As filed with the Securities and Exchange Commission on April 12, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
PSEG Energy Holdings Inc.
(Exact name of registrant as specified in its charter)
New Jersey 6719 22-2983750
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification Number)
or organization) Code Number)
80 Park Plaza-T22
Newark, New Jersey 07102-4194
(973) 456-3581
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
Bruce E. Walenczyk
Vice President-Finance
80 Park Plaza-T22
Newark, New Jersey 07102-4194
(973) 456-3581
(Name, address, including zip code and telephone number, including area code, of
agent for service)
---------------------
Copies To:
James T. Foran, Esquire
Associate General Counsel
Public Service Enterprise Group Incorporated
80 Park Plaza
P.O. Box 1171
Newark, New Jersey 07101-1171
(973) 430-7000
---------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, please check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities to be Price Per Offering Registration
to be Registered Registered Unit Price Fee (1)
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<S> <C> <C> <C> <C>
10% Senior Notes due 2009 $400,000,000 100% $400,000,000 $105,600
=============================================================================================================
</TABLE>
(1) The registration fee has been calculated pursuant to rule 457(f)(2) under
the Securities Act. The proposed maximum aggregate offering price
represents the total value of the bonds being exchanged under this
registration statement.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8 (a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8 (a),
may determine.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated April 12, 2000.
PROSPECTUS
[LOGO] PSEG
Energy Holdings
$400,000,000
PSEG Energy Holdings Inc.
Offer to Exchange
10% Senior Notes due 2009
Which have been registered under the Securities Act
For Any and All Outstanding
10% Senior Notes due 2009
Which have not been so registered
TERMS OF THE EXCHANGE OFFER
o The exchange offer expires at 5:00 p.m., Eastern Standard Time, on
______________, unless extended by us in our sole discretion subject to
applicable law.
o The terms of the exchange notes are substantially identical to the original
notes, except that the exchange notes are registered under the Securities
Act and the transfer restrictions and registration rights applicable to the
original notes do not apply to the exchange notes.
o All original notes that are validly tendered and not validly withdrawn will
be exchanged.
o Tenders of original notes may be withdrawn at any time prior to expiration
of the exchange offer.
o We do not intend to apply for listing of the exchange notes on any
securities exchange or to arrange for them to be quoted on any quotation
system.
o The exchange offer is subject to customary conditions, including the
condition that the exchange offer not violate applicable law or any
applicable interpretation of the staff of the Securities and Exchange
Commission.
o We will not receive any proceeds from the exchange offer.
o You will not incur any material federal income tax consequences from your
participation in the exchange offer.
Please see "Risk Factors" beginning on page 13 for a discussion of factors
you should consider in connection with the exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the exchange notes, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2000.
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TABLE OF CONTENTS
Page
----
Where to Find More Information ........................................ 3
Prospectus Summary .................................................... 4
Summary Consolidated Financial Data ................................... 12
Risk Factors .......................................................... 13
Forward-Looking Statements ............................................ 18
Use of Proceeds ....................................................... 19
Capitalization ........................................................ 19
Selected Consolidated Financial Data .................................. 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 21
Business .............................................................. 34
Management ............................................................ 56
The Exchange Offer .................................................... 58
Description of Exchange Notes ......................................... 66
Federal Income Tax Considerations ..................................... 81
Plan of Distribution .................................................. 84
Legal Opinions ........................................................ 85
Experts ............................................................... 85
Independent Auditors' Report .......................................... F-1
Consolidated Financial Statements ..................................... F-2
When we refer to the term "note" or "notes", we are referring to both the
original notes and the exchange notes to be issued in the exchange offer. When
we refer to "holders" of the notes, we are referring to those persons who are
the registered holders of notes on the books of the registrar appointed under
the indenture.
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to exchange only the notes offered by this prospectus, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
2
<PAGE>
WHERE TO FIND MORE INFORMATION
In connection with the exchange offer, we have filed with the Securities
and Exchange Commission a registration statement under the Securities Act,
relating to the exchange notes to be issued in the exchange offer. As permitted
by SEC rules, this prospectus omits information included in the registration
statement. For a more complete understanding of this exchange offer, you should
refer to the registration statement, including its exhibits.
The public may read and copy any reports or other information that we file
with the SEC at the SEC's public reference room, Room 1024 at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, or at the SEC's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. The public may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available to the public from commercial
document retrieval services and at the web site maintained by the SEC at
http://www.sec.gov. You may also obtain a copy of the exchange offer
registration statement at no cost by writing or telephoning us at the following
address:
PSEG Energy Holdings Inc.
80 Park Plaza-T22
Newark, New Jersey 07102-4194
(973) 456-3581
Attention: Treasurer
3
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this prospectus.
Summary of the Exchange Offer
The Exchange Offer .................. We are offering to exchange an aggregate
of $400,000,000 principal amount of
exchange notes for $400,000,000 of
original notes. The original notes may be
exchanged only in multiples of $1,000.
Issuance of the Original Notes ...... The original notes were issued and sold
on October 8, 1999 in a transaction not
requiring registration under the
Securities Act.
Exchange and Registration
Rights ............................ At the time we issued the original notes,
we entered into an exchange and
registration rights agreement which
obligates us to make this exchange offer.
Required Representations ............ In order to participate in the exchange
offer, you will be required to make some
representations in a letter of
transmittal, including (1) that you are
not affiliated with us, (2) that you are
not a broker-dealer who bought your
original notes directly from us, (3) that
you will acquire the exchange notes in
the ordinary course of business, and (4)
that you have not agreed with anyone to
distribute the exchange notes. If you are
a broker-dealer that purchased original
notes for your own account as part of
market-making or trading activities, you
may represent to us that you have not
agreed with us or our affiliates to
distribute the exchange notes. If you
make this representation, you need not
make the representation provided for in
clause (4) above.
Resale of the Exchange Notes ........ We are making the exchange offer in
reliance on the position of the staff of
the Division of Corporation Finance of
the SEC. We believe that the exchange
notes acquired in this exchange offer may
be freely traded without compliance with
the provisions of the Securities Act that
call for registration and delivery of a
prospectus, except as described in the
following paragraph.
The exchange notes will be freely
tradable only if the holders meet the
conditions described under "Required
Representations" above. If you are a
broker-dealer that purchased original
notes for your own account as part of
market-making or trading activities, you
must deliver a prospectus when you sell
exchange notes. We have agreed in the
exchange and registration rights
agreement relating to the original notes
to allow you to use this prospectus for
this purpose during the 180-day period
following completion of the exchange
offer, subject to our right under some
circumstances to restrict your use of
this prospectus.
Broker dealers who acquired original
notes directly from us may not rely on
the staff's interpretations and must
comply with the registration and
prospectus delivery requirements of the
Securities Act, including being named as
a selling security holder, in order to
resell the original notes or the exchange
notes.
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4
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Accrued Interest on the
Original Notes .................... The exchange notes will bear interest at
an annual rate of 10%. Any interest that
has accrued on the original notes before
their exchange in this exchange offer
will be payable on the exchange notes on
the first interest payment date after the
conclusion of this exchange offer.
Procedures for Exchanging
Notes ............................. The procedures for exchanging original
notes involve notifying the exchange
agent before the expiration date of the
exchange offer of your intention to do
so. The procedures for properly making
notification are described in this
prospectus under the heading "The
Exchange Offer -- Procedures for
Tendering Original Notes".
Expiration Date ..................... 5:00 p.m., Eastern Standard Time, on
_____________, 2000, unless the exchange
offer is extended.
Exchange Date ....................... We will notify the exchange agent of the
date of acceptance of the original notes
for exchange.
Withdrawal Rights ................... If you tender your original notes for
exchange in this exchange offer and later
wish to withdraw them, you may do so at
any time before 5:00 p.m., Eastern
Standard Time, on the day this exchange
offer expires.
Acceptance of Original
Notes and Delivery of
Exchange Notes .................... We will accept any original notes that
are properly tendered for exchange before
5:00 p.m., Eastern Standard Time, on the
day this exchange offer expires. The
exchange notes will be delivered promptly
after expiration of this exchange offer.
Tax Consequences .................... You will not incur any material federal
income tax consequences from your
participation in this exchange offer.
Use of Proceeds ..................... We will not receive any cash proceeds
from this exchange offer.
Exchange Agent ...................... First Union National Bank is serving as
the exchange agent. Its address and
telephone number are provided in this
prospectus under the heading "The
Exchange Offer -- Exchange Agent".
Effect on Holders of
Original Notes .................... Any original notes that remain
outstanding after this exchange offer
will continue to be subject to
restrictions on their transfer. After
this exchange offer, holders of original
notes will not (with limited exceptions)
have any further rights under the
exchange and registration rights
agreement. Any market for original notes
that are not exchanged could be adversely
affected by the conclusion of this
exchange offer.
Summary of the Exchange Notes
This exchange offer applies to $400,000,000 aggregate principal amount of
the original notes. The terms of the exchange notes will be essentially the same
as the original notes, except that the exchange notes will not contain language
restricting their transfer, and holders of the exchange notes generally will not
be entitled to further registration rights under the exchange and registration
rights agreement. The exchange notes issued in the exchange offer will evidence
the same debt as the outstanding original notes, which they will replace, and
both the original notes and the exchange notes are governed by the same
indenture.
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Securities Offered .................. $400,000,000 principal amount of 10%
Senior Notes due 2009 which have been
registered under the Securities Act.
Interest Payment Dates .............. April 1 and October 1, commencing April
1, 2000.
Stated Maturity Date ................ October 1, 2009
Optional Redemption ................. The exchange notes will be redeemable at
our option in whole or in part at any
time, at a redemption price equal to the
greater of
o 100% of the principal amount of the
exchange notes to be redeemed, and
o the sum of the present values of the
principal amount and the remaining
scheduled payments of interest on the
exchange notes to be redeemed from the
redemption date to October 1, 2009
discounted on a semiannual basis
(assuming a 360-day year consisting of
30-day months) at a specified Treasury
Rate plus 40 basis points,
plus, in either case, accrued interest to
the date of redemption. See "Description
of Exchange Notes -- Optional
Redemption".
Ranking ............................. The exchange notes will be senior
unsecured obligations and will rank
equally with our senior unsecured
indebtedness. As of March 31, 2000, we
had outstanding $425 million of debt that
ranks equal with the exchange notes and
had no secured debt outstanding. Since we
are a holding company, the exchange notes
will be structurally subordinated to any
indebtedness and other liabilities of our
operating subsidiaries.
Cross Acceleration .................. The exchange notes will be subject to the
acceleration of their maturity in the
event of the acceleration of the
indebtedness under our revolving credit
facilities and certain other indebtedness
as described under "Description of
Exchange Notes -- Events of Default and
Remedies".
Ratings ............................. The exchange notes have been assigned
ratings of "BBB-" by Standard & Poor's
Ratings Group and "Ba1" by Moody's
Investors Service, Inc.
A security rating is not a recommendation
to buy, sell or hold securities and may
be subject to revision or withdrawal at
any time by the assigning rating agency.
Each rating should be evaluated
independently of any other rating.
Sinking Fund ........................ None.
Limitation on Liens ................. Energy Holdings and its subsidiaries may
not incur any liens to secure
indebtedness without providing that the
exchange notes will be equally and
ratably secured with such indebtedness.
These restrictions do not apply to liens
granted by subsidiaries (other than
"Material Subsidiaries" as defined on
page 70) in connection with project
financings, liens securing indebtedness
not exceeding 10% of Consolidated Net
Tangible Assets (as defined on page 69)
and other specified liens.
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Limitation on Sale and
Leasebacks ........................ Energy Holdings and its subsidiaries may
not enter into sale and leaseback
transactions unless it would be
permissible to incur indebtedness secured
by a lien under the foregoing Limitation
on Liens covenant in the amount of the
indebtedness associated with that sale
and leaseback transaction or unless the
proceeds of that sale and leaseback were
applied to the reduction of indebtedness.
Also not restricted is indebtedness
associated with sale and leaseback
transactions not exceeding 10% of
Consolidated Net Tangible Assets.
Change of Control ................... Upon a "Change of Control" (as defined on
page 69), a holder of exchange notes may
require us to repurchase that holder's
exchange notes, in whole or in part, at
101% of the principal amount of the
exchange notes, plus accrued interest. A
Change of Control will not be deemed to
have occurred if, after giving effect to
circumstances otherwise constituting a
Change of Control, the exchange notes are
rated "BBB-" or better by Standard &
Poor's Ratings Group and "Ba1" or better
by Moody's Investors Service, Inc.
Form ................................ The exchange notes will be represented by
one or more permanent global exchange
notes in fully registered form without
interest coupons, deposited with the
Trustee as custodian for, and registered
in the name of, a nominee of DTC, except
in certain limited circumstances
described in this prospectus.
Risk Factors ........................ Our business, and an investment in the
exchange notes, is subject to risks,
including the following:
o Because we are a holding company, our
ability to service our debt could be
limited.
o Our ability to control the cash flow
from our minority investments is
limited.
o We may not have access to sufficient
capital in the amounts and at the
times needed.
o We cannot assure sufficient cash flow
to service the notes.
o Because a substantial amount of our
business is conducted outside the
United States, adverse international
developments could negatively impact
our business.
The Company
PSEG Energy Holdings Inc. participates in three energy-related lines of
business through its wholly-owned subsidiaries: PSEG Global Inc., PSEG Resources
Inc. and PSEG Energy Technologies Inc. Our objective is to pursue investment
opportunities in the rapidly changing worldwide energy markets where our
technical, market and regulatory expertise can be applied to create economic
value.
We focus on
o supplying reliable, competitively priced energy in high growth markets,
o providing capital to finance energy-related assets and
o supplying products and services designed to assist customers in
efficient energy utilization.
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We are a direct, wholly-owned subsidiary of Public Service Enterprise
Group Incorporated (PSEG) and an affiliate of Public Service Electric and Gas
Company, a public utility operating in New Jersey, which is also a wholly-owned
subsidiary of PSEG. We provide administrative support for our subsidiaries and
financing on the basis of a combined credit profile. In addition, PSEG Capital
Corporation, our subsidiary, has provided debt financing in the form of
Medium-Term Notes, with maturities ranging from 2000 to 2003, in an aggregate
principal amount of up to $650 million to our subsidiaries on the basis of a net
worth maintenance agreement with PSEG. As of December 31, 1999, PSEG had
approximately $1.4 billion of equity (including retained earnings of
approximately $276 million) invested in our company.
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 nineteen operating
generation projects totaling 2,026 MW (544 MW net) located in the United States,
Argentina, China and Venezuela. Global has ownership interests in seventeen
projects totaling 4,808 MW (2,245 MW net) in construction or advanced
development that are located in the United States, Argentina, Venezuela, India,
Tunisia, China, Italy and Poland. Of Global's generation projects in operation,
construction or advanced development, 1,294 MW net, or 46%, are located in the
United States. Global is actively involved, through its joint ventures, in
managing the operations of eight operating generation projects and will be
actively involved in managing the operations of five of the projects in
construction or advanced development. Global owns interests in six distribution
companies, which as of December 31, 1999, totaled approximately 68% of Global's
assets, providing electricity to approximately 2.7 million customers in
Argentina, Brazil, Chile and Peru. Global is actively involved in managing the
operations of these distribution companies. Global was established in 1984 and
as of December 31, 1999 had assets of approximately $1.7 billion.
Resources
Resources provides energy infrastructure financing in developed countries.
Resources invests in energy-related financial transactions and manages a
diversified portfolio of more than 60 investments including leveraged leases,
leveraged buyout funds, limited partnerships and marketable securities. As of
December 31, 1999, Resources had approximately $1.8 billion invested in
leveraged leases representing approximately 84% of Resources' assets.
Approximately 79% of these leveraged leases are with lessees that have
investment grade credit ratings. Leveraged leases of energy-related plant and
equipment totaled approximately $1.3 billion or 73% of the lease portfolio and
61% of Resources' assets. The remainder of Resources' portfolio is further
diversified across a wide spectrum of asset types and business sectors,
including leveraged leases of aircraft, railcars, real estate and industrial
equipment, limited partnership interests in project finance transactions,
leveraged buyout and venture funds and marketable securities. All of Resources'
investments since 1992 have been energy-related. Resources was established in
1985 and as of December 31, 1999 had assets of approximately $2.1 billion.
Energy Technologies
Energy Technologies is an energy management company that constructs,
operates and maintains heating, ventilating and air conditioning (HVAC) systems
for, and provides energy-related engineering, consulting and mechanical
contracting services to, industrial and commercial customers in the Northeastern
and Middle Atlantic United States. Energy Technologies was established in 1997
and as of December 31, 1999 had assets of approximately $252 million.
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Recent Activities
Energy Holdings
o In February 2000, we issued $300 million of 9 1/8 % senior notes due
2004. The net proceeds from the sale were used for the repayment of
short-term debt outstanding under our revolving credit facilities.
o In October 1999, we issued $400 million of 10% senior notes due 2009.
These are the original notes being offered for exchange. Interest is
payable semi-annually on April 1 and October 1, commencing April 1,
2000. The net proceeds from the sale were used for the repayment of
short-term debt outstanding under our revolving credit facilities.
o In June 1999, PSEG invested approximately $200 million in additional
equity in our company, which we used to repay short-term debt incurred
in connection with recent investment activity.
Global
o In February 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 is
under construction and commercial operation is expected in 2001.
Global's equity investment, including loans and guarantees, for its
50% interest is expected to be approximately $190 million.
o In November 1999, Global announced that it plans to build a combined
heat and power plant of 220 MW of electricity and 500 MW of thermal
energy capacity utilizing circulating fluidized bed technology in
Poland. Total project cost is estimated at $320 million with
commercial operation targeted for 2003.
o In October 1999, Global closed on the acquisition of a 70% interest in
Prisma 2000, a power project development company in Italy specializing
in renewable energy. Prisma 2000 currently has approximately 550 MW of
power projects either in development or under construction consisting
of biomass, hydro and gas powered production. Global's investment
requirements over the next two years are expected to be approximately
$80 million.
o In October 1999, Global and its 50% partner completed a $312 million
project financing of a 1,000 MW gas-fired combined-cycle electric
generation facility in Guadalupe County in south central Texas. The
plant is under construction and commercial operation is expected to
commence in late 2000. Global's equity investment, including loans and
guarantees, for its 50% interest is expected to be approximately $193
million.
o In September 1999, Global and a partner closed on a tender offer for
outstanding publicly traded shares of Luz del Sur, a Peruvian
distribution company. The number of shares tendered constitutes 22.5%
of the shares of Luz del Sur. At the time of the tender, Global and
its partner already owned 37% of Luz del Sur which was acquired in
June 1999 as part of the acquisition of Chilquinta Energia, S.A.
discussed below. The tender was offered exclusively in Peru. Global
and its partner also purchased an additional 25% of Luz del Sur upon
closing of the tender offer. Global's investment in connection with
these transactions was approximately $108 million.
o In August 1999, Global sold its 50% partnership interest in the Newark
Bay cogeneration facility, a 137 MW gas-fired combined-cycle plant in
Newark, NJ. Global recognized an after-tax gain of approximately $40
million as a result of this transaction.
o In August 1999, Global and its partners closed project financing for
the Rades facility, a 471 MW gas-fired combined-cycle electric
generation facility in Rades, Tunisia. Construction of the facility
began in August 1999 and is expected to be completed in the summer of
2001. Total cost is anticipated to be approximately $261 million.
Global's equity investment, including contingencies, for its 35%
interest is expected to be approximately $27 million.
