capitalized interest of $16 million, $21
million, $8 million, $1 million and $5 million for the years ended December 31,
2001, 2000, 1999, 1998, and 1997, respectively.
(F) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this ratio, earnings include net income before income taxes
and all fixed charges (net of capitalized interest) and exclude non-distributed
income from investments in which Energy Holdings' subsidiaries have less than a
50% interest. Fixed charges include interest expense, expensed or capitalized,
amortization of premiums, discounts or capitalized expenses related to
indebtedness and an estimate of interest expense included in rental expense.
(G) Information concerning EBIT and EBITDA is presented here not as a measure of
operating results, but rather as a measure of ability to service debt. In
addition, EBIT and EBITDA may not be comparable to similarly titled measures by
other companies. EBITDA should not be construed as an alternative to operating
income or cash flow from operating activities, each as determined according to
generally accepted accounting principles. Although we are not required to meet
minimum EBIT or EBITDA to interest charges tests as part of our debt covenants,
we use these measures in our financial and business planning process to provide
reasonable assurance that our forecasts will provide adequate interest coverage
to maintain or improve our target credit ratings.
(H) EBITDA includes operating income plus other income plus depreciation and
amortization less minority interest. For this ratio, interest expense is net of
capitalized interest as noted above.
(I) Excludes consolidated debt that is non-recourse to Global, Resources, Energy
Technologies and Energy Holdings of $909 million, $420 million, $302 million,
$220 million and $232 million as of December 31, 2001, 2000, 1999, 1998 and
1997, respectively.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Energy Holdings
This discussion should be read in conjunction with the Consolidated
Financial Statements and related notes of PSEG Energy Holdings Inc. (Energy
Holdings). 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 participate in three energy-related reportable
segments through our wholly-owned subsidiaries: PSEG Global Inc. (Global), PSEG
Resources Inc. (Resources) and PSEG Energy Technologies Inc. (Energy
Technologies). Our objective is to pursue investment opportunities in the
rapidly changing worldwide energy markets. Global focuses on the operating
segment of the electric industries and Resources seeks to make financial
investment in these industries. Effective June 30, 2002, we announced our
intention to sell the businesses of Energy Technologies, an energy management
company and one of Global's investments, Tanir Bavi, an electric generation
facility in India. The Consolidated Statements of Operations for the quarter and
six months ended June 30, 2002, the Consolidated Balance Sheet as of June 30,
2002, and the Statement of Cash Flows for the six months ended June 30, 2002
reflected these businesses as discontinued operations. The Consolidated
Statements of Income and the Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000, and 1999, and the Consolidated Balance Sheets as
of December 31, 2001, and 2000, and related Notes for all periods have been
restated, where applicable, to reflect the heating, ventilating and air
conditioning (HVAC) and asset management businesses of Energy Technologies and
the Tanir Bavi facility as discontinued operations.
Overview and Future Outlook
The electric and gas utility industries in the United States and around
the world continue to experience significant change. Deregulation,
restructuring, privatization and consolidation are creating opportunities for
us. At the same time, competitive pressures are increasing.
We are a major part of Public Service Enterprise Group Incorporated
(PSEG's) growth strategy. In order to achieve this strategy, Global will focus
on generation and distribution investments within targeted high-growth regions.
Resources will utilize its market access, industry knowledge and transaction
structuring capabilities to expand its energy-related financial investment
portfolio. 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. Global's more recent activities have been concentrated on developing
generation internationally and in acquiring distribution businesses, principally
in South America, that have been privatized by the local governments. As Global
has grown, its objective has evolved from being a minority or equal partner to
seeking to be the majority or sole owner of many of its investments. Global's
business depends on the ability to negotiate or obtain favorable prices and
terms for the output of its generating facilities nationally and
internationally, and to obtain favorable governmental and regulatory treatment
for its distribution assets in foreign countries. Global undertakes investments
where the expected return is commensurate with the market, regulatory,
international and currency risks that are inherent with its investments. Since
these risks are priced in the original investment decision, to the extent that
market, regulatory international or currency conditions evolve differently than
originally forecasted, the investment performance of Global's assets will differ
from the expected performance. Thus, the expected investment returns from
Global's projects are priced to produce relatively high returns to compensate
for the high level of risk associated with this business.
Since Global operates in foreign countries, it may also be affected by
changes in foreign currency exchange rates versus the US Dollar. Generally,
revenues associated with rate regulated distribution assets in relatively
limited competitive environments are more stable and predictable than revenues
from generation assets. Global's revenue includes its share of the net income
from joint ventures recorded under the equity method of accounting and
consolidated revenues from its majority-owned subsidiaries.
Future revenue growth will be partially offset by the reduction of
revenue, anticipated in 2002 from certain generation facilities in California
and Texas due to lower energy prices, and distribution facilities in Argentina
due to the current economic, political and social crisis. Global has investment
exposure of $632 million in four distribution companies and two generation
plants in Argentina. For a further discussion of the California power market,
see "California Power Market." For further discussion of the Argentine
2
economic crisis and our $632 million investment exposure, see "Argentine
Economic Crisis." For further discussion of the Texas power market, see
"Business Environment."
Resources invests in energy-related financing transactions, principally
leveraged leases. Revenues from Resources' existing leveraged lease investments
are based upon fixed rates of return. As such, it is designed to produce
predictable earnings at reasonable levels with relatively low risk. The modest
risks faced by Resources are the credit risk of its counterparties and changes
of substantive tax law. Resources' revenues in the future are expected to be
earned primarily from energy-related leveraged leases with a decrease in
contribution from leveraged buyout funds, other partnership investments and
non-energy-related leveraged leases. Revenues from Resources' investments in
leveraged buyout funds are subject to the share price performance and dividend
income of the securities held by these funds.
Energy Technologies is a business that principally constructs and installs
HVAC and related services. It has not produced profitable operations due to the
extremely competitive nature of the business and the failure of the retail
energy market to develop. For a discussion of our intention to sell the
businesses of Energy Technologies, and certain related subsequent events, see
Note 4. "Discontinued Operations" and Note 21. "Subsequent Events - DSM
Investments" of the Notes to Consolidated Financial Statements.
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.
Argentine Economic Crisis
As of December 31, 2001, approximately $737 million or 10% of our assets
were invested in Argentina. This includes the consolidated assets of a
distribution company, Empresa Distribuidora de Electricidad de Entre Rios S.A.
(EDEERSA), and our minority interests in three distribution companies, Empresa
Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur
S.A. (EDES) and Empresa Distribuidora La Plata S.A. (EDELAP) and two generating
companies, Central Termica San Nicolas (CTSN) and Parana under contract for sale
to a subsidiary of the AES Corporation. Our aggregate investment exposure in
Argentina is approximately $632 million, including $212 million of investment
exposure for EDEERSA, and $420 million of investment exposure for the assets
under contract. Goodwill related to our investment in EDEERSA is approximately
$63 million. For a discussion of the pending sale of certain investments in
Argentina, see Note 20. "Subsequent Events" of the Notes to Consolidated
Financial Statements.
The Argentine economy has been in a state of recession for approximately
four years. Continued deficit spending in the 23 Argentine provinces coupled
with low growth and high unemployment has precipitated an economic, political
and social crisis. Toward the end of 2001, a liquidity crisis ensued causing the
Argentine government to default on $141 billion of national debt. The economic
crisis was fueled by political instability and social unrest as the new year
began. The present administration is in the process of developing an economic
plan to avert a return to the economic instability and hyperinflationary economy
of the 1980s. In early January 2002, the decade old convertibility formula, that
maintained the Peso at a 1:1 exchange rate with the US Dollar, was abandoned. In
early February 2002, the Peso was floated freely with the US Dollar. In the
first day of the free floating formula, the currency weakened to a rate of
approximately 2 Pesos per 1 US Dollar. On February 28, 2002, the currency
weakened further to a rate of approximately 2.15 Pesos per 1 US Dollar.
As of December 31, 2001, the functional currency of Global's Argentine
distribution company, EDEERSA, was the US Dollar, as all revenues, most expenses
and all financings were denominated in US Dollars or were US Dollar linked. As a
US Dollar reporting entity, EDEERSA's monetary accounts in Pesos, such as
short-term receivables or payables, were re-measured into the US Dollar with a
minimal impact to the Income Statement. We have US Dollar denominated
3
debt at EDEERSA, our 90% share of which is approximately $76 million. This debt
is non-recourse to us and Global. For a discussion of the impacts of a potential
change in functional currency to the Argentine Peso, see Note 20. "Subsequent
Events" of the Notes to Consolidated Financial Statements.
In the Province of Entre Rios, where EDEERSA is located, the electricity
law provided for a pass-through of devaluation to the end user customer.
Customers' bills are first computed in the US Dollar and converted into the Peso
for billing. This mechanism assures that devaluation will not impact the level
of US Dollar revenues an electric distribution company receives. However, in
January 2002, the Argentine federal government implemented a new law that
prohibits any foreign price or other indexation and any US Dollar or other
foreign currency adjustment clauses relating to public service tariffs, thus
prohibiting the pass through of the costs of devaluation to customers. The
provincial governments have been requested to adopt this provision. The Province
of Entre Rios has recently adopted this provision as well as a law that requires
public service companies within the Province such as EDEERSA to accept payment
for all billed services in a provincial promissory note, the "Federal". The
terms of the "Federal" require principal payment at maturity in an equal amount
of Argentine Pesos. However, the "Federal" is not freely convertible in the
financial markets to Argentine Peso or US Dollars. There are ongoing
negotiations to remedy this situation, although no assurances can be given.
While we continue to operate EDEERSA, there has been an adverse impact to the
financial condition and cash flows of EDEERSA due to its inability to pass
through the costs of devaluation to customers and its receipt of an illiquid
provincial currency. We are pursuing remedies on several fronts, including
holding discussions with the Province and United States politicians both
individually and collectively with a coalition of international investors, and
shall be pursuing legal recourse under the Bilateral Investment Treaty between
the United States and Argentina. We have been notified by lenders of the
occurrence of events of default related to the Parana, EDEN and EDES credit
facilities, all of which are under contract to be sold to AES. For additional
information regarding Global's equity commitments, see "Disclosures about
Contractual Obligations and Commercial Obligations." If Argentine conditions do
not improve, Global's other Argentina properties may also default on
non-recourse obligations in connection with other financings. Currently, we
cannot predict the outcome of our ongoing negotiations with the lenders.
Other potential impacts of the Argentine economic, political and social
crisis include increased collection risk, further devaluation of the Peso,
potential nationalization of assets, foreclosure of our assets by lenders, and
an inability to complete the pending sale of certain Argentine assets to a
subsidiary of AES. We cannot predict the outcome of these events and accordingly
cannot predict the impact to our financial condition, results of operations or
net cash flows, although such impact may be material, and could include a
write-down of our investment exposure.
The events leading to the Argentine economic crisis contributed to
downward pressure on the Brazilian and Chilean currencies in 2001. The Brazilian
Real devalued approximately 15% since year-end 2000 from 1.951 to 1 US Dollar to
2.308 to 1 US Dollar as of December 31, 2001 and the Chilean Peso devalued
approximately 13% since year-end 2000 from 573.90 to 1 US Dollar to 660.45 to 1
US Dollar as of December 31, 2001.
Net foreign currency devaluations, caused primarily by the Brazilian Real,
have reduced Stockholder's Equity by the net of tax amounts of $258 million and
$203 million, as of December 31, 2001 and December 31, 2000, respectively (see
Consolidated Statements of Stockholder's Equity).
Results of Operations - 2001 compared to 2000
Our earnings before discontinued operations improved $71 million from $99
million to $170 million in 2001 as compared to 2000.
Revenues
Our revenues increased $168 million or 38% from $444 million to $612
million in 2001, as compared to 2000.
Revenues at Global increased $227 million or 134% from $169 million to
$396 million in 2001 as compared to 2000 primarily attributable to $128 million
of consolidated Electric Generation and Distribution revenues recorded in
connection with the acquisitions of Elektrocieplownia Chorzow Sp. z o.o. (ELCHO)
in the third quarter of 2000, EDEERSA in the second quarter of 2001, and
Sociedad Austral
4
de Electricidad S.A. (SAESA) in the third quarter of 2001. Revenues further
increased from the gain of $75 million on the withdrawal and sale of Global's
interest in the Eagle Point Cogeneration Partnership (Eagle Point) and were
partially offset by a loss of equity in earnings of $26 million, which were
recorded in 2000 and not recorded in 2001, as a result of the withdrawal. In
addition, revenues benefited from an increase of $45 million in Interest Income
recorded in connection with the note received as consideration for the
withdrawal from its interest in Eagle Point; the loans to Texas Independent
Energy, L.P. (TIE); and the payment agreement associated with the pending sale
of Global's interest in EDEN, EDES, EDELAP, CTSN and Parana to a subsidiary of
AES. For a discussion of the loans to TIE, see "Business Environment". Revenues
increased an additional $11 million from increased earnings at Chilquinta
Energia, S.A. (Chilquinta) and Luz del Sur, and a net increase of $6 million
from certain other projects. These increases were partially offset by lower
revenues of $12 million due to a reduction in earnings at RGE primarily related
to the adverse effect of exchange rate changes in the Brazilian Real and $9
million due to project closing fees from ELCHO and TIE recorded in 2000, while
none were earned in 2001.
Revenues at Resources increased $9 million or 4% from $206 million to $215
million in 2001 as compared to 2000 primarily due to improved revenues of $45
million from new leveraged lease transactions. This increase was partially
offset by lower Net Investment (Losses) Gains of $37 million, of which $22
million resulted from lower gains on sales of leveraged leases and $12 million
resulted from a net decrease in the carrying value and sale of publicly traded
equity securities within certain leveraged buyout funds.
Revenues at Energy Technologies decreased $67 million or 100% from 2001 as
compared to 2000 due to its decision in June 2000 to exit the retail commodity
business. Energy Technologies had recorded $67 million of energy supply revenues
related to the retail commodity business in 2000 and none in 2001. In addition,
effective June 30, 2002, we announced our intention to sell the remaining
businesses of Energy Technologies and all periods presented herein have been
restated to reflect those businesses as discontinued operations.
Operating Expenses
Our operating expenses increased $39 million or 27% from $142 million to
$181 million in 2001, as compared to 2000.
Operating expenses at Global increased $103 million, primarily
attributable to the consolidated operating results from the acquisitions of
SAESA, ELCHO, and EDEERSA. Energy Technologies' operating expenses decreased $65
million, primarily related to its decision in June 2000 to exit the retail
commodity business. Energy Technologies recorded $58 million of Costs of Energy
Sales related to the retail commodity business in 2000 and none in 2001. In
addition, Energy Technologies recorded a restructuring charge of $7 million in
2000 resulting from its decision to exit the retail commodity business. There
were no restructuring charges recorded in 2001.
Other (Loss) Income
Other (Loss) Income decreased by $7 million in 2001, as compared to 2000.
Other income declined in 2001 primarily related to foreign currency transaction
losses recorded in connection with Global's investment in RGE.
Net Financing Expenses
Interest expense increased $46 million or 34% from $134 million to $180
million in 2001 as compared to 2000. Our Interest expense associated with
recourse financing activities increased $45 million primarily due to additional
borrowings incurred as a result of equity investments in distribution and
generation facilities.
Income Taxes
Income taxes increased $12 million or 24% from $49 million to $61 million
in 2001 as compared to 2000, primarily attributable to increased pre-tax income.
Results of Operations - 2000 compared to 1999
Our earnings before discontinued operations improved $14 million or 16%
from $85 million to $99 million in 2000 as compared to 1999.
5
Revenues
Revenues decreased $32 million or 7% from $476 million to $444 million in
2000, as compared to 1999. Revenues decreased by $42 million at Global primarily
due to a $69 million gain on the sale of its interest in Newark Bay recorded in
1999 as compared to no significant gain on sale of assets in 2000. The decrease
of $69 million was partially offset by increased earnings at Luz Del Sur and
Chilquinta. Revenues decreased by $19 million at Energy Technologies as a result
of its decision to exit the retail commodity business in June 2000. Revenues at
Resources increased by $26 million primarily due to higher leveraged lease
income from new leveraged lease investments.
Operating Expenses
Operating expenses decreased $70 million or 33% from $212 million to $142
million in 2000, as compared to 1999, primarily due to a pre-tax charge of
approximately $55 million, to reduce the carrying value of certain assets was
recorded in 1999. Operating expenses were further reduced as a result of Energy
Technologies decision to exit the retail commodity business in June 2000. For
further discussion of the $44 million charge to reduce the carrying value of
certain assets in 1999 at Global, see Note 6. "Investments in Global's Assets."
For further discussion of the $11 million charge to reduce the carrying value of
certain assets in 1999 at EGDC, see Note 7. "Other Investments." There was no
similar adjustment recorded in 2000.
Other Income
Other Income decreased by $5 million or 63% from $8 million to $3 million
in 2000, as compared to 1999. Other income in 1999 was favorably impacted by a
reduction in reserves recorded in connection with the 1996 sale of Energy
Development Corporation. There was no similar adjustment recorded in 2000.
Net Financing Expenses
Interest expense increased $40 million or 43% from $94 million to $134
million in 2000 as compared to 1999. Our interest expense associated with
recourse financing activities increased $51 million primarily due to additional
borrowings incurred as a result of equity investments in distribution and
generation facilities and the repayments of non-recourse debt. Interest expense
associated with non-recourse debt financing decreased by $11 million due to the
repayment of approximately $157 million of non-recourse debt.
Income Taxes
Income taxes decreased $24 million or 35% from $69 million to $45 million
in 2000 as compared to 1999. The year ended December 31, 2000 reflects a lower
effective tax rate due to a decrease in the foreign tax liability from foreign
investments at Global recorded under the equity method. 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 equity in earnings rather
than in the income tax provision. During 1999, there was an increase in state
income taxes at Resources totaling $11 million due to the early termination of a
leveraged lease.
EBIT Contribution
The results of operations for each of our business segments are explained
below with reference to the EBIT contribution. We borrow on the basis of a
combined credit profile to finance the activities of its 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 Corporation (PSEG Capital).
EBIT Contribution
Energy Holdings'
Subsidiaries
- -----------------
Years Ended December 31,
------------------------------------------------
2001 2000 1999
----------- -------------------- -----------
(Millions of Dollars)
Global .................... $233 $124 $118
Resources ................. 200 190 169
Energy Technologies ....... (3) (1) (6)
Other ..................... (4) (7) (8)
---- ---- ----
Total Consolidated EBIT ... $426 $306 $273
==== ==== ====
6
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. Global has ownership interests in 30 operating generation
projects totaling 4,772 MW (1,884 MW net of other partners' interests) located
in the United States, Argentina, China, India, Italy, Peru, Poland and
Venezuela. Global has ownership interests in 13 projects totaling 3,205 MW
(1,399 MW net) in construction or advanced development that are located in the
United States, Argentina, China, Italy, Oman, Poland, Taiwan, Tunisia and
Venezuela. For a discussion of the pending sale of certain projects located in
Argentina, see Note 20. "Subsequent Events" of the Notes to Consolidated
Financial Statements.
Until the fourth quarter of 2000, Global's investments consisted primarily
of minority ownership positions in projects and joint ventures. Other than fees
collected for providing operations and maintenance services, Global's revenues
represented its pro-rata ownership share of net income generated by project
affiliates which are accounted for by the equity method of accounting. The
expenses in the table below were those required to develop projects and general
and administrative expenses required to operate the business as a whole. In the
fourth quarter of 2000, Global increased its interest in Carthage Power Company,
an electric generation facility under construction in Rades, Tunisia from 35% to
60% and completed project financing for a 55% economic interest in ELCHO, a
power plant in Poland with the expectation of an increase to a 90% economic
interest by 2003.
In the first quarter of 2001, Global increased its interest in Tanir Bavi,
an electric generation facility in India from 49% to 74%. (For a description of
the anticipated sale of Global's interest in Tanir Bavi, see Note 4.
"Discontinued Operations.") 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 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 Empresa de
Electricidad de los Andes S.A. (Electroandes), a hydroelectric generation and
transmission company in Peru. The accounts of Global include the assets,
liabilities, revenues and expenses of majority-owned subsidiaries over which
Global exercises control and for which control is other than temporary.
Summary Results
Global
- ---------------
Years Ended December 31,
-----------------------------------------
2001 2000 1999
------- -------- --------
(Millions of Dollars)
Revenues ...................... $396 $169 $211
Expenses ...................... 153 49 97
---- ---- ----
Operating Income .............. 243 120 114
Other Income (Loss) ........... (10) 4 4
---- ---- ----
EBIT .......................... $233 $124 $118
==== ==== ====
Global's EBIT increased $109 million or 88% in 2001 as compared to 2000.
The Global EBIT increase in 2001 was primarily realized from the gain of $75
million on the withdrawal and sale of its interest in Eagle Point and was
partially offset by a loss of equity in earnings of $26 million, which was
recorded in 2000 and not recorded in 2001, as a result of the withdrawal. A net
$46 million increase in EBIT was realized from the earnings related to the
acquisitions of EDEERSA in the second quarter of 2001, SAESA in the third
quarter of 2001, and Electroandes in the fourth quarter of 2001. In addition,
EBIT benefited from an increase of $45 million in Interest Income recorded in
connection with the payment agreement associated with the pending sale of
Global's interest in three Argentine distribution companies, EDEN, EDES and
EDELAP, and two generation stations, CTSN and Parana, to a subsidiary of AES;
the loans to TIE; and the note received as consideration for the withdrawal from
its interest in Eagle Point. EBIT increased an additional $11 million from
increased earnings at Chilquinta and Luz del Sur. These increases were partially
offset by lower revenues of $12 million due to a reduction in earnings at RGE
primarily related to the adverse effect of exchange rate changes in the
Brazilian Real and a $9 million increase in corporate operating expenses
primarily due to a $7 million write-off of a foreign investment. Other Income
decreased by $15 million primarily due to $6 million of foreign currency
transaction losses recorded in 2001 as compared to foreign currency transaction
gains of $3 million in 2000.
7
The Global EBIT increased by $6 million or 5% from $118 million to $124
million in 2000, as compared to 1999. This increase was primarily due to the
favorable performance by its domestic generation assets and by its investments
made in Latin America distribution assets in June and September of 1999.
Global's operating expenses in 1999 were negatively impacted by a write-down of
$44 million to reduce the carrying value of certain assets. Revenues in 1999
were favorably impacted by a gain of $69 million from the sale of its 50%
interest in Newark Bay.
Resources
Resources derives its leveraged lease revenues primarily from rental
payments and tax benefits associated with such transactions. As a passive
investor in limited partnership project financing transactions, Resources
recognizes revenue from its pro-rata share of the income generated by these
investments. As an owner of beneficial interests in two leveraged buyout funds,
Resources recognizes revenue as the share prices of public companies in the
leveraged buyout funds fluctuate. In addition, revenue is recognized as
companies in the fund distribute dividend income through the fund to the
investors and as the fund liquidates its holdings.
Summary Results
Resources
- ---------------
Years Ended December 31,
-----------------------------------------
2001 2000 1999
------- -------- --------
(Millions of Dollars)
Revenues .......................... $215 $206 $179
Expenses .......................... 15 16 10
---- ---- ----
Operating Income and EBIT ......... $200 $190 $169
==== ==== ====
Resources' EBIT increased $10 million or 5% in 2001 as compared to 2000.
The Resources' EBIT increase in 2001 was due to improved revenues of $9 million
or 4% primarily attributable to higher leveraged lease income of $44 million
from new leveraged lease transactions, partially offset by lower Net Investment
Gains (Losses) of $37 million, of which $22 million resulted from a net decrease
in the gains from the sale of properties subject to leveraged leases and $12
million resulted from a net decrease carrying value of publicly traded equity
securities within certain leveraged buyout funds.
Resources' EBIT increased $21 million or 12% from $169 million to $190 in
2000 as compared to 1999 due primarily to higher leveraged lease income of $51
million from the continued investment by Resources in such financing
transactions. Further augmenting EBIT was other increased revenues of $4 million
primarily related to gains from the sales of properties subject to leveraged
leases. Offsetting the above benefits were lower gains of $28 million from the
sales of securities and lower revenues of $6 million related to lower income
from certain limited partnerships.
Energy Technologies
Energy Technologies' businesses include constructing, operating and
maintaining HVAC systems and providing energy-related engineering, consulting
and mechanical contracting services to industrial and commercial customers in
the Northeastern and Middle Atlantic United States. For a discussion of the
discontinued operations of Energy Technologies and certain related subsequent
events, see Note 4. "Discontinued Operations." and Note 21. "Subsequent Events -
DSM Investments." of the Notes to Consolidated Financial Statements.
Summary Results
Energy Technologies
- -------------------
Years Ended December 31,
-----------------------------------------
2001 2000 1999
------- -------- --------
(Millions of Dollars)
Revenues .......................... $-- $67 $86
Expenses .......................... 3 68 92
--- --- ---
Operating Loss .................... (3) (1) (6)
Other Income ...................... -- -- --
--- --- ---
EBIT .............................. $(3) $(1) $(6)
=== === ===
Energy Technologies' EBIT decreased $2 million for the year ended December
31, 2001 as compared to 2000. Energy Technologies' EBIT decrease in 2001
resulted primarily from the loss of income associated with its decision to exit
the retail commodity business in June 2000. The EBIT contribution decrease was
partially offset by a restructuring charge of $7 million in 2000. There were no
restructuring charges recorded in 2001.
8
Energy Technologies' EBIT increased $5 million in 2000 as compared to 1999
primarily due to the improved operating results of it retail commodity business.
Partially offsetting the improved operating results of its retail commodity
business was a pre-tax restructuring charge of $7 million for the year ended
December 31, 2000. Of this amount approximately $2 million was related to
employee severance costs for the termination of approximately 60 employees, $2
million was related to deferred transportation costs and $3 million was related
to the write-off of computer hardware and software. As of December 31, 2000, all
severance costs had been paid related to the terminations.
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 in 2001, Global, Resources and Energy Technologies.
Our capital requirements and those of our subsidiaries are met and
liquidity provided by internally generated cash flow and external financings. 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. The debt incurred is our direct obligation. We use some of the
proceeds of this debt to make equity investments in our subsidiaries.
All of our publicly traded debt and debt of PSEG Capital has received
investment grade ratings from each of the three major credit rating agencies.
The changes in the energy industry and the recent bankruptcy of Enron Corp. are
attracting increased attention from the rating agencies, which regularly assess
business and financial matters. Given the changes in the industry, attention to
and scrutiny of our performance, capital structure and competitive strategies by
rating agencies will likely continue. These changes could affect the bond
ratings, cost of capital and market prices of our securities. We will continue
to evaluate our capital structure, financing requirements, competitive
strategies and future capital expenditures to maintain our current credit
ratings.
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.
Moody's Standard & Poor's Fitch
--------- ------------------- -------
Energy Holdings
Senior Notes Baa3 BBB- BBB-
PSEG Capital
Medium Term Notes Baa2 BBB Not Rated
The availability and cost of external capital could be affected by each
subsidiary's performance as well as by the performance of their respective
subsidiaries and affiliates. This could include the degree of structural or
regulatory separation between us and our subsidiaries and between Public Service
Electric and Gas Company and its non-utility affiliates and the potential impact
of affiliate ratings on consolidated and unconsolidated credit quality.
Additionally, compliance with applicable financial covenants will depend upon
future financial position and levels of earnings and net cash flows, as to which
no assurances can be given.
Financing for Global's projects and investments is generally provided by
non-recourse project financing transactions. These consist of loans from banks
and other lenders that are typically secured by project and special purpose
subsidiary assets and/or cash flows. Non-recourse transactions generally impose
no obligation on the parent-level investor to repay any debt incurred by the
project borrower. However, in some cases, certain obligations relating to the
investment being financed, including additional equity commitments, are
guaranteed by Global and/or us. Further, the consequences of permitting a
project-level default could include loss of any invested equity by us or any of
our subsidiaries.
9
Our debt indenture and credit agreements and those of our subsidiaries and
PSEG contain cross-default provisions under which a default by us or by
specified subsidiaries of 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 for
a specified amount with respect to any indebtedness of Global including
obligations in non-recourse transactions, as set forth in various credit
agreements, could cause a cross-default in one of our or our subsidiaries'
credit agreements.
Such lenders, or the debt holders under our indenture or any of our or our
subsidiaries' credit agreements could determine that debt payment obligations
may be accelerated as a result of a cross-default. These occurrences could
severely limit our liquidity and restrict our ability to meet our debt, capital
and, in extreme cases, operational cash requirements. Any inability to satisfy
required covenants and/or borrowing conditions would have a similar impact. This
would have a material adverse effect on our financial condition, results of
operations and net cash flows, 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, loan funds may not be advanced.
Some of these credit agreements also contain maximum debt to equity
ratios, minimum cash flow tests and other restrictive covenants and conditions
to borrowing. Compliance with applicable financial covenants will depend upon
our future financial position and the level of earnings and cash flow, as to
which no assurances can be given. As part of our financial planning forecast, we
perform stress tests on our financial covenants. These tests include a
consideration of the impacts of potential asset impairments, foreign currency
fluctuations, and other items. Our current analyses and projections indicate
that, even in a worst-case scenario with respect to our investments in Argentina
and considering other potential events, we will still be able to meet our
financial covenants.
Our debt indenture and credit agreements and those of our subsidiaries do
not contain any "ratings triggers" that would cause an acceleration of the
required interest and principal payments in the event of a ratings downgrade.
However, in the event of a downgrade we and/or our subsidiaries may be subject
to increased interest costs on certain bank debt. We and Global may have to
provide collateral for certain of our and their equity commitments if our
ratings should fall below investment grade. This would increase our costs of
doing business.
PSEG Capital has a $750 million 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 December 31, 2001 and December 31, 2000, total debt
outstanding under the MTN program was $480 million and $650 million,
respectively maturing in 2002 and 2003.
Capital resources and investment requirements could be affected by the
outcome of proceedings by the BPU pursuant to its Energy Master Plan and Energy
Competition Act and the requirements of the 1992 Focused Audit conducted by the
BPU, of the impact of our non-utility businesses, owned by us, on PSE&G. As a
result of the Focused Audit, the BPU ordered that, among other things:
(1) We will not permit Energy Holdings' investments to exceed 20% of our
consolidated assets without prior notice to the BPU;
(2) PSE&G's Board of Directors would provide an annual certification
that the business and financing plans of Energy Holdings will not
adversely affect PSE&G;
(3) We will (a) limit debt supported by the minimum net worth
maintenance agreement between us and PSEG Capital to $650 million
and (b) make a good-faith effort to eliminate such support over a
six to ten year period from May 1993; and
(4) Energy Holdings will pay PSE&G an affiliation fee of up to $2
million a year which is to be used to reduce customer rates.
10
In the Final Order the BPU noted that, due to significant changes in the
industry and, in particular, PSEG's corporate structure as a result of the Final
Order, modifications to or relief from the Focused Audit order might be
warranted. PSE&G has notified the BPU that PSEG will eliminate PSEG Capital debt
by the end of the second quarter of 2003 and that it believes that the Final
Order otherwise supercedes the requirements of the Focused Audit. While we
believe that this issue will be satisfactorily resolved, no assurances can be
given.
In addition, if PSEG were no longer to be exempt under the Public Utility
Holding Company Act of 1935 (PUHCA), we and our subsidiaries would be subject to
additional regulation by the SEC with respect to financing and investing
activities, including the amount and type of non-utility investments. We believe
that this would not have a material adverse effect on our financial condition,
results of operations and net cash flows.
Over the next several years, we and our subsidiaries will be required to
refinance maturing debt, incur additional debt and provide equity to fund
investment activity. Any inability to obtain required additional external
capital or to extend or replace maturing debt and/or existing agreements at
current levels and reasonable interest rates may affect our financial condition,
results of operations and net cash flows.
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 December 31, 2001.
Total Primary Amount
Energy Holdings Maturity Date Facility Purpose Outstanding
------------- -------- ------- -----------
(Millions of Dollars)
364-day Credit Facility May 2002 $200 Funding $ --
5-year Credit Facility May 2004 495 Funding 250
Bilateral Credit Agreement N/A 100 Funding 50
---- ---
Total $795 $300
==== ====
The five-year facility also permits up to $250 million of letters of
credit to be issued of which $57 million are outstanding as of December 31,
2001.
Financial covenants contained in these facilities include the ratio of
cash flow available for debt service (CFADS) to fixed charges. At the end of any
quarterly financial period such ratio shall not be less than 1.50x for the
12-month period then ending. As a condition of borrowing, the pro-forma CFADS to
fixed charges ratio shall not be less than 1.75x as of the quarterly financial
period ending immediately following the first anniversary of each borrowing or
letter of credit issuance. CFADS includes, but is not limited to, operating cash
before interest and taxes, pre-tax cash distributions from all asset
liquidations and equity capital contributions from PSEG to the extent not used
to fund investing activity. In addition, the ratio of consolidated recourse
indebtedness to recourse capitalization, at the end of any quarterly financial
period, shall not be greater than 0.60 to 1.00. This ratio is calculated by
dividing the total recourse indebtedness by the total recourse capitalization.
This ratio excludes the debt of PSEG Capital which is supported by PSEG. As of
December 31, 2001, the latest 12 months CFADS coverage ratio was 4.4 and the
ratio of recourse indebtedness to recourse capitalization was 0.45 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 its
business will depend to a significant degree on PSEG's ability to access capital
and our ability to obtain additional financing beyond current levels.
In October 2001, $135 million of 6.74% Medium-Term Notes (MTN) matured
under the PSEG Capital MTN program and were refinanced with funds from our
issuance of short-term debt.
In October 2001, PSEG Chile Holding S.A., a wholly-owned subsidiary of
Global and a US Dollar functional currency entity closed on $150 million of
project financing related to its investment in SAESA, a Chilean Peso functional
currency entity. The debt is variable and is based on LIBOR. In connection with
this project financing, PSEG Chile Holding S.A. entered into two foreign
currency forward exchange contracts with a total notional amount of $150
million. The two contracts were entered into to hedge the Chilean Peso/US Dollar
exposure on the net investment. This transaction qualifies for hedge accounting
under SFAS 133.
11
In March 2001, $160 million of non-recourse bank debt originally incurred
to fund a portion of the purchase price of Global's interest in Chilquinta was
refinanced. The private placement offering by Chilquinta Energia Finance Co.
LLC, a Global affiliate, of senior notes was structured in two tranches: $60
million due 2008 at an interest rate of 6.47% and $100 million due 2011 at an
interest rate of 6.62%. An extraordinary loss of $2 million (after-tax) was
recorded in connection with the refinancing of the $160 million non-recourse
bank debt.
It is intended that Global and Resources will provide our earnings and
cash flow for long-term growth. Resources' investments are designed to produce
immediate cash flow and earnings that enable Global to focus on longer
investment horizons. During the next five years, we will need significant
capital to fund our planned growth. Capital is expected to be provided from
additional debt financing, equity from PSEG and operating cash flows.
Our cash provided by (used in) operating, investing and financing
activities was as follows:
Years Ended December 31,
-------------------------------------
2001 2000 1999
------- ------- -------
(Millions of Dollars)
Total Operating Activities ........ $ 379 $ 240 $ 291
======= ===== =======
Total Investing Activities ........ $(1,717) $(855) $(1,157)
======= ===== =======
Financing Activities
Debt ............................ $ 1,002 $ 326 $ 731
Equity .......................... 374 263 171
------- ----- -------
Total Financing Activities ........ $ 1,376 $ 589 $ 902
======= ===== =======
Operating Activities
Cash flow from operating activities increased $139 million or 58% from
$240 million to $379 million in 2001 as compared to 2000. Global's cash flow
from operations increased $94 million, primarily attributable to proceeds
received from the withdrawal and sale by Global of its interest in the Eagle
Point Cogeneration Partnership. Resources' cash flow from operations increased
$34 million, primarily due to increased proceeds from the sales of properties
subject to leveraged leases and the sales of its interest in certain equity
securities held in its leveraged buyout funds.
Cash flow from operating activities decreased $51 million or 18% from $291
million to $240 million in 2000 as compared to 1999. The decrease was primarily
due to the proceeds of $71 million that Global received as consideration from
the sale of Newark Bay in 1999 while no such sales were recorded in 2000.
Additionally, operating activities were negatively impacted in 2000 by reduced
proceeds from sales of properties subject to leveraged leases by Resources.
These decreases were partially offset by increased dividends received in 2000 by
Global from affiliates of its equity method investments and increased rents
received by Resources from the continued investments in leveraged leases.
Investing Activities
In 2001, Global invested $810 million to acquire majority interests in
EDEERSA, Electroandes, Salalah, SAESA, Tanir Bavi and made additional
investments of $136 million in existing domestic and international facilities.
In addition, Global invested an additional $271 million in property, plant, and
equipment and other assets. In 2001, Resources invested approximately $460
million in six leveraged lease transactions including electric and gas
distribution assets in Austria, Belgium and the Netherlands and electric power
plants in the United States.
In 2000, Global invested $361 million to acquire interests in a
distribution company in Argentina, a generation project in India, a generation
project in Poland and made additional investments in existing domestic and
international facilities. In 2000, Resources invested approximately $460 million
in five leveraged lease transactions including electric and gas distribution
assets in the Netherlands and electric power plants in the United States.
In 1999, Global invested $722 million to acquire interests in two energy
distribution companies in Chile and Peru and additional investments in existing
domestic and international facilities. Resources invested approximately $380
million primarily in six leveraged leases of energy facilities: two gas
distribution networks in the Netherlands, three cogeneration plants in Germany,
two generation plants in the United States and a liquefied natural gas plant in
the United States. Energy Technologies acquired six HVAC and mechanical service
contractors for a total cost of approximately $49 million.
12
Financing Activities
As of December 31, 2001 and December 31, 2000, PSEG had $2.5 billion and
$2.0 billion of equity, respectively, (including retained earnings of
approximately $510 million and $353 million, respectively) invested in Energy
Holdings. In 2001, PSEG invested $400 million of additional equity in Energy
Holdings.
In July and February 2001, we issued $550 million of 8.50% Senior Notes
due 2011 and $400 million of 8.625% Senior Notes due 2008, respectively. The
proceeds were used to repay certain short-term debt and for general corporate
purposes. Additionally, non-recourse project debt increased $718 million related
to construction financings at Global's consolidated projects. At December 31,
2001, our consolidated capital structure consisted of 30% common equity, 9%
preferred stock and 61% debt. Approximately $1.07 billion, or 19% of our total
invested capital represented debt consolidated on the balance sheet that is
non-recourse to Global and Energy Holdings.
In 2000, we issued $300 million of 9.125% Senior Notes due 2004 and PSEG
invested $300 million of additional equity in Energy Holdings. The proceeds were
used to repay certain short-term debt and for general corporate purposes. At
December 31, 2000, our consolidated capital structure consisted of 32% common
equity, 13% preferred stock and 55% debt. Approximately $354 million, or 9% of
our total invested capital represented debt consolidated on the balance sheet
that is non-recourse to Global and Energy Holdings.
During 1999, PSEG invested approximately $200 million of additional equity
in Energy Holdings, the proceeds of which were used to repay short-term debt. In
addition, we received proceeds from new debt issuances, net of repayments,
totaling approximately $572 million for general corporate purposes. In addition,
Global issued non-recourse debt totaling approximately $160 million primarily to
fund its acquisition of a Chilean distribution company.
Capital Requirements
We plan to continue the growth of Global and Resources. We are in the
process of exiting the businesses of Energy Technologies. In 2001, our
subsidiaries made investments totaling approximately $1.7 billion. These
investments included leveraged lease investments totaling $460 million by
Resources, and acquisitions of international generation and distribution
facilities totaling $810 million by Global. Global also made additional
investments of $136 million in existing generation and distribution projects.
In 2002, capital expenditures to fund Global's anticipated acquisitions
and existing generation and distribution projects are expected to approximate
$200 million and includes $70 million of equity for projects currently under
construction. This amount is included in the discussion of "Contractual
Obligation and Commercial Obligations" shown below. The remaining $130 million
is discretionary and depends on the availability of projects, and the timing and
success of our development efforts. Capital expenditures to fund Resources'
investments are expected to approximate $250 million. Resources' anticipated
expenditures are discretionary and are dependent upon availability of potential
investments meeting certain profit thresholds. We have $270 million of long-term
debt due within one year, including $228 million of Medium-Term Notes maturing
in 2002.
We expect funds available, in 2002, from the following sources:
approximately $495 million of borrowing capacity, estimated operating cash flow
of $475 million and estimated equity contributions from PSEG of $400 million.
Significant factors that may negatively impact operating cash flow in 2002
include the inability of Global to close on its intended sale of certain
Argentine assets to a subsidiary of AES and additional adverse impacts from the
Argentine economic, political and social crisis. The Argentine crisis may create
significant uncertainty with respect to operational performance, cash flow and
potential for profitability of the electricity industry in Argentina, including
EDEERSA. For a more comprehensive discussion, see "Argentine Economic Crisis",
shown above.