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o As part of a comprehensive review of assets and development
activities, Global recognized an after-tax write-down in the third
quarter of 1999 of $27 million, related to equity investments in
generation facilities in California and in development companies in
Thailand and the Philippines.
o In June 1999, Global and a partner acquired 90.23% of Chilquinta
Energia, S.A., a distribution company providing electric and gas
service to more than one million customers in Chile and Peru. In
January 2000, Global and its partner completed the purchase of an
additional 9.75% of the shares of Chilquinta Energia, S.A., increasing
their total holdings to 99.98%. Global's 50% share of the acquisition
was funded with approximately $268 million of equity and $160 million
of debt that is non-recourse to Global and to us.
o In June 1999, Global and a partner closed project financing for
Parana, an 830 MW gas-fired combined-cycle electric generation
facility to be constructed in San Nicolas, Argentina. The new facility
is adjacent to the Central Termica San Nicolas (CTSN) power plant, a
650 MW facility also owned by Global and its partner. Construction
began in August 1999 and is expected to be completed by 2001 at a
total cost of approximately $448 million. Global's equity investment
for its 33% interest is expected to be approximately $86 million,
including contingencies.
o In May 1999, Global acquired a 63% interest in Tri-Sakthi Energy
Private Limited, a company which is developing and will own a 525 MW
coal-fired electric generation facility to be constructed in Ennore,
Tamil Nadu, India. Upon scheduled completion in 2003, Global will be
the operator of the plant. The total project cost is expected to be
approximately $630 million. Global's equity investment, including
contingencies, is expected to be approximately $180 million.
o In April 1999, Global announced the formation of a joint venture which
plans to construct and operate up to three gas-fired electric
generation facilities, the Turboven project, with total installed
capacity of up to 200 MW and associated distribution systems to serve,
under contract, industrial customers in Venezuela. Turboven has
essentially completed construction of the first two facilities. An
injunction, currently being appealed, prohibits operation of the
facilities. Global has invested $42 million in its 50% interest to
date.
o In December 1998, Global and its partners closed project financing for
the PPN project, a 330 MW gas-fired combined-cycle electric generation
facility currently in construction and located in Pillaiperumanallur,
Tamil Nadu, India. Upon scheduled completion in 2001, Global will be
the operator of the plant. Total project cost is estimated to be
approximately $328 million. Global holds a 20% equity interest in the
project and its equity investment, including contingencies, is
expected to be approximately $32 million.
Resources
o In February 2000, Resources negotiated the early termination of a
lease of electric generating equipment and received cash proceeds of
$9 million and recognized an after-tax gain of approximately $2
million.
o In January and February 2000, Resources invested $73 million in two
leveraged lease transactions including a gas distribution system in
the Netherlands and an electric power plant in the United States.
o In November 1999, Resources sold its interest in a limited partnership
and received cash proceeds of $11 million and recognized an after-tax
gain of approximately $1 million.
o In 1999, Resources negotiated the early termination of three leveraged
leases and received cash proceeds of $126 million and recognized an
after-tax gain of approximately $14 million.
o In 1999, Resources invested approximately $380 million in six
leveraged lease transactions of energy-related assets, including gas
distribution networks in the Netherlands, cogeneration plants in
Germany, a generation facility in the United States and a liquefied
natural gas storage facility in the United States.
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o In 1999, Resources, through its investment in a leveraged buyout fund,
received cash distributions of approximately $99 million resulting in
an after-tax gain of approximately $23 million from the fund's sale of
a portion of its equity interests.
Energy Technologies
o In January 2000, Energy Technologies acquired two mechanical
contracting companies based in Pennsylvania and New York for an
aggregate cost of approximately $21 million.
o In 1999, Energy Technologies acquired six mechanical, HVAC and
building service contractors in New Jersey, Rhode Island and Virginia
for a total cost of approximately $63 million.
o In January 1999, PSEG contributed the capital stock of Public Service
Conservation Resources Corporation (PSCRC), an energy management
contractor with net assets of $57 million, to Energy Technologies.
We are incorporated under the laws of the State of New Jersey. Our
headquarters and principal executive offices are located at 80 Park Plaza,
Newark, NJ 07102 and our telephone number is (973) 456-3581.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth a summary of our consolidated financial
data for the periods indicated. The summary consolidated financial data was
derived from the audited consolidated financial statements of Energy Holdings
and its consolidated subsidiaries for the four years in the period ended
December 31, 1999. The summary data for 1995 was derived from unaudited
financial statements, which in the opinion of management, were prepared in
accordance with generally accepted accounting principles. This summary data is
qualified in its entirety by the more detailed information and financial
statements, including the notes thereto.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Thousands of Dollars, except ratios)
<S> <C> <C> <C> <C> <C>
Operating Data:
Total Revenues ...................................... $617,773 $440,284 $341,590 $302,800 $250,100
Total Operating Expenses ............................ 380,497 250,539 196,462 171,169 122,520
Interest, Net of Capitalized
Interest ........................................ 94,685 90,367 72,363 58,261 56,894
Taxes ............................................... 68,942 30,160 25,816 24,968 23,594
Income from Discontinued
Operations (A) .................................. -- -- -- 24,238 35,036
Net Income .......................................... 107,999 69,204 47,873 72,662 82,401
Preferred Stock Dividends (B) ....................... 25,007 17,478 598 -- --
Earnings Available to
Common Stockholder .............................. $ 82,992 $ 51,726 $ 47,275 $ 72,662 $ 82,401
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets ........................................ $4,114,385 $3,168,530 $3,022,956 $2,122,413 $2,295,803
Total Liabilities ................................... 1,038,332 958,528 962,954 817,889 634,502
Total Capitalization:
Debt (F) ........................................ 1,701,188 967,673 1,275,103 627,381 707,819
Common Equity (B) ............................... 865,665 733,129 709,899 677,143 953,482
Preferred Equity (B) ............................ 509,200 509,200 75,000 -- --
---------- ---------- ---------- ---------- ----------
Total Stockholder's Equity ...................... 1,374,865 1,242,329 784,899 677,143 953,482
---------- ---------- ---------- ---------- ----------
Total Capitalization ............................ $3,076,053 $2,210,002 $2,060,002 $1,304,524 $1,661,301
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other Data:
Earnings Before Interest and Taxes (EBIT) ........... $ 270,709 $ 187,927 $ 145,813 $ 131,631 $ 127,540
Cash flows from:
Operating ....................................... $ 92,396 $ 52,780 $ 137,057 $ 232,411 $ 156,141
Investing ....................................... (960,372) (160,133) (998,424) 560,965 (212,473)
Financing ....................................... 902,320 105,133 722,832 (726,442) (85,033)
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges (C) .......................................... 2.7x 2.4x 1.4x 3.0x 2.4x
EBIT to Interest Expense (D) (H) ....................................... 2.9x 2.1x 2.0x 2.3x 2.2x
EBITDA to Interest Expense (E) (H) ..................................... 3.1x 2.4x 2.2x 2.5x 2.5x
Consolidated Debt to Capitalization (F) ................................ 55% 44% 62% 48% 43%
Consolidated Recourse Debt to Recourse
Capitalization (G) ................................................. 50% 38% 57% 48% 43%
</TABLE>
- ---------------
(A) In 1996, EDC was sold for an aggregate price of $779 million. This sale
resulted in an after-tax gain of $13.5 million.
(B) All outstanding preferred and common stock is owned by PSEG.
(C) 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.
(D) EBIT includes operating income plus other income. For this ratio, interest
expense is net of capitalized interest of $8.5 million, $1.2 million, $5.1
million, $1.3 million and $1.9 million for the years ended December 31,
1999, 1998, 1997, 1996 and 1995, respectively.
(E) EBITDA includes operating income plus other income plus depreciation and
amortization. For this ratio, interest expense is net of capitalized
interest as noted above.
(F) Includes all recourse debt and debt that is non-recourse to Global and
Energy Holdings which is consolidated on the balance sheet.
(G) Excludes consolidated debt that is non-recourse to Global and Energy
Holdings of $327 million, $220 million and $232 million as of December 31,
1999, 1998 and 1997, respectively. There was no consolidated non-recourse
debt outstanding prior to 1997.
(H) 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.
- --------------------------------------------------------------------------------
12
<PAGE>
RISK FACTORS
You should carefully consider the risks described below. Each of the following
factors could have a material adverse effect on our business, financial
condition, results of operations, net cash flows and/or our ability to service
our outstanding indebtedness, including the notes.
Because we are a holding company, our ability to service our debt could be
limited
The notes will be our exclusive obligations and not the obligations of any
of our subsidiaries or affiliates. Our obligations with respect to the notes
will not be supported by PSEG.
We are a holding company with no material assets other than the stock of
our subsidiaries and project affiliates. Accordingly, all of our operations are
conducted by our subsidiaries and project affiliates which are separate and
distinct legal entities that have no obligation, contingent or otherwise, to pay
any amounts when due on the notes or to make any funds available to us to pay
such amounts. As a result, the notes will effectively be subordinated to all
existing and future debt, trade creditors, and other liabilities of our
subsidiaries and project affiliates and our rights and hence the rights of our
creditors (including holders of the notes) to participate in any distribution of
assets of any such subsidiary or project affiliate upon its liquidation or
reorganization or otherwise would be subject to the prior claims of such
subsidiary's or project affiliate's creditors, except to the extent that our
claims as a creditor of such subsidiary or project affiliate may be recognized.
We depend on our subsidiaries' and project affiliates' cash flow and our
access to capital in order to service our indebtedness, including the notes. The
project-related debt agreements of subsidiaries and project affiliates generally
restrict their ability to pay dividends, make cash distributions or otherwise
transfer funds to us. These restrictions may include achieving and maintaining
financial performance or debt coverage ratios, absence of events of default, or
priority in payment of other current or prospective obligations.
Global has financed some of its generation and distribution facilities
using non-recourse project financing. Each non-recourse project financing is
structured to be repaid out of cash flow provided by the facility or facilities.
In the event of a default under a financing agreement which is not cured, the
lenders would generally have rights to the facility and any related assets. In
the event of foreclosure after a default, Global may lose its equity in the
facility or may not be entitled to any cash that the facility may generate.
Although a default under a project financing agreement will not cause a default
with respect to the notes, it may materially affect our ability to service our
outstanding indebtedness, including the notes.
Our ability to control the cash flow from our minority investments is limited
Our ability to control our minority investments is limited. As such, we
and Global are unable unilaterally to cause dividends or distributions to be
made to us or Global from these operations.
Minority investments may involve risks not otherwise present for
investments made solely by us and our subsidiaries, including the possibility
that a partner, majority investor or co-venturer might become bankrupt, may have
different interests or goals, and may take action contrary to our instructions,
requests, policies or business objectives. Also, if no party has full control,
there could be an impasse on decisions. In addition, certain investments of
Resources are managed by unaffiliated entities which limits Resources' ability
to control the activities or performance of such investments and managers.
We may not have access to sufficient capital in the amounts and at the times
needed
Equity capital for our subsidiaries' projects and our investments have
been provided by equity contributions from PSEG, internally-generated cash flow
and borrowings by ourselves and PSEG Capital. We require continued access to
debt capital from outside sources in order to assure the success of our future
projects and acquisitions. Our ability to arrange financing on a non-recourse
basis and the costs of capital depend on numerous factors including, among other
things, general economic
13
<PAGE>
and market conditions, the availability of credit from banks and other financial
institutions, investor confidence, the success of current projects and the
quality of new projects.
We can give no assurances that our current and future capital structure or
financial condition will permit access to bank and debt capital markets. We also
will require capital from PSEG, the availability of which is not assured since
it is dependent upon our performance and that of PSEG's other subsidiaries. As a
result, there is no assurance that we will be successful in obtaining financing
for our projects and acquisitions or funding the equity commitments required for
such projects and acquisitions in the future.
We cannot assure sufficient cash flow to service the notes
As of December 31, 1999, we had total debt of $1.4 billion, excluding
consolidated non-recourse debt appearing on our balance sheet. We can give no
assurances that our projects and investments will generate sufficient cash to
service our outstanding indebtedness, including the notes.
Under the existing instruments governing our debt, including the indenture
under which the notes will be issued and our bank agreements, as well as the
agreement governing debt of PSEG Capital, debt may be accelerated or otherwise
be subject to repayment upon certain events of default, including cross
defaults, or if we undergo a change of control. In addition, a default on the
notes would result in a cross default under our bank agreements. If any such
event were to occur, we may not have sufficient capital to pay holders of the
notes in full the amounts due under the notes or to repay any notes tendered
pursuant to the Change of Control Offer described under "Description of Exchange
Notes -- Certain Covenants -- Repayment of Notes Upon a Change of Control".
Because a substantial amount of our business is conducted outside the United
States, adverse international developments could negatively impact our business
A key component of our business strategy is the development, acquisition
and operation of projects outside the United States. The economic and political
conditions in certain countries where Global has interests or in which Global is
or could be exploring development or acquisition opportunities present risks
that may be different than those found in the United States including: delays in
permitting and licensing, construction delays and interruption of business, as
well as risks of war, expropriation, nationalization, renegotiation or
nullification of existing contracts and changes in law or tax policy. Changes in
the legal environment in foreign countries in which Global may develop or
acquire projects could make it more difficult to obtain non-recourse project
refinancing on suitable terms and could impair Global's ability to enforce its
rights under agreements relating to such projects.
Operations in foreign countries also present risks associated with
currency exchange and convertibility, inflation, and repatriation of earnings.
In some countries in which Global may develop or acquire projects in the future,
economic and monetary conditions and other factors could affect Global's ability
to convert its cash distributions to United States Dollars or other freely
convertible currencies or to move funds offshore from such countries.
Furthermore, the central bank of any such country may have the authority to
suspend, restrict or otherwise impose conditions on foreign exchange
transactions or to approve distributions to foreign investors. Although Global
generally seeks to structure power purchase contracts and other project revenue
agreements to provide for payments to be made in, or indexed to, United States
Dollars or a currency freely convertible into United States Dollars, its ability
to do so in all cases may be limited. See "-- Credit, currency, commodity and
financial market risks may have an adverse impact".
Our project development, construction and acquisition activities may not be
successful
Our project development and acquisition activities require significant
expenditures for evaluation, engineering, permitting, legal and financial
advisory services, some of which may not result in increased revenues. For
example, we may choose not to proceed with development or may not be successful
in competitive bids despite having incurred significant expenses in connection
with potential investments.
14
<PAGE>
The construction, expansion or refurbishment of a power generation or
distribution facility may involve equipment and material supply interruptions,
labor disputes, unforeseen engineering, environmental and geological problems
and unanticipated cost overruns. The proceeds of any insurance, vendor
warranties or performance guarantees may not be adequate to cover lost revenues,
increased expenses or payments of liquidated damages. In addition, some power
purchase contracts permit the customer to terminate the related contract, retain
security posted by the developer as liquidated damages or change the payments to
be made to the subsidiary or the project affiliate in the event certain
milestones, such as commencing commercial operation of the project, are not met
by specified dates. If project start-up is delayed and the customer exercises
these rights, the project may be unable to fund principal and interest payments
under its project financing agreements.
If our operating performance falls below projected levels, we may not be able to
service our debt
The risks associated with operating power generation facilities include
the breakdown or failure of equipment or processes, labor disputes and fuel
supply interruption, each of which could result in performance below expected
capacity levels. Operation below expected capacity levels may result in lost
revenues, increased expenses, higher maintenance costs and penalties, in which
case there may not be sufficient cash available to service project debt. In
addition, many of Global's generation projects rely on a single fuel supplier
and a single customer for the purchase of the facility's output under a long
term contract. While Global generally has liquidated damage provisions in its
contracts, the default by a supplier under a fuel contract or a customer under a
power purchase contract could adversely affect the facility's cash generation
and ability to service project debt.
Countries in which Global owns and operates electric and gas distribution
facilities may impose financial penalties if reliability performance standards
are not met. In addition, inefficient operation of the facilities may cause lost
revenue and higher maintenance expenses, in which case there may not be
sufficient cash available to service project debt.
Credit, currency, commodity and financial market risks may adversely impact our
business
Adverse changes in commodity prices, equity security prices, interest
rates and foreign currency exchange rates and non-performance or non-payment by
counterparties could lower revenues, raise costs and adversely affect our
financial condition, results of operations and net cash flows and our ability to
service our outstanding indebtedness, including the notes.
We seek to manage risk consistent with our business plans and prudent
practices. For further discussion of financial risk, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Qualitative and Quantitative Disclosures About Market Risk".
We and our subsidiaries are subject to substantial competition
We and our subsidiaries are subject to substantial competition in the
United States and in international markets from independent power producers,
domestic and multi-national utility generators, fuel supply companies,
engineering companies, equipment manufacturers and affiliates of other
industrial companies. Restructuring of worldwide energy markets, including the
privatization of government-owned utilities and the sale of utility-owned
assets, is creating opportunities for, and substantial competition from,
well-capitalized entities which may adversely affect our ability to make
investments on favorable terms and achieve our growth objectives. Increased
competition could contribute to a reduction in prices offered for power and
could result in lower returns which may affect our ability to service our
outstanding indebtedness, including the notes.
Deregulation may continue to accelerate the current trend toward
consolidation among domestic utilities and could also result in the splitting of
vertically-integrated utilities into separate generation, transmission and
distribution businesses. As a result, additional significant competitors could
become active in the independent power industry. Resources faces competition
from numerous well-capitalized investment and finance company affiliates of
banks, utilities and industrial companies. Energy Technologies faces substantial
competition from utilities and their affiliates, and HVAC and mechanical
contractors.
15
<PAGE>
Compliance with environmental and other governmental regulation is costly and
could negatively impact our business
We and the projects in which we invest are subject to a number of complex
and stringent environmental and other laws and regulations, including those
which regulate the construction or permitting of new facilities and operation of
existing facilities. Compliance is costly and could delay project operation and
the receipt of revenues.
Global's electric and gas distribution facilities are rate-regulated
enterprises. Rates charged to customers are established by governmental
authorities and are currently sufficient to cover all operating costs and
provide a return. We can give no assurances that future rates will be
established at levels sufficient to cover such costs and provide a return on our
investment. In addition, future rates may not be adequate to provide cash flow
to pay principal and interest on our subsidiaries' and affiliates' debt and to
enable such subsidiaries and affiliates to comply with the terms of debt
agreements.
Fundamental changes in the United States utility industry are causing regulatory
uncertainty
The electric and gas utility industries in the United States are
undergoing major transformations and are experiencing competitive pressures.
Regulatory changes, including the unbundling of energy supply and services and
the establishment of a competitive energy marketplace for products and services
are affecting our company, PSEG and Public Service Electric and Gas Company.
On August 24, 1999, the Board of Public Utilities (BPU) issued its Final
Decision and Order (Final Order) in the matter of Public Service Electric and
Gas Company's rate unbundling, stranded costs and restructuring filings. Appeals
filed on behalf of several Public Service Electric and Gas Company customers are
pending at the Appellate Division of the New Jersey Superior Court. Pending
resolution of these appeals, stranded cost recovery through securitization
financing and sale to an affiliate of generation-related assets by Public
Service Electric and Gas Company have not been completed.
As a result of the 1992 focused audit of PSEG's non-utility businesses
(Focused Audit), PSEG agreed, among other things, that it would not permit its
non-utility assets to exceed 20% of PSEG's consolidated assets without prior
notice to the BPU and that it would make a good faith effort to eliminate its
net worth maintenance agreement with PSEG Capital by 2003. In July 1999, Public
Service Electric and Gas Company notified the BPU that PSEG's non-utility assets
were expected to exceed 20% of its consolidated assets in 1999. At December 31,
1999, such assets were approximately 22% of consolidated assets and PSEG
Capital's outstanding debt was $630 million, with maturities in 2003 or sooner.
Regulatory oversight by the BPU to assure that there is no harm to utility
ratepayers from PSEG's non-utility assets is expected to continue. As a result
of the final outcome of the Energy Master Plan proceedings and accounting
impacts resulting from the deregulation of the generation of electricity and the
unbundling of the utility business, we do not believe that the Focused Audit
provision regarding BPU notification if PSEG's non-utility assets exceed 20% of
its consolidated assets remains appropriate and believe that modifications will
be required.
The Final Order noted that PSEG's non-regulated assets would likely exceed
20% of total PSEG assets once the utility's generating assets were transferred
to a non-regulated subsidiary, as provided in the Final Order. The Final Order
also 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. Further, Public Service
Electric and Gas Company was directed to file a petition with the BPU to
maintain the existing regulatory parameters or to propose modifications to the
Focused Audit order no later than the end of the first quarter of 2000. In March
2000, Public Service Electric and Gas Company submitted a letter to the BPU as
its initial compliance with this filing requirement, in which it notified the
BPU of its intention to make a filing to modify the terms of the Focused Audit
within 120 days after the Final Order becomes final and non-appealable.
We are unable to predict what actions could be taken by the BPU before any
resolution is reached or what procedures may be utilized by the BPU. Inability
to achieve satisfactory resolution of these
16
<PAGE>
matters could impact our future relative size and financing and, accordingly,
future prospects, including financial condition, results of operations and cash
flows. To date, our financial condition, results of operations and cash flows
have not been materially adversely impacted. See "Business -- Regulation".
PSEG could exercise its power over us to the detriment of holders of the notes
As our sole stockholder, PSEG has the power to control the election of the
directors and all other matters submitted for stockholder approval and has
control over our management and affairs. In circumstances involving a conflict
of interest between PSEG, as the sole stockholder, on the one hand, and our
creditors, on the other, we can give no assurances that PSEG would not exercise
its power to control us and allocate resources in a manner that would benefit
PSEG or another subsidiary to the detriment of the holders of the notes.
The indenture imposes no limitations on our ability to pay dividends or to
make other payments to PSEG or on our ability to enter into transactions with
PSEG or our other affiliates. PSEG could decide to no longer continue to hold
our stock, although failure to maintain ownership of a majority of the common
stock could trigger the change of control repurchase provisions in the
indenture. Any of these actions could materially adversely affect our business
and thus ultimately our ability to service the notes.
As a wholly-owned subsidiary of PSEG, we and our subsidiaries are included
in PSEG's consolidated tax filing for federal income tax purposes. Generally,
the leveraged lease transactions in which Resources invests provide tax losses
in the early years of their term that offset taxable income from other PSEG
subsidiaries. We and our subsidiaries are parties to a tax allocation agreement
with PSEG under which we and each of our subsidiaries are responsible to pay the
respective share of taxes due or entitled to receive tax benefits earned. If
PSEG were to modify the tax allocation agreement, our future investment strategy
might change, including Resources' possible curtailment of new leveraged lease
investments that generate tax benefits. For additional discussion, see "Business
- -- Regulation".
The exchange notes may not be liquid because there is no public market for the
exchange notes
There is currently no trading market for the exchange notes and we do not
intend to list the exchange notes on any securities exchange or to arrange for
them to be quoted on any quotation system. We can give no assurances as to the
liquidity of any market that may develop for the exchange notes, the ability of
investors to sell the exchange notes or the price at which investors would be
able to sell their exchange notes.
Consequences of failure to exchange original notes -- original notes remain
subject to transfer restrictions
Any original notes that remain outstanding after this exchange offer will
continue to be subject to restrictions on their transfer. After this exchange
offer, holders of original notes will not (with limited exceptions) have any
further rights under the exchange and registration rights agreement. Any market
for original notes that are not exchanged could be adversely affected by the
conclusion of this exchange offer.
Exchange offer procedures--late deliveries of notes and other required documents
could prevent a holder from exchanging its notes
Holders are responsible for complying with all exchange offer procedures.
Issuance of exchange notes in exchange for original notes will only occur upon
completion of the procedures described in this prospectus under the heading "The
Exchange Offer--Procedures for Tendering Original Notes". Therefore, holders of
original notes who wish to exchange them for exchange notes should allow
sufficient time for timely completion of the exchange procedure. We are not
obligated to notify you of any failure to follow the proper procedure.
17
<PAGE>
Restrictions applicable to participating broker-dealers--if you are a
broker-dealer, your ability to transfer the notes may be restricted
A broker-dealer that purchased original notes for its own account as part
of market-making or trading activities must deliver a prospectus when it sells
the exchange notes. Our obligation to make this prospectus available to
broker-dealers is limited. Consequently, we cannot guarantee that a proper
prospectus will be available to broker-dealers wishing to resell their exchange
notes.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this prospectus, some
of the matters discussed in this prospectus constitute "forward-looking
statements". These forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
anticipated. These statements are based on management's beliefs as well as
assumptions made by and information currently available to management. When used
in this prospectus, the words "will", "anticipate", "intend", "estimate",
"believe", "expect", "plan", "hypothetical", "potential", variations of such
words and similar expressions are intended to identify forward-looking
statements. PSEG Energy Holdings Inc. undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
In addition to any assumptions and other factors referred to specifically
in connection with forward-looking statements, factors that could cause actual
results to differ materially from those contemplated in any forward-looking
statements include, among others, the following, some of which relate to PSEG
Energy Holdings Inc. indirectly as a result of their potential impact upon
Public Service Enterprise Group Incorporated (PSEG) or Public Service Electric
and Gas Company:
o deregulation and the unbundling of energy supplies and services and
the establishment of a competitive energy marketplace for products and
services;
o managing rapidly changing wholesale energy trading operations in
conjunction with electricity and gas production, transmission and
distribution systems;
o managing foreign investments and electric generation and distribution
operations in locations outside of the traditional utility service
territory;
o political and foreign currency risks;
o an increasingly competitive energy marketplace;
o sales retention and growth potential in a mature Public Service
Electric and Gas Company service territory;
o ability to complete development or acquisition of current and future
investments;
o partner and counterparty risk;
o exposure to market price fluctuations and volatility of fuel and power
supply, power output and marketable securities, among others;
o ability to obtain adequate and timely rate relief, cost recovery, and
other necessary regulatory approvals;
o ability of Public Service Electric and Gas Company to obtain
securitization proceeds;
o federal, state and foreign regulatory actions;
o regulatory oversight with respect to utility and non-utility affiliate
relations and activities;
o Year 2000 issues;
o operating restrictions, increased costs and construction delays
attributable to environmental regulations;
o nuclear decommissioning and the availability of reprocessing and
storage facilities for spent nuclear fuel;
18
<PAGE>
o licensing and regulatory approvals necessary for nuclear and other
operating stations;
o the ability to economically and safely operate nuclear facilities in
which PSEG has an interest in accordance with regulatory requirements;
o environmental concerns; and
o market risk and debt and equity market concerns associated with these
issues.
USE OF PROCEEDS
The exchange offer is intended to satisfy some of our obligations under
the exchange and registration rights agreement. We will not receive any cash
proceeds from the issuance of the exchange notes in the exchange offer. In
exchange for issuing the exchange notes as described in this prospectus, we will
receive an equal principal amount of original notes, which will be canceled.
The net proceeds from the sale of the original notes were used for the
repayment of short-term debt outstanding under revolving credit facilities.
Borrowings under the revolving credit facilities were used to finance
investments and acquisitions and for general corporate purposes. The applicable
per annum interest rate on the revolving credit facilities is LIBOR plus 1.375%.
CAPITALIZATION
The following table sets forth Energy Holdings' consolidated
capitalization as of December 31, 1999 which reflects the sale of the original
notes.
As of December 31, 1999
----------------------
Actual
------
(Thousands of Dollars)
Short-term debt (A) ................. $ 525,856
Long-term debt ...................... 1,175,332
----------
Total debt ...................... 1,701,188
----------
Total common equity (B) ............. 865,665
Total preferred equity (B) .......... 509,200
----------
Total stockholder's equity .......... 1,374,865
----------
Total capitalization ................ $3,076,053
==========
- ----------
(A) Short-term debt includes the portion of long-term debt due within one year.
(B) Owned by PSEG.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the periods indicated. The selected consolidated financial data was derived from
the audited consolidated financial statements of Energy Holdings and its
consolidated subsidiaries for the four years in the period ended December 31,
1999. The selected data for 1995 was derived from unaudited financial
statements, which in the opinion of management, were prepared in accordance with
generally accepted accounting principles. This selected data is qualified in its
entirety by the more detailed information and financial statements, including
the notes thereto.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Thousands of Dollars, except ratios)
<S> <C> <C> <C> <C> <C>
Operating Data:
Total Revenues ...................................... $617,773 $440,284 $341,590 $302,800 $250,100
Total Operating Expenses ............................ 380,497 250,539 196,462 171,169 122,520
Interest, Net of Capitalized
Interest ........................................ 94,685 90,367 72,363 58,261 56,894
Taxes ............................................... 68,942 30,160 25,816 24,968 23,594
Income from Discontinued
Operations (A) .................................. -- -- -- 24,238 35,036
Net Income .......................................... 107,999 69,204 47,873 72,662 82,401
Preferred Stock Dividends (B) ....................... 25,007 17,478 598 -- --
Earnings Available to
Common Stockholder .............................. $ 82,992 $ 51,726 $ 47,275 $ 72,662 $ 82,401
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets ........................................ $4,114,385 $3,168,530 $3,022,956 $2,122,413 $2,295,803
Total Liabilities ................................... 1,038,332 958,528 962,954 817,889 634,502
Total Capitalization:
Debt (F) ........................................ 1,701,188 967,673 1,275,103 627,381 707,819
Common Equity (B) ............................... 865,665 733,129 709,899 677,143 953,482
Preferred Equity (B) ............................ 509,200 509,200 75,000 -- --
---------- ---------- ---------- ---------- ----------
Total Stockholder's Equity ...................... 1,374,865 1,242,329 784,899 677,143 953,482
---------- ---------- ---------- ---------- ----------
Total Capitalization ............................ $3,076,053 $2,210,002 $2,060,002 $1,304,524 $1,661,301
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other Data:
Earnings Before Interest and Taxes (EBIT) ........... $ 270,709 $ 187,927 $ 145,813 $ 131,631 $ 127,540
Cash flows from:
Operating ....................................... $ 92,396 $ 52,780 $ 137,057 $ 232,411 $ 156,141
Investing ....................................... (960,372) (160,133) (998,424) 560,965 (212,473)
Financing ....................................... 902,320 105,133 722,832 (726,442) (85,033)
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges (C) .......................................... 2.7x 2.4x 1.4x 3.0x 2.4x
EBIT to Interest Expense (D) (H) ....................................... 2.9x 2.1x 2.0x 2.3x 2.2x
EBITDA to Interest Expense (E) (H) ..................................... 3.1x 2.4x 2.2x 2.5x 2.5x
Consolidated Debt to Capitalization (F) ................................ 55% 44% 62% 48% 43%
Consolidated Recourse Debt to Recourse
Capitalization (G) ................................................. 50% 38% 57% 48% 43%
</TABLE>
- ---------------
(A) In 1996, EDC was sold for an aggregate price of $779 million. This sale
resulted in an after-tax gain of $13.5 million.
(B) All outstanding preferred and common stock is owned by PSEG.
(C) 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.
(D) EBIT includes operating income plus other income. For this ratio, interest
expense is net of capitalized interest of $8.5 million, $1.2 million, $5.1
million, $1.3 million and $1.9 million for the years ended December 31,
1999, 1998, 1997, 1996 and 1995, respectively.
(E) EBITDA includes operating income plus other income plus depreciation and
amortization. For this ratio, interest expense is net of capitalized
interest as noted above.
(F) Includes all recourse debt and debt that is non-recourse to Global and
Energy Holdings which is consolidated on the balance sheet.
(G) Excludes consolidated debt that is non-recourse to Global and Energy
Holdings of $327 million, $220 million and $232 million as of December 31,
1999, 1998 and 1997, respectively. There was no consolidated non-recourse
debt outstanding prior to 1997.
(H) 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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview and Future Outlook
The electric and gas utility industries in the United States and around
the world continue to experience significant change. Deregulation,
restructuring, privatization and consolidation are creating opportunities for
Energy Holdings. At the same time, competitive pressures are increasing.
PSEG has positioned Energy Holdings as a major part of its planned growth
strategy. In order to achieve this strategy, Global will focus on generation and
distribution investments within targeted high-growth regions. A significant
portion of Global's growth is expected to occur internationally due to the
current and anticipated growth in electric capacity required in certain regions
of the world. Resources will utilize its market access, industry knowledge and
transaction structuring capabilities to expand its energy-related financial
investment portfolio. Energy Technologies will continue to provide HVAC
contracting and other energy-related services to industrial and commercial
customers in the Northeastern and Middle Atlantic United States. However, Energy
Holdings will assess the growth prospects and opportunities for Energy
Technologies' business before committing additional capital.
Global derives its revenues and earnings from independent power production
and the distribution of electricity. Earnings will, therefore, be impacted by
the ability of Global and its partners to successfully manage the generation and
distribution facilities now in operation and to bring those projects in
construction and development into operation. The acquisition of additional
facilities and projects will be another important factor for future earnings
growth at Global. Future revenue growth will be partially offset by the
reduction of revenue, beginning in 2000, from certain generation facilities in
California due to lower energy prices to be paid by the purchaser under the
energy contracts associated with the plants. Two-thirds of such California
facilities in which Global has an interest will change from fixed energy pricing
by December 31, 2000, with the remainder changing in 2001. Based on current
energy prices, Global's share of annual income before income taxes from these
facilities is projected to decrease by approximately $30 million to $35 million
when all such contracts reflect the lower energy pricing. Actual revenues over
the remaining contract terms, which begin to expire in 2011, will depend on a
number of factors, including the actual energy prices in effect in the
applicable future periods. As a result of the projected revenue loss, Global
recognized an after-tax write down of $27 million in its equity investment in
these facilities in the third quarter of 1999. Energy Holdings expects revenue
from projects in operation, construction and development to offset this revenue
shortfall, however, no assurances can be given. Since Global operates in foreign
countries, it may also be affected by changes in foreign currency exchange rates
versus the United States Dollar. Generally, revenues associated with rate
regulated distribution assets in relatively limited competitive environments are
more stable and predictable than revenues from generation assets.
Revenues from Resources' existing leveraged lease investments are based
upon fixed rates of return. Generally, the leveraged lease transactions in which
Resources invests provide tax losses in the early years of their term that
offset taxable income from other PSEG subsidiaries. As a wholly-owned subsidiary
of PSEG, Energy Holdings and its subsidiaries are included in PSEG's
consolidated tax filing group for federal income tax purposes. Energy Holdings
and its subsidiaries are parties to a tax allocation agreement with PSEG under
which each of Energy Holdings and its subsidiaries is responsible to pay its
share of taxes due or entitled to receive tax benefits earned. If PSEG were to
modify the tax allocation agreement, Energy Holdings' future investment strategy
might change, including Resources' possible curtailment of new leveraged lease
investments. Energy Holdings does not believe that its ability to service its
debt, including the notes, would be impaired if a modification to the tax
allocation agreement were to occur, although no assurances can be given.
Resources' revenues in the future are expected to be derived 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.
Having acquired nine companies involved in the installation and
maintenance of energy equipment and HVAC services for a total of $73 million
since its formation in 1997, Energy Technologies' present strategic focus is to
consolidate its position as an energy services supplier in the Northeastern and
21
<PAGE>
Middle Atlantic United States. Earnings at Energy Technologies are expected to
be modest as it grows existing operations and integrates recent acquisitions. As
a result of discontinuing the business of buying and selling gas and
electricity, Energy Technologies will recognize a charge to income of
approximately $6.7 million for the year ended December 31, 2000 relating to
severance costs and the writedown of fixed assets.
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. Energy Holdings continuously evaluates its
plans and capital structure in light of available investment opportunities and
seeks to maintain the flexibility to pursue strategic growth investments.
Depending upon the level of investment activity, Energy Holdings anticipates
obtaining additional equity contributions from PSEG as necessary to maintain its
growth objectives and targeted capital structure. The availability of equity
capital from PSEG cannot be assured since it is dependent upon the performance
and needs of Energy Holdings and PSEG's other subsidiaries.
Results of Operations -- 1999 Compared to 1998
Energy Holdings' earnings improved $31 million from $52 million in 1998 to
$83 million in 1999. Revenues increased $178 million from $440 million to $618
million while operating expenses increased $129 million from $251 million to
$380 million.
Revenues
The increase in revenues was driven by an improvement of $17 million at
Global from additional revenue of $8 million from generation assets in the
United States, augmented by an increase of $6 million due to the acquisition of
a 50% interest in a distribution company serving customers in Chile and Peru in
June 1999. Revenues from Resources improved $34 million primarily due to the
addition of revenue from new leveraged lease investments in 1999. Revenues from
Energy Technologies improved approximately $126 million due to the acquisition
of six mechanical service/HVAC companies in 1999.
Operating Expenses
The increase in operating expenses of $129 million was driven by Energy
Technologies' acquisitions noted above. In addition, EGDC recognized a charge of
$11 million to reflect a write-down to net realizable value of a property in the
portfolio pending sale. The sale is expected to be completed in 2000.
Operating Income
Operating income increased $47 million for the reasons noted above in
Revenues and Operating Expenses.
Other Income (Loss)
Other income (loss) increased $35 million primarily due to the sale by
Global of its 50% interest in a 137 MW cogeneration facility in New Jersey which
yielded a gain of approximately $69 million. This was partially offset by other
reductions taken to the carrying value of certain of Global's assets in the
third quarter of 1999 totaling approximately $44 million. For a further
discussion of the write-downs, see the expanded discussion of Global's EBIT
contribution below.
Net Financing Expenses
Interest expense increased $5 million from $90 million to $95 million for
the year ended December 31, 1999 as compared to 1998 primarily due to an
increase of $8 million related to the debt financing associated with Global's
acquisition of an interest in distribution facilities in Chile and Peru in June
1999. While such debt is non-recourse to Global and Energy Holdings, it is
consolidated on the balance sheet since it was issued by entities which are
majority or wholly-owned by Global. Interest expense associated with recourse
financing activities at Energy Holdings decreased $3 million for the year ended
December 31, 1999 as compared to 1998 primarily due to lower average debt
outstanding.
22
<PAGE>
Preferred Stock dividends increased $8 million from $17 million to $25 million
due to the issuance of $509 million of cumulative preferred stock to PSEG in
January, June and July of 1998.