13
Our capital expenditures in 2003-2006 are expected to average
approximately $600 million per year comprised of investments in generation and
distribution facilities and projects and leveraged lease transactions. Such
amounts include $75 million of equity for generation and distribution projects,
currently under construction which are expected to be funded by 2003 and are
included in the discussion of "Contractual Obligations and Commercials
Obligations" shown below. The remaining capital expenditures are discretionary
and depend on the availability of projects, and the timing and success of our
development efforts. Investment activity will be subject to periodic review and
revision and may vary significantly depending upon the opportunities presented.
Factors affecting actual expenditures and investments include availability of
capital and suitable investment opportunities, market volatility and local
economic trends. The anticipated sources of funds for such growth opportunities
are additional equity from PSEG, cash flow from operations and external
financings.
For an analysis of certain contractual and commercial obligations in
2002-2006, see "Disclosures about Contractual Obligations and Commercial
Obligations and Certain Investments", shown below.
Disclosures about Contractual Obligations and Commercial Obligations
The following tables reflect the contractual cash obligations and other
commercial commitments in the respective periods in which they are due.
Total Less
Amounts Than
Contractual Cash Obligations Committed 1 year 1 - 3 years 4 - 5 years Over 5 years
- --------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
Long-Term Debt (A) $2,916 $270 $727 $80 $1,839
Operating Leases (B) 28 7 11 6 4
- --------------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $2,944 $277 $738 $86 $1,843
- --------------------------------------------------------------------------------------------------------------------
(A) Includes $27 million, $38 million, $36 million and $36 million
related to the discontinued operations of Tanir Bavi and Energy
Technologies for the periods of Less Than 1 year, 1-3 years, 4-5
years, and Over 5 years, respectively.
(B) Includes $0, $2 million, $1 million and $0 related to the
discontinued operations of Energy Technologies for the periods of
Less Than 1 Year, 1-3 Years, 4-5 Years, and Over 5 Years,
respectively.
Energy Holdings, Global and/or PSEG 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 $241 million, as of December 31, 2001. A substantial portion of
such guarantees is eliminated upon successful completion of construction,
performance of certain obligations and/or refinancing of construction debt with
non-recourse project term debt. The Administrative Agent for the Parana power
facility notified Global that the project was in default and our $30 million
equity commitment would be accelerated. Such payment is expected to occur in
March 2002 and is included in our Argentine investment exposure of $632 million.
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, Energy
Holdings would be required to provide additional support for the performance
bonds. Tangible equity is defined as net equity less goodwill. As of December
31, 2001, Energy Technologies had tangible equity of $114 million and
performance bonds outstanding of $124 million. The performance bonds are not
included in the table below.
Total Less
Amounts Than
Other Commercial Commitments Committed 1 year 1 - 3 years 4 - 5 years Over 5 years
- --------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
Standby Letters of Credit $ 54 $45 $ 5 $4 $--
Guarantees 187 27 118 0 42
- --------------------------------------------------------------------------------------------------------------------
Total Commercial Commitments $241 $72 $123 $4 $42
- --------------------------------------------------------------------------------------------------------------------
14
Off Balance Sheet Arrangements
Global has certain investments that are accounted for under the equity
method in accordance with generally accepted accounting principles. Accordingly,
an amount is recorded on our balance sheet which is primarily our equity
investment and is increased for our pro-rata share of earnings less any dividend
distribution from such investments. The companies in which we invest that are
accounted for under the equity method have an aggregate $1.88 billion of debt on
their combined, consolidated financial statements. Our pro-rata share of such
debt is $737 million and is non-recourse to us, Global and PSEG. We are
generally not required to support the debt service obligations of these
companies.
Resources has investments in leveraged leases that are accounted for in
accordance with SFAS 13 "Accounting for Leases." Leveraged lease investments
generally involve three parties: an owner/lessor, a creditor, and a lessee. In a
typical leveraged lease financing, the lessor purchases an asset to be leased.
The purchase price is typically financed 80% with debt provided by the creditor
and the balance comes from equity funds provided by Resources. The creditor
provides long term financing to the transaction, and is secured by the property
subject to lease. Such long term financing is non-recourse to Resources. As
such, in the event of default the creditor may only look to the leased asset as
security on the loan. As a lessor, Resources has ownership rights to the
property and rents the property to the lessee for use in its business operation.
As of December 31, 2001 Resources' equity investment in leased assets was
approximately $1.6 billion, net of deferred taxes of approximately $1.2 billion.
In the event that collectibility of the minimum lease payments to be
received by the lessor is no longer reasonably predictable, the accounting
treatment for some of the leases may change. In such cases, Resources may deem
that a lessee has a high probability of defaulting on the lease obligation. In
many instances, Resources has protected its equity investment in such
transactions by providing for the direct right to assume the debt obligation.
Debt assumption would be at Resources' sole discretion, and normally only 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. In the events described above, the lease essentially changes from being
classified as a capital lease to a conventional operating lease.
Discussion of Critical Accounting Policies
The accounting policies listed below are policies that involve the use
both objectively and subjectively derived information to record financial
statement transactions in accordance with Generally Accepted Accounting
Principles (GAAP) applied in the United States. The use of subjective judgment
and estimates by management is a critical element in the application of GAAP.
The principles below were determined to be most significant in the determination
of our financial statements for the years presented, and will impact our
financial statements prospectively.
Leveraged Leases
A leveraged lease is recorded by applying cash flows to lease income and
amortization on a constant return basis throughout the lease term. A key
assumption in our lease transactions is the residual value at the end of the
lease term. The residual value is estimated at the beginning of the lease term,
and is reviewed annually for adequacy. If management were to determine that
there is a permanent impairment to the residual value of an asset subject to
lease, the reduction must be recorded immediately. Appreciation in residual
value is not booked immediately, but is deferred until termination of the lease
transaction normally through the purchase of the asset by the lessee.
Lease accounting also includes estimates of the likelihood of a borrower's
ability to pay the rent contractually derived in the transaction. If significant
uncertainty exists over the level of rent to be received, or rent is deferred to
future periods, the income accrual must be reduced to reflect lower estimates of
future lease income. In the event of default by a lessee, the leased asset may
be recorded on the balance sheet along with the related non-recourse debt.
Lease accounting also includes estimates of future tax rates. Changes in
statutory rates could affect the level of lease income recorded, as tax cash
flow is a key component of income in a lease transaction.
15
Percentage of Completion Accounting
Percentage of completion accounting is applied to construction and service
contracts by Energy Technologies. This method involves estimates of gross profit
percentage at the inception of a contract term. As contract work is complete,
the gross profit is recognized in our Income Statement. If there is a change in
the expected contract gross profit, the change is recognized immediately in the
Consolidated Statements of Income. The determination of gross profit includes
significant use of contract estimates, both of variables that are directly
within our control, and those that are not. For a discussion of the decision to
sell our interests in the businesses of Energy Technologies, see Note 4.
"Discontinued Operations" of the Notes to Consolidated Financial Statements.
Measurement of Derivative Financial Instruments
We use 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 complete
discussion of the application of Statement of Financial Accounting Standards,
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), see Note 2. "Summary of Significant Policies" of the Notes to Consolidated
Financial Statements.
Use of Fair Value Accounting
Resources applies fair value accounting for certain securities held in
Limited Partnership interests that have quotable market prices on liquid
exchanges. For other securities in the portfolio that do not trade on liquid
exchanges, securities are carried at cost unless a valuation report prepared by
the fund manager indicates a permanent impairment in value below cost. While
objectively derived, the volatility of securities markets over the past few
years has caused significant fluctuations in security prices. For example, we
recorded net pretax (losses)/gains from fair value adjustments or security sales
totaling $(16) million, ($4) million and $24 million for the three years ended,
December 31, 2001, December 31, 2000 and December 31, 1999, respectively. While
the carrying value of the trading portfolio was only $34 million as of December
31, 2001, it is possible that a volatile market could cause significant
fluctuations in our reported income in prospective periods.
Impairment Testing
Under SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", (SFAS 121), we test our long-lived assets
for impairment periodically using a non-discounted cash flow test to determine
if cash flows are sufficient to recover asset or investment balances. Tests are
also performed when industry, regulatory or significant changes in market
dynamics cause a change in the relative level of income or cash flow projected
to be earned from an asset. Our equity investments are tested periodically using
the principles of APB 18 "The Equity Method of Accounting for Investments in
Common Stock" (APB 18). Impairment testing involves the use of financial models
that project asset or investment cash flows in future periods, inclusive of a
terminal value. Other assumptions include customer sales growth, inflation, and
fuel and labor costs. In 2002, we will apply SFAS 141, "Business Combinations"
(SFAS 141) and SFAS 142, "Goodwill and Other Intangible Assets" (SFAS 142). The
goodwill impairment testing involves the use of estimates to derive the fair
value of a reporting unit inclusive of the goodwill. Also in 2002, we will apply
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which includes a non-discounted cash flow test similar to SFAS 121.
Although management believes its assumptions are the best available and in
accordance with industry standards, actual results will likely differ from these
assumptions and could have a material adverse impact on our financial condition,
results of operations and net cash flows.
Foreign Currency Accounting
Our financial statements are prepared using the US Dollar as the reporting
currency. In accordance with SFAS 52 "Foreign Currency Translation", foreign
operations whose functional currency is deemed to be the local (foreign)
currency, asset and liability accounts are translated into US Dollars at current
exchange rates and revenues and expenses are translated at average exchange
rates prevailing during the period. Translation gains and losses (net of
applicable deferred taxes) are not included in determining net income but are
reported in Other Comprehensive Income (OCI). Gains and losses on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
16
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), Argentina, Brazil, Chile,
China, India, Italy, Oman, Peru, Poland, Taiwan, Tunisia and Venezuela. These
operations are subject to compliance with environmental laws and regulations by
relevant authorities at each location, which may include air and water quality
control, land use, disposal of wastes, aesthetics and other matters. In order to
achieve compliance, expenditures may be needed for construction, continued
operation or remediation of new and existing facilities and sites.
As Global pursues new opportunities, they 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 its
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 its financial condition, results of
operations and net cash flows.
Business Environment
We continue to evaluate the economic consequences of the September 11,
2001 terrorist attacks on the United States and subsequent developments,
particularly their impact on accelerating the continued economic slowdown in the
United States and worldwide. The consequences of a prolonged recession may
include the continued weakening of certain Latin American currencies, including
the Argentine Peso, Brazilian Real, the Chilean Peso, the Peruvian Sol, and the
Venezuelan Bolivar, lower energy prices in power markets, including power
markets where Global invests in merchant generation assets, and further credit
rating downgrades of certain airlines in the United States and worldwide. As of
December 31, 2001, $2.5 billion or 34% of our assets were invested in Latin
America, specifically in Argentina, Brazil, Chile, Peru and Venezuela and $108
million or 1% of our assets were comprised of leveraged leases of seven aircraft
leased to five separate lessees.
As of December 31, 2001, Global had $281 million invested in two 1000 MW
gas-fired combined-cycle electric generating facilities in Texas, including
approximately $165 million of loans earning an annual rate of 12%. Of the $165
million outstanding at December 31, 2001, $88 million was repaid in February
2002. TIE's funding for these payments to Global were made from equity
contributions of $44 million from Global and $44 million from Panda Energy.
Earnings and cash distributions from TIE during 2001 were $15 million and $25
million, respectively, below expectations due to lower energy prices, resulting
from the over-supply of energy in the Texas power market and mild summer
temperatures suppressing demand in the region. Global expects this trend to
continue until the 2004-2005 time frame when market prices are expected to
increase, as older less efficient plants in the Texas power market are expected
to be retired and the demand for electricity is expected to increase. However,
no assurances can be given as to the accuracy of these estimates. Current
projections of future cash flows for each plant, using independent market
studies for estimating gas and electricity prices, market heat rates and
capacity prices, do not indicate the investment to be impaired. We believe that
those independent market studies are the best available for estimating future
prices. This impairment test was done in accordance
17
with SFAS 121 at the project level and no assurance can be given as to the
accuracy of the projections used in the analysis.
We cannot predict the impact of any further currency devaluations,
continued economic slowdown, lower energy prices and potential lessee payment
defaults; however, such impact could have a material adverse effect on its
financial condition, results of operations and net cash flows.
Qualitative and Quantitative Disclosures About Market Risk
The risk inherent in our market risk sensitive instruments and positions
is the potential loss arising from adverse changes in commodity prices, equity
security prices, interest rates and foreign currency exchange rates as discussed
below. Our policy is to use financial instruments to manage risk consistent with
our business plans and prudent practices. PSEG has a Risk Management Committee
comprised of executive officers, which utilizes an independent risk oversight
function to ensure compliance with corporate policies and prudent risk
management practices for all of its subsidiaries, including us and our
subsidiaries.
Counterparties expose us to credit losses in the event of nonperformance
or nonpayment. We have a credit management process which is used to assess,
monitor and mitigate counterparty exposure. In the event of nonperformance or
nonpayment by a major counterparty, there may be a material adverse impact on
our financial condition, results of operations and net cash flows.
Commodity Risk
We are subject to commodity price risk related to the selling prices of
electricity at our merchant generation facilities, particularly in the Texas
power market. For a comprehensive discussion of our generation plants in Texas
and the Texas power market, see "Business Environment", shown below.
Equity Securities
Resources has investments in equity securities and limited partnerships
which invest in equity securities. Resources carries its investments in equity
securities at their approximate fair value. Consequently, the carrying value of
these investments is affected by changes in the fair value of the underlying
securities. Fair value is determined by adjusting the market value of the
securities for liquidity and market volatility factors, where appropriate. The
aggregate fair values of such investments, which had available market prices at
December 31, 2001 and December 31, 2000, were $34 million and $115 million,
respectively. The decrease in the recorded amount of investments was primarily
due to the sales of its interests in equity securities which had a fair value of
$66 million on December 31, 2000 and a decline in the valuation of publicly
traded equity securities held within its limited partnerships. A sensitivity
analysis has been prepared to estimate our exposure to market volatility of
these investments. The potential change in fair value resulting from a
hypothetical 10% change in quoted market prices of these investments would
result in a $3 million and a $9 million change in revenues for the years ended
December 31, 2001 and 2000, respectively.
Interest Rates
We are subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate debt, floating rate debt and interest rate swaps. As of December 31,
2001 and December 31, 2000, a hypothetical 10% change in market interest rates
would result in a $2 million and a $6 million respectively, change in interest
costs related to short-term and floating rate debt. The hypothetical change in
interest costs of $2 million for 2001 includes less than $1 million related to
discontinued operations. There was no impact in the hypothetical change in
interest costs for 2000 related to discontinued operations. For a description of
interest rate swaps, see Note 13. "Financial Instruments and Risk Management" of
the Notes to Consolidated Financial Statements.
Foreign Currencies
We conduct our business on a multinational basis in a wide variety of
foreign currencies. Our objective for foreign currency risk management policy is
to preserve the economic value of cash flows in currencies other than the US
Dollar. Our policy is to hedge significant cash flows, which are probable of
occurring, and identified as subject to significant foreign currency
variability. In addition, we typically hedge a portion of our exposure resulting
from identified anticipated cash flows, providing the flexibility to deal with
the variability of longer-term forecasts as well as changing market conditions,
in which the cost of hedging may be excessive relative to the level of risk
involved. Our foreign currency hedging activities to date include hedges of US
Dollar debt arrangements in operating companies that conduct business in
currencies other than the US Dollar.
18
California Power Market
As a result of the California energy crisis, Pacific Gas & Electric
Company (PG&E) filed for protection under Chapter 11 of the US Bankruptcy Code
on April 6, 2001. GWF, Hanford and Tracy had combined pre-petition receivables
due from PG&E, for all plants amounting to approximately $62 million. Of this
amount, approximately $25 million had been reserved as an allowance for doubtful
accounts as of December 21, 2000, resulting in a net receivable balance of
approximately $37 million. Global's pro-rata share of this gross receivable and
net receivable was approximately $30 million and $18 million, respectively.
In December 2001, GWF, Hanford and Tracy reached an agreement with PG&E
which stipulates that PG&E will make full payment of the $62 million in 12 equal
installments, including interest by the end of 2002. On December 31, 2001, PG&E
paid GWF $8 million, representing the initial installment payment and all
accrued interest due, pursuant to the agreement. As a result of this agreement,
GWF, Hanford and Tracy reversed the reserve of $25 million which increased
operating income by $25 million (of which Global's share was $11 million).
As of December 31, 2001, GWF, Hanford and Tracy still had combined
pre-petition receivables due from PG&E for all plants amounting to approximately
$57 million. Global's pro-rata share of this receivable was $27 million.
Accounting Issues
For a discussion of significant accounting matters, see Notes 2. "Summary
of Significant Accounting Policies" and 3. "Accounting Matters" of the Notes to
Consolidated Financial Statements.
Impact of New Accounting Pronouncements
For a discussion of SFAS 133 and related Derivative Implementation Group
issues, see Note 2. "Summary of Significant Accounting Policies." For a
discussion of SFAS 141, SFAS 142, SFAS 143, and SFAS 144, see Note 3.
"Accounting Matters" of the Notes to Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used herein, the words
"will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential", variations of such words and similar expressions
are intended to identify forward-looking statements. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. The following review of factors
should not be construed as exhaustive or as any admission regarding the adequacy
of our disclosures prior to the effective date of the Private Securities
Litigation Reform Act of 1995.
In addition to any assumptions and other factors referred to specifically
in connection with such forward-looking statements, factors that could cause
actual results to differ materially from those contemplated in any
forward-looking statements include, among others, the following:
o because a significant portion of our business is conducted outside
the United States, adverse international developments could
negatively impact our business;
o credit, commodity, and financial market risks may have an adverse
impact;
o the electric industry is undergoing substantial change;
o generation operating performance may fall below projected levels;
o we and our subsidiaries are subject to substantial competition from
well capitalized participants in the worldwide energy markets;
o our ability to service debt could be limited;
o if our operating performance or cash flow from minority interests
falls below projected levels, we may not be able to service our
debt;
o power transmission facilities may impact our ability to deliver our
output to customers;
o government regulation affects many of our operations;
o environmental regulation significantly impacts our operations;
o insurance coverage may not be sufficient;
19
o acquisition, construction and development may not be successful; and
o changes in technology may make our power generation assets less
competitive
o recession, acts of war or terrorism could have an adverse impact.
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about
market risk is set forth under the caption "Qualitative and Quantitative
Disclosures About Market Risk" in Management's Discussion and Analysis of
Financial Condition and Results of Operations and "Use of Derivative Financial
Instruments" in Note 2. "Summary of Significant Accounting Policies" of the
Notes to Consolidated Financial Statements. Such information is incorporated
herein by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
20
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars)
For The Years Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- --------
(Includes reclassifications
for discontinued
operations; see Note 4.)
OPERATING REVENUES
Income from Capital and Operating Leases ............................ $ 215 $ 170 $ 112
Income from Joint Ventures and Partnerships ......................... 144 157 135
Electric Generation and Distribution Revenues ....................... 128 -- --
Gain on Withdrawal from/Sale of Partnerships ........................ 75 -- 69
Interest and Dividend Income ........................................ 48 3 2
Other ............................................................... 4 12 12
Energy Supply Revenues .............................................. -- 67 85
Net Investment (Losses) Gains ....................................... (2) 35 61
----- ----- -----
Total Operating Revenues ....................................... 612 444 476
----- ----- -----
OPERATING EXPENSES
Operation and Maintenance ........................................... 30 4 2
Administrative and General .......................................... 74 67 81
Electric Energy Costs ............................................... 55 -- --
Depreciation and Amortization ....................................... 15 6 3
Cost of Energy Sales ................................................ -- 58 82
Write-down of Project Investments ................................... 7 -- 44
Restructuring Charge ................................................ -- 7 --
----- ----- -----
Total Operating Expenses ..................................... 181 142 212
----- ----- -----
OPERATING INCOME ....................................................... 431 302 264
OTHER (LOSS) INCOME
Foreign Currency Transaction (loss) gain ............................ (8) 3 2
Other ............................................................... 4 -- 6
----- ----- -----
Total Other (Loss) Income ..................................... (4) 3 8
INTEREST EXPENSE
Interest Expense .................................................... 196 155 103
Capitalized Interest ................................................ (16) (21) (9)
----- ----- -----
Total Interest Expense-Net ................................... 180 134 94
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS,
DISCONTINUED OPERATIONS, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE ............................................... 247 171 178
INCOME TAXES
Current ............................................................. (94) (125) 11
Deferred ............................................................ 150 175 59
Other ............................................................... 5 (1) (1)
----- ----- -----
Total Income Taxes ............................................. 61 49 69
MINORITY INTERESTS ..................................................... 1 (1) (1)
----- ----- -----
INCOME BEFORE DISCONTINUED OPERATIONS,
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE ............................... 185 123 110
DISCONTINUED OPERATIONS
Loss From Discontinued Operations (net of tax of
$4, $4 and $0 in 2001, 2000 and 1999, respectively) ......... (9) (9) (2)
----- ----- -----
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE .............. 176 114 108
Extraordinary Loss on Early Retirement of Debt (net of tax) ............ (2) -- --
Cumulative Effect of a Change in Accounting Principle
(net of tax of $8) ................................................... 9 -- --
----- ----- -----
NET INCOME ............................................................. 183 114 108
Preferred Stock Dividend Requirements .................................. 22 24 25
----- ----- -----
EARNINGS AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP ..................................................... $ 161 $ 90 $ 83
===== ===== =====
See Notes to Consolidated Financial Statements.