Income Before Income Taxes
Income before income taxes increased $78 million from $98 million to $176
million for the reasons noted above.
Income Taxes
Income taxes increased $39 million from $30 million to $69 million
primarily due to the increase in pre-tax income noted above. In addition, state
income taxes increased by approximately $11 million due to the payment of state
taxes associated with the early termination of a leveraged lease interest.
Results of Operations -- 1998 Compared to 1997
Energy Holdings' earnings improved $5 million from $47 million in 1997 to
$52 million in 1998. Revenues increased $98 million from $342 million to $440
million while operating expenses increased $55 million from $196 million to $251
million.
Revenues
The increase in revenues was driven by an improvement of $33 million at
Global primarily from additional revenue from investments made in three Latin
American distribution companies in 1997. Resources' revenue improved $1 million
primarily due to the addition of revenue from new leveraged lease investments of
$19 million in 1997 partially offset by a pre-tax charge of $26 million taken to
restate two leveraged lease investments due to a permanent decline in market
value of the underlying leased property. In addition, Resources sold a leveraged
lease asset and recognized a pre-tax gain of approximately $8 million. Revenues
from Energy Technologies improved approximately $67 million primarily from the
acquisition of a mechanical contracting firm that added approximately $58
million in revenue.
Operating Expenses
The increase in operating expenses of $55 million was driven by Energy
Technologies' acquisition noted above.
Operating Income
Operating income increased $45 million for the reasons noted above in
Revenues and Operating Expenses.
Other Income (Loss)
Other income (loss) decreased $3 million primarily due to losses on
foreign currency transactions related to Global's long-term debt. For a further
discussion, see Note 11 in Notes to Consolidated Financial Statements.
Net Financing Expenses
Interest expense increased $18 million for the year ended December 31,
1998 as compared to 1997 primarily due to debt financing associated with
Global's acquisition of three Latin American distribution companies in 1997.
While the debt is non-recourse to Global and Energy Holdings, it is consolidated
on the balance sheet since it was issued by acquisition entities which are
majority or wholly-owned by Global. The interest expense associated with such
debt increased $16 million from 1997 to 1998. Interest expense associated with
recourse financing activities at Energy Holdings, increased $2 million from 1997
to 1998 primarily due to higher debt levels from the 1997 investment activity.
Preferred stock dividends to PSEG increased $17 million in 1998 as compared to
1997 due to the issuance of the preferred stock in 1998.
23
<PAGE>
Income Before Income Taxes
Income before income taxes increased $25 million from $73 million to $98
million for the reasons noted above.
Income Taxes
Income taxes increased $4 million from $26 million to $30 million
primarily due to the increase in pre-tax income noted above offset by tax
credits recognized in 1998 income that were not utilized in 1997.
EBIT Contribution
The results of operations for each of Energy Holdings' business segments
are explained further with reference to the EBIT contribution. Energy Holdings
borrows 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.
EBIT Contribution -
Energy Holdings'
Subsidiaries Years Ended December 31,
- ----------- ------------------------------
1999 1998 1997
---- ---- ----
(Millions of Dollars)
Global ..................................... $117 $ 72 $ 46
Resources .................................. 169 135 134
Energy Technologies ........................ (8) (16) (25)
Other ...................................... (7) (3) (9)
---- ---- ----
Total Consolidated EBIT... ................. $271 $188 $146
==== ==== ====
Global
Global's investments consist of minority ownership positions in projects
and joint ventures, none of which it consolidates. Other than fees collected for
providing operations and maintenance services, Global's revenues primarily
represent its pro-rata ownership share of net income generated by project
affiliates which is accounted for by the equity method of accounting. The
expenses in the table below are those required to develop projects and general
and administrative expenses required to operate the business as a whole. Project
operating expenses are not reported as direct expenses of Global but are
deducted to arrive at net income of project affiliates, a pro-rata share of
which is reported as revenues by Global.
In the third quarter of 1999, Global completed a comprehensive review of
its existing assets and development activities focusing on rationalizing the
portfolio to ensure efficient capital deployment. Global's management has
decided that Global will not commit additional resources to its investments in
Thailand and the Philippines and will focus its current Asian development
activities in China and Taiwan. As a result, Global recognized a $13 million
pre-tax write-down in the third quarter of 1999 to adjust the carrying value of
these assets to net realizable value. One such investment in a development
company in Thailand was sold in the fourth quarter of 1999 for an amount
approximately equal to the net realizable value. In addition, the substantial
decline in revenue related to energy contracts for six generation facilities in
California resulted in a third quarter pre-tax write-down of Global's equity
investment in such facilities of $31 million.
Summary Results -
Global Years Ended December 31,
- ----------------- -------------------------------
1999 1998 1997
---- ---- ----
(Millions of Dollars)
Revenues ..................................... $141 $124 $91
Expenses ..................................... 52 51 46
---- ---- ---
Operating Income ............................. 89 73 45
Other Income/(Loss) .......................... 28 (1) 1
---- ---- ---
EBIT ......................................... $117 $ 72 $46
==== ==== ===
24
<PAGE>
Global's EBIT contribution increased $45 million from $72 million to $117
million for the year ended December 31, 1999 as compared to 1998. The higher
contribution was due to an increase in revenues due to greater contribution from
Latin American assets of approximately $6 million due to higher revenue from the
investment in June 1999 in distribution companies in Chile and Peru partially
offset by lower revenue from Global's Brazilian distribution company due to the
devaluation of the currency in January 1999 and the overall recession of the
Brazilian economy in 1999. For further discussion of the devaluation and its
impact on Global, see Note 5 in Notes to Consolidated Financial Statements.
Further augmenting EBIT was an increase in revenues from generation facilities
in the United States totaling $8 million due to enhanced performance of these
facilities. Other income at Global increased approximately $29 million from a
loss of $1 million to income of $28 million, due primarily to the sale of a 50%
interest in a cogeneration facility in New Jersey yielding a pre-tax gain of $69
million. This was partially offset by a loss on the write-down and subsequent
sale of an interest in a development company in Thailand totaling $8 million and
a one-time adjustment totaling $36 million to write down the carrying value of
other equity investments to recognize a permanent loss of value.
Global's EBIT contribution increased $26 million for the year ended
December 31, 1998 as compared to 1997, primarily due to increased revenues of
$33 million. Revenue improvement was primarily due to the additional revenue
from investments made in three Latin American distribution companies in 1997.
The increase in operating expenses from $46 million to $51 million was primarily
caused by higher expenses associated with the development of projects. Other
income/(loss) decreased from income of $1 million to a loss of $1 million
primarily due to a foreign currency gain of $1 million recorded in 1997 as
compared to a loss of $3 million recorded in 1998 related to the consolidated
non-recourse debt noted above. In addition, 1998 included a net pre-tax gain of
$2 million from the sale of partnership interests in four generation facilities.
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,
- ----------------- ----------------------------
1999 1998 1997
---- ---- ----
(Millions of Dollars)
Revenues ............................... $179 $145 $144
Expenses ............................... 10 10 10
---- ---- ----
Operating Income ....................... 169 135 134
Other Income ........................... -- -- --
--- ---- ----
EBIT ................................... $169 $135 $134
==== ==== ====
Resources EBIT contribution increased $34 million from $135 million to
$169 million for the year ended December 31, 1999 as compared to 1998 primarily
due to higher leveraged lease income of $36 million from the continued
investment by Resources in such financing transactions. Further augmenting
revenues were higher investment gains from the sale of properties subject to
leveraged lease and the sale of securities in leveraged buyout funds totaling
$19 million. Offsetting the above benefits were lower interest and dividend
income of $8 million due to the further liquidation of securities in the
leveraged buyout funds and lower income from partnership investments of $12
million due to the continued liquidation of such investments.
Resources' EBIT contribution increased $1 million for the year ended
December 31, 1998 as compared to 1997 due to an increase in revenues. Resources'
revenues increased $1 million primarily due to an increase of $19 million in
lease revenues from the addition of leveraged lease investments to the portfolio
and the sale of an asset subject to a leveraged lease resulting in an $8 million
gain. This
25
<PAGE>
increase was offset by lower revenues of $26 million from the restatement of two
leveraged lease investments in real estate recognized in 1998 due to the decline
in market values of the underlying property subject to leveraged lease. Revenues
from investments in limited partnership interests in leveraged buyout funds and
other limited partnership interests in project financing transactions remained
constant over the period.
Energy Technologies
Energy Technologies derives its revenues from the sale of energy-related
equipment and services. Prior to 2000, it also derived revenue from the sale of
natural gas and electricity.
Summary Results -
Energy Technologies Years Ended December 31,
- ------------------ ----------------------------
1999 1998 1997
---- ---- ----
(Millions of Dollars)
Revenues ................................. $297 $171 $104
Expenses ................................. 305 187 129
---- ---- ----
Operating Loss ........................... (8) (16) (25)
Other Income (Loss) ...................... -- -- --
---- ---- ----
EBIT ..................................... $ (8) $ (16) $ (25)
==== ===== =====
Energy Technologies EBIT contribution increased $8 million from ($16)
million to ($8) million for the year ended December 31, 1999 as compared to
1998. The improvement was primarily due to the addition of EBIT contribution
from the acquisition of six HVAC and mechanical service contractors in 1999.
Revenues increased $126 million from $171 million to $297 million, while related
operating expenses increased $118 million from $187 million to $305 million.
Energy Technologies' EBIT contribution increased $9 million for the year
ended December 31, 1998 as compared to 1997 primarily due to improved operating
results of $7 million in the existing businesses. The improvement was also due
to the addition of EBIT contribution from the January 1998 acquisition of a
mechanical contracting firm that added $58 million in revenue and $55 million in
expenses.
Other
Other includes primarily EBIT from EGDC. In 1999, EGDC recognized a
pre-tax charge of approximately $11 million to recognize a write-down to net
realizable value of a property pending sale. 1998 EBIT reflects a non-recurring
charge at Energy Holdings related to taxes incurred as a result of Energy
Holdings' previous interest in EDC. In 1997, EGDC recognized a pre-tax charge of
approximately $10 million to reflect a decline in market values of certain
properties in the portfolio pending sale. See Note 11 in Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
It is intended that Global and Resources provide earnings and cash flow
for long-term growth for Energy Holdings. Resources' investments are designed to
produce immediate cash flow and earnings that enable Global and Energy
Technologies to focus on longer investment horizons. During the next five years,
Energy Holdings will need significant capital to fund its planned growth.
Capital is expected to be provided from additional debt financing, equity from
PSEG and operating cash flows.
26
<PAGE>
Energy Holdings' cash provided by (used in) operating, investing and
financing activities was as follows:
Years Ended December 31,
----------------------------
1999 1998 1997
---- ---- ----
(Millions of Dollars)
Operating Activities
Normal .................................. $ 92 $ 53 $ 70
Non-recurring (A) ...................... -- -- 67
----- ------ ------
Total Operating Activities ........... $ 92 $ 53 $ 137
===== ====== =====
Investing Activities .................... $(960) $(160) $(998)
----- ------ -----
Total Investing Activities ........... $(960) $(160) $(998)
===== ===== =====
Financing Activities
Debt .................................. 731 $(311) $ 648
Equity ................................ 171 416 75
----- ----- -----
Total Financing Activities ........... $ 902 $ 105 $ 723
===== ===== =====
- ----------
(A) In 1997 Resources received additional cash from income tax benefits related
to tax deductions deferred in earlier years as a result of PSEG previously
paying Alternative Minimum Tax. These benefits had been deferred by
Resources due to the overall consolidated position of the PSEG tax filing
group which did not permit the full recognition of the tax deductions
associated with the leases in the tax return. The aggregate amount of cash
received related to such deferrals that is included in the operating cash
flow for 1997 noted above was approximately $67 million. Energy Holdings
does not anticipate that this situation will occur in the future.
Operating Activities
Cash flow from operating activities increased $39 million from $53 million
to $92 million for the year ended December 31, 1999 as compared to 1998
primarily due to increased cash generation at PSEG Resources. Approximately $21
million was due to increased cash generation from new investments as well as the
addition of cash flow from existing investments. Cash paid for interest expense
decreased $19 million due to the refinancing of approximately $509 million of
outstanding debt with preferred stock in 1998 and additional contribution of
capital of approximately $200 million from PSEG in June of 1999.
Cash flow from operating activities decreased $84 million in 1998 as
compared to 1997 primarily due to a reduction in Resources' cash flow from the
leveraged lease portfolio of $67 million related to the previous deferral of tax
deductions as a result of PSEG's consolidated tax position noted above. In
addition, cash generation at Resources was affected by the termination of a
leveraged lease at a taxable gain resulting in an increase in the current income
tax liability of approximately $38 million as noted above. Cash paid for
interest expense increased by $24 million in 1998 due to higher average debt
outstanding resulting from 1997 and 1998 investing activity partially offset by
lower interest rates. The above reductions were partially offset by overall net
improvement in cash generation by Energy Holdings' subsidiaries aggregating
approximately $38 million primarily from improvement in the cash generation of
existing investments as well as the addition of cash generation from new
investments.
Investing Activities
In 1999, Global invested approximately $536 million to acquire interests
in two energy distribution companies in Chile and Peru. Of the total capital
invested, $160 million was financed with project debt consolidated on the
balance sheet which is non-recourse to Global and Energy Holdings. Global also
invested approximately $237 million for construction of generation projects in
the United States, Venezuela, China, India, Tunisia and Italy. 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 generations 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 $63
million.
In August 1999, Global sold its interest in the Newark Bay cogeneration
facility and received net cash proceeds of approximately $69 million. Also in
1999, Resources received net cash proceeds of approximately $126 million from
early buyouts of leveraged leases of generation stations and an office building.
27
<PAGE>
In 1998, Global invested approximately $74 million to acquire a 30%
interest in an electric distribution system in Argentina and a 20% interest in a
generation project in India. In addition, Global sold its partnership interests
in four generation facilities for approximately $137 million. Resources invested
approximately $251 million in five leveraged leases of energy-related assets and
received proceeds of $59 million from the exercise of an early buyout option by
the lessee in a leveraged lease. Energy Technologies acquired one mechanical
service contracting firm at a total cost of $10 million.
In 1997, Global invested in two electric distribution companies in
Argentina and one in Brazil at a total cost of approximately $721 million, of
which approximately $233 million was financed with debt consolidated on the
balance sheet which is non-recourse to Global and Energy Holdings. In addition,
Global invested approximately $133 million in generation projects primarily
located in China, Colombia and the United States. The investment in Colombia was
subsequently sold in 1998 for $55 million, which was equal to Global's equity
invested in the project. In 1997, Resources entered into four leveraged lease
transactions of power plants, one located in the United Kingdom and three in the
Netherlands, for a total cost of approximately $145 million.
Financing Activities
During 1999, PSEG contributed approximately $200 million of additional
equity to Energy Holdings, the proceeds of which were used to pay down
short-term debt. In addition, Energy Holdings received proceeds from new debt
issuances totaling approximately $572 million primarily to fund new investment
activity for Global, Resources and Energy Technologies. At December 31, 1999,
Energy Holdings' consolidated capital structure consisted of 28% common equity,
17% preferred stock and 55% debt. Approximately $327 million, or 11%, of Energy
Holdings' total invested capital represented debt consolidated on the balance
sheet that is non-recourse to Global and Energy Holdings.
In January, June and July 1998, PSEG invested $217 million, $147 million
and $145 million, respectively, in Energy Holdings which issued to PSEG like
amounts of its 5.01%, 4.80% and 4.875% Cumulative Preferred Stock. The proceeds
were used primarily to retire debt of Energy Holdings, and to retire all of the
$75 million of 4.10% Cumulative Preferred Stock issued to PSEG in October 1997.
The average dividend rate of all Cumulative Preferred Stock is 4.9%.
In 1997, Energy Holdings, through PSEG Capital and another financing
subsidiary, Enterprise Capital Funding Corporation (Funding), issued net new
debt of $417 million primarily to fund new investment activity by Global and
Resources. In October 1997, Energy Holdings received approximately $75 million
from the issuance of 4.10% Cumulative Preferred Stock to PSEG. The proceeds were
used to partially fund Global's investment in a Brazilian distribution company.
Capital Requirements
Energy Holdings plans to continue the growth of Global and Resources.
Energy Holdings will assess the growth prospects and opportunities for Energy
Technologies' business before committing substantial amounts of additional
capital. In 1999, Energy Holdings' subsidiaries made investments totaling
approximately $1.2 billion. These investments included leveraged lease
investments totaling $380 million by Resources and the acquisition by Global of
interests in distribution companies in Chile and Peru. Global's investment in
such assets totaled $536 million, including fees and closing costs and $160
million of debt consolidated on Energy Holdings' balance sheet that is
non-recourse to Global and Energy Holdings. Investment expenditures for 2000 are
expected to be approximately $700 million, comprised of investments in
generation and distribution facilities and projects and leveraged lease
transactions. Investment activity in 2000 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, including the notes.
Over the next several years, Energy Holdings, certain of its project
affiliates and PSEG Capital 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 Energy Holdings' financial condition, results of operations and net
cash flows.
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<PAGE>
Capital resources and investment requirements may be affected by the
outcome of the proceedings being conducted by the BPU pursuant to the Energy
Master Plan and Energy Competition Act and the requirements of the Focused
Audit. As a result of the final outcome of such proceedings and accounting
impacts resulting from the deregulation of the generation of electricity and the
unbundling of the utility business in New Jersey, Energy Holdings does not
believe that the Focused Audit provision requiring notification of the BPU if
PSEG's non-utility assets exceed 20% of its consolidated assets remains
appropriate and believes that modifications will be required. On August 24,
1999, the BPU issued its Final Order in the matter of Public Service Electric
and Gas Company's rate unbundling, stranded costs and restructuring filings.
Appeals filed on behalf of several Public Service Electric and Gas Company
customers are pending at the Appellate Division of the New Jersey Superior
Court. The Final Order directed Public Service Electric and Gas Company to file
a petition with the BPU to maintain the existing regulatory parameters or to
propose modifications to the Focused Audit order no later than the end of the
first quarter of 2000. In March 2000, Public Service Electric and Gas Company
submitted a letter to the BPU as its initial compliance with this filing
requirement, in which it notified the BPU of its intention to make a filing to
modify the terms of the Focused Audit within 120 days after the Final Order
becomes final and non-appealable. Regulatory oversight by the BPU to ensure that
there is no harm to utility ratepayers from PSEG's non-utility investments is
expected to continue. Energy Holdings believes that these issues will be
satisfactorily resolved, although no assurances can be given. Inability to
achieve satisfactory resolution of these matters could impact the future size
and financing activities of Energy Holdings and, accordingly, Energy Holdings'
future prospects, including financial condition, results of operations and net
cash flows. Energy Holdings does not believe that its ability to service its
debt, including the Exchange Notes, would be impaired in such circumstances,
although no assurances can be given.
In addition, if PSEG were no longer to be exempt under PUHCA, PSEG and its
subsidiaries would be subject to additional regulation by the SEC with respect
to financing and investing activities, including the amount and type of
non-utility investments. We believe that this would not have a material adverse
effect on our company. See "Business -- Regulation".
External Financings
In May 1999, Energy Holdings closed on 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 $165 million, 364 day
revolving credit facility. The interest rate on these facilities is based on
LIBOR and the average borrowing rate at Energy Holdings current rating level is
1.375% over the one, three or six month LIBOR rate. Interest payments on
LIBOR-based loans are paid on the last day of each quarter. The revolving credit
facilities also permit shorter term base rate borrowings at the prime rate.
Interest on the base rate loans is paid when the loan is repaid. The five year
facility also permits up to $250 million of letters of credit to be issued. The
five year facility matures on May 12, 2004 and the 364 day facility matures on
May 12, 2000. We expect to roll over the 364 day facility on the same terms for
an additional 364 days. These facilities replaced revolving credit facilities
totaling $450 million at Funding, a financing subsidiary of Energy Holdings
which is not expected to be active in the future.
Financial covenants contained in the new 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, as at the end of any quarterly
financial period, shall not be greater than 0.60 to 1.00. This ratio is
calculated by dividing the total recourse indebtedness of Energy Holdings by the
total recourse capitalization. This ratio excludes the debt of PSEG Capital
which is supported by PSEG. As of December 31, 1999, the latest 12 months CFADS
coverage ratio was 10.1x, and the ratio of recourse indebtedness to recourse
capitalization was 0.34 to 1.00.
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<PAGE>
Compliance with applicable financial covenants will depend upon Energy
Holdings' future financial position and the level of earnings and cash flow, as
to which no assurances can be given. In addition, Energy Holdings' ability to
continue to grow its business will depend to a significant degree on PSEG's
ability to access capital and Energy Holdings' ability to obtain additional
financing beyond current levels. At December 31, 1999, Energy Holdings had $351
million outstanding under existing revolving credit facilities.
In October 1999, Energy Holdings, in a private placement, issued $400
million of its 10% senior notes due 2009. These are the original notes for which
the exchange notes are being offered for the exchange by means of this
prospectus. Interest is payable semi-annually on April 1 and October 1,
commencing April 1, 2000. The net proceeds from the sale were used for the
repayment of short-term debt outstanding under Energy Holdings' revolving credit
facilities.
In February 2000, Energy Holdings, in a private placement, issued $300
million of 91/8% senior notes due 2004. The proceeds of the sale were used for
repayment of short-term debt outstanding under Energy Holdings' credit
facilities.
In September 1999 and February 2000, Energy Holdings entered into two
standby letter of credit agreements with a group of banks in the aggregate
principal amount of $340 million to support equity contribution obligations of
Global with respect to two of its investments. These agreements contain
identical financial covenants to those in our revolving credit facilities.
The availability and cost of external capital could be affected by the
performance of Energy Holdings and PSEG's other subsidiaries and by any actions
ultimately taken by the BPU and PSEG in response to the proceedings discussed
above. They could also be affected by rating agencies' views of such matters,
including the degree of structural or regulatory separation between Public
Service Electric and Gas Company and its non-utility affiliates and the
potential impact of affiliate ratings on the consolidated credit quality of PSEG
and other rated affiliates.
The minimum net worth maintenance agreement between PSEG Capital and PSEG
provides, among other things, that PSEG (1) maintain its ownership, directly or
indirectly, of all outstanding common stock of PSEG Capital, (2) cause PSEG
Capital to have at all times a positive tangible net worth of at least $100,000
and (3) make sufficient contributions of liquid assets to PSEG Capital in order
to permit it to pay its debt obligations. In 1993, in connection with the
Focused Audit, PSEG agreed with the BPU to make a good faith effort to eliminate
such PSEG support within six to ten years. Effective January 31, 1995, PSEG
Capital notified the BPU of its intention not to have more than $650 million of
debt outstanding at any time. PSEG Capital has a $650 million MTN program which
provides for the private placement of MTNs.
PSEG Capital's assets consist principally of demand notes of Global and
Resources. Intercompany borrowing rates are established based upon PSEG
Capital's cost of funds. At December 31, 1998, PSEG Capital had total debt
outstanding of $498 million, all of which was comprised of MTNs. In March and
June 1999, PSEG Capital issued $252 million of 6.25% MTNs due May 2003 and $35
million of 6.73% MTNs due June 2001, respectively. The proceeds were used to
repay $100 million of PSEG Capital MTNs which matured in February 1999 and $35
million which matured in May 1999 and to reduce Energy Holdings' short-term
debt. At December 31, 1999, total debt outstanding under the MTN program was
$630 million, maturing from 2000 to 2003. Energy Holdings believes it is capable
of eliminating PSEG support of PSEG Capital debt within the time period set
forth in the Focused Audit.
For a discussion of non-recourse debt of Global, See Note 8 in Notes to
Consolidated Financial Statements.
Qualitative and Quantitative Disclosures About Market Risk
The risk inherent in Energy Holdings' 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. Energy Holdings' policy is to use financial
instruments to manage risk consistent with its business plans and prudent
practices. PSEG has a Risk Management Committee comprised of executive officers,
which utilizes an independent risk oversight function to ensure compliance with
corporate policies and prudent risk management practices for all of its
subsidiaries, including Energy Holdings and its subsidiaries.
30
<PAGE>
Energy Holdings is exposed to credit losses in the event of nonperformance
or nonpayment by counterparties. Energy Holdings has 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 Energy Holdings' financial condition, results of
operations and net cash flows.
Commodities
During the year ended December 31, 1999, Energy Technologies entered into
futures contracts to buy natural gas and electricity related to fixed-price
sales commitments. Such contracts hedged approximately 64% and 85% of its fixed
price natural gas and electric sales commitments, respectively at December 31,
1999. As of December 31, 1999 and 1998, Energy Technologies had a net unrealized
hedge loss of $0.1 million and $5 million, respectively, related to its electric
and gas hedges.
Energy Technologies uses a value-at-risk model to assess the market risk
of its commodity business. This model includes fixed price sales commitments and
financial derivative instruments. Value-at-risk represents the potential gains
or losses for the portfolio due to changes in market factors, for a specific
time period and a given confidence level. The methodology used to measure the
value-at-risk is the variance/co-variance model based on historical volatility
and correlation, a 95% confidence level and a one-week holding period. The
measured value-at-risk was approximately $990,000 at December 31, 1999 compared
to the December 31, 1998 level of approximately $400,000 due primarily to higher
natural gas price volatility and greater sales volume. Energy Technologies'
calculated value-at-risk exposure represents an estimate of potential net losses
that could be recognized on its portfolio of physical and financial derivative
instruments assuming historical movements in future market rates. These
estimates, however, are not necessarily indicative of actual results which may
occur, since actual future gains and losses will differ from those historical
estimates based upon actual fluctuations in market rates, operating exposures,
and the timing thereof, and changes in Energy Technologies' portfolio of hedging
instruments during the year.
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 as of the reporting date.
Consequently, the carrying value of these investments is affected by changes in
the fair value of the underlying securities. Fair value is determined by
adjusting the market value of the securities for liquidity and market volatility
factors, where appropriate. The aggregate fair values of such investments which
had available market prices at December 31, 1999 and December 31, 1998 were $131
million and $204 million, respectively. A sensitivity analysis has been prepared
to estimate Energy Holdings' 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 amounted to $11 million as of December
31, 1999.
Interest Rates
Energy Holdings is subject to the risk of fluctuating interest rates in
the normal course of business. Energy Holdings' policy is to manage interest
rates through the use of fixed rate debt, floating rate debt and interest rate
swaps. As of December 31, 1999, a hypothetical 10% change in market interest
rates would result in a $2 million change in interest costs related to
short-term and floating rate debt.
Global has $67 million of consolidated project debt associated with the
investment in two Argentine distribution companies that is non-recourse to
Global and Energy Holdings. The debt was refinanced in June 1999 for a term of
one year. An interest rate swap was entered into which effectively converts a
portion of the floating rate obligation into a fixed rate obligation. The
interest rate differential to be received or paid under the agreement is
recorded over the life of the agreement as an adjustment to interest expense.
See Note 8 in Notes to Consolidated Financial Statements.
Foreign Operations
In accordance with their growth strategies, Global and Resources have
approximately $1.4 billion and $1.0 billion, respectively, of international
investments as of December 31, 1999. These investments
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<PAGE>
represented 59% of Energy Holdings' consolidated assets. Resources'
international investments are primarily leveraged leases of assets located in
the Netherlands, Germany, Australia and the United Kingdom with associated
revenues denominated in United States Dollars and, therefore not subject to
foreign currency risk.
Global's international investments are primarily in projects that
currently, or upon completion will, distribute or generate electricity in
Argentina, Brazil, Chile, China, India, Italy, Peru, Poland, Tunisia and
Venezuela. Investing in foreign countries involves certain risks. Economic
conditions that result in higher comparative rates of inflation in foreign
countries likely result in declining values in such countries' currencies. As
currencies fluctuate against the United States Dollar, there is a corresponding
change in Global's investment value in terms of the United States Dollar. Such
change is reflected as an increase or decrease in comprehensive income, a
separate component of stockholder's equity. Net foreign currency devaluations
have reduced the reported amount of Global's total stockholder's equity by $200
million, $170 million of which was caused by the devaluation of the Brazilian
Real, as of December 31, 1999. In January 1999, Brazil abandoned its managed
devaluation strategy and allowed its currency, the Real, to float against other
currencies. As of December 31, 1999, the Real had devalued approximately 33%
against the United States Dollar since December 31, 1998, affecting the carrying
value of Global's investment in a Brazilian distribution company. For additional
information, see Note 16 in Notes to Consolidated Financial Statements.
Higher comparative rates of inflation in foreign economies also means that
borrowing costs in local currency will be higher than in the United States. When
warranted, Global has financed certain foreign investments with United States
Dollar denominated debt. While less costly to service in terms of United States
Dollars, such debt is exposed to currency risk because a devaluation would cause
repayment to be more expensive in local currency terms since more units of local
currency would be required to repay the debt. United States Dollar denominated
debt was incurred by Global in Argentina, Chile and Peru to finance the
acquisition of interests in rate regulated distribution entities. These entities
may be able to recover higher costs incurred as a result of a devaluation
specifically through the terms of the concession agreement, or as a pass through
of higher inflation costs in rates over time although no assurances can be given
that this will occur. In evaluating its investment decisions, Global considers
the social, economic, political and currency risks associated with each
potential project and, if warranted, assumes a certain level of currency
devaluation when making its investment decisions. In Argentina, the currency is
pegged 1:1 with the United States Dollar, and a legislative act is required to
de-couple the currency from the Dollar.
Global had consolidated debt totaling $90 million as of December 31, 1999
that is non-recourse to Global and Energy Holdings associated with an investment
in the Brazilian distribution company noted above. The debt is denominated in
the Brazilian Real and is indexed to a basket of currencies, approximately 50%
of which is the United States Dollar. As a result, Global is subject to foreign
currency exchange rate risk which would result from exchange rate movements
between the indexed foreign currencies and the United States Dollar. Exchange
rate changes ultimately impact the debt level outstanding in the reporting
currency and result in foreign currency gains or losses in accordance with
generally accepted accounting principles (GAAP). Any related gains or (losses)
resulting from such exchange rate movements are included in net income for the
period, and amounted to a gain of $3 million and a loss of $3 million for the
years ended December 31, 1999 and 1998, respectively.
Energy Holdings cannot predict foreign currency exchange rate movements
and, therefore, cannot predict the impact of such movements on Energy Holdings'
financial condition, results of operations and net cash flows.
Year 2000 Disclosure
Many of Energy Holdings' systems, which include information technology
applications, plant control and telecommunications infrastructure systems, were
modified due to computer program limitations in recognizing dates beyond 1999.
Energy Holdings has had a formal project in place since 1997 to address Year
2000 issues. All mission critical systems were ready before January 1, 2000.
Energy Holdings' and its subsidiaries did not experience any major problems or
Year 2000-related service interruptions as their systems rolled over from 1999
to 2000. Energy Holdings' and its subsidiaries expect most material Year 2000
compliance problems would have arisen on or shortly after January 1,
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<PAGE>
2000. To date, Energy Holdings' and its subsidiaries are not aware of any
material Year 2000-related problems associated with their internal systems or
software or with the software and systems of their vendors, distributors or
suppliers. Although not expected by Energy Holdings and its subsidiaries, it is
possible that Year 2000-related problems may arise.
Energy Holdings has no outstanding litigation relating to Year 2000
issues. The likelihood of future Year 2000 related liabilities cannot be
determined at this time.
Energy Holdings estimates the total cost related to Year 2000 readiness
will approximate $5.3 million, to be incurred through 2001, of which $150,000
was incurred in 1997, $1.1 million was incurred in 1998 and approximately $3.7
million was incurred in 1999. A portion of these costs is not likely to be
incremental to Energy Holdings, but rather, represents a redeployment of
existing personnel/resources and its share of partnership assets. Energy
Holdings' and its subsidiaries expect that expenses related to remediating any
remaining noncompliant non-critical systems will not be material.
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, New Jersey, Pennsylvania and Texas), Argentina,
Brazil, Chile, China, India, Italy, Peru, Poland, 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 and
Energy Technologies pursue new opportunities, they will be required to comply
with applicable environmental laws and regulations.
Global and Energy Technologies attempt 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 Energy
Holdings' financial condition, results of operations and net cash flows would
not be materially and adversely affected. Energy Holdings is committed to
operating its businesses cleanly, safely and reliably and strives 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 Energy Holdings' financial condition, results of operations
and net cash flows.
We do not anticipate any material unbudgeted capital expenditures for
environmental control facilities or in connection with compliance with federal,
state or local environmental laws and regulations in 2000 or 2001 or in
connection with the generation projects currently in construction or advanced
development. We do not believe that compliance with federal, state and local
environmental laws and regulations will have a material adverse effect on our
financial condition, results of operations and net cash flows.
Accounting Issues
For a discussion of significant accounting matters, see Notes 2 and 17 in
Notes to Consolidated Financial Statements.
Impact of New Accounting Pronouncements
For a discussion of the impact of new accounting pronouncements including
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), SOP 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5), SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137),
see Note 17 in Notes to Consolidated Financial Statements.
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<PAGE>
BUSINESS
ENERGY HOLDINGS
We participate in three energy-related lines of business through our
wholly-owned subsidiaries: Global, Resources and Energy Technologies. Together,
these operating subsidiaries have more than 90 financial and operating
investments. We seek to pursue investment opportunities in the rapidly changing
global energy markets, with Global and Energy Technologies focusing on the
operating segments of the electric and gas industries and Resources seeking to
make financial investments in these industries.
We have developed a portfolio of investments which supports long-term
growth with near-term earnings. We balance risk, return, timing of cash flow and
growth objectives in creating a complementary blend of investments. Resources'
investments generate cash flow and earnings in the near term, while investments
at Global and Energy Technologies generally have a longer time horizon prior to
achieving expected cash flow and earnings. Also, Resources' passive lower-risk
investments balance the higher risk associated with operating investments at
Global and Energy Technologies.
Our portfolio is diversified by number, type and geographic location of
investments. As of December 31, 1999, our assets were comprised of the following
types of investments.
Assets
------
Leveraged Leases ......................... 43%
Other Passive Financial Investments ...... 8%
Domestic Generation Plants ............... 5%
International Generation Plants .......... 7%
International Distribution Facilities .... 28%
Energy Services .......................... 6%
Other .................................... 3%
The characteristics of each of these investment types are described in
more detail below.
We are a direct, wholly-owned subsidiary of PSEG and an affiliate of
Public Service Electric and Gas Company, a public utility operating in New
Jersey, which is also a wholly-owned subsidiary of PSEG. As of December 31,
1999, PSEG had approximately $1.4 billion of equity (including retained earnings
of approximately $276 million) invested in our company.
GLOBAL
Strategic Overview
Global's goal is to develop, own and operate electric generation and
distribution facilities in selected high-growth areas of the worldwide energy
market. In carrying out its strategy, Global's assessment of potential
opportunities includes a multi-faceted analysis of the resident country,
potential partners and transaction economics. Global identifies target markets
based on economic fundamentals, including expected growth of electricity
consumption, evaluation of the social, political and regulatory climate, and the
opportunities for participation by private power developers. Following the
identification of target market prospects, Global evaluates the possibility of
utilizing partners with local contacts and complementary expertise. Global will
consider investments or projects in which it is the sole or a majority owner if
justified by strategic considerations, anticipated returns and other factors.
Global then focuses on projects which meet or exceed its specified risk-adjusted
rate of return and which present potential synergies with existing projects or
anticipated future investments. As a result of the implementation of this
analytical approach, Global has developed or acquired interests in electric
generation and/or distribution facilities in the United States, Argentina,
Brazil, Chile, Peru, Venezuela and China. In addition, projects are in
construction or advanced development in the United States, Argentina, Venezuela,
India, Tunisia, China, Italy and Poland.
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Business Description
Global, formed in 1984 as an independent power producer and developer of
qualifying facilities (QFs) under the Public Utility Regulatory Policies Act of
1978 (PURPA), now develops, acquires, owns and operates electric generation and
distribution facilities and is engaged in power production and distribution,
including wholesale and retail sales of electricity, in selected domestic and
international markets.
Deregulation and privatization of energy markets, as well as growth in
electricity demand throughout the world, have provided the opportunity for
Global to expand the scope of its operations. Global has concentrated its
development activities on markets in which it believes most of the new worldwide
electric generating capacity will be installed in the next five years: China,
India, the Middle East, Latin America and selected regions in the United States
and Europe. Global has established a presence in these high growth markets in
order to access and better evaluate potential investment opportunities.
Global has ownership interests in 19 operating generation projects
totaling 2,026 MW (544 MW net) and 17 projects totaling 4,808 MW (2,245 MW net)
in construction or advanced development. Of Global's generation projects in
operation, construction or advanced development, 1,294 MW net or 46% are located
in the United States. Global is actively involved, through its joint ventures,
in managing the operations of eight operating generation projects and will be
actively involved in managing the operations of five of the projects in
construction or advanced development. Global owns interests in six distribution
companies providing electricity to over 2.7 million customers in Argentina,
Brazil, Chile and Peru. Global is actively involved in managing the operations
of these distribution companies in accordance with shareholder agreements and/or
operating contracts. As of December 31, 1999, Global had assets of approximately
$1.7 billion.
Global focuses on multiple project acquisitions or development in a
particular geographic area in order to minimize development and operating costs
and maximize the value of existing and planned investments. By investing in both
generation and distribution facilities, Global seeks to balance revenue and cost
volatility associated with generation plants with the stability of
rate-regulated revenues from distribution facilities. Global will seek
opportunities to divest assets which are no longer strategically important or do
not achieve profitability objectives.
Generation
When assessing generation development and acquisition opportunities,
Global identifies regions that demonstrate a need for energy infrastructure and
prospects for incremental growth that Global believes will withstand potential
short-term economic turbulence. Global expects that most of its new generation
investments will be in international markets due to the current and anticipated
growth in required electric generating capacity in the regions in which it
maintains a presence.
Global seeks to minimize risk in the development and operation of its
projects by selecting partners with complementary skills, structuring long-term
power purchase contracts, arranging financing prior to the commencement of
construction and contracting for adequate fuel supply. Historically, Global's
operating affiliates have entered into long-term power purchase contracts,
selling the electricity produced for the majority of the project life.
Fuel supply arrangements are designed to balance long-term supply needs
with price considerations. Global's project affiliates utilize long-term
contracts and spot market purchases. Global believes that there are adequate
fuel supplies for the anticipated needs of its generating projects. Global also
believes that transmission access and capacity are sufficient at this time for
its generation projects.