21
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
December 31,
--------------------
2001 2000
------ ------
(Includes reclassifications
for discontinued
operations; see Note 4.)
CURRENT ASSETS
Cash and Cash Equivalents ...................... $ 54 $ 16
Accounts Receivable:
Trade ........................................ 102 28
Other Accounts Receivable .................... 18 2
Affiliated Companies ......................... 2 60
Assets Held for Sale ........................... 422 48
Notes Receivable ............................... -- 4
Inventory ...................................... 15 --
Prepayments .................................... 2 1
Other Current Assets ........................... -- 2
Current Assets of Discontinued Operations ...... 540 305
------ ------
Total Current Assets ...................... 1,155 466
------ ------
PROPERTY, PLANT AND EQUIPMENT
Real Estate (net of valuation allowance
of $0 and $5, respectively) ................. 115 102
Property and Equipment ......................... 43 10
Electric Generation and Distribution Assets .... 669 10
Construction in Progress ....................... 345 172
------ ------
Total ..................................... 1,172 294
Accumulated Depreciation and Amortization ...... (154) (18)
------ ------
Net Property, Plant and Equipment ......... 1,018 276
------ ------
INVESTMENTS
Capital Leases-Net .............................. 2,784 2,253
Corporate Joint Ventures ........................ 1,105 1,584
Partnership Interests ........................... 659 575
Other Investments ............................... 11 10
------ ------
Total Investments ......................... 4,559 4,422
------ ------
OTHER ASSETS
Goodwill ........................................ 548 --
Deferred Costs .................................. 82 10
Other ........................................... 78 23
------ ------
Total Other Assets ........................ 708 33
------ ------
TOTAL ASSETS ..................................... $7,440 $5,197
====== ======
See Notes to Consolidated Financial Statements.
22
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDER'S EQUITY
(Millions of Dollars)
December 31,
------------------------
2001 2000
--------- ---------
(Includes reclassifications
for discontinued operations;
see Note 4.)
CURRENT LIABILITIES
Long-Term Debt Due Within One Year ............. $ 243 $ 267
Short-Term Borrowings Due to Public
Service Enterprise Group
Incorporated ............................... 38 --
Accounts Payable:
Trade ....................................... 47 12
Taxes ....................................... 21 4
Interest .................................... 48 31
Other ....................................... 49 19
Affiliated Companies ........................ 43 --
Borrowings Under Lines of Credit ............... 300 392
Notes Payable .................................. 285 91
Current Liabilities of
Discontinued Operations ...................... 259 86
------- -------
Total Current Liabilities ................. 1,333 902
------- -------
NONCURRENT LIABILITIES
Deferred Income Taxes and
Investment and Energy Tax Credits ............ 1,211 1,070
Other Noncurrent Liabilities ................... 95 22
------- -------
Total Noncurrent Liabilities .............. 1,306 1,092
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES ........... -- --
------- -------
MINORITY INTERESTS ............................... 47 23
------- -------
LONG-TERM DEBT ................................... 2,530 1,431
------- -------
STOCKHOLDER'S EQUITY
Common Stock ................................... -- --
Preferred Stock ................................ 509 509
Additional Paid-in Capital ..................... 1,490 1,090
Retained Earnings .............................. 510 353
Accumulated Other Comprehensive Loss ........... (285) (203)
------- -------
Total Stockholder's Equity ................ 2,224 1,749
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ....... $ 7,440 $ 5,197
======= =======
See Notes to Consolidated Financial Statements.
23
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
For The Years Ended December 31,
--------------------------------
2001 2000 1999
-------- ------ -------
(Includes reclassifications for
discontinued operations; see Note 4.)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................... $ 183 $ 114 $ 108
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization .......................... 28 25 18
Deferred Income Taxes (Other than Leases) .............. (20) (11) (32)
Leveraged Lease Income, Adjusted for Rents Received .... (6) 74 6
Investment Distributions ............................... 74 51 134
Undistributed Earnings from Affiliates ................. (111) (28) (53)
Net Gains on Investments ............................... (74) (35) (116)
Write-down of Project Investments ...................... 7 -- 44
Proceeds from Sales of Capital Leases .................. 104 89 126
Proceeds from Withdrawal from/Sale of Partnerships ..... 75 -- 71
Non-Cash Portion of Restructuring Charge ............... -- 5 --
Net Changes in certain current assets and liabilities:
Accounts Receivable ................................. (56) (107) (33)
Accounts Payable .................................... 109 46 (10)
Other Current Assets and Liabilities ................ 51 11 29
Other .................................................. 15 6 (1)
------- ------- -------
Net Cash Provided By Operating Activities ........... 379 240 291
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Joint Ventures and Partnerships ........... (151) (368) (725)
Investments in Capital Leases ............................ (460) (460) (378)
Acquisitions, Net of Cash Acquired ....................... (810) (14) (49)
Additions to Property, Plant and Equipment ............... (169) (56) (9)
Return of Capital from Partnerships ...................... 2 87 11
Additions to Deferred Project Costs ...................... (31) (8) (7)
Other .................................................... (98) (36) --
------- ------- -------
Net Cash Used In Investing Activities ............... (1,717) (855) (1,157)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Additional Paid-in Capital ................. 400 300 200
Net Increase in Short-Term Debt .......................... 139 146 145
Net Increase in Short-Term Intercompany Borrowings ....... 40 -- --
Cash Dividends Paid ...................................... (26) (37) (29)
Repayment of Long-Term Debt .............................. (422) (155) (250)
Proceeds from Long-Term Debt ............................. 1,287 331 835
Other .................................................... (42) 4 1
------- ------- -------
Net Cash Provided By Financing Activities ........... 1,376 589 902
------- ------- -------
Net Change In Cash And Cash Equivalents .................... 38 (26) 36
Cash And Cash Equivalents At Beginning Of Year ............. 16 42 6
------- ------- -------
Cash And Cash Equivalents At End Of Year ................... $ 54 $ 16 $ 42
======= ======= =======
Supplemental Disclosure of Cash Flow Information
Cash Payments (Receipts) for:
Income Taxes (Benefits) ............................. $ (178) $ (105) $ 3
Interest Expense .................................... $ 155 $ 87 $ 74
Non-Cash Investing and Financing Activities:
Issuance of PSEG Stock for Companies Acquired ....... $ -- $ -- $ 11
Fair Value of Property, Plant and Equipment Acquired $ 727 $ 182 $ 5
Debt Assumed from Companies Acquired ................ $ 256 $ 161 $ 11
See Notes to Consolidated Financial Statements.
24
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Millions of Dollars)
Accumulated
Additional Other Total
Common Preferred Paid-in Retained Comprehensive Stockholder's
Stock Stock Capital Earnings Income (Loss) Equity
------ --------- ---------- -------- ------------- -------------
Balance as of January 1, 1999 ...... $ -- $ 509 $ 579 $ 197 $ (43) $ 1,242
Net Income ..................... -- -- -- 108 -- 108
Other Comprehensive Income
(Loss), net of tax:
Currency Translation Adjustment,
net of tax of $(17) .......... -- -- -- -- (157) (157)
-------
Other Comprehensive Loss ... -- -- -- -- -- (157)
-------
Comprehensive Loss ............. -- -- -- -- -- (49)
Additional Paid-in Capital ..... -- -- 211 -- -- 211
Preferred Stock Dividends ...... -- -- -- (25) -- (25)
Common Stock Dividends ......... -- -- -- (4) -- (4)
---- ------- ------- ------- ------- -------
Balance as of December 31, 1999 .... -- 509 790 276 (200) 1,375
---- ------- ------- ------- ------- -------
Net Income ..................... -- -- -- 114 -- 114
Other Comprehensive Income
(Loss), net of tax:
Currency Translation Adjustment,
net of tax of $0 ............. -- -- -- -- (3) (3)
-------
Other Comprehensive Loss ... -- -- -- -- -- (3)
-------
Comprehensive Income ........... -- -- -- -- -- 111
Additional Paid-in Capital ..... -- -- 300 -- -- 300
Preferred Stock Dividends ...... -- -- -- (24) -- (24)
Common Stock Dividends ......... -- -- -- (13) -- (13)
---- ------- ------- ------- ------- -------
Balance as of December 31, 2000 .... -- 509 1,090 353 (203) 1,749
---- ------- ------- ------- ------- -------
Net Income ..................... -- -- -- 183 -- 183
Other Comprehensive Income
(Loss), net of tax:
Currency Translation Adjustment,
net of tax of $(6) ........... -- -- -- -- (55) (55)
Cumulative Effect of a Change
in Accounting Principle
(net of tax of $14 and
minority interest of $12) .... -- -- -- -- (15) (15)
Current Period Declines in Fair
Value of Derivative
Instruments-Net .............. -- -- -- -- (16) (16)
Reclassification Adjustments for
Net Amounts Included
in Net Income ................ -- -- -- -- 4 4
-------
Other Comprehensive Loss ... -- -- -- -- -- (82)
-------
Comprehensive Income ........... -- -- -- -- -- 101
Additional Paid-in Capital ..... -- -- 400 -- -- 400
Preferred Stock Dividends ...... -- -- -- (22) -- (22)
Common Stock Dividends ......... -- -- -- (4) -- (4)
---- ------- ------- ------- ------- -------
Balance as of December 31, 2001 .... $ -- $ 509 $ 1,490 $ 510 $ (285) $ 2,224
==== ======= ======= ======= ======= =======
25
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
PSEG Energy Holdings Inc. (Energy Holdings), a wholly-owned subsidiary of
Public Service Enterprise Group Incorporated (PSEG), is the parent of PSEG
Global Inc. (Global), which invests and participates in the development and
operation of projects in the generation and distribution of energy, which
include cogeneration and independent power production facilities and electric
distribution companies; PSEG Resources Inc. (Resources), which makes investments
primarily in assets that can provide funds for future growth as well as provide
incremental earnings for Energy Holdings; PSEG Energy Technologies Inc. (Energy
Technologies), which provides energy-related services and construction to
industrial and commercial customers; Enterprise Group Development Corporation
(EGDC), a commercial real estate property management business; PSEG Capital
Corporation (PSEG Capital), which serves as a financing vehicle for our
subsidiaries, and borrows on the basis of a minimum net worth maintenance
agreement with PSEG; and Enterprise Capital Funding Corporation (Funding) which
is currently inactive and formerly served as the financing vehicle on the basis
of our consolidated financial position. EGDC has been conducting a controlled
exit from the real estate business since 1993. In June 2002, we announced our
intention to exit the businesses of Energy Technologies, and one of Global's
investments, Tanir Bavi, an electric generation facility in India. For
additional information, see Note 4. "Discontinued Operations" and Note 21.
"Subsequent Events--DSM Investments."
Unless the context otherwise indicates, all references to "Energy
Holdings," "we," "us" or "our" herein mean PSEG Energy Holdings Inc. and its
consolidated subsidiaries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include our accounts and all direct
and indirect subsidiaries in which we have a controlling interest. All
significant intercompany accounts and transactions have been eliminated in
consolidation. For a discussion of recent acquisitions by Global, including
those that are majority-owned subsidiaries, see Note 6. "Investments in Global's
Assets."
Reclassifications
Certain reclassifications of prior period data have been made to conform
with the current presentation.
Cash and Temporary Cash Investments
We classify cash and investments, with original or purchased maturities of
three months or less, as cash and temporary cash investments.
Property, Plant and Equipment
The estimated useful lives for purposes of computing depreciation, on a
straight-line basis are from 3 to 12 years for furniture and equipment and 20
years for buildings. The estimated useful lives for purposes of computing
depreciation, on a straight-line basis are up to 40 years for Electric
Generation and Distribution assets. Maintenance and repairs are expensed when
incurred.
Construction progress payments, engineering costs, insurance costs,
salaries, interest and other costs relating to electric generation construction
in progress are capitalized for those generation assets that are consolidated.
Construction in progress balances will be transferred to Electric Generation
assets when the assets are ready for their intended use.
Assets Held For Sale
For a discussion of the pending sale of certain investments in Argentina,
see Note 20. "Subsequent Events."
EGDC has been conducting a controlled exit from the real estate business
since 1993. In 1999, a pre-tax charge of $11 million was recorded for a property
held for sale. This amount is recorded in operations and maintenance expense.
Since EGDC has been conducting a controlled exit from the real estate business,
gains and losses from property sales are considered to be in the normal course
of business of EGDC. As of December 31, 2001 and December 31, 2000, EGDC has
three properties and four properties, respectively, reported as Assets Held for
Sale amounting to $23 million and $13 million, respectively.
26
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment of Long-lived Assets
Statement of Financial Accounting Standards 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", requires that long-lived assets and certain intangible assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If undiscounted expected
future cash flows are less than the carrying value of the asset, an impairment
loss is to be recognized based on the fair value of the asset.
The application of SFAS 121 relates to long-lived assets of consolidated
affiliates as well as long-lived generation assets of affiliates accounted for
under the equity method. Should an impairment loss be recognized at one of our
affiliates, its pro-rata share of the loss after taxes would be reflected in our
consolidated statements of income. For the years ended December 31, 2001, 2000,
and 1999, no such impairment losses were recognized against the long-lived
assets of our affiliates.
Capital Leases
Resources, as lessor, leases property and equipment, through leveraged
leases, with terms ranging from 4 to 45 years. The lease investments are
recorded on a net basis by summing the lease rents receivable over the lease
term and adding the residual value, if any, less unearned income and deferred
taxes to be recognized over the lease term. Leveraged leases are recorded net of
non-recourse debt.
Income on leveraged leases is recognized by a method which produces a
constant rate of return on the outstanding net investment in the lease, net of
the related deferred tax liability, in the years in which the net investment is
positive. Initial direct costs are deferred and amortized using the interest
method over the lease period.
Investments in Corporate Joint Ventures and Partnerships
Global's and Resources' interests in active joint ventures and
partnerships are accounted for under the equity method of accounting where its
ownership interest is 50% or less and significant influence over joint venture
or partnership operating and management decisions exist. The pro-rata share of
income or loss is recorded in the Income from Joint Ventures and Partnerships
Line of the Consolidated Statements of Income with a corresponding increase in
the investment amount on the Consolidated Balance Sheets. Cash distributions are
recorded as reductions to the investment balance on the Consolidated Balance
Sheets. For investments in which significant influence does not exist, the cost
method of accounting is applied. Interest is capitalized on investments during
the construction and development of qualifying assets. The capitalized interest
is amortized over the operating lives of the projects beginning on the date of
commercial operation. The amount of interest capitalized was $16 million, $21
million, and $9 million for the years ended December 31, 2001, 2000, and 1999,
respectively.
Resources carries its partnership investments in certain venture 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. Fair value is determined based on the review of market
price and volume data in conjunction with our invested liquid position in such
securities. Changes in fair value are recorded in Net investment (losses) gains
in the Consolidated Statements of Income.
Income Taxes
We and our subsidiaries file a consolidated Federal income tax return with
PSEG. We and our subsidiaries have entered into tax allocation agreements with
PSEG which provide that we and our subsidiaries 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. Energy Holdings' 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 most 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.
27
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Financial Instruments
We and our subsidiaries use derivative financial instruments to manage
risk from changes in interest rates and foreign currency exchange rates,
pursuant to its business plans and prudent practices.
On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The standard
requires an entity to recognize the fair value of derivatives held as assets or
liabilities on the balance sheet. The change in the fair value of the effective
portion of the gain or loss on a derivative instrument designated as a cash flow
hedge is reported in Other Comprehensive Income (OCI), net of tax. Amounts in
accumulated OCI are ultimately recognized in earnings when the related hedged
forecasted transaction occurs. The change in the fair value of the ineffective
portion of the gain or loss on a derivative instrument is recorded in earnings.
Derivative instruments that have not been designated as hedges are adjusted to
fair value through earnings. Energy Holdings and its subsidiaries have not
utilized any derivative instruments for fair value hedging purposes.
Effective January 1, 2001, we recorded a cumulative effect from adopting
SFAS 133 as follows:
Other
Comprehensive
Earnings Income
---------- -------------
(Millions of Dollars)
Adjustment to fair value of derivatives ......... $23 $(41)
Income tax effects .............................. (8) 14
Minority interests effects ...................... (6) 12
--- ----
Total ........................................... $ 9 $(15)
--- ----
The cumulative effect on earnings was comprised of one significant element
associated with a Power Purchase Agreement (PPA) that Carthage Power Company, a
Global affiliate, entered into that provides for indexation of foreign
currencies to the US Dollar over the tariff collection period. The indexation
provides for an increased amount of foreign currency to be provided to the
affiliated entity in the event of a devaluation in the foreign currency.
The indexation portion of the PPA is considered an embedded derivative and
has been recognized and valued separately as a derivative instrument. As
currencies devalue/revalue in relation to the US Dollar, the derivative
increases/decreases in value equal to the discounted present value of additional
units of foreign currency (measured in US Dollars) over the life of the PPA.
This increased/decreased value is reported on the balance sheet as an
asset/liability. To the extent that such indexation is provided to hedge foreign
currency debt exposure, the offsetting amount is recorded in OCI. Amounts will
be reclassed from OCI to Earnings over the life of the debt beginning on the
date of commercial operation of the project, expected to occur in 2002. To the
extent such indexation is provided to hedge an equity return in US Dollars, the
offsetting amount is recorded in Earnings. The total value of this embedded
derivative was recorded on January 1, 2001 as a transition adjustment to
Earnings as required by SFAS 133. All changes in fair value of this embedded
derivative recorded subsequent to January 1, 2001 impact both OCI and Earnings.
The cumulative effect on OCI was attributable to marking to market
interest rate swaps used to hedge variable-rate borrowings. Decreases in the
fair values of these instruments were attributable to declines in interest rates
since inception of the hedging arrangements and will be recognized
contemporaneously in Earnings in future periods by offsetting lower interest
expense associated with the hedged items.
The fair value of the derivative instruments is determined by reference to
quoted market prices, listed contracts, published quotations or quotations from
counterparties. In the absence thereof, we utilized mathematical models based on
current and historical data.
The Financial Accounting Standards Board (FASB) Derivative Implementation
Group (DIG) issued guidance, effective January 1, 2002, regarding the normal
purchases and normal sales exception for option-type contracts and forward
contracts in electricity. In addition, the FASB DIG issued amended guidance,
effective April 1, 2002, regarding the normal purchases and normal sales
exception to contracts that combine a forward contract and a purchased option
contract. We are currently evaluating this guidance in light of its potential
impacts, and cannot predict the impact on its financial position of results of
operations, however, such impact could be material.
28
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We do not enter into derivative financial instruments for trading
purposes.
See Note 13. "Financial Instruments and Risk Management." for additional
information.
Foreign Currency
Our financial statements are prepared using the US Dollar as the reporting
currency. For 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 (See the Consolidated Statements of Stockholder's
Equity).
The exchange rate is the ratio between a unit of one currency and the
amount of another currency for which that unit can be exchanged at a particular
time. If exchangeability between two currencies is temporarily lacking at
balance sheet date, the first subsequent rate at which exchanges can be obtained
are used for translation.
Gains and losses on transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred. Gains
and losses on foreign currency transactions, which operate as hedges of
identifiable foreign currency commitments, hedges of foreign currency investment
positions, or when the entities involved in the transactions are consolidated or
accounted for by the equity method and settlement of the transaction is not
expected in the foreseeable future, are included in OCI.
Net Investment Gains or Losses
Resources holds a beneficial partnership interest in two leveraged buyout
funds which hold publicly traded securities. Investment gains or losses are
recognized in income as the value of securities in the funds fluctuate. When
securities are sold from the funds and cash is distributed, such gains or losses
become realized. The investments in leveraged buyout funds represent investments
in marketable securities that are accounted for using fair value accounting.
Resources also recognizes investment gains or losses when leveraged lease
interests are sold at an amount either greater or less than the carrying amount,
respectively. Losses are also recognized if management determines that there has
been other than a temporary decline in the market value of a property subject to
leveraged lease or a change in the assumption of the residual value expected
upon lease termination. Increases in market value of leased property are not
recognized in the financial statements. Investment gains or losses are also
recognized upon sale of partnership interests at amounts greater than or less
than the recorded amount, respectively.