It is Global's policy to limit its financial exposure to each project and
to mitigate development and operating risk, including fuel and foreign currency
exposure, through contracts. In addition, the project loan agreements are
structured on a non-recourse basis. Further, Global structures project financing
so that a default under one project's loan agreement will have no effect on the
loan agreements of other projects or the debt of Energy Holdings.
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<PAGE>
GENERATION FACILITIES
<TABLE>
<CAPTION>
Global's
Net Equity
Global's Interest in
Total Ownership Total
Location Primary Fuel MW Interest MW
-------- ------------ ----- --------- -----------
<S> <C> <C> <C> <C> <C>
Operating Power Plants
- ----------------------
United States
- -------------
Eagle Point ............................. NJ Natural gas 225 50% 113
Kalaeloa ................................ HI Oil 180 50% 90
GWF
Bay Area I ........................ CA Petroleum coke 21 50% 10
Bay Area II ....................... CA Petroleum coke 21 50% 10
Bay Area III ...................... CA Petroleum coke 21 50% 10
Bay Area IV ....................... CA Petroleum coke 21 50% 10
Bay Area V ........................ CA Petroleum coke 21 50% 10
Hanford ................................. CA Petroleum coke 27 50% 14
Tracy ................................... CA Biomass 21 35% 7
Bridgewater ............................. NH Biomass 16 40% 7
SEGS III ................................ CA Solar 30 9% 3
Kennebec ................................ ME Hydro 15 16% 2
Conemaugh ............................... PA Hydro 15 50% 8
----- ----
Total United States 634 294
International
- -------------
CTSN .................................... Argentina Coal/Natural gas/Oil 650 19% 124
MPC
Jingyuan - Units 5 and 6 .......... China Coal 600 15% 90
Jinqiao (Thermal Energy) .......... China Coal/Oil N/A 30% N/A
Tongzhou .......................... China Coal 30 40% 12
Zuojiang - Units 1, 2 and 3 ....... China Hydro 72 30% 21
TGM ..................................... Venezuela Natural gas 40 9% 3
----- -----
Total International 1,392 250
----- -----
Total Operating Power Plants 2,026 544
----- -----
</TABLE>
<TABLE>
<CAPTION>
In Service
Date
----------
Power Plants in Construction or Advanced Development
- ----------------------------------------------------
Turboven
<S> <C> <C> <C> <C> <C> <C>
Maracay ........................... Venezuela Natural gas 60 50% 30 2000
Cagua ............................. Venezuela Natural gas 60 50% 30 2000
Valencia .......................... Venezuela Natural gas 80 50% 40 2001
MPC
Shanghai BFG ...................... China Blast furnace gas 50 16% 8 2000
Fushi ............................. China Hydro 54 35% 19 2000
Nantong ........................... China Coal 24 46% 11 2000
Texas Independent Energy, L.P.
Guadalupe ......................... Texas Natural gas 1,000 50% 500 2000
Odessa ............................ Texas Natural gas 1,000 50% 500 2001
Prisma 2000
Crotone ........................... Italy Biomass 20 70% 14 2001
Bando ............................. Italy Biomass 20 70% 14 2001
Strongoli ......................... Italy Biomass 40 70% 28 2002
Porto Empedocle ................... Italy Biomass 24 70% 17 2002
Parana .................................. Argentina Natural gas 830 33% 274 2001
Rades ................................... Tunisia Natural gas 471 35% 165 2001
PPN ..................................... India Naptha/Natural gas 330 20% 66 2001
Tri-Sakthi .............................. India Coal 525 63% 331 2003
Chorzow ................................. Poland Coal 220 90% 198 2003
----- -----
Total Construction or Advanced Development 4,808 2,245
----- -----
TOTAL GENERATION FACILITIES 6,834 2,789
===== =====
</TABLE>
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<PAGE>
Domestic Generation in Operation
All of Global's domestic operating generation facilities were developed as
QFs under PURPA and have power purchase contracts for their output with the
local utility companies. As a result of QF requirements, Global is limited to
50% ownership or less of these facilities.
Eagle Point
The Eagle Point Power Plant is a 225 MW gas-fired combined-cycle facility
located in West Deptford, New Jersey. Approximately 90% of the electricity
generated by the Eagle Point Power Plant is sold to Public Service Electric and
Gas Company under a 25-year power purchase contract terminating in May 2016. The
balance of the electricity generated is sold to Coastal Eagle Point Oil Company
along with approximately 575,000 lbs./hr of steam under a 20-year contract
terminating in May 2011. Global and its partner, ANR Venture Eagle Point
Company, a subsidiary of The Coastal Corporation, each own 50% of the facility.
The plant has been in commercial operation since May 1991. In 1999, the Eagle
Point Power Plant generated approximately 1,779 gigawatt hours (GWH) of electric
energy and approximately $131 million of gross revenue. The plant availability
factor for 1999 was 98%.
Kalaeloa
The Kalaeloa Power Plant is a 180 MW oil-fired cogeneration plant located
at Barbers Point, Oahu, Hawaii, which began operating in April 1990. Global
purchased a 49% limited partnership interest in the facility in 1997 and a 1%
general partnership interest in April 2000. Global's partner is Harbert Power.
All of the electricity generated by the Kalaeloa Power Plant is sold to Hawaiian
Electric Company under a 25-year power purchase contract terminating in May
2016. Under a steam purchase and sale agreement expiring in May 2016, the
Kalaeloa Power Plant will supply approximately 121,000 lbs./hr. of steam to
Hawaiian Independent Refinery, Inc. In 1999, the plant generated approximately
1,350 GWH of electric energy for sale to Hawaiian Electric Company and
approximately $91 million of gross revenue. The plant availability factor in
1999 was 93%.
GWF and Hanford
Global and Harbert Power each own 50% of GWF, which owns and operates five
petroleum coke-fired power plants totaling 102.5 MW in the San Francisco Bay
area in California. Power purchase contracts for the plants' net output are in
place with Pacific Gas and Electric Company ending in 2020 and 2021. In 1999,
the plants generated 647 GWH of electric energy for sale to Pacific Gas and
Electric Company and approximately $116 million of gross revenue. The plants
went into service between October 1989 and December 1990. The average
availability factor of the five plants in 1999 was 82%.
Global and Harbert Power each own 50% of Hanford, which owns and operates
a 27 MW petroleum coke-fired facility in Hanford, California. A power purchase
contract for the plant's net output is in place with Pacific Gas and Electric
Company through 2011. In 1999, the Hanford plant generated 160 GWH of electric
energy for sale to Pacific Gas and Electric Company and steam which was sold to
Pirelli-Armstrong Tire Corp. pursuant to a 20-year contract expiring in 2010.
The Hanford plant generated approximately $30 million of gross revenue in 1999
and had an availability factor of 81%.
Power from the California facilities is sold pursuant to Pacific Gas and
Electric's Standard Long-Term Energy and Capacity Power Purchase Agreements
(SO4). Power has been sold at fixed rates for energy and capacity. Beginning in
2000, energy prices under such contracts will be reduced from the current fixed
rates to short-run avoided costs energy prices approved by the California Public
Utilities Commission. As a result, Global's revenues from its investments in
California are expected to decrease. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview and Future
Outlook".
Other minority investments held by Global in five domestic generation
facilities totaled 27 MW net and generated less than 5% of Global's total gross
revenues in 1999.
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International Generation in Operation
Global owns interests in operating generation facilities in Argentina,
China and Venezuela. Over the next five years, Global anticipates pursuing
additional opportunities resulting from its presence in these countries, as
warranted by local market considerations.
Argentina
CTSN
Central Termica San Nicolas (CTSN) is a 650 MW electric generation
facility located near the city of San Nicolas, Argentina that is 19% owned by
Global and 69% by The AES Corporation, with the remaining 12% owned by CTSN's
employees. CTSN was acquired in 1993 in conjunction with the initial Argentine
privatization process, and is the third largest thermal power plant in
Argentina, consisting of one 350 MW and four 75 MW steam turbines. CTSN, as the
only multi-fuel generation facility in Argentina, is capable of operating on
natural gas, oil or coal. At the time of privatization, CTSN's availability was
below 45%. The plant availability factor in 1999 was 66%.
The facility sells its output through a combination of spot market sales,
contracts with distributors and contracts with a wide variety of large or medium
sized industrial users. Approximately half of the output is sold pursuant to
power purchase contracts that expire in 2001. Upon expiration of its power
purchase contracts, Global expects that CTSN's output will be sold into the
merchant market. Although CTSN is an older facility and will face substantial
competition from more efficient plants, the facility has direct access by vessel
to its own port, rail and motorway, and is located in Argentina's industrial
belt on the Parana River. It is also situated near the Argentine natural gas
transportation system and is connected to the regional transmission lines which
provide access to the wholesale electricity market. In 1999, CTSN generated
2,241 GWH of electric energy. Experience gained through this investment led to
Global's subsequent investments in Argentine electric distribution systems and
the development of a new power plant adjacent to CTSN, as described below. See
"-- Power Plants in Construction or Advanced Development -- Argentina -- Parana"
and "-- Distribution -- Argentina -- EDEN, EDES, EDELAP".
China
Global's activities in China are exclusively conducted through Meiya Power
Company Limited (MPC), a joint venture with the Asian Infrastructure Fund (AIF)
and Hydro Quebec International (HQI). Global owns 50% of MPC, while AIF and HQI
own 30% and 20%, respectively. AIF is a private equity fund whose sponsors and
investors include Frank Russell Company, International Finance Corporation,
Asian Development Bank and Asian Infrastructure Development Fund.
As the result of its existing investments in China, MPC has established
relationships and partnerships with local authorities. Its focus has been on
investment opportunities in eastern China, where power demand is high and
cogeneration opportunities exist, central China, where heavy industry is located
and there are abundant supplies of coal, and northwest China, where power
shortages prevail and central government policy continues to support growth in
designated areas. MPC's strategy is to identify projects that are consistent
with central government policies, to pursue negotiated investment opportunities
rather than competitive bid situations and to seek projects with demonstrated
expansion possibilities.
MPC is focused on developing, acquiring, owning and operating electric
generation facilities in China and Taiwan. MPC seeks to structure long-term
power purchase contracts with its customers and to incorporate take-or-pay and
minimum take provisions to support debt service and a specified equity return.
Pricing terms for energy from its facilities generally include a base price and
indexed adjustments to compensate for changes in inflation, foreign currency
exchange rates up to the minimum equity return and laws affecting taxes, fees
and required reserves. MPC's projects, either under construction or in
operation, have obtained all required approvals to enable issuance of a business
license in their respective localities. As legal business entities, these
projects generally have access to foreign currency swap markets.
38
<PAGE>
Jingyuan
MPC, through a wholly-owned subsidiary, owns a 30% interest in Jingyuan
Units 5 and 6, two 300 MW mine-mouth coal-fired power plants located in Gansu
Province, China. The plants are 50% owned by the State Development Investment
Corporation, 15% by the Gansu Electric Power Construction Investment and
Development Co. and 5% by the Gansu Electric Power Company (GEPC), which is the
operator. GEPC has a take-or-pay power purchase contract for 22 years, ending in
2017. The power purchase contract provides for a minimum take of 5,500 hours,
supporting the debt service and a specified equity return. The contract provides
incentives for power taken above the minimum level. The minimum level was not
met in 1998 and 1999. Payment terms are being discussed between MPC and GEPC. In
addition, MPC is seeking final tariff approval for 1999 from the Provincial
Government. EnergyHoldings believes the impact of these matters will not have a
material adverse effect on it. The power contract provides for a pass through of
foreign currency debt service payments. Foreign currency protection of the
equity return resulting from the minimum take is covered under a separate
agreement with MPC's partner, the Gansu Electric Power Construction Investment
and Development Co. Equity return beyond the minimum take is exposed to foreign
currency fluctuations. MPC's investment consists of direct equity and
shareholder loans to the Jingyuan project. The shareholder loans were provided
in part by a non-recourse loan from international banks to a wholly-owned
subsidiary of MPC. This non-recourse loan totaled approximately $50 million and
will mature in 2006. The balance of the project debt was provided in local
currency by Chinese banks. The Jingyuan units have been in commercial operation
since October 1996 and October 1997, respectively. In 1999, the Jingyuan units
generated 2,637 GWH of electric energy and had an availability factor of 92%.
Jinqiao
MPC is a partner in the Meiya Jinqiao Energy Project, a thermal
distribution system located in Shanghai, China. Jinqiao is owned 60% by MPC and
40% by the Shanghai Jinqiao Heat Power Corporation. Fuel is supplied by Shanghai
General Fuel Corporation, which has a 60% ownership interest in Shanghai Jingiao
Heat Power Corporation. The plant's output is sold under approximately 60 steam
purchase agreements in place with commercial tenants of the Jinqiao Export
Processing Zone. Most of the tenants are foreign multinationals and large
Chinese firms. Approximately 25% of the contracted capacity is sold to General
Motors and NEC Electronics pursuant to contracts that expire in 2025. Financing
for the project was provided by local banks. MPC is evaluating the possibility
of constructing a cogeneration facility within the Zone.
Tongzhou
MPC owns 80% of the Tongzhou facility, which is a 30 MW coal-fired
cogeneration plant consisting of two 15 MW units located at Tongzhou in Jiangsu
Province. MPC's 20% partner is the Tongzhou Municipal Government through Jiangsu
Tongzhou Co-Generation Plant, a company established to hold its interest in the
project. The two units began operating in July and August 1999. The plant is
located within the Tongzhou Development Zone on the outskirts of the city. Based
on a governmental restructuring of the electric power distribution system in
Jiangsu Province, responsibility for electric sales and distribution has been
removed from the municipal authority with whom MPC had originally entered into a
25 year take-or-pay power purchase agreement. Electric output is now sold to the
Jiangsu Provincial Power Bureau, which has assumed responsibility for electric
sales and distribution, on a merchant basis at prices established by the Jiangsu
Provincial Pricing Bureau. Steam is sold directly to customers and fuel is
purchased on the spot market. As a result, MPC and its partners have recently
reached an agreement on a restructuring of the partnership agreement and MPC
will receive 100% of the partnership cash distributions. Energy Holdings
believes that the restructuring will not have a material adverse effect on it.
39
<PAGE>
Zuojiang
MPC owns 60% of the Zuojiang facility, which is a 72 MW run-of-the-river
hydroelectric station comprised of three 24 MW units located near Nanning, the
capital of Guangxi Province in Southwest China. All three units have been
completed and are currently in operation. MPC's investment, through a
combination of equity and shareholder loans, is expected to total approximately
$39 million. MPC's 40% partner is Nanning Regional Power Company, the original
developer of the project and a state enterprise owned by the Nanning government.
The joint venture will build, own, operate and eventually transfer the facility
to its partner, Nanning Regional Power Company. Power from the facility will be
sold to the Guangxi Electric Power Bureau pursuant to a 23-year power purchase
contract that commits the Guangxi Electric Power Bureau to take-or-pay for an
annual minimum amount of power that is equal to approximately 80% of the total
average annual electricity expected to be produced by the facility. The price of
power will be comprised of a base price and formula adjustments to compensate
for changes in inflation and laws regarding taxes, fees and required reserves.
In addition, approximately 50% of the tariff is indexed to United States
Dollars.
Venezuela
TGM
Global, in partnership with Corporacion Industrial de Energia (CIE), owns
Turbogeneradores de Maracay (TGM), a 40 MW natural gas-fired plant in Venezuela.
TGM sells all of the energy produced under contract to Manufacturas del Papel
(MANPA), a paper manufacturing concern located in Maracay. MANPA and CIE have
common controlling shareholders. Through its 9% ownership interest in TGM, which
has been held since 1995, and its relationship with CIE and MANPA, Global has
obtained an understanding of the power requirements of potential customers in
the north-central industrial region of Venezuela and the supply dynamics of the
existing system. This has created additional opportunities to develop new
generating projects and provide electricity to industrial customers in
Venezuela. See "-- Power Plants in Construction or Advanced Development --
Venezuela -- Turboven".
Other
Global currently holds a minority interest in a project development
company located in the Philippines. The total investment in this company
represented less than 1% of Global's assets as of December 31, 1999. As part of
a comprehensive review of existing assets and development activities, Global's
management has decided that it will not commit additional resources to its
investment in the Philippines and will focus its current Asian development
activities in China. For further discussion, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Global".
Power Plants in Construction or Advanced Development
Global has seventeen projects in construction or advanced development
totaling 4,808 MW (2,245 MW net) located in Venezuela, China, the United States,
Argentina, India, Italy, Poland and Tunisia. Global seeks to obtain power
purchase contracts for the output of its plants. Global has obtained long-term
power purchase contracts for the output of its plants in China, India, Italy,
Poland, Tunisia and Venezuela. Conditions in certain markets, including the
United States, dictate that Global's generation projects will be merchant
facilities that sell their output under short-term contracts or into the open
market. Global's assessment of investments in merchant generation facilities is
based on an underlying analysis of the wholesale power market in the relevant
geographic area. This analysis includes models which simulate the market and the
dispatch order of existing and planned power facilities. These models form the
basis for the economic evaluation of projects and their expected performance.
Venezuela
Turboven
In April 1999, Global and CIE, its partner in the TGM facility, announced
plans to construct and operate up to three gas-fired simple cycle electric
generation facilities with total installed capacity of up
40
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to 200 MW and associated distribution systems to serve industrial customers in
Maracay (60 MW), Cagua (60 MW) and Valencia (80 MW), Venezuela. The facilities
will be owned and operated by Turboven, an entity which is jointly owned by
Global and CIE. The facilities will utilize 10 refurbished General Electric
turbines and local fuel. Through its previous investment in Venezuela, Global
determined that industrial users were dissatisfied with the quality of service
from the existing power grid. To date, power purchase contracts have been
entered into for the sale of approximately 50% of the output of the first two
plants, Maracay and Cagua, to various industrial customers, approximately 33% of
whom are subsidiaries or affiliates of multinational companies. The power
purchase contracts are structured to provide energy only with minimum take
provisions. Fuel costs will be passed through directly to customers and the
energy tariffs will be calculated in United States Dollars and paid in local
currency. Construction of the first two facilities is essentially completed.
Global and its partner will secure power contracts with additional customers
before proceeding with construction of the third facility which is currently
scheduled to be completed in late 2001. Global's investment for all three units
is not expected to exceed approximately $70 million.
Global has been advised by Turboven that litigation has been instituted
against it by a subsidiary of CA de Administracion y Fomento Electrico (CADAFE),
a Venezuelan state-owned electricity company. CADAFE alleges that Turboven's
operation of the Cagua plant interferes with its installations and that Turboven
does not meet certain Venezuelan legal requirements. On February 4, 2000, the
Superior Court in Maracay, Venezuela issued an injunction prohibiting the
start-up of the Cagua plant. Global believes Turboven has met all legal
requirements for operation of Cagua. Global is advised by Turboven that it has
appealed this decision and will vigorously defend its right to operate such
facility. The appeal of this decision is pending before the First Court for the
litigation of administrative matters of Venezuela. A final court decision
preventing operation of Cagua would likely also affect Turboven's ability to
operate Maracay and its planned development of the Valencia project. Global's
total indirect investment to date in the Cagua and Maracay facilities is
approximately $42 million. Turboven, and consequently Global, cannot predict the
outcome of this matter.
China
MPC is a partner in several projects under construction in China. These
projects described below are expected to require a total investment by Global of
approximately $24 million.
Shanghai BFG
Shanghai BFG is a 50 MW blast furnace gas-fired facility located at the
Shanghai No. 1 Iron and Steel Company (No. 1 Steel). MPC and Westcoast Energy
Inc. each own 50% of Can Am Energy Holding LLC which in turn owns 65% of the
facility. No. 1 Steel, which owns the remaining 35%, will provide blast furnace
gas and heavy fuel oil to fuel the power plant and is expected to purchase all
of the electricity generated pursuant to a 25-year power purchase contract. The
power purchase contract requires No. 1 Steel to take or pay for the full plant
output at an annual operating factor of approximately 80%. Pricing will be the
same as or less than published retail grid prices for industrial customers with
escalation clauses and protection against inflation. In addition, approximately
28% of the tariff is indexed to United States Dollars. The total cost of the
facility is expected to be approximately $52 million with MPC's investment
expected to be approximately $17 million. The facility is in the start up and
testing phase and is expected to be operational in the second quarter of 2000.
This project has received government support due to its favorable environmental
impact stemming from the use of blast furnace gas as fuel.
Nantong
The Nantong project is located in Nantong Development zone located
approximately 15 miles from MPC's Tongzhou project in Jiangsu. The facility
consists of 3 x 75 T/H coal-fired boilers, 2 x 12 MW extracting
turbine-generating units and a 4 kilometer steam pipeline network. The project
has a power purchase contract and interconnection and dispatch agreement with
the Jiangsu Power Company and will sell power to the Jiangsu power grid. Steam
and soft water will be sold to industrial users in the Development Zone.
Completion of both 12 MW units is scheduled for the third quarter of 2000.
41
<PAGE>
Fushi
The Fushi Hydropower Project, currently under construction, is a 3 x 18 MW
run-of-river, hydroelectric station located along the Rongjiang River in
Guangxi. MPC owns 70% of the project with the remaining 30% owned by Liuzhou
Development, formed under two 23-year cooperative joint-ventures. MPC's
investment, through a combination of equity and shareholder loans, is expected
to total approximately $21 million. Power from the facility will be sold to the
Guangxi Electric Power Bureau pursuant to a 23-year power purchase contract that
commits the Guangxi Electric Power Bureau to take-or-pay for an annual minimum
amount of power that is equal to approximately 80% of the total average annual
electricity expected to be produced by the facility. The price of power will be
comprised of a base price and formula adjustments to compensate for changes in
inflation and laws regarding taxes, fees and required reserves. In addition,
approximately 50% of the tariff is indexed to UnitedStates Dollars. Completion
of the first 18 MW unit is scheduled for the second quarter of 2000 with the
second and third units scheduled for completion later in the year.
Italy
Prisma 2000
Global acquired 70% of Prisma 2000 in November 1999. Global's 30% partner
is Societive Financiere Cremonese, a project development company. Prisma is an
Italian power project development company with four biomass projects in
construction or advanced development totaling 104 MW with commercial operation
scheduled for 2001 and 2002. These projects' capacity will be sold to ENEL, the
Italian Government owned electric company. Prisma is also actively pursuing
other development opportunities in Italy. Global's investment is not expected to
exceed $80 million over the next two years.
United States
Guadalupe
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.
The first TIE facility, a 1,000 MW gas-fired combined-cycle electric generation
facility in Guadalupe County in south central Texas is currently under
construction. The first 500 MW phase of this merchant plant is expected to be
operational in late 2000. It is anticipated that approximately 50% of the
plant's output will be sold into the Texas spot market and the remaining 50%
will be sold under various bi-lateral power purchase and tolling agreements with
terms of one to five years. Global believes that relatively low capital costs
resulting from long standing equipment orders will provide the facility with a
competitive advantage in selling its output into the Texas grid. Global believes
that the Texas market provides particularly favorable merchant plant
opportunities due to its low reserve margins and relative isolation. The total
cost of this facility is estimated to be approximately $460 million. Global's
investment, including loans and guarantees, is expected to be approximately $193
million. Construction began on the Guadalupe facility in August 1999. Global and
Panda have announced plans to develop two additional projects in Texas under the
TIE joint venture, including the Odessa facility discussed below.
Odessa
TIE is constructing a 1,000 MW gas-fired combined-cycle electric
generation facility near Odessa, Texas. The first block of 500 MW is expected to
be operational in June 2001. It is anticipated that approximately 50% of the
output of the facility will be sold through various bi-lateral power purchase
and tolling agreements with terms of one to five years. The balance of the
output will be sold on a spot or short-term basis into the Texas market. The
total cost of the facility is estimated to be approximately $528 million.
Global's investment, including loans and guarantees, is expected to be
approximately $190 million. Non-recourse project financing relative to the
Odessa facility totaling $329 million was completed in February 2000.
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<PAGE>
Argentina
Parana
In June 1999, Global and AES closed on the non-recourse project financing
of the Parana facility, an 830 MW natural gas-fired combined-cycle electric
generation facility to be constructed on land to be purchased from CTSN and
adjacent to the CTSN facility in San Nicolas. Global has a 33% ownership share
in AES Parana, S.A., the joint venture entity that is constructing and will
operate the Parana project. AES owns the remaining 67%. The Parana facility will
utilize infrastructure and services provided under contract from CTSN and is
expected to be completed in 2001 at a total cost of approximately $448 million.
Global's equity investment in Parana, including contingencies, is expected to be
approximately $86 million. Global expects that this facility's design
technology, along with construction and operating efficiencies derived from the
proximity to CTSN, will enable it to compete effectively. Parana has been
designed to serve as a base load generator and will operate as a merchant plant
selling into the wholesale power market.
Tunisia
Rades
Global and its partners, Sithe Energies, Inc. and Marubeni Corporation,
closed project financing for a 471 MW gas-fired combined-cycle electric
generation facility in Rades, Tunisia, in August 1999. Global will own 35% of
the facility, with Sithe and Marubeni each owning 32.5%. Sithe will be the
operator. A 20-year power purchase contract has been entered into for the sale
of 100% of the output to Societe Tunisienne d'Electricite et du Gaz, the
national utility. The power purchase contract tariff consists of a fixed
capacity charge to cover debt and equity return as well as fixed and variable
charges to cover fuel, operations and maintenance costs. Each tariff component
will be paid in local currency (dinars) and indexed to actual costs or a
combination of United States Dollars and Euros. The facility is expected to be
completed in the summer of 2001 at a total cost of approximately $261 million.
Global's equity investment is expected to be approximately $27 million,
including contingencies.
India
PPN
Global owns a 20% interest in PPN Power Generating Company Limited (PPN),
which has a 330 MW gas-fired combined-cycle facility under construction in the
State of Tamil Nadu, India. Global's partners include Marubeni, with a 26%
interest, El Paso Energy Corporation, with a 26% interest and the Reddy Group,
with a 28% interest. Upon completion, scheduled for January 2001, Global will be
the operator. A take-or-pay power purchase contract has been entered into for
the sale of 100% of the output to the State Electricity Board of Tamil Nadu for
30 years. The contract is supported by letters of credit, a State guarantee and
an escrow arrangement. Foreign currency exposure has been minimized by utilizing
local currency (rupee) financing and providing for devaluation protection, up to
a base return, in the power purchase contract. The total project cost is
estimated to be approximately $328 million. Global's equity investment,
including contingencies, is not expected to exceed $32 million.
Tri-Sakthi
In May 1999, Global acquired an interest in Tri-Sakthi Energy Private
Limited, a company which is developing and will own a 525 MW coal-fired electric
generation facility to be constructed in Ennore, Tamil Nadu, India. Upon
scheduled completion in 2003, Global will be the operator of the plant. Global's
partner is Pembinaan Redzai Bhd Sdn (PR Group) of Malaysia. A take-or-pay power
purchase contract has been entered into for the sale of 100% of the output to
the State Electricity Board of Tamil Nadu for 30 years. The contract is
supported by letters of credit, an escrow arrangement and a State guarantee. The
total project cost is approximately $630 million. Project financing negotiations
are underway with local Indian institutions and international banks. Foreign
currency exposure will be minimized by utilizing rupee financing and as a result
of devaluation protection, up to a base return, in the power purchase contract.
The cost of fuel is a pass through to the State Electricity Board. Global plans
to close financing for this project and commence construction in the fourth
quarter of 2000. Global's equity investment, including contingencies, for its
63% interest is expected to be approximately $180 million.
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Poland
Chorzow
In November 1999, Global announced that, through its majority shareholding
in Elektrocieplownia Chorzow ELCHO Sp zo.o (ELCHO), it plans to construct a
combined heat and power plant in Poland. The capacity of the facility which will
be located in Chorzow, near Katowice in upper Silesia, is planned to be 220 MW
(electrical) and 500 MW (thermal). Global will hold a 90% interest in ELCHO with
the balance held by local Polish companies. Total project cost is estimated at
$320 million with Global's investment totaling approximately $94 million. The
plant has a targeted commercial operation date in early 2003. Polskie Sieci
Elektroenergetyczne SA, the Polish power grid company, has entered into a 20
year power purchase agreement with ELCHO for 100% of the electrical output. All
of the thermal energy will be sold to Przedsiebiorstwo Energetyki Cieplnej, the
district heating company serving the city of Katowice and its surrounding
communities, for a term of 20 years.
Distribution
Global has expanded its business to include electric distribution where it
can be linked to existing or prospective generation opportunities. Since 1997,
Global has invested in six distribution companies which serve approximately 2.7
million customers and a population of 10 million in Argentina, Brazil, Chile and
Peru. Investments in these rate-regulated distribution companies represented 28%
of Energy Holdings' assets, or $1.2 billion, as of December 31, 1999. Global is
actively involved in managing the operations of these distribution companies in
accordance with shareholder agreements and/or operating contracts.
Global's analysis of distribution investments is based on an in-depth
assessment of the regulatory environment, expected growth in the service area
and related generation opportunities. Global's experience in the technical and
operating aspects of electric distribution systems enables it to identify and
correct operational deficiencies and thereby enhance efficiency and
profitability. Global's approach to management of its distribution investments
is to appoint a transition team, which includes its own experts and local
representatives, with appropriate experience to assess operational activities
and implement improvements as required. The team then recruits local managers to
assume operational responsibility ultimately. When required, Global has
contracted with its affiliate, Public Service Electric and Gas Company, to
assist in investment evaluation and project assessment and provide facility
management and operation services.
DISTRIBUTION OPERATIONS
<TABLE>
<CAPTION>
Number of Global's
Location Customers Ownership Interest
-------- --------- -------------------
<S> <C> <C> <C>
EDEN ............................. Argentina 270,000 30%
EDES ............................. Argentina 130,000 30%
EDELAP ........................... Argentina 290,000 30%
Rio Grande Energia ............... Brazil 940,000 31%
Chilquinta Energia ............... Chile 410,000 50%
Luz del Sur ...................... Peru 690,000 43%
---------
TOTAL ..................... 2,730,000
=========
</TABLE>
Argentina
EDEN, EDES and EDELAP
In 1997, Global and its partner, AES, acquired Empresa Distribuidora de
Energia Norte S.A. (EDEN) and Empresa Distribuidora de Energia Sur S.A. (EDES)
which distribute electricity to areas within the Province of Buenos Aires.
Global has a 30% ownership interest in each of EDEN and EDES. EDEN and EDES each
have a 95-year exclusive territorial franchise concession and collectively serve
a total of approximately 400,000 customers. In 1998, Global purchased from AES a
30% interest in Empresa Distribuidora La Plata S.A. (EDELAP) which distributes
electricity predominantly in the provincial capital, La Plata. EDELAP has a
95-year exclusive territorial franchise concession, granted
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in 1992, and serves a total of approximately 290,000 customers. EDEN, EDES and
EDELAP purchase electric power from the spot market and pursuant to contracts
with CTSN, which is partially owned by Global and AES. The CTSN power purchase
contracts expire in May 2001.
Pursuant to contracts and operating practices, Global has significant
operating responsibilities with respect to these three distribution systems.
Shareholder agreements specify corporate governance, voting rights and key
financial elements. Global has veto power over major decisions including, among
other things, material contracts, indebtedness, bankruptcy, sale of assets,
operating and capital budgets and dividend policy. In order to satisfy the
requirements of the EDEN and EDES privatization process with respect to
experience managing distribution systems, Global was identified as the named
operator.
In its first year of ownership, the following technical improvements were
achieved at EDEN and EDES: outage duration decreased 2%; outage frequency
decreased 43%; line losses were reduced from 15% to 13%; and staff was reduced
from 2,000 to 1,206. The costs associated with achieving these improvements were
funded by internally generated cash flow and did not require any additional
investment by Global. With regard to EDELAP, many of the operational
improvements expected in privatization had already been achieved by the previous
owners. Global and AES have combined certain EDELAP operations with the nearby
EDEN and EDES distribution systems operations to provide opportunities for cost
savings and efficiencies.
EDELAP's tariffs are regulated by the national agency, Ente Nacional
Regulador de la Electricidad, while EDEN and EDES are regulated by the
provincial authority, Ente Provincial Regulador de la Electricidad. Each
privatized system was granted rate certainty for the ten year period following
privatization, which occurred in 1997 in the case of EDEN and EDES and 1992 in
the case of EDELAP. Although regulated by different authorities, ratemaking
principles adopted under Argentine national law and provincial law are similar
and can be characterized as "price-cap with periodic review" methodology, a type
of incentive regulation which allows regulated companies to retain a portion of
the economic benefits arising from efficiency gains. As a general matter, the
tariff is intended to allow distribution companies to recover the cost of
electricity and to earn a margin for distribution services. Large industrial
users may purchase electricity from distributors or directly from generators
with the local distributor collecting a toll. Any loss of such customers is not
expected to have a material impact on the profitability of the distribution
system.
Rate cases are held every five years with periodic adjustments as follows:
changes in the United States Producer Price Index (PPI) and Consumer Price Index
(CPI) -- every 12 months; changes in cost of electricity -- every six months;
and efficiency factor -- 1% annual reduction in margin starting January 31,
2002. The tariffs are denominated in United States Dollars and converted to
pesos when billed to customers.
Semi-annually, the quality of service of each distribution system is
measured against established standards and penalties may be imposed and paid to
compensate customers if such standards are not achieved. Global intends to
implement capital improvement budgets which will attempt to meet quality of
service standards. Failure to meet required standards would result in penalties
which are not expected to have a material impact on the distribution system,
although no assurances can be given.
With the combined EDEN, EDES and EDELAP systems, Global, along with its
partner AES, is the third largest power distributor in Argentina. Global's
electric distribution facilities in Argentina now provide over 6,200 GWH per
annum to a population of nearly two million within the Province of Buenos Aires.
Brazil
Rio Grande Energia
Together with VBC Energia, a consortium of Brazilian companies formed to
invest in electric privatization, and Previ, the largest pension fund in Brazil,
Global acquired Rio Grande Energia (RGE), a Brazilian distribution company
privatized in 1997. Global's ownership interest in RGE is approximately 31%. Due
to Global's distribution experience, it was designated as and remains the named
operator for the system in order to satisfy requirements of the privatization
process. A shareholder's agreement
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establishes corporate governance, voting rights and key financial provisions.
Global has veto rights over certain actions, including approval of the annual
budget and financing plan, executive officers, significant investments or
acquisitions, sale or encumbrance of assets, establishment of guarantees,
amendment of the concession agreement and dividend policies. Day-to-day
operations are the responsibility of RGE, subject to partnership oversight.
RGE serves approximately 940,000 customers in the state of Rio Grande do
Sul in Southern Brazil and operates under a 30-year non-exclusive territorial
concession agreement ending in 2027. The concession is non-exclusive in that the
distribution system must provide large consumers the right to choose another
provider of energy or to self-generate. Global does not believe this represents
a substantial threat to the profitability of the distribution system in Brazil
since the tariff structure provides the distribution system the opportunity to
recover all costs associated with distribution service plus a return. RGE
secures its energy supply through contractual agreements expiring between 2007
and 2020. RGE also purchases 20% of its requirements through 2013 under the
terms of contracts which are denominated in United States Dollars.
Since the acquisition in 1997, RGE has achieved the following technical
improvements: outage duration has been reduced by 45% and frequency of
interruption has dropped by 39%; line losses were reduced from 15% to 9%, while
during the same time period costs were lowered by reducing staff from 2,092 to
1,470 employees.
RGE is regulated by Agencia Nacional de Energia Eletrica (ANEEL), the
national regulatory authority. ANEEL's functions include granting and
supervising electric utility concessions, approving electricity tariffs, issuing
regulations and auditing distribution systems' performance. The rate setting
process for Brazilian distribution companies has two components, an annual
adjustment for which RGE applies every April and is embedded in the concession
contract, and a rate revision which will be calculated for RGE in 2003 and every
subsequent fifth year anniversary.
The annual adjustment is designed to permit the distribution system to
recover inflationary cost increases as well as to pass through to consumers
increases in energy purchase costs, subject to timing differences. The rate
calculation formula also includes an "X" factor which permits ANEEL to adjust
for productivity. ANEEL has set the "X" factor at zero for the first five-year
period.
RGE has filed for and been granted two annual adjustments per the
specified formula. In 1998, RGE received a 4% increase and in April 1999, RGE
was awarded a 10.9% increase based on its annual review. RGE was also granted a
special adjustment of 2.6% in May 1999 to account for increased costs related to
United States Dollar denominated energy supply contracts during the January to
April 1999 time period prior to the annual review. This special adjustment was
granted as a result of the devaluation of the Brazilian Real.
The second component of the rate setting process is the tariff review
conducted every five years by ANEEL. The tariff setting considers changes in the
structure of costs and in the market of the distribution system, the tariffs
charged by similar companies and efficiency factors. RGE's first rate review is
scheduled to be performed in 2003. During this rate revision, ANEEL can revise
the "X" factor which would be in place for the following five year period.
ANEEL also monitors service quality by auditing duration and frequency of
outages as well as several other performance measures. Global intends to
implement capital improvement budgets which will attempt to meet quality of
service standards. Failure to meet required standards would result in penalties
which are not expected to have a material negative impact on the distribution
system, although no assurances can be given.
Chile and Peru
Chilquinta Energia
In June 1999, Global together with its partner, Sempra, jointly acquired
90.23% of the shares of Chilquinta Energia, S.A. (Chilquinta), an energy
distribution company with numerous energy holdings, based in Valparaiso, Chile.
In January 2000, Global and Sempra jointly acquired an additional 9.75%,
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increasing their total share holding to 99.98% of the company. Funding for the
purchase of the incremental shares was provided at the time of the initial
investment. Chilquinta provides growth opportunities and enhances Global's
market position in the region by adding electric and gas distribution facilities
in Chile. Gas distribution is provided through Energas, a start-up company that
provides service to more than 18,000 natural gas customers in Chile as of
December 1999. The Chilquinta acquisition also included a 37% interest in Luz
del Sur which owns electric distribution facilities in Peru. Simultaneous with
the closing of this acquisition, Global and its partner sold Chilquinta's 32%
interest in Central Puerto, S.A., an Argentine thermal electric generator. In
September 1999, Global and Sempra closed on a tender offer for outstanding
publicly traded shares of Luz del Sur. The number of shares tendered constitutes
22.5% of the shares of Luz del Sur. The tender was offered exclusively in Peru.