Energy Service Earnings/Losses
Energy Technologies' earnings/losses from fixed price and other long-term
construction contracts are recognized on the percentage-of-completion method of
accounting determined by the ratio of costs incurred to management's estimates
of final total anticipated costs. Earnings/losses from cost-plus-fee and time
and material contracts are recognized on the basis of costs incurred during the
period plus the fee earned, measured by the cost-to-cost method and are included
in Energy service earnings/losses within Loss from Discontinued Operations in
the Consolidated Statements of Income. Contract costs include all direct labor
and benefits, material purchased for or installed in the project, subcontract
costs and allocations of indirect construction costs, and are recorded as a
component of Loss from Discontinued Operations. As contracts extend over one or
more years, revisions in cost and profit estimates during the course of the work
are reflected in the accounting period in which the facts that require the
revisions become known. Amounts representing contract change orders, customer
approved claims or other items are included in Loss from Discontinued Operations
only when they can be reasonably estimated and realization is probable. When it
is indicated that a contract will result in an ultimate loss, the entire loss is
recognized in the financial statements during the period in which such loss
becomes known.
Energy Supply
Prior to February 2000, Energy Technologies recorded revenues from the
sale of natural gas and electricity to customers. These sales were recorded in
Energy Supply Revenues in the consolidated statements of income and related
supply costs were recorded in cost of energy sales.
As a result of exiting from the electric and gas commodity business,
Energy Technologies recognized a pre-tax restructuring charge of approximately
$7 million for the year ended December 31, 2000. Of this
29
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amount approximately $2 million related to employee severance costs for the
termination of approximately 60 employees, $2 million related to deferred
natural gas transportation costs and $3 million was related to the write-off of
computer hardware and software. As of December 31, 2000, all severance costs had
been paid related to the terminations.
Deferred Project Costs
Global capitalizes all direct external and direct internal costs related
to project development once a project reaches certain milestones. Once the
project reaches financial closing, Global transfers the deferred project balance
to the investment account. These costs are amortized on a straight-line basis
over the lives of the related project assets as a reduction to equity in
earnings of the investee. Such amortization commences upon the date of
commercial operation. Development costs related to unsuccessful projects are
charged to expense. Deferred project costs on the consolidated balance sheets
are shown in Other Assets.
Deferred Debt Issuance Costs
Deferred debt issuance costs are amortized over the term of the related
indebtedness using the interest method. Such costs are recorded as a component
of Other Long Term Assets.
Goodwill
We classified the cost in excess of fair value of the net assets as
goodwill (including tax attributes) of companies acquired in purchase business
transactions. Goodwill recorded in connection with acquisitions that occurred
prior to July 1, 2001 was amortized on a straight-line method over 20 years. For
a discussion of recent accounting standards with respect to recent business
combinations and goodwill, see Note 3. "Accounting Matters".
Discontinued Operations
In June 2002, we announced our intention to exit the businesses of Energy
Technologies, and one of Global's investments, Tanir Bavi. The results of these
discontinued operations, less applicable income taxes (benefit) are reported as
a separate component of income (loss) before extraordinary items and the
cumulative effect of a change in accounting principles. The assets and
liabilities of these entities are reflected separately in the Consolidated
Balance Sheets as Current Assets of Discontinued Operations and Current
Liabilities of Discontinued Operations. The Consolidated Statements of Cash
Flows reflect the reduction in Cash and Cash Equivalents related to the
reclassification to Current Assets of Discontinued Operations. These adjustments
to the Statements of Cash Flows related to the reduction in Cash and Cash
Equivalents have been reflected within Operating Activities. The consolidated
statements for all periods have been restated to present these businesses as
discontinued operations. For additional information, see Note 4. "Discontinued
Operations" and Note 21. "Subsequent Events -- DSM Investments."
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
NOTE 3. ACCOUNTING MATTERS
In July 2001, the FASB issued SFAS 141, "Business Combinations" (SFAS
141), and SFAS 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS 121. We are required to adopt the provisions of SFAS 141
immediately, and SFAS 142 effective January 1, 2002. A transitional goodwill
impairment test will be completed and will require us to perform an assessment
of whether there is an indication that
30
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
goodwill [and equity method goodwill] is impaired as of the date of adoption. An
impairment loss, as of the date of adoption, will be recognized as the
cumulative effect of a change in accounting principle in the first interim
period, if applicable. If certain events or changes in circumstance indicate
that goodwill might be impaired before completion of the transitional goodwill
impairment test, goodwill shall be tested for impairment and any impairment loss
shall be recorded as a component of income from continuing operations.
For a discussion of the potential goodwill impairment, see Note 14.
"Commitments and Contingencies."
Also in July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under SFAS 143, the fair value of a
liability for an asset retirement obligation should be recorded in the period in
which it is incurred. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. We are
currently evaluating this guidance and cannot determine the impact on our
financial position, results of operations, or net cash flows.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 modifies the rules for accounting
for the impairment or disposal of long-lived assets. The new rules become
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. 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 4. DISCONTINUED OPERATIONS
These financial statements include reclassifications to our Consolidated
Balance Sheets as of December 31, 2001 and 2000 and Consolidated Statements of
Income and Cash Flows for each of the three years in the period ended December
31, 2001 to reflect the effects of a decision in June 2002, to discontinue
operations of Energy Technologies and Global's interest in Tanir Bavi, an
electric generation facility in India. The revisions are limited to these events
and impact the selected financial data, management's discussion and analysis,
the financial statements and the related notes and Schedule II -- valuation and
qualifying accounts. NO ATTEMPT HAS BEEN MADE IN TO MODIFY OR UPDATE OTHER
DISCLOSURES AS PRESENTED IN OUR FINANCIAL STATEMENTS FILED ON THE ORIGINAL FORM
10-K EXCEPT AS REQUIRED TO REFLECT THE EFFECTS OF THE 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.
In June 2002, we adopted a plan to sell our interests in the HVAC
operating companies. The sale of the HVAC operating companies is planned to be
completed in 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, as of June 30, 2002, we
expected to sell by June 30, 2003. Based on our assessments, we believe the fair
market value of these asset management group assets approximates their carrying
value as of June 30, 2002 and accordingly no impairment loss was indicated. 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 accordingly. For additional information regarding the DSM
Investments, see Note 21. "Subsequent Events - DSM Investments."
Operating results of the asset management group and DSM investments at
Energy Technologies, less certain allocated costs from Energy Holdings, have
been reclassified into discontinued operations in our Consolidated Statements of
Income. For the years ended
31
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000 and 1999, the businesses of Energy Technologies included
retail commodity sales of electricity and natural gas, which do not qualify for
accounting treatment as discontinued operations. The results of operations of
discontinued operations for the three years ended December 31, 2001, 2000 and
1999, respectively, are disclosed below:
Years Ended December 31,
--------------------------------
2001 2000 1999
------ ------ ------
Operating Revenues ................... $467 $349 $211
Pre-Tax Operating Loss ............... (21) (10) (2)
Loss Before Income Taxes ............. (24) (13) (2)
32
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of the assets and liabilities of Energy Technologies'
investments, as of December 31, 2001 and December 31, 2000, 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 December 31, 2001 and
December 31, 2000, are summarized in the following table:
December 31, December 31,
2001 2000
------------ ------------
CURRENT ASSETS (millions of dollars)
Accounts Receivable:
Trade (net of allowance for doubtful accounts) ... $ 114 $ 105
Notes Receivable ................................. 21 17
Costs and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts .......................... 19 27
Other ............................................ 4 17
----- -----
Total Current Assets ............................. 158 166
----- -----
PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment .................... 45 49
Accumulated Depreciation
and Amortization ............................... (31) (31)
----- -----
Net Property, Plant and Equipment ................ 14 18
----- -----
INVESTMENTS ...................................... 54 60
----- -----
OTHER ASSETS
Goodwill ......................................... 53 56
Other ............................................ 4 5
----- -----
Total Other Assets ............................... 57 61
----- -----
TOTAL ASSETS ..................................... $ 283 $ 305
===== =====
CURRENT LIABILITIES
Accounts Payable:
Trade ............................................ $ 37 $ 43
Other ............................................ 17 13
Affiliated Companies ............................. 8 5
Billing in Excess of Costs and Estimated
Earnings on Uncompleted Contracts .............. 19 18
----- -----
Total Current Labilities ......................... 81 79
----- -----
NONCURRENT LIABILITIES ........................... 5 6
LONG-TERM DEBT ................................... 1 1
----- -----
TOTAL LIABILITIES ................................ $ 87 $ 86
===== =====
As a result of our June 2002 adoption of a plan to sell our interests in
the 11 HVAC operating companies, we have reduced the related carrying value 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.
33
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 would 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 2002. Should this sale not be consummated, we will seek
another buyer for this facility. In such an event, we can give no assurances
that we will be able to realize the amount of our carrying value. Tanir Bavi
meets the criteria for classification as a component of discontinued operations
and all periods reflect such classification.
Our share of operating results of this discontinued operation are
summarized in the following table:
Years Ended December 31,
-------------------------------
2001 2000 1999
--------- -------- -------
Operating Revenues ...................... $56 $-- $--
Operating Income ........................ 16 -- --
Income Before Income Taxes .............. 14 -- --
34
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of the assets and liabilities of Tanir Bavi, as of
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 December 31, 2001 are summarized in
the following tables:
December 31, 2001
-------------------
CURRENT ASSETS Millions of Dollars)
Cash ...................................................... $ 2
Accounts Receivable:
Trade (net of allowance for doubtful accounts) ............ 27
Notes Receivable .......................................... 5
Inventory ................................................. 3
----
Total Current Assets ...................................... 37
----
PROPERTY, PLANT AND EQUIPMENT
Electric Generation and Distribution Assets ............... 194
Accumulated Depreciation .................................. (4)
----
Net Property, Plant and Equipment ......................... 190
----
OTHER ASSETS
Goodwill .................................................. 27
Other ..................................................... 3
----
TOTAL OTHER ASSETS ........................................ 30
----
TOTAL ASSETS .............................................. $257
====
LIABILITIES
Long-Term Debt Due Within One Year ........................ $ 28
Accounts Payable-Trade .................................... 16
Accounts Payable-Other .................................... 1
----
Total Current Liabilities ................................. 45
----
LONG-TERM DEBT ............................................ 108
MINORITY INTEREST ......................................... 19
----
TOTAL LIABILITIES ......................................... $172
====
As of December 31, 2000, we had $18 million of an equity method investment
associated with our 50% interest in Tanir Bavi.
As a result of our June 2002 adoption of a plan to sell our interests in
Tanir Bavi, we have reduced the related carrying value 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).
35
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. CAPITAL LEASES
Resources' net investment in leveraged leases is composed of the following
elements:
December 31,
----------------------
2001 2000
------ ------
(Millions of Dollars)
Lease rents receivable (net of
principal and interest
on non-recourse debt) ........................ $3,644 $3,175
Estimated residual value of
leased assets ................................ 1,414 1,040
------ ------
5,058 4,215
Less - unearned and
deferred income .............................. 2,274 1,962
------ ------
Investment in leveraged leases ................. 2,784 2,253
Less - deferred taxes
arising from leveraged leases ................ 1,175 1,031
------ ------
Net investment in leveraged
leases ....................................... $1,609 $1,222
====== ======
Resources' pre-tax income and income tax effects related to investments in
leveraged leases are as follows:
Years ended December 31,
------------------------------
2001 2000 1999
---- ---- ----
(Millions of Dollars)
Pre-tax income ....................... $206 $163 $112
==== ==== ====
Income tax effect on
pre-tax income ..................... $ 62 $ 58 $ 41
Amortization of investment
tax credits ........................ $ (1) $ (1) $ (1)
Resources' leases property and equipment, through leveraged leases, with
terms ranging from 8 to 45 years. The leveraged lease portfolio consisted of the
following types of property:
December 31,
--------------------
2001 2000
---- ----
Energy-related ............................... 86% 79%
Aircraft ..................................... 4% 9%
Real Estate .................................. 7% 7%
Commuter rail cars ........................... 3% 4%
Industrial ................................... -- 1%
Resources' initial investment in leveraged leases represents approximately
15% to 20% of the purchase price of the leveraged leased property; the balance
is provided by third-party financing in the form of non-recourse long-term debt
which is secured by the property.
In 2001, Resources negotiated the early termination of nine leveraged
leases and received cash proceeds of $104 million and recognized a pre-tax gain
of $15 million.
In 2000, Resources negotiated the early termination of four leveraged
leases and received cash proceeds of $89 million and recognized a pre-tax gain
of $38 million.
In 1999, Resources negotiated the early termination of three leveraged
leases and received cash proceeds of $126 million and recognized a pre-tax gain
of $22 million. The pre-tax gains were recorded in Net investment gains.
NOTE 6. INVESTMENTS IN GLOBAL'S ASSETS
Global's investments include domestic qualifying facilities (QFs) under
the Public Utility Regulatory Policies Act of 1978, exempt wholesale generators
(EWGs) under the 1992 amendments to the Public Utility Holding Company Act of
1935 and foreign utility companies (FUCOs). Global's investments are generally
financed through debt that is non-recourse to Global and Energy Holdings.
Global's investments in QF projects have been undertaken with other participants
because Global, together with other utility affiliates, may not own more than
50% of a QF subsequent to its in-service date. Projects involving EWGs are not
restricted to a 50% investment limitation.
36
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2001, Global's portfolio consisted of investments in 30
cogeneration or independent power projects (and 13 under construction or
advanced development) which range in gross production capacities from 15 to
1,000 megawatts (MW) of electricity, and eight electric distribution companies.
As of December 31, 2001 and December 31, 2000, Global's assets, which include
equity and consolidated projects, and share of project MW by region were as
follows:
2001 MW 2000 MW
------- ------ ------- ------
(Millions of (Millions of
Dollars) Dollars)
Generation
North America ........ $ 476 1,350 $ 321 1,294
Latin America ........ 391 685 115 501
Asia Pacific ......... 131 246 111 161
Europe (1) ........... 478 774 287 593
India (2) ............ 78 228 33 397
Distribution
Latin America ........ 2,081 N/A 1,221 N/A
Other
Other (3) ............ 182 N/A 165 N/A
------ ------ ------ ------
Total Investment ..... $3,817 3,283 $2,253 2,946
====== ====== ====== ======
(1) Europe and Africa
(2) India and the Middle East. Amounts for 2001 exclude $257 million of
assets and 163 MW related to the discontinued operations of Tanir
Bavi. Amounts for 2000 exclude $18 million of assets and 163 MW
related to the discontinued operations of Tanir Bavi.
(3) Assets not allocated to a specific project, including corporate
receivables.
Investments in and Advances to Affiliates
Investments in net assets of affiliated companies accounted for under the
equity method of accounting by Global amounted to $1.5 billion and $1.9 billion
at December 31, 2001 and December 31, 2000, respectively. During the three years
ended December 31, 2001, 2000 and 1999, the amount of dividends from these
investments was $48 million, $107 million, and $83 million respectively.
Global's share of income and cash flow distribution percentages currently range
from 16% to 50%. Interest is earned on loans made to various projects. Such
loans earned rates of interest ranging from 7.5% to 14% during 2001 and 2000.
37
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized results of operations and financial position of all affiliates
in which Global uses the equity method of accounting are presented below:
Foreign Domestic Total
------- -------- -----
(Millions of Dollars)
December 31, 2001
Condensed Income Statement Information
Revenue .............................. $ 819 $ 473 $1,292
Gross Profit ......................... 317 165 482
Minority Interest .................... (20) -- (20)
Net Income ........................... 141 91 232
Condensed Balance Sheet Information
Assets:
Current Assets ...................... $ 341 $ 131 $ 472
Property, Plant & Equipment ......... 1,198 1,406 2,604
Goodwill ............................ 863 50 913
Other Non-current Assets ........... 616 23 639
------ ------ ------
Total Assets ......................... $3,018 $1,610 $4,628
------ ------ ------
Liabilities:
Current Liabilities ................. $ 415 $ 109 $ 524
Debt* ............................... 761 658 1,419
Other Non-current Liabilities ....... 132 212 344
Minority Interest ................... 25 -- 25
------ ------ ------
Total Liabilities .................... 1,333 979 2,312
Equity ............................... 1,685 631 2,316
------ ------ ------
Total Liabilities & Equity ........... $3,018 $1,610 $4,628
------ ------ ------
Foreign Domestic Total
------- -------- -----
(Millions of Dollars)
December 31, 2000
Condensed Income Statement Information
Revenue .............................. $1,059 $ 452 $1,511
Gross Profit ......................... 434 256 690
Minority Interest .................... (25) -- (25)
Net Income ........................... 156 162 318
Condensed Balance Sheet Information
Assets:
Current Assets ...................... $ 504 $ 130 $ 634
Property, Plant & Equipment ......... 2,355 1,349 3,704
Goodwill ............................ 1,201 -- 1,201
Other Non-current Assets ............ 464 77 541
------ ------ ------
Total Assets ......................... $4,524 $1,556 $6,080
------ ------ ------
Liabilities:
Current Liabilities ................. $ 818 $ 99 $ 917
Debt* ............................... 696 732 1,428
Other Non-current Liabilities ....... 174 90 264
Minority Interest ................... 129 1 130
------ ------ ------
Total Liabilities .................... 1,817 922 2,739
Equity ............................... 2,707 634 3,341
------ ------ ------
Total Liabilities & Equity ........... $4,524 $1,556 $6,080
------ ------ ------
Foreign Domestic Total
------- -------- -----
(Millions of Dollars)
December 31, 1999
Condensed Income Statement Information
Revenue .............................. $1,184 $423 $1,607
Gross Profit ......................... 416 265 681
Minority Interest .................... (23) -- (23)
Net Income ........................... 110 155 265
(*)Debt is non-recourse to Global and us.
38
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchase Business Combinations/Asset Acquisitions
In December 2001, Global acquired Empresa de Electricidad de los Andes
S.A. (Electroandes) for $227 million, subject to certain purchase price
adjustments pending completion in April 2002. Electroandes is the sixth largest
electric generator in Peru with a 6% market share. Electroandes' main assets
include four hydroelectric facilities with a combined installed capacity of 183
MW and 460 miles of transmission lines located in the Central Andean region
(northeast of Lima). In addition, Electroandes has a temporary concession to
develop a 100 MW expansion of an existing station and a 150 MW greenfield
hydroelectric facility for a period of two years from March 15, 2001. In 2000,
Electroandes generated 1,150 GWH of electrical energy, of which 97% was sold
through power purchase agreements to mining companies in the region. We have not
finalized the allocation of the purchase price as of December 31, 2001. An
estimation of this allocation was prepared and included as part of our
consolidated financial statements. The purchase price was allocated $15 million
to Current Assets, $78 million to Property, Plant and Equipment, $164 million to
Goodwill, and $30 million to Current Liabilities.
In August 2001, Global purchased a 94% equity stake in Sociedad Austral de
Electricidad S.A., (SAESA) and all of its subsidiaries from Compania de
Petroleos de Chile S.A. (COPEC). The SAESA group of companies consists of four
distribution companies and one transmission company that provide electric
service in the southern part of Chile. Additionally, Global purchased from COPEC
approximately 14% of Empresa Electrica de la Frontera S.A. (Frontel) not owned
by SAESA. SAESA also owns a 50% interest in the Argentine distribution company
Empresa Electrica del Rio Negro S.A. (EDEERSA). In 2001 Global spent $447
million (net of $16 million in cash acquired) to acquire a 94% interest in SAESA
and a 14% interest in Frontel. In October 2001, Global completed a tender offer
for an additional 6% of publicly traded SAESA shares, for approximately $25
million. We have not finalized the allocation of the purchase price as of
December 31, 2001. An estimation of this allocation was prepared and included as
part of our consolidated financial statements. The total purchase price of $488
million was allocated $55 million to Current Assets, $210 million to Property,
Plant and Equipment, $315 million to Goodwill, $10 million to Other Non-Current
Assets, $46 million to Current Liabilities, $39 million to Long-Term Debt, and
$17 million to Deferred Taxes and Other Non-Current Liabilities.
In June 2001, Global exercised its option to acquire an additional 49% of
Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA), an electric
distribution company providing electric service to more than 230,000 customers
in the Province of Entre Rios, Argentina, bringing its total ownership of
EDEERSA to 90%. The additional ownership was purchased for $110 million. An
estimation of this allocation was prepared and included as part of our
consolidated financial statements. The purchase price was allocated
approximately $22 million to Current Assets, $114 million to Property, Plant and
Equipment, $30 million to Goodwill, $15 million to Current Liabilities, and $41
million to Long-Term Debt. We have not finalized the allocation of the purchase
price as of December 31, 2001.
In 2000, Global closed the project financing for ELCHO, a combined heat
and power plant consisting of 220 MW of electricity and 500 MW of thermal energy
capacity located in Poland. Total project cost is estimated at $324 million with
Global's equity investment not expected to exceed $105 million. The plant is
under construction and commercial operation is targeted for 2003.
In 2000, Global acquired a 49% interest in Tanir Bavi Power Company
Private Ltd., which was constructing a 220 MW barge mounted, combined-cycle
generating facility located near Mangalore in the state of Karnataka, India. In
January 2001, Global acquired an additional 25% interest in the project bringing
its total ownership interest to 74%. In November 2001, the facility achieved
full commercial operation. Power from the facility will be sold to the Karnataka
Electricity Board pursuant to a seven-year fixed price power purchase agreement
with a five-year renewal term. For a description of the plan to sell Tanir Bavi,
see Note 4 - "Discontinued Operations".
In 2000, Global and its 50% partner completed a $329 million project
financing for a 1,000 MW gas-fired combined-cycle electric generation facility
to be located near Odessa, Texas. The facility commenced full commercial
operations in August 2001.
Other
As part of a comprehensive review of assets and development activities,
Global recognized a $44 million write-down in the third quarter of 1999, related
to equity investments in generation facilities in California and in development
companies in the Philippines and Thailand.
39
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In California, Global owns a 50% equity interest in seven generating
facilities totaling 153 MW (71 MW net) known as GWF, Hanford and Tracy. The
facilities began operations between 1989 and 1991. Electricity is sold to a
utility under a pricing structure that provided for fixed rate energy prices for
the first 10 year period coupled with capacity payments over the entire power
purchase contract terms which range from 20 to 30 years. In the 11th year of the
contracts, the energy component of the price is based on Short Run Avoided Cost
(SRAC) which is a formula based pricing mechanism that takes into account the
cost of fuel, plant efficiency and other factors. This price is correlated to
market pool prices on the exchange. The market prices and correspondingly, the
SRAC prices, are driven by many factors including, but not limited to, demand,
availability of generation supply and cost of the supply. Market prices are most
volatile during the summer when high temperatures cause a higher demand for
power often increasing the cost. In 1999, as part of a review of all equity
investments, Global assessed the carrying value of GWF and Hanford taking into
account the future cash flows expected from these investments after review of
the most current SRAC prices which were significantly lower than fixed rate
prices paid in the first 10 years. Global determined that there was a permanent
loss in value of its equity investment and recognized a pre-tax charge to income
of $31 million in accordance with APB 18, "The Equity Method of Accounting for
Investments in Common Stock". For a discussion of recent developments in the
California power market, see Note 13. "Financial Instruments And Risk
Management."
Interests in two power development companies in Thailand and the
Philippines were acquired in 1997 for a total cost of approximately $22 million.
The Asian financial crisis, which began in 1997, significantly impacted
development prospects in the region having an impact on the financial condition
of the companies which consistently recognized losses over the reported periods.
In the third quarter of 1999, management made a decision to cease providing an
operating and financial commitment to the development ventures. A pre-tax charge
to income of $8 million was recognized to write-off the equity investment in the
development company in Thailand. Global sold its investment later in the year
for $5,000. A pre-tax charge to income of $5 million was recognized to reduce
the value of Global's equity investment in the development company in the
Philippines to the remaining cash and land value of approximately $3 million.
NOTE 7. OTHER INVESTMENTS
Resources has limited partnership investments in two leveraged buyout
funds, a collateralized bond obligation structure, a clean air facility and
solar electric generating systems. Resources' total investment in limited
partnerships was $163 million, and $239 million at December 31, 2001 and 2000,
respectively.
Included in the amounts above are limited partnership interests in two
leveraged buyout funds that hold publicly traded securities, which are managed
by KKR Associates L.P., (KKR). The book value of the investment in the leveraged
buyout funds was $130 million and $213 million as of December 31, 2001 and
December 31, 2000, respectively. The largest single investment in the funds held
indirectly by Resources is the investment in approximately 16,847,000 shares of
common stock of Borden Inc., having a book value of $81 million and $83 million
as of December 31, 2001 and December 31, 2000, respectively. Borden is in the
consumer products industry.
Resources applies fair value accounting to investments in the funds where
publicly traded market prices are available as described in Note 2. "Summary of
Significant Accounting Policies." Approximately $34 million and $115 million
represent the fair value of Resources' share of the publicly traded securities
in the funds as of December 31, 2001 and December 31, 2000, respectively.
During January and February 2001, KKR sold its interest in FleetBoston
Financial Corporation. Resources received cash proceeds of $35 million and
recorded a $4 million pre-tax gain as a result of this transaction. In August
2001, KKR sold its interest in Gillette Corporation. Resources received cash
proceeds of $30 million from the sale, which had a book value of $31 million.
EGDC has been conducting a controlled exit from the real estate business
since 1993. In 1999, a pre-tax charge of $11 million was recorded for a property
held for sale. This amount is recorded in operations and maintenance expense.
Since EGDC has been conducting a controlled exit from the real estate business,
gains and losses from property sales are considered to be in the normal course
of business of EGDC.
40
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. FOREIGN INVESTMENTS AND OPERATIONS
As of December 31, 2001, Global and Resources had approximately $3.4
billion and $1.3 billion, respectively, of international assets. As of December
31, 2001, foreign assets represented 64% of our consolidated assets and the
revenues related to those foreign assets contributed 60% to consolidated
revenues for the year ended December 31, 2001.
Our foreign investments were comprised of leveraged leases in aircraft,
utility facilities and commuter rail cars, a note receivable, electric
distribution facilities, exempt wholesale generators and foreign utility
companies. Foreign revenues and foreign assets, as a percent of total revenues
and total assets, is as follows:
Years ended December 31
------------------------------------------------------------------
2001 % 2000 % 1999 %
------------------------------------------------------------------
(Millions of Dollars)
Revenues from consolidated projects $ 140 $ -- $ --
Income from capital leases ........ 131 109 89
Income from joint ventures ........ 79 74 53
Interest and dividends ............ 16 1 --
Operator/Management fees .......... 2 4 7
------ ------ ------
Total foreign revenues ............ $ 368 60% $ 188 42% $ 149 31%
====== ====== ======
Foreign assets (A) ................ $4,764 64% $2,990 58% $2,420 59%
(A) Amount is net of pre-tax foreign currency translation adjustment of $285
million, $225 million, $222 million as of December 31, 2001, 2000, and 1999,
respectively. Amount includes assets related to the discontinued operations of
Tanir Bavi of $257 million, $18 million and none as of December 31, 2001, 2000,
and 1999, respectively.
As of December 31, 2001, Global had approximately $3.4 billion including
deferred project costs, of international investments ($540 million in
construction or advanced development) in projects that generate or distribute
energy primarily in Argentina, Brazil, Chile, China, India, Italy, Oman, Peru,
Poland, Tunisia and Venezuela. The $3.4 billion of international assets includes
$257 million related to the discontinued operations of Tanir Bavi. Global is
expected to continue to make international investments. Global seeks to
structure its investments to manage the risk associated with project
development, including foreign currency devaluation and fluctuations.
Net foreign currency devaluations, caused primarily by the Brazilian Real,
have reduced Stockholder's Equity by the net of tax amounts of $258 million and
$203 million, as of December 31, 2001 and December 31, 2000, respectively (see
Consolidated Statements of Stockholder's Equity).
The net foreign currency transaction gains or (losses) for the years ended
December 31, 2001, 2000 and 1999 were ($6) million, $3 million and $2 million,
respectively, and are recorded in Other Income in the Consolidated Statements of
Income.
NOTE 9. SHORT-TERM DEBT
As of December 31, 2001, we had two separate senior revolving credit
facilities with a syndicate of banks; a $495 million five-year revolving credit
and letter of credit facility and a $200 million 364-day revolving credit
facility. In addition, we have an uncommitted credit line of up to $100 million
from a single financial institution, which can be accessed as market conditions
warrant. The revolving credit facilities also permit shorter term base rate
borrowings at the prime rate. The five-year facility also permits up to $250
million of letters of credit to be issued of which $57 million are outstanding
as of December 31, 2001. The 364-day facility and the five-year facility mature
in May 2002 and May 2004, respectively. As of December 31, 2001 and December 31,
2000, we had $300 million and $392 million borrowed under all of our revolving
credit facilities, respectively.
41
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. LONG-TERM DEBT
December 31,
-----------------------
Year Due 2001 2000
-------- ------ ------
(Millions of Dollars)
Energy Holdings
Senior Notes
9.125%.............................................. 2004 $ 300 $ 300
8.625%.............................................. 2008 400 --
10.00%.............................................. 2009 400 400
8.50% .............................................. 2011 550 --
------ ------
Principal amount outstanding........................ 1,650 700
Net unamortized discount............................ (6) (5)
------ ------
Total long-term debt of Energy Holdings....... 1,644 695
------ ------
PSEG Capital
Medium-Term Notes (MTNs) (A)
6.73% - 6.74%....................................... 2001 -- 170
3.12% - 7.72%....................................... 2002 228 228
6.25% .............................................. 2003 252 252
------ ------
Principal amount outstanding........................ 480 650
Amounts due in one year............................. (228) (170)
Net unamortized discount............................ -- (1)
------ ------
Total long-term debt of PSEG Capital.......... 252 479
------ ------
Global
Non-recourse Debt
10.010% - 10.385% - Bank Loan....................... 2001 -- 96
5.470% - 10.385% - Bank Loan........................ 2002 14 64
6.640% - 9.460% Bank Loan........................... 2003-2019 602 160
14.00% - Minority Shareholder Loan.................. 2027 10 10
------ ------
Principal amount outstanding........................ 626 330
Amounts due in one year............................. (14) (96)
------ ------
Total long-term debt of Global................ 612 234
------ ------
Resources
8.60% - Bank Loan................................... 2001-2020 23 24
------ ------
Principal amount outstanding........................ 23 24
Amounts due in one year............................. (1) (1)
------ ------
Total long-term debt of Resources............. 22 23
------ ------
Total long-term debt....................... $2,530 $1,431
====== ======
- ----------
(A) PSEG Capital's MTN program permits borrowings up to $750 million.
Effective January 31, 1995, PSEG Capital determined that it will not have
more than $650 million of debt outstanding at any time and it is expected
that such debt will be eliminated by the second quarter of 2003.
Annual Principal Requirements
The scheduled principal maturities during the years following December 31,
2001 are as follows:
Energy PSEG
Holdings Capital Global Resources Total
-------- ------- ------ --------- ------
2002 ....... $ -- $228 $ 14 $ 1 $ 243
2003 ....... -- 252 37 1 290
2004 ....... 300 -- 98 1 399
2005 ....... -- -- 21 1 22
2006 ....... -- -- 21 1 22
Thereafter 1,350 -- 435 18 1,803
------ ---- ---- --- ------
$1,650 $480 $626 $23 $2,779
====== ==== ==== === ======
For information regarding the major classes of assets and liabilities,
including long-term debt, that have been classified as components of Current
Assets of Discontinued Operations and Current Liabilities of Discontinued
Operations, see Note 4. "Discontinued Operations."
42
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Minority Shareholder Loan
A subsidiary of Global entered into a $10 million minority shareholder
loan (Shareholder Loan) in May 1997, which matures on May 29, 2027. The loan
proceeds were used to partially fund the acquisition of EDEN and EDES in
Argentina in 1997 by a subsidiary of Global. Amounts borrowed under the
Shareholder Loan are unsecured and subordinated to amounts borrowed under
existing credit facilities of EDEN and EDES.
In accordance with the Shareholder Loan, the principal is due in one lump
sum on the maturity date. Interest accrues at 14% and is payable semi-annually.
However, failure to pay interest does not constitute an event of default, but
results in an increase in the principal amount due upon maturity.
For a discussion of the pending sale of certain Argentine assets, to a
subsidiary of AES, see Note 20. "Subsequent Events."
NOTE 11. INCOME TAXES
A reconciliation of income taxes calculated at the Federal statutory rate
of 35% of income before income taxes and the income tax provision is as follows:
Years ended December 31,
--------------------------------
2001 2000 1999
------ ------ ------
(Millions of Dollars)
Federal income tax expense at
statutory rate ........................ $ 83 $ 55 $ 62
State income taxes, net of Federal
income tax benefit .................... (2) 4 16
Amortization of investment and
energy tax credits .................... (1) (1) (1)
Dividends received deduction ............ -- -- (1)
Tax effects attributable to
foreign operations .................... (20) (14) (7)
Tax credits ............................. -- (1) --
Other ................................... (3) 2 --
---- ---- ----
Income tax expense ...................... $ 57 $ 45 $ 69
==== ==== ====
December 31,
-----------------------
2001 2000
------ ------
(Millions of Dollars)
Assets - non-current:
Development expenses ....................... $ 21 $ 17
Foreign currency translation ............... 29 23
Real estate ................................ 4 4
Discontinued operations .................... 12 13
Derivatives ................................ 14 --
Other ...................................... 6 9
------ ------
Total Assets ................................... $ 86 $ 66
====== ======
Liabilities - non-current:
Leasing activities ......................... $1,146 $ 987
Partnership activities ..................... 73 101
Income from foreign operations ............. 41 14
Capitalized interest ....................... 14 4
State income tax deferrals ................. 15 22
------ ------
Total Liabilities .............................. 1,289 1,128
------ ------
Net Liabilities ................................ $1,203 $1,062
====== ======
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 most of its foreign investments using the equity method of
accounting. Under such accounting method, Global reflects in operating revenues
its pro-rata share of the investment's earnings, net of tax. Under this
accounting method, the foreign income taxes are a component of our equity in
earnings rather than reflected in the income tax provision.
43
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. STOCKHOLDER'S EQUITY
Common Stock
We had 100 shares of no-par common stock issued and outstanding as of
December 31, 2001 and December 31, 2000, all of which were held by PSEG. The
total authorized amount as of December 31, 2001 and December 31, 2000 was
1,000,000 shares.
Preferred Stock
In October 2000, we exchanged 435 shares of 5.01% Cumulative, 1,467 shares
of 4.80% Series B Cumulative and 1,450 shares of 4.875% Series C Cumulative of
outstanding preferred stock owned by PSEG for a new series of 4.03% Series D
Cumulative preferred stock owned by PSEG. In January 2001, that rate was reset
to 4.47% through June 2008.
Energy Holdings has authorized 1,000,000 shares of preferred stock. The
issuance of preferred stock is as follows:
Par value per Number of December 31,
Date Description share Shares 2000
- ------------ ------------------------- ------------- --------- ------------
October 2000 4.47% Series D Cumulative $100,000 5,092 $509,200,000
We paid preferred dividends of $22 million and $24 million in 2001 and
2000, respectively, to PSEG.
Additional Paid-in Capital
PSEG invested approximately $400 million and $300 million of equity in
Energy Holdings in 2001 and 2000, respectively. The proceeds were used to fund
additional investments and pay down short term debt.
Dividends on Common Stock
We paid $4 million and $13 million in dividends on our common stock to
PSEG in 2001 and 2000, respectively.
NOTE 13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Our operations are exposed to market risks from changes in commodity
prices, foreign currency exchange rates, interest rates and equity prices that
could affect our results of operations and financial condition. We manage our
exposure to these market risks through our regular operating and financing
activities and, when deemed appropriate, hedge these risks through the use of
derivative financial instruments. We use the term "hedge" to mean a strategy
designed to manage risks of volatility in prices or rate movements on certain
assets, liabilities or anticipated transactions and by creating a relationship
in which gains or losses on derivative instruments are expected to
counterbalance the losses or gains on the assets, liabilities or anticipated
transactions exposed to such market risks. We use derivative 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 the exposure of Energy Holdings
through its use of derivatives. We limit our exposure to credit-related losses
in the event of nonperformance by counterparties by limiting our transacting
with counterparties to those with high credit ratings. For a discussion of the
adoption of SFAS 133 as amended, see Note 3. "Accounting Matters."
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.
44
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currencies
We conduct our business on a multinational basis in a wide variety of
foreign currencies. Our objective for foreign currency risk management policy is
to preserve the economic value of cash flows in currencies other than the US
Dollar. Our policy is to hedge significant cash flows, which are probable of
occurring, and identified as subject to significant foreign currency
variability. In addition, we typically hedge a portion of our exposure resulting
from identified anticipated cash flows, providing the flexibility to deal with
the variability of longer-term forecasts as well as changing market conditions,
in which the cost of hedging may be excessive relative to the level of risk
involved. Our foreign currency hedging activities to date include hedges of US
Dollar debt arrangements in operating companies that conduct business in
currencies other than the US Dollar.
Global holds a 60% ownership interest in Carthage Power Company, a
Tunisian generation facility under construction. The Power Purchase Agreement,
signed in 1999, contains an embedded derivative that indexes the fixed Tunisian
Dinar payments to US Dollar exchange rates. The indexation portion of the PPA is
considered an embedded derivative and has been recognized and valued separately
as a derivative instrument. As currencies devalue/revalue in relation to the US
Dollar, the derivative increases/decreases in value equal to the discounted
present value of additional units of foreign currency (measured in US Dollars)
over the life of the PPA. This increased/decreased value is reported on the
balance sheet as an asset/liability. To the extent that such indexation is
provided to hedge foreign currency debt exposure, the offsetting amount is
recorded in OCI. Amounts will be reclassed from OCI to Earnings over the life of
the debt beginning on the date of commercial operation of the project, expected
to occur in 2002. To the extent such indexation is provided to hedge an equity
return in US Dollars, the offsetting amount is recorded in Earnings. As of
January 1, 2001, a $9 million gain, net of tax and minority interests, was
recorded as the cumulative effect of accounting change for SFAS 133, as amended.
During 2001, an additional gain of $1 million, net of tax and minority
interests, was recorded to earnings as a result of a net increase in the value
of the derivative.
Global holds a 32% ownership interest in a Brazilian distribution company,
Rio Grande Energia (RGE), whose debt is denominated in US Dollars. As of
December 31, 2001, Global's pro-rata share of such debt was approximately $60
million. A wholly-owned subsidiary of Global entered into a forward exchange
contract in December 2001 to hedge the foreign currency exposure associated with
the outstanding debt principal. The contract expired prior to December 31, 2001
and was not designated as a hedge for accounting purposes. As a result of
unfavorable movements in the US Dollar to Brazilian Real exchange rates, a loss
of $4 million, after-tax was recorded related to this derivative upon maturity
of the contract. This amount was recorded in Other Income on the Consolidated
Statement of Income.
In order to hedge the risk of fluctuations in the exchange rate between
the two currencies associated with the debt principal payments due in May, June
and July 2002, RGE entered into a series of three forward exchange contracts to
purchase US Dollars for Brazilian Reals in December 2001. Global's share of the
notional value of these contracts, which expire in the same months as the
respective principal payments are due, is approximately $13 million. These
contracts were established as hedges for accounting purposes and the change in
fair value for the year ended December 31, 2001 impacted Global's OCI by $1
million, after-tax. In order to hedge the risk of fluctuations in the exchange
rate between the two currencies associated with the interest payments due in
February and May 2002, RGE entered into two cross currency interest rate swaps
in January 2002. The instruments convert the variable LIBOR-based interest
payments to a variable CDI (the Brazilian inter-bank offered rate) based
payments. As a result, RGE has hedged its foreign currency exposure but is still
at risk for variability in the Brazilian CDI interest rate during the terms of
the instruments. Global's share of the notional value of these two instruments
is approximately $3 million each. In order to hedge the risk of fluctuations in
the exchange rate between the two currencies associated with the principal
payments due in May, June and July of 2003 through 2005, RGE entered into a
series of similar nine cross currency interest rate swaps in January 2002.
Global's share of the notional value of the instruments totals approximately $15
million per year for the instruments maturing in May, June and July of 2003
through 2004 and totals approximately $19 million for the instruments maturing
in May, June and July 2005. For accounting purposes, the fluctuations in the
fair value of the interest rate components of these cross currency swaps will
not be recorded under hedge accounting rules and will be recorded directly to
the Consolidated Statements of Income.
45
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Through its 50% joint venture, Meiya Power Company, Global holds a 17.5%
ownership interest in a Taiwanese generation project under construction where
the construction contractor's fees, payable in installments through July 2003,
are payable in Euros. To manage the risk of foreign exchange rate fluctuations
associated with these payments, the project entered into a series of forward
exchange contracts to purchase Euros in exchange for Taiwanese Dollars. As of
December 31, 2001, Global's share of the fair value and aggregate notional value
of these forward exchange contracts was approximately $1 million and $16
million, respectively. These forward exchange contracts were not designated as
hedges for accounting purposes and were marked to market, resulting in an
after-tax gain of approximately $1 million (Global's share). In addition,
after-tax gains of $1 million were recorded during 2001 on similar forward
exchange contracts expiring during the year.