Global and Sempra also purchased an additional 25% of Luz del Sur upon closing
of the tender offer, which gives them approximately 85% control of Luz del Sur.
Global's investment in connection with these transactions was approximately $108
million.
As equal partners in the acquisition, Global and Sempra share in the
management of Chilquinta, however, Sempra has assumed lead operational
responsibilities in Chile, while Global has assumed lead operational
responsibilities in Peru. The shareholders' agreement gives Global important
veto rights over major partnership decisions including dividend policy, budget
approvals, management appointments and indebtedness.
Chilquinta sells approximately 4,500 GWH per year to approximately 410,000
customers in Chile. Chilquinta operates under a non-exclusive perpetual
franchise within Chile's Region V which is located just north and west of
Santiago. Global believes that direct competition for distribution customers
would be uneconomic for potential competitors. Luz del Sur operates under an
exclusive, perpetual franchise in the southern portion of the city of Lima and
in an area just south of the city along the coast serving approximately 690,000
customers. Both Chilquinta and Luz del Sur purchase energy for distribution from
generators in their respective markets on a contract basis.
Distribution companies in Chile are subject to rate regulation by the
Comision Nacional de Energia, a national governmental regulatory authority. The
Chilean regulatory framework has been in existence since 1982, with rates set
every four years based on a model company. The tariff which distribution
companies charge to regulated customers consists of two components: the actual
cost of energy purchased plus an additional amount to compensate for the value
added in distribution (DVA tariff). The DVA tariff considers allowed losses
incurred in the distribution of electricity, administrative costs of providing
service to customers, costs of maintaining and operating the distribution
systems, and an annual real return on investment of 8% to 14% based on the new
replacement cost of distribution assets. Changes in electricity distribution
companies' cost of energy are passed through to customers, with no impact on the
distributors' margins (equal to the DVA tariff). Therefore, distributors,
including Chilquinta, are not affected by changes in the generation sector which
affect prices. The next setting of tariff levels based on the model company is
scheduled to take place in November 2000. The DVA tariff index provides for
monthly adjustments based on variations in certain economic indicators whenever
the component costs increase by more than 3% over prior levels. This index
provides inflation adjustments and indirect devaluation protection.
Distribution companies in Peru are subject to rate regulation by the
Comision de Tarifas Electricas, a national governmental regulatory authority.
The Peruvian rate setting mechanism was established in 1992 and is similar to
the Chilean system described above. Rates are set every four years. The next
regularly scheduled rate setting for Luz del Sur will be in November 2001.
In April 1999, Chile implemented service quality standards and penalties,
however, specific regulations have not yet been published. Quality of service
limits have been published in Peru in November 1999 and distribution companies
will be subject to penalties if the standards are not met. Requirements in Chile
and Peru are expected to be consistent with those established in Argentina and
Brazil. Global intends to implement capital improvement budgets which will
attempt to meet quality of service standards. Failure to meet required standards
would result in penalties which are not expected to have a material impact on
the distribution system, although no assurances can be given.
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RESOURCES
Strategic Overview
Resources focuses on providing energy infrastructure financing in
developed countries. Resources invests in energy-related financial transactions
and manages a diversified portfolio of investments, including leveraged leases,
leveraged buyout funds, limited partnerships and marketable securities.
Resources seeks to invest in transactions where its expertise and understanding
of the inherent risks and operating characteristics of energy-related assets
provide a competitive advantage. Resources currently expects to concentrate its
future investment activity on energy-related financial transactions. Since it
was established in 1985, Resources has grown its portfolio to include more than
60 separate investments.
Worldwide deregulation of energy markets is creating new investment
opportunities for Resources. As energy assets are privatized or sold, purchasers
require significant amounts of acquisition capital. In addition to traditional
bank and debt financing, leveraged leases provide purchasers with a source of
funding for such acquisitions. Resources, as an experienced participant in the
leveraged lease financing market for energy assets, is actively pursuing
domestic and international opportunities to invest in these highly structured
transactions.
Recently, Resources has entered into leveraged lease transactions of
electric generation plants and electric and gas distribution networks with
utilities located in Western Europe. In addition, Resources acquired investments
in lease transactions of utility assets in the United States nearing the end of
their initial lease term. Resources has invested in 16 energy-related leases
since 1997.
As of December 31, 1999, Resources had approximately $1.8 billion invested
in leveraged lease transactions which represented approximately 84% of
Resources' total assets of $2.1 billion. Leveraged leases of energy-related
plant and equipment totaled approximately $1.3 billion or 73% of the lease
portfolio and 61% of Resources' assets. The remainder of Resources' portfolio is
further diversified across a wide spectrum of asset types and business sectors
including leveraged leases of aircraft, railcars and real estate, limited
partnership interests in project finance transactions, and leveraged buyout and
venture funds. Approximately 79% of the lease investments in Resources'
portfolio are with lessees that have investment grade credit ratings.
Portfolio Segments
The major components of Resources' investment portfolio as a percent of
its total assets as of December 31, 1999 were:
Leveraged Lease Investments
Energy-Related ........................... 61%
Real Estate .............................. 9%
Aircraft ................................. 10%
Railcars and Industrial Equipment ........ 4%
Leveraged Buyout Funds ..................... 11%
Other Limited Partnerships and Venture Funds 2%
Marketable Securities and other ............ 1%
As of December 31, 1999, no single investment represented more than 7% of
Resources' total assets.
Leveraged Lease Investments
Resources' equity investments in leveraged leases help to diversify Energy
Holdings' portfolio. In addition, they provide a fixed rate of return,
predictable income and cash flow, and depreciation and amortization deductions
for federal income tax purposes.
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Leveraged lease investments are complex transactions that are carefully
structured to achieve specific economic results. In a leveraged lease, the
lessor acquires an asset by investing equity representing approximately 15% to
20% of the cost and incurring non-recourse lease debt for the balance. The
lessor acquires economic and tax ownership of the asset and then leases it to
the lessee for a period of time no greater than 80% of its remaining useful
life. As the owner, the lessor is entitled to depreciate the asset under
applicable federal tax guidelines. In addition, the lessor receives income from
lease payments made by the lessee during the term of the lease and interest
deductions associated with the lease debt. Lease rental payments are
unconditional obligations of the lessee and are always set at levels at least
sufficient to service the non-recourse lease debt. The lessor is also entitled
to any residual value associated with the leased asset at the end of the lease
term. An evaluation of the after-tax cash flows to the lessor determines the
return on the investment. Under GAAP, the lease investment is recorded on a net
basis and income is recorded periodically as a constant return on the net
unrecovered investment.
Resources evaluates lease investment opportunities with respect to
specific risk factors. The assumed residual value risk, if any, is analyzed and
verified by third-party experts at the time the investment is made. Credit risk
is assessed and, if necessary, mitigated or eliminated through various
structuring techniques, such as defeasance mechanisms and letters of credit.
Resources does not take currency risk in its cross-border lease investments.
Transactions are therefore structured with rental payments denominated and
payable in United States Dollars. Resources, as a passive lessor or investor,
does not take operating risk with respect to the assets it owns, so leases are
structured with the lessee having an absolute obligation to make rental payments
whether or not the assets operate. The assets subject to lease are an integral
element in Resources' overall security and collateral position. If such assets
were to be impaired, the rate of return on a particular transaction could be
affected. The operating characteristics and the business environment in which
the assets operate are, therefore, important and must be understood and
periodically evaluated. For this reason, Resources retains experts to conduct
regular appraisals on the assets it owns and leases.
As an equity investor in leveraged leases since 1985, Resources has
developed significant expertise in evaluating leveraged lease opportunities,
structuring transactions to satisfy its investment criteria and the requirements
of lessees and completing transactions in a timely manner. Resources' market
presence, reputation and access to capital are expected to provide opportunities
to invest in future transactions.
Energy-Related Leases
The Resources' portfolio contains twenty two separate leveraged leases of
energy-related assets. The total amount invested in such transactions was
approximately $1.3 billion, or 61%, of Resources' assets. This portion of the
portfolio, along with anticipated new investments of this type, is expected to
contribute approximately 76% to 88% of Resources' revenues over the next five
years. Over 95% of this portion of the lease portfolio represents investment
grade credit risk. The energy-related sector is expected to be the primary focus
of Resources' future investment activity.
Included in Resources' energy-related leveraged lease portfolio are
transactions with United States utilities and independent power producers for
peaking plants, combined-cycle facilities, a nuclear power plant, a cogeneration
facility and a reservoir storage facility. Resources has also structured
leveraged lease investments for electric generation plants, gas distribution
networks and a waste-to-energy facility for lessees in the Netherlands, the
United Kingdom, Germany and New Zealand. Resources currently retains undivided
interests in approximately 4,323 MW of generation capacity, of which
approximately 3% is nuclear.
Real Estate Leases
The real estate leveraged lease portion of the portfolio is expected to
generate revenue of approximately $10 million per annum on average over the next
five years. This represents approximately 5% of Resources' average annual
revenue. Real estate leveraged leases represented approximately 9% of Resources'
assets at December 31, 1999 and totaled approximately $193 million.
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The portfolio consists of separate leases on 48 properties with seven lessees.
Resources is not currently planning to invest in any new leveraged leases of
real property.
Aircraft Leases
The aircraft leveraged lease portion of the portfolio totaled
approximately $200 million as of December 31, 1999. This represented
approximately 10% of Resources' assets. Revenue associated with these
investments is expected to be less than 1% of Resources' revenue or
approximately $1 million per annum on average over the next five years. The
current portfolio contains sixteen aircraft leased to six separate lessees.
Resources believes that the lessees in this portion of the portfolio represent
acceptable credit risk except in one situation where United States Treasuries
have been provided as additional collateral. Resources is not currently planning
to invest in any new aircraft leveraged lease transactions.
Railcars and Industrial Equipment Leases
The remaining portion of the leveraged lease portfolio totaling
approximately $90 million is expected to contribute revenue of less than $2
million per annum on average over the next five years.
Leveraged Buyout Funds/Limited Partnerships
As of December 31, 1999, approximately 11% of Resources' assets were
invested in leveraged buyout funds and 2% in other limited partnerships and
venture funds. Approximately $279 million was invested in this segment of the
portfolio as of December 31, 1999. Approximately $131 million included in the
leveraged buyout funds represents the fair value of Resources' share of publicly
traded common stock in six companies. The leveraged buyout funds and limited
partnership investments in Resources' portfolio are expected to contribute,
excluding distributions associated with asset sales, approximately 15% of total
revenue in 2000 and diminish to approximately 6% in 2004 as they mature.
Resources is not currently planning to make investments of this nature in the
future.
Resources does not manage any fund or partnership in this portfolio. The
timing of distributions from these investments is not within Resources' control.
For more information on Resources' operations and investments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
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SCHEDULE OF ASSETS AS OF December 31, 1999
(Thousands of Dollars)
<TABLE>
<CAPTION>
% of Resources'
Amount Total Assets
--------- ---------------
<S> <C> <C>
Leveraged Leases
Energy-Related
Foreign .................................. $ 758,431 36.2%
Domestic ................................. 516,865 24.7%
Real Estate
Foreign .................................. -- --
Domestic ................................. 192,704 9.2%
Aircraft
Foreign .................................. 132,254 6.3%
Domestic ................................. 68,204 3.2%
Commuter Railcars
Foreign .................................. 81,012 3.9%
Domestic ................................. -- --
Industrial
Foreign .................................. -- --
Domestic ................................. 9,244 0.4%
--------- -----
Total Leveraged Leases, Net ............ 1,758,714 83.9%
Limited Partnerships
Leveraged Buyout Funds ...................... 230,104 11.0%
Other ....................................... 49,182 2.3%
--------- -----
Total Limited Partnerships ............. 279,286 13.3%
Marketable Securities ........................... 7,336 0.4%
Owned Property and Equipment .................... 7,591 0.4%
Current Assets .................................. 42,761 2.0%
--------- -----
Total Resources' Assets ......................... $2,095,688 100.0%
========== =====
</TABLE>
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ENERGY TECHNOLOGIES
Energy Technologies is an energy management company that provides
energy-related engineering, consulting and mechanical contracting services to
and constructs, operates and maintains heating, ventilating and air conditioning
(HVAC) systems for industrial and commercial customers in the Northeastern and
Middle Atlantic United States. Energy Technologies also supplies electricity and
gas to industrial and commercial customers. Energy Technologies currently
provides such services to 13,000 customers. As of December 31, 1999, Energy
Technologies had assets of $252 million. Energy Holdings will assess the growth
prospects and opportunities for Energy Technologies' business before committing
additional capital.
Since its formation in 1997, Energy Technologies has established a
presence in the energy services business through the acquisition of seven
companies involved in the engineering, construction, installation, operation and
maintenance of energy equipment and HVAC systems. In January 1998, Energy
Technologies acquired Fluidics, Inc., a diversified mechanical and building
services contractor with operations from Pennsylvania and New Jersey to
Virginia. During 1999, Energy Technologies acquired six mechanical and building
service companies headquartered in New Jersey, Rhode Island and Virginia. The
combination of these companies created a regional energy service capability from
New England to Virginia. In addition, PSEG transferred one of its subsidiaries,
Public Service Conservation Resources Corporation (PSCRC), an energy management
contractor, to Energy Technologies effective January 1, 1999. In February 2000,
Energy Technologies entered into a business arrangement with Enermetrix.com to
provide an internet-based auction exchange that will allow their customers an
alternative method in purchasing their energy requirements. As a result of this
new strategic direction, Energy Technologies will discontinue the business of
buying and selling gas and electricity. Energy Technologies plans to grow
existing operations and utilize the recently acquired companies to deliver
expanded energy-related services and products to new and existing customers.
OTHER SUBSIDIARIES
EGDC, a nonresidential real estate property management business, has been
conducting a controlled exit from the real estate business since 1993. EGDC has
investments in eight commercial real estate properties (one of which is
developed) in several states. EGDC's strategy is to preserve the value of its
assets to allow for the controlled disposition of its properties as favorable
sales opportunities arise. As of December 31, 1999 and 1998, EGDC's consolidated
assets aggregated $67 million and $75 million, respectively.
PSEG Capital has served as our financing vehicle, borrowing on the basis
of a minimum net worth maintenance agreement with PSEG. As of December 31, 1999
and 1998, PSEG Capital had debt outstanding of $630 million and $498 million,
respectively. Existing debt matures from 2000 to 2003. For additional
information including certain restrictions relating to the BPU Focused Audit,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- External Financings".
Funding formerly served as our financing vehicle on the basis of our
consolidated financial position. At December 31, 1998, Funding had debt
outstanding of $251 million. At December 31, 1999, Funding had no debt
outstanding.
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COMPETITIVE ENVIRONMENT
Our businesses face increasing competition from numerous well-capitalized
competitors. See "Risk Factors -- We and our subsidiaries are subject to
substantial competition".
REGULATION
We are not subject to direct regulation by the BPU, except potentially
with respect to some transfers of control and reporting requirements.
Our parent, PSEG, is also the parent of Public Service Electric and Gas
Company, an operating public utility company engaged principally in the
generation, transmission, distribution and sale of electric energy service and
in the transmission, distribution and sale of gas service in New Jersey. Public
Service Electric and Gas Company is subject to regulation by the BPU.
As a result of the 1992 Focused Audit of PSEG's non-utility businesses,
the BPU approved a plan which, among other things, provides that:
(1) PSEG will not permit Energy Holdings' non-utility investments to
exceed 20% of PSEG's consolidated assets without prior notice to the
BPU;
(2) the Public Service Electric and Gas Company Board of Directors will
provide an annual certification that the business and financing plans
of Energy Holdings will not adversely affect Public Service Electric
and Gas Company;
(3) PSEG will (a) limit debt supported by the minimum net worth
maintenance agreement between PSEG 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 Public Service Electric and Gas Company an
affiliation fee of up to $2 million a year.
PSEG and Energy Holdings and its subsidiaries continue to reimburse Public
Service Electric and Gas Company for the costs of all services provided to them
by employees of Public Service Electric and Gas Company.
The Energy Competition Act empowers the BPU to impose requirements with
respect to affiliate transactions between and among Public Service Electric and
Gas Company, PSEG and Energy Holdings. The BPU has been conducting proceedings
pursuant to the Energy Master Plan and the Energy Competition Act and is
expected to issue a series of orders that will decide both generic issues for
the energy industry, including affiliate standards (including fair competition
and affiliate transactions), and company specific matters for each utility,
including Public Service Electric and Gas Company. In March 2000, the BPU issued
an order establishing affiliate standards. This will primarily affect
transactions between Energy Technologies and Public Service Electric and Gas
Company. However, we do not believe this will have an adverse material effect on
us.
As a result of the final outcome of the BPU's proceedings in connection
with the Energy Master Plan and Energy Competition Act and accounting impacts
resulting from deregulation of the generation of electricity and the unbundling
of the utility business, we do not believe that the Focused Audit provision
requiring notification to the BPU that PSEG's non-utility assets exceed 20%
remains appropriate and believes that modifications will be required. In July
1999, Public Service Electric and Gas Company notified the BPU that PSEG's
non-utility assets were expected to exceed 20% of its consolidated assets in
1999. On August 24, 1999, the BPU issued its Final Order in the matter of Public
Service Electric and Gas Company's rate unbundling, stranded costs and
restructuring filings. Appeals filed on behalf of several Public Service
Electric and Gas Company customers are pending at the Appellate Division of the
New Jersey Superior Court. Pending resolution of these appeals, stranded cost
recovery through securitization financing and sale of generation-related assets
to an affiliate by Public Service Electric and Gas Company have not been
completed. The Final Order noted that PSEG's non-regulated assets would likely
exceed 20% of total PSEG assets once the utility's generating assets were
transferred to a non-regulated subsidiary, as provided in the Final Order. The
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Final Order also noted that, due to significant changes in the industry and, in
particular, PSEG's corporate structure as a result of the Final Order,
modifications to or relief from the Focused Audit order might be warranted. The
Final Order directed Public Service Electric and Gas Company to file a petition
with the BPU to maintain the existing regulatory parameters or to propose
modifications to the Focused Audit order no later than the end of the first
quarter of 2000. In March 2000, Public Service Electric and Gas Company
submitted a letter to the BPU as its initial compliance with the filing
requirement, in which it notified the BPU of its intention to make a filing to
modify the terms of the Focused Audit within 120 days after the Final Order
becomes final and non-appealable. Regulatory oversight by the BPU to assure that
there is no harm to utility ratepayers from PSEG's non-utility investments is
expected to continue. Such assets were approximately 22% of PSEG's consolidated
assets at December 31, 1999. We believe that if still required, we are capable
of eliminating PSEG support of PSEG Capital debt within the time period set
forth in the Focused Audit. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- External Financings".
We believe that these issues will be satisfactorily resolved, although no
assurances can be given.
PSEG has claimed an exemption from regulation by the SEC as a registered
holding company under PUHCA, except for the provision which relates to the
acquisition of 5% or more of the voting securities of an electric or gas utility
company. PUHCA regulates public utility holding companies and their
subsidiaries. Global's investments include exempt wholesale generators (EWGs)
and foreign utility companies (FUCOs) under PUHCA. Failure to maintain status of
these plants