During 2001, Global purchased approximately 100% of a Chilean distribution
company. In order to hedge final Chilean Peso denominated payments required to
be made on the acquisition, Global entered into a forward exchange contract to
purchase Chilean Pesos for US Dollars. This transaction did not qualify for
hedge accounting, and, as such, upon settlement of the transaction, Global
recognized an after-tax loss of $0.5 million. Furthermore, as a requirement to
obtain certain debt financing necessary to fund the acquisition, and in order to
hedge against fluctuations in the US Dollar to Chilean Peso foreign exchange
rates, Global entered into two forward contracts with notional values of $75
million each to exchange Chilean Pesos for US Dollars. These transactions expire
in October 2002 and are considered hedges for accounting purposes. As of
December 31, 2001, the derivative asset value of $4 million has been recorded to
OCI, net of taxes. In addition, Global holds a 50% interest in another Chilean
distribution company, which was anticipating paying its US investors a return of
capital. In order to hedge the risk of fluctuations in the Chilean Peso to US
Dollar exchange rate, the distribution company entered into a forward exchange
contract to purchase US Dollars for Chilean Pesos. Global's after-tax share of
the loss on settlement of this transaction (recorded by the distribution
company) was $0.3 million.
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, interest rate swaps and treasury locks.
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:
December 31,
---------------------
2001 2000
------ ------
(Millions of Dollars)
Senior Notes -- Energy Holdings ............... $1,701 $727
MTNs-- PSEG Capital .......................... 484 643
Non-recourse debt -- Global ................... 626 330
Bank Loan -- Resources ........................ 23 24
The fair value of the Senior Notes and Medium-Term Notes is based on
information obtained from market sources.
Substantially all non-recourse debt has floating interest rates that are
reset several times during the year to various market indices. As such, carrying
value of such debt approximates its market value.
Global is constructing electric generation facilities in Oman, Poland and
Tunisia. The operating companies of these facilities have entered into interest
rate swaps to lock in fixed interest rates on up to $599 million of its
construction loans. Such rate swaps hedge the value of the cash flows of future
interest payments. The gross notional amounts, interest rates and fair values as
of December 31, 2001 are listed below. Global owns 55%, 60%, and 81% of the
Polish, Tunisian, and Oman investments, respectively:
Oman Poland Tunisia
---------- ---------------------------- -----------------------------
US $ US $ PLN US $ Euro
Tranche Tranche Tranche Tranche Tranche
---------- ----------- ------------- ----------- --------------
(Millions, where applicable)
Notional Amount.......................... $18 $85 $38 $60 $67
Pay Rate................................. 6.3% 8.4% 13.2% 6.9% 5.2%
Receive Rate............................. LIBOR LIBOR WIBOR** LIBOR EURIBOR*
Fair Value............................... ($3) ($30) ($22) ($4) ($2)
46
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
* EURIBOR-Euro Area Inter-Bank Offered Rate
** WIBOR- Warsaw Inter-Bank Offered Rate
The ineffective portion of these interest rate swaps is recorded to
earnings. During 2001, an after-tax loss of $1 million was recorded by Global
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% ownership in three such investments, two located in Texas and one in Hawaii,
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 December 31, 2001, the aggregate
notional balance of these swaps was $415 million, the weighted average fixed
interest rate paid was 7.1% 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. In 2001, we reclassified approximately $4 million of losses from cash
flow hedges, including our pro-rata share from our equity method investees, from
OCI to earnings. In 2002, we anticipate reclassifying approximately $8 million
of losses from cash flow hedges, including our pro-rata share from our equity
method investees, from OCI to earnings.
In March 2001, $160 million of non-recourse bank debt originally incurred
to fund a portion of the purchase price of Global's interest in Chilquinta
Energia, S.A. was refinanced. The private placement offering by Chilquinta
Energia Finance Co. LLC, a Global affiliate, of senior notes was structured in
two tranches: $60 million due 2008 at an interest rate of 6.47% and $100 million
due 2011 at an interest rate of 6.62%. An extraordinary loss of $2 million
(after-tax) was recorded in connection with the refinancing of the $160 million
non-recourse bank debt.
Equity Securities
Resources has investments in equity securities and partnerships, in which
Resources is a limited partner. Resources carries its investments in equity
securities at their approximate fair value as of the reporting date.
Consequently, the carrying value of these investments is affected by changes in
the market prices of the underlying securities. Fair value is determined by
adjusting the market value of the securities for liquidation and market
volatility factors, where appropriate. The aggregate amount of such investments
which have quoted market prices at December 31, 2001, and December 31, 2000 was
$34 million and $115 million, respectively. The decrease in the recorded amount
of investments was primarily due to the sales in 2001 of its interests in equity
securities which had a fair value of $66 million on December 31, 2000 and a
decline in the valuation of publicly traded equity securities held within its
limited partnerships.
California Power Market
As a result of the California energy crisis, Pacific Gas & Electric
Company (PG&E) filed for protection under Chapter 11 of the US Bankruptcy Code
on April 6, 2001. GWF, Hanford and Tracy had combined pre-petition receivables
due from PG&E, for all plants amounting to approximately $62 million. Of this
amount, approximately $25 million had been reserved as an allowance for doubtful
accounts as of December 31, 2000, resulting in a net receivable balance of
approximately $37 million. Global's pro-rata share of this gross receivable and
net receivable was approximately $30 million and $18 million, respectively.
In December 2001, GWF, Hanford and Tracy reached an agreement with PG&E
which stipulates that PG&E will make full payment of the $62 million in 12 equal
installments, including interest by the end of 2002. On December 31, 2001, PG&E
paid GWF $8 million, representing the initial installment payment and all
accrued interest due, pursuant to the agreement. As a result of this agreement,
GWF, Hanford and
47
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Tracy reversed the reserve of $25 million which increased operating income by
$25 million (of which Global's share was $11 million).
As of December 31, 2001, GWF, Hanford and Tracy still had combined
pre-petition receivables due from PG&E for all plants amounting to approximately
$57 million. Global's pro-rata share of this receivable was $27 million.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Argentine Economic Crisis
As of December 31, 2001, approximately $737 million or 10% of our assets
were invested in Argentina. This includes the consolidated assets of a
distribution company, EDEERSA, and our minority interests in three distribution
companies, Empresa Distribuidora de Energia Norte S.A. (EDEN), Empresa
Distribuidora de Energia Sur S.A. (EDES), and Empresa Distribuidora La Plata
S.A. (EDELAP) and two generating companies, Central Termica San Nicolas power
plant (CTSN), and Parana under contract for sale to a subsidiary of the AES
Corporation. Our aggregate investment exposure in Argentina is approximately
$632 million, including $212 million of investment exposure for EDEERSA, and
$420 million of investment exposure for the assets under contract. Goodwill
related to our investment in EDEERSA is approximately $63 million. For a
discussion of the pending sale of certain investments in Argentina, see Note 20.
"Subsequent Events."
The Argentine economy has been in a state of recession for approximately
four years. Continued deficit spending in the 23 Argentine provinces coupled
with low growth and high unemployment has precipitated an economic, political
and social crisis. Toward the end of 2001, a liquidity crisis ensued causing the
Argentine government to default on $141 billion of national debt. The economic
crisis was fueled by political instability and social unrest as the new year
began. The present administration is in the process of developing an economic
plan to avert a return to the economic instability and hyperinflationary economy
of the 1980s. In early January, the decade old convertibility formula, that
maintained the Peso at a 1:1 exchange rate with the US Dollar, was abandoned. In
early February, the Peso was floated freely with the US Dollar. In the first day
of the free floating formula, the currency weakened to a rate of approximately 2
Pesos per 1 US Dollar. On February 28, 2002, the currency weakened further to a
rate of approximately 2.15 Pesos per 1 US Dollar.
As of December 31, 2001, the functional currency of Global's Argentine
distribution company, EDEERSA, was the US Dollar, as all revenues, most expenses
and all financings were denominated in US Dollars or were US Dollar linked. As a
US Dollar reporting entity, EDEERSA's monetary accounts in Pesos, such as
short-term receivables or payables, were re-measured into the US Dollar with a
minimal impact to the Income Statement. We have US Dollar denominated debt at
EDEERSA, our 90% share of which is approximately $76 million. This debt is
non-recourse to us and Global. For a discussion of the impacts of a potential
change in the functional currency to the Argentine Peso, see Note. 20
"Subsequent Events."
In the Province of Entre Rios, where EDEERSA is located, the electricity
law provided for a pass-through of devaluation to the end user customer.
Customers' bills are first computed in the US Dollar and converted into the Peso
for billing. This mechanism assures that devaluation will not impact the level
of US Dollar revenues an electric distribution company receives. However, in
January 2002, the Argentine federal government implemented a new law that
prohibits any foreign price or other indexation and any US Dollar or other
foreign currency adjustment clauses relating to public service tariffs, thus
prohibiting the pass through of the costs of devaluation to customers. The
provincial governments have been requested to adopt this provision. The Province
of Entre Rios has recently adopted this provision as well as a law that requires
public service companies within the Province such as EDEERSA to accept payment
for all billed services in a provincial promissory note, the "Federal". The
terms of the "Federal" require principal payment at maturity in an equal amount
of Argentine Pesos. However, the "Federal" is not freely convertible in the
financial markets to Argentine Peso or US Dollars. There are ongoing
negotiations to remedy this situation, although no assurances can be given.
While we continue to operate EDEERSA, there has been an adverse impact to the
financial condition and cash flows of EDEERSA due to its inability to pass
through the costs of devaluation to customers and its receipt of an illiquid
provincial currency. We are pursuing remedies on several fronts, including
holding discussions with the Province and United States politicians both
individually and collectively with a coalition of international investors, and
shall be pursuing legal recourse under the Bilateral Investment Treaty between
the United States and Argentina. We have been notified by lenders of the
occurrence of events of default related to the Parana,
48
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EDEN and EDES credit facilities, all of which are under contract to be sold to
AES. If Argentine conditions do not improve, Global's other Argentina properties
may also default on non-recourse obligations in connection with other
financings. Currently, we cannot predict the outcome of our ongoing negotiations
with the lenders.
Other potential impacts of the Argentine economic, political and social
crisis include increased collection risk, further devaluation of the Peso,
potential nationalization of assets, foreclosure of our assets by lenders, and
an inability to complete the pending sale of certain Argentine assets to a
subsidiary of AES. We cannot predict the outcome of these events and accordingly
cannot predict the impact to our financial condition, results of operations or
net cash flows, although such impact may be material, and could include a
write-down of our investment exposure.
The events leading to the Argentine economic crisis contributed to
downward pressure on the Brazilian and Chilean currencies in 2001. The Brazilian
Real devalued approximately 15% since year-end 2000 from 1.951 to 1 US Dollar to
2.308 to 1 US Dollar as of December 31, 2001 and the Chilean Peso devalued
approximately 13% since year-end 2000 from 573.90 to 1 US Dollar to 660.45 to 1
US Dollar as of December 31, 2001.
Other
We are required to adopt SFAS 142 in 2002, which initiates certain
goodwill impairment testing. For a comprehensive discussion of SFAS 142, See
Note. 3 "Accounting Matters."
As of December 31, 2001, we had recorded unamortized goodwill in the
amount of $628 million, of which $479 million was recorded in connection with
Global's acquisitions of SAESA and Electroandes in Chile and Peru in August and
December of 2001, respectively. The amortization expense related to goodwill was
approximately $3 million for the year ended December 31, 2001.
As of December 31, 2001, our pro-rata share of goodwill included in equity
method investees totaled $375 million. In accordance with generally accepted
accounting principles, such goodwill is not consolidated on our balance sheet.
Global's share of the amortization expense related to such goodwill was
approximately $8 million.
We are currently evaluating the effect of adopting SFAS 142 on the
recorded amount of goodwill. Some or all of the goodwill at: RGE totaling $142
million (our share), EDEERSA totaling $63 million, Tanir Bavi totaling $27
million (classified as Current Assets of Discontinued Operations) and Energy
Technologies totaling $53 million (classified as Current Assets of Discontinued
Operations) could be impaired upon completion of our evaluation. The impact of
adopting SFAS 142 is likely to be material to our financial position, results of
operations and net cash flows.
49
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2001, our unamortized goodwill, (including goodwill
classified as Current Assets of Discontinued Operations) and pro-rata share of
goodwill in equity method investees was as follows:
As of
December 31, 2001
---------------------
(Millions of Dollars)
---------------------
EDEERSA ............................................... $ 63
SAESA ................................................. 315
Electroandes .......................................... 164
ELCHO ................................................. 6
Tanir Bavi (Discontinued Operations) .................. 27
------
Total Global ..................................... 575
------
Energy Technologies (Discontinued Operations) ......... 53
------
Total On Balance Sheet ........................... $ 628
------
RGE ................................................... $ 142
Chilquinta/Luz ........................................ 174
Luz Del Sur ........................................... 34
Kalaeloa .............................................. 25
------
Total Off Balance Sheet .......................... 375
------
Total Goodwill ............................. $1,003
======
In 2002, we will be implementing SFAS 144. SFAS 144 requires periodic
reviews of long-lived assets for impairment, and supercedes SFAS 121. Review is
generally initiated by a certain event or series of events that causes a change
in the operation or business environment in which we operate. The recent
economic crisis in Argentina will cause us to initiate a review of our Argentine
operations under SFAS 144. As noted above, the impact of implementing SFAS 144
could be material to our financial position, results of operations and net cash
flows.
As of December 31, 2001, we had $53 million, or 1%, of our assets invested
in the Turboven generation facilities, located in Venezuela. Recently, Venezuela
has been subject to a loss of capital as the country's debt has been subject to
a credit rating downgrade. In February 2002, the government of Venezuela
abandoned the crawling currency peg and allowed the Bolivar to float freely with
the US Dollar. The currency experienced a precipitous drop in value in the first
day of free trading. Global's Venezuelan affiliate, Turboven is a US Dollar
functional currency entity. Its power purchase contracts are indexed to the US
Dollar as are the fuel supply costs. Our near term income statement exposure
relates to our net monetary position in Bolivars. Since we are a US Dollar
functional entity, any receivables and payables in Bolivars must be re-measured
to the US Dollar. The impact of the re-measurement is recorded as a loss or gain
to the income statement. The recent decision to devalue the Venezuelan Bolivar
is not expected to have a material adverse impact on our financial position,
statement of operations or net cash flows, although no assurances can be given.
Energy Holdings, Global and/or PSEG 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 $241 million, as of December 31, 2001. A substantial portion of
such guarantees is eliminated upon successful completion of construction,
performance or certain obligations and/or refinancing of construction debt with
non-recourse project term debt.
In the normal course of business, Energy Technologies secures construction
obligations with performance bonds issued by insurance companies. In the event
that Energy Technologies' tangible equity falls below $100 million, Energy
Holdings would be required to provide additional support for the performance
bonds. Tangible equity is defined as net equity less goodwill. As of December
31, 2001, Energy Technologies had tangible equity of $114 million and
performance bonds outstanding of $124 million. The performance bonds are not
included in the table below.
In May 2001, GWF Energy LLC (GWF Energy), a 50/50 joint venture between
Global and Harbinger GWF LLC, entered into a 10-year power purchase agreement
with the California Department of Water Resources to provide 340 MW of electric
capacity to California from three new natural gas-fired peaker plants that GWF
Energy expects to build and operate in California. Total project cost is
estimated at $325 million. The first plant, a 90 MW facility, was completed and
began operation in August 2001. Global's permanent equity investment in these
plants, including contingencies, is not expected to exceed $100 million after
completion of project financing, expected to occur in 2002.
50
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 25, 2002 the Public Utilities Commission of the State of
California (CPUC) filed a complaint with the Federal Energy Regulatory
Commission (FERC) under Section 206 of the Federal Power Act against sellers
who, pursuant to long-term, FERC authorized contracts, provide power to the
California Division of Water Resources (DWR). GWF Energy is a named respondent
in this proceeding. The CPUC's complaint, which addresses 44 transactions
embodied in 32 contracts with 22 sellers, alleges that collectively, the
specified long term wholesale power contracts are priced at unjust and
unreasonable levels and requests FERC to abrogate the contracts to enable the
State to obtain replacement contracts as necessary or in the alternative, to
reform the contracts to provide for just and reasonable pricing, reduce the
length of the contracts, and strike from the contracts the specific non-price
and conditions found to be unjust and unreasonable. In the event of an adverse
ruling by the FERC, Energy Holdings and Global would reconsider any plans to
invest in additional generation facilities in California.
In March 2001, Global, through Dhofar Power Company (DPCO), signed a
20-year concession with the government of Oman to privatize the electric system
of Salalah. A consortium led by Global (81% ownership) and several major Omani
investment groups owns DPCO. The project will enhance the existing network of
generation, transmission and distribution assets and is expected to add 200 MW
of new generating capacity. The project achieved financial closure in September
2001 and construction on the project commenced in the same month. The project is
expected to achieve commercial operation by March 2003. Total project cost is
estimated at $277 million. Global's equity investment, including contingencies,
is expected to be approximately $82 million.
The Brazilian Consumer Association of Water and Energy has filed a lawsuit
against Rio Grande Energia S.A. (RGE), a Brazilian distribution company (of
which Global is a 32% owner), and two other utilities, claiming that certain
value added taxes and the residential tariffs that are being charged by such
utilities to their respective customers are illegal. RGE believes that its
collection of the tariffs and value added taxes are in compliance with
applicable tax and utility laws and regulations. While it is the contention of
RGE that the claims are without merit, and that it has valid defenses and
potential third party claims, an adverse determination could have a material
adverse effect on our financial condition, results of operations and net cash
flows.
RGE is also currently engaged in a dispute with its regulator ANEEL which
is seeking to mandate a reduction in RGE's fixed asset base due to a
pre-privatization review of Companhia Estadual de Energia's (CEEE) asset base.
This pre-privatization review was not brought to the attention of the bidders
during the RGE privatization process. The result of such a decrease in RGE's
fixed asset base would be a likely reduction in RGE's tariff of approximately $8
million during the next rate case as RGE's return on fixed assets would be above
the accepted level. RGE is currently contesting the matter.
We and our subsidiaries and equity method investees are involved in
various legal actions arising in the normal course of business. We do not expect
there will be material adverse effect on its financial statements as a result of
these proceedings, although no assurances can be given.
NOTE 15. MINIMUM LEASE PAYMENTS
Energy Holdings and its subsidiaries lease administrative office space and
equipment under operating leases, which expire prior to the end of 2010. Total
future minimum lease payments as of December 31, 2001 are:
(Millions of Dollars)
2002 ................................................. $ 7
2003 ................................................. 6
2004 ................................................. 3
2005 ................................................. 3
2006 ................................................. 2
Thereafter ........................................... 4
---
---
Total minimum lease payments ................ $25
===
Rent expense for 2001, 2000 and 1999 was approximately $4 million, $3
million and $3 million, respectively.
51
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. PENSION AND OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS
Employees of Energy Holdings and its subsidiaries are participants in a
non-contributory pension plan administered by PSEG. See Note 18. "Related Party
Transactions", for Energy Holdings' funding requirements for the years ended
2001, 2000, and 1999.
In addition, PSEG sponsors two defined contribution plans. Represented
employees of Energy Holdings are eligible for participation in the PSEG Employee
Savings Plan (Savings Plan) while all other employees of Energy Holdings are
eligible for participation in PSEG's Thrift and Tax-Deferred Savings Plan
(Thrift Plan). The two principal defined contribution plans are sponsored 401(k)
plans to which eligible employees may contribute up to 25% of their
compensation. Employee contributions up to 7% for Savings Plan participants and
up to 8% for Thrift Plan participants are matched with employer contributions of
cash or PSEG common stock equal to 50% of such employee contributions. For
periods prior to March 1, 2002, employer contributions, related to participant
contributions in excess of 5% and up to 7%, were made in shares of PSEG common
stock for Thrift Plan participants. For periods prior to March 1, 2002, employer
contributions, related to participant contributions in excess of 6% and up to
8%, were made in shares of PSEG common stock for Thrift Plan participants.
Beginning on March 1, 2002, and thereafter, all employer contributions will be
made in cash to each plan. PSEG billed Energy Holdings for its portion of
employer contributions. The amount expensed for the matching provision of the
plans was approximately $1 million for the years ended 2001, 2000, and 1999.
NOTE 17. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
Basis of Organization
The reportable segments disclosed herein were determined based on a
variety of factors including the way management organizes the segments within
Energy Holdings for making operating decisions and assessing performance.
Global
Global earns revenues from its investment in and operation of projects in
the generation and distribution of energy, both domestically and
internationally.
Resources
Resources earns revenues from its passive investments in leveraged leases,
limited partnerships, leveraged buyout funds and marketable securities.
Energy Technologies
Energy Technologies realizes earnings/losses from constructing, operating
and maintaining HVAC systems and providing energy-related engineering,
consulting and mechanical contracting services to industrial and commercial
customers in the Northeastern and Middle Atlantic United States. (See Note 4 -
Discontinued Operations)
52
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Activities
Information related to the segments of our business is detailed below:
Other
Energy Activities Consolidated
Global Resources Technologies (A) Total
------ --------- ------------ ---------- ------------
(Millions of Dollars)
For the year ended December 31, 2001
Total revenues ........................... $ 396 $ 215 $ -- $ 1 $ 612
Depreciation and amortization(B) ......... 11 4 -- -- 15
Interest expense -- net .................. 78 100 -- 2 180
Income taxes ............................. 36 30 (1) (4) 61
Equity in earnings of unconsolidated
affiliates (C) ........................ 143 55 -- -- 198
EBIT(D) .................................. 233 200 (3) (4) 426
Income before Income Taxes, Minority
Interests, Discontinued Operations,
Extraordinary Item, and Cumulative
Effect of a Change in Accounting
Principle ............................. 155 100 (3) (5) 247
Income Before Discontinued Operations,
Extraordinary Item, and Cumulative
Effect of a Change in Accounting
Principle ............................. 119 70 (2) (2) 185
Income (Loss) from Discontinued
Operations ............................ 7 -- (16) -- (9)
Income Before Cumulative Effect of a
Change in Accounting Principle ........ 126 70 (18) (2) 176
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 $ 116 $ 64 $ (18) $ (1) $ 161
======= ======= ======= ======= =======
As of December 31, 2001
Total assets .......................... $ 4,074 $ 3,026 $ 290 $ 50 $ 7,440
Investments in equity method affiliates $ 1,541 $ 163 $ 3 $ 19 $ 1,726
======= ======= ======= ======= =======
For the year ended December 31, 2000
Total revenues ........................... $ 169 $ 206 $ 67 $ 2 $ 444
Depreciation and amortization(B) ......... 1 5 -- -- 6
Interest expense-- net ................... 53 79 -- 2 134
Income taxes ............................. 12 40 -- (3) 49
Equity in earnings of unconsolidated
affiliates (C) ........................ 157 13 -- -- 170
EBIT(D) .................................. 124 190 (1) (7) 306
Income before Income taxes, Minority
Interests, and Discontinued Operations 69 111 (1) (8) 171
Income Before Discontinued Operations .... 58 71 (1) (5) 123
Income (Loss) from Discontinued
Operations ............................ -- -- (9) -- (9)
Segment earnings (loss) available to PSEG $ 40 $ 65 $ (10) $ (5) $ 90
======= ======= ======= ======= =======
As of December 31, 2000
Total assets ........................... $ 2,271 $ 2,565 $ 312 $ 49 $ 5,197
Investments in equity method affiliates $ 1,900 $ 239 $ -- $ 15 $ 2,154
======= ======= ======= ======= =======
For the year ended December 31, 1999
Total revenues ........................... $ 211 $ 179 $ 86 $ -- $ 476
Depreciation and amortization(B) ......... 1 1 1 -- 3
Interest expense -- net .................. 48 46 -- -- 94
Income taxes ............................. 24 50 (2) (3) 69
Equity in earnings of unconsolidated
affiliates (C) ......................... 129 78 -- -- 207
EBIT(D) .................................. 118 169 (6) (8) 273
Income before Income taxes, Minority
Interests, and Discontinued Operations 69 123 (6) (8) 178
Income Before Discontinued Operations .... 46 73 (4) (5) 110
Income (Loss) from Discontinued
Operations ............................... -- -- (2) -- (2)
Segment earnings (loss) available to PSEG $ 28 $ 66 $ (6) $ (5) $ 83
======= ======= ======= ======= =======
As of December 31, 1999
Total assets ........................... $ 1,715 $ 2,096 $ 252 $ 53 $ 4,116
Investments in equity method affiliates $ 1,629 $ 279 $ -- $ 7 $ 1,915
======= ======= ======= ======= =======
(A) Other Activities include amounts applicable to Energy Holdings (the
parent), EGDC, PSEG Capital and intercompany eliminations.
(B) Includes amounts reported in the Depreciation and amortization line
of the Consolidated Statements of Income. Depreciation and
amortization of PSCRC is included in Operations and Maintenance
expense as indicated in Note 2. "Summary of Significant Accounting
Policies."
(C) Equity in earnings of unconsolidated affiliates is included in
Income from joint ventures and partnerships and Net investment gains
in the Consolidated Statements of Income.
(D) EBIT includes operating income plus other income less minority
interest.
53
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Geographic Information for Energy Holdings is disclosed below.
Revenues (A)
-----------------------------------
December 31,
-----------------------------------
2001 2000 1999
------ ------ ------
(Millions of Dollars)
United States ..................... $244 $256 $327
Foreign Countries:
Argentina ..................... 85 14 17
Netherlands ................... 84 83 65
Chile ......................... 77 21 9
Peru .......................... 33 19 9
England ....................... 17 18 19
Australia ..................... 16 2 2
Brazil ........................ 7 18 20
Other ......................... 49 13 8
---- ---- ----
Total Foreign ................. 368 188 149
---- ---- ----
Total ....................... $612 $444 $476
==== ==== ====
(A) Revenues are attributed to countries based on the locations of the
investments.
Assets (B)
-------------------------
December 31,
-------------------------
2001 2000
(Millions of Dollars)
United States ............................ $2,676 $2,207
Foreign Countries:
Netherlands .......................... 911 815
Chile ................................ 880 270
Argentina ............................ 737 470
Peru ................................. 520 250
India (C) ............................ 288 51
Brazil ............................... 282 295
Tunisia .............................. 245 155
Other ................................ 901 684
------ ------
Total Foreign ........................ 4,764 2,990
------ ------
Total .............................. $7,440 $5,197
====== ======
(B) 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 $283 million and $225 million for the
years ended December 31, 2001 and 2000, respectively.
(C) India includes assets classified as Current Assets of Discontinued
Operations of $257 million and $18 million in 2001 and 2000, respectively.
The table below reflects our investment exposure in Latin American
countries.
Investment Exposure (C)
--------------------------
December 31,
--------------------------
2001 2000
------ ------
(Millions of Dollars)
Argentina .............................. $632 $622
Brazil ................................. 467 462
Chile .................................. 542 180
Peru ................................... 387 224
Venezuela .............................. 53 51
(C) The investment exposure consists of invested equity plus equity commitment
guarantees. The investment exposure in these Latin American countries is
Global's.
54
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
NOTE 18. RELATED PARTY TRANSACTIONS
Operation and Maintenance and Development Fees
Global provides operating, maintenance and other services to and receives
management and guaranty fees from various joint ventures and partnerships in
which it is an investor. Fees related to the development and construction of
certain projects are deferred and recognized when earned. Income from these
services of $3 million, $12 million, and $12 million were included in Revenues
in the Consolidated Statements of Income for the years ended December 31, 2001,
2000, and 1999, respectively.
Administrative Costs
PSEG Services Corporation provides and bills administrative services to
Energy Holdings on a monthly basis. These costs amounted to approximately $32
million, $19 million, and $11 million for 2001, 2000, and 1999, respectively. In
addition, we were billed administrative overheads of $2 million by PSEG during
2000 and 1999. We were billed administrative overheads of an immaterial amount
by PSEG during 2001.
Employees of Energy Holdings and its subsidiaries are participants in a
non-contributory pension plan administered by PSEG and are billed on a monthly
basis based on funding requirements. Such billings amounted to approximately $2
million for the years ended December 31, 2001 and 1999. For the year ended
December 31, 2000, we had no funding requirements of the pension plan.
TIE Loans
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 December 31, 2001, Global's investments in the TIE partnership include $165
million of loans that earn interest at an annual rate of 12% of which $88
million was repaid in February 2002 and $77 million will be repaid over the next
12 years. TIE's funding for these payments to Global were made from equity
contributions of $44 million from Global and $44 million from Panda Energy.
Foster Wheeler Ltd.
We enter into a number of contracts with various suppliers, customers and
other counterparties in the ordinary course of business. Certain contracts were
entered into with subsidiaries of Foster Wheeler Ltd. E. James Ferland, PSEG
Chairman of the Board, President and Chief Executive Officer, serves on the
Board of Directors of Foster Wheeler. Richard J. Swift, who serves on PSEG's
Board of Directors, was the President and Chief Executive Officer of Foster
Wheeler Ltd. at the time the contract was entered into. The open commitment
under the contracts is for approximately $124 million of engineering,
procurement and construction services related to the development of certain
generating facilities for Global. We believe that the contracts were entered
into on commercial terms no more favorable than those available in an
arms-length transaction from other parties and the pricing is consistent with
that available from other third parties.
55
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
NOTE 19. SELECTED QUARTERLY DATA (Unaudited)
The information shown below, in our opinion, includes all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of such amounts.
Quarter Ended
------------------------------------------------------------------
2001
March 31 June 30 September 30(1) December 31
------------- ------------ ---------------- ------------
(Millions of Dollars)
Operating Revenues .............................. $122 $88 $151 $ 251
Operating Income ................................ 102 67 91 171
Net Income Before Discontinued Operations,
Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle .............. 56 25 30 74
Income (Loss) from Discontinued Operations ...... (3) (8) (1) 3
Net Income Before Extraordinary Item and
Cumulative Effect of a Change in Accounting
Principle ................................... 53 17 29 77
Extraordinary Loss on Early Retirement of Debt .. (2) -- -- --
Cumulative Effect of a Change in Accounting
Principle ................................... 9 -- -- --
Net Income ...................................... 60 17 29 77
Earnings/(Losses) Available to PSEG ............. 54 12 23 72
Quarter Ended
-----------------------------------------------------------------
2000
March 31 June 30 September 30(2) December 31
------------ ------------ --------------- -----------
(Millions of Dollars)
Operating Revenues ....................... $142 $80 $96 $126
Operating Income ......................... 83 38 66 115
Net Income Before Discontinued Operations 34 4 27 58
Income (Loss) from Discontinued Operations (3) (3) -- (3)
Net Income ............................... 31 1 27 55
Earnings/(Losses) Available to PSEG ...... 25 (5) 21 49
(1) In 2001, revenues include the consolidated results of certain investments
at Global.
(2) Second quarter 2000 Earnings/(Losses) Available to PSEG includes a
write-down to fair value of certain financial instruments, held by
Resources, totaling $13 million on a pre-tax basis.
NOTE 20. SUBSEQUENT EVENTS
Assets Held for Sale
On August 24, 2001, Global entered into a Stock Purchase Agreement to sell
its minority interests in certain assets located in Argentina to The AES
Corporation (AES), the majority owner. The sale has not closed, pending receipt
of certain lender consents and regulatory approvals.
On February 6, 2002, AES notified Global that it was terminating the Stock
Purchase Agreement. In the Notice of Termination, AES alleged that a Political
Risk Event, within the meaning of the Stock Purchase Agreement, had occurred, by
virtue of certain decrees of the Government of Argentina, thereby giving AES the
right to terminate the Stock Purchase Agreement. Global disagrees that a
Political Risk Event as defined in the Stock Purchase Agreement has occurred,
and has so notified AES. Global will vigorously pursue its rights under the
Stock Purchase Agreement if discussions between the parties do not successfully
resolve the matter. PSEG cannot predict the ultimate outcome.
As of December 31, 2001, Global had total investment exposure in Argentina
of approximately $632 million. The investments include the following minority
interests, with investment exposure of approximately $420 million, jointly owned
by Global and AES, which are the subject of the Stock Purchase Agreement: a 30%
interest in three Argentine electric distribution companies, EDEN, EDES, and
EDELAP; a 19% share in the 650 MW power plant CTSN and a 33% interest in the 830
MW Parana power plant which began commercial operation in February 2002.
56
PSEG ENERGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
In addition to these investments, Global also has $212 million of
investment exposure with respect to its 90% interest in another Argentine
company, EDEERSA, inclusive of $63 million of goodwill.
As of the date of the Notice of Termination by AES, we had approximately
$18 million of interest receivables due from AES, as provided for in the Stock
Purchase Agreement.
Functional Currency - Argentine Operations
As of December 31, 2001, the functional currency of Global's Argentine
distribution company, EDEERSA, was the US Dollar, as all revenues, most expenses
and all financings were denominated in US Dollars or were linked to the US
Dollar. As a US Dollar reporting entity, EDEERSA's monetary accounts denominated
in Pesos, such as short-term receivables or payables, were re-measured into the
US Dollar with a minimal impact to earnings. At December 31, 2001, our 90% share
of EDEERSA's US dollar denominated debt was approximately $76 million. This debt
is non-recourse to us and Global. Certain events, including proposed American
Institute of Certified Public Accountants (AICPA) industry guidance, indicate
that the functional currency of our Argentine operations will likely change to
the Argentine Peso. In such an event, all monetary accounts denominated in US
Dollars would be re-measured to the Argentine Peso, including the US Dollar
denominated debt. This would result in a pre-tax loss of approximately $40
million. This potential loss would reduce our aggregate Argentine investment
exposure of $632 million noted above, and is therefore not incremental. In
addition to such potential impact on our earnings, the recorded amount of our
net investment in EDEERSA would decrease by approximately $100 million due to a
translation adjustment.
For a further discussion of the potential Impacts of the Argentine social,
political and economic crisis, see Note 14. "Commitments and Contingencies."
NOTE 21. SUBSEQUENT EVENTS
DSM Investments
In the second quarter of 2002, we initiated a process for the sale of
Energy Technologies businesses, including the demand side management (DSM)
investments. Our intention was to dispose of the assets of these businesses
through sales transactions. In the third quarter of 2002, we experienced
unanticipated changes in market conditions with respect to the planned sale of
the DSM investments and we have decided to continue to own and operate these
investments and anticipate continued profitability. Because the fair value of
DSM projects approximates their carrying value, no reduction in the recorded
amount is anticipated. At September 30, 2002, we anticipate that all DSM
investments will be reclassified from discontinued operations to continuing
operations and the consolidated statements for all periods presented will be
restated to reflect this reclassification.
57
FINANCIAL STATEMENT RESPONSIBILITY-- ENERGY HOLDINGS
Management of Energy Holdings is responsible for the preparation,
integrity and objectivity of the consolidated financial statements and related
notes of Energy Holdings. The consolidated financial statements and related
notes are prepared in accordance with generally accepted accounting principles.
The financial statements reflect estimates based upon the judgment of management
where appropriate. Management believes that the consolidated financial
statements and related notes present fairly Energy Holdings' financial position
and results of operations. Information in other parts of this Annual Report is
also the responsibility of management and is consistent with these consolidated
financial statements and related notes.
The firm of Deloitte & Touche LLP, independent auditors, is engaged to
audit Energy Holdings' consolidated financial statements and related notes and
issue a report thereon. Deloitte & Touche's audit is conducted in accordance
with generally accepted auditing standards. Management has made available to
Deloitte & Touche all the corporation's financial records and related data, as
well as the minutes of directors' meetings. Furthermore, management believes
that all representations made to Deloitte & Touche during its audit were valid
and appropriate.
Management has established and maintains a system of internal accounting
controls to provide reasonable assurance that assets are safeguarded, and that
transactions are executed in accordance with management's authorization and
recorded properly for the prevention and detection of fraudulent financial
reporting, so as to maintain the integrity and reliability of the financial
statements. The system is designed to permit preparation of consolidated
financial statements and related notes in accordance with generally accepted
accounting principles. The concept of reasonable assurance recognizes that the
costs of a system of internal accounting controls should not exceed the related
benefits. Management believes the effectiveness of this system is enhanced by an
ongoing program of continuous and selective training of employees. In addition,
management has communicated to all employees its policies on business conduct,
safeguarding assets and internal controls.
The Internal Auditing Department of Services conducts audits and
appraisals of accounting and other operations of PSEG and its subsidiaries and
evaluates the effectiveness of cost and other controls and, where appropriate,
recommends to management improvements thereto. Management has considered the
internal auditors' and Deloitte & Touche's recommendations concerning the
corporation's system of internal accounting controls and has taken actions that,
in its opinion, are cost-effective in the circumstances to respond appropriately
to these recommendations. Management believes that, as of December 31, 2001, the
corporation's system of internal accounting controls was adequate to accomplish
the objectives discussed herein.
The Board of Directors of PSEG carries out its responsibility of financial
overview through the Audit Committee of PSEG, which presently consists of six
directors who are not employees of Energy Holdings or any of its affiliates. The
PSEG Audit Committee meets periodically with management as well as with
representatives of the internal auditors and Deloitte & Touche. The Audit
Committee reviews the work of each to ensure that its respective
responsibilities are being carried out and discusses related matters. Both the
internal auditors and Deloitte & Touche periodically meet alone with the Audit
Committee and have free access to the Audit Committee and its individual members
at all times.
Robert J. Dougherty, Jr. Miriam E. Gilligan
President and Vice President-Finance and Treasurer
Chief Operating Officer (Principal Financial Officer)
Derek M. DiRisio
Vice President and Controller
(Principal Accounting Officer)
February 15, 2002
58
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
PSEG Energy Holdings Inc.:
We have audited the consolidated balance sheets of PSEG Energy Holdings
Inc. and its subsidiaries (the "Company") as of December 31, 2001 and 2000, and
the related consolidated statements of income, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the consolidated financial statement schedule listed in the
Index in Item 14(B)(a). These consolidated financial statements and the
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheets of the Company as of December 31, 1999, 1998, and 1997, and the related
consolidated statements of income, stockholder's equity and cash flows for the
years ended December 31, 1998 and 1997 (none of which are presented herein), and
we expressed unqualified opinions on those consolidated financial statements.
In our opinion, the information set forth in the Selected Financial Data
under the caption "Operating Data", "Balance Sheet Data", and "Cash Flows", for
each of the five years in the period ended December 31, 2001, presented in Item
6, is fairly stated in all material respects, in relation to the consolidated
financial statements from which it has been derived.
As discussed in Note 2 to the consolidated financial statements, on
January 1, 2001, the Company adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended.
DELOITTE & TOUCHE LLP
February 15, 2002
(March 7, 2002 as to Note 20 and
September 10, 2002 as to Notes 4 and 21)
59
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(b) The following document is filed as part of this report.
a: Energy Holdings Financial Statement Schedule: Schedule II --
Valuation and Qualifying Accounts for each of the three years
ended December 31, 2001.
SCHEDULE II
ENERGY HOLDINGS
Schedule II -- Valuation and Qualifying Accounts
Years Ended December 31, 2001-- December 31, 1999
Column B Column C Column D Column E
---------- ---------------------------- ----------- ----------
Additions
----------------------------
Balance at Charged to Charged to Balance at
beginning cost and ther accounts Deductions- end of
Description of period expenses Describe describe Period
- ----------- ---------- ---------- ------------- ----------- ----------
(Millions of Dollars)
2001: (C)
Allowance for Doubtful Accounts.......... $ -- $ -- $ 2(A) $ -- $ 2
Other Valuation Allowances............... 22 -- -- -- 22
2000: (C)
Other Valuation Allowances............... 22 -- -- -- 22
1999: (C)
Other Valuation Allowances............... 11 11(B) -- -- 22
(A) Valuation allowances consolidated in connection with the acquisitions of
SAESA and EDEERSA.
(B) Increase in valuation allowances for certain properties held by EGDC.
(C) Energy Technologies had a balance of $5 million in its allowance for
doubtful accounts as of December 31, 2001, December 31, 2000 and December
31, 1999. Such amounts have been reclassified as a component of
discontinued operations.
Item 7. Financial Statements and Exhibits
- --------------------------------------------------------------------------------
Exhibit Designation Nature of Exhibit
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
99.1 Certification by E. James Ferland pursuant to Rules
13a-14 and 15d-14 of the 1934 Securities Exchange Act
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
99.2 Certification by E. James Ferland pursuant to Section
1350 of Chapter 63 of Title 18 of the United States Code
- --------------------------------------------------------------------------------
99.3 Certification by Thomas M. O'Flynn pursuant to Rules
13a-14 and 15d-14 of the 1934 Securities Exchange Act
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
99.4 Certification by Thomas M. O'Flynn pursuant to Section
1350 of Chapter 63 of Title 18 of the United States Code
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
PSEG Energy Holdings Inc.
(Registrant)
By: Derek M. DiRisio
--------------------------------------------------
Derek M. DiRisio
Vice President and Controller
(Principal Accounting Officer)
Date: September 27, 2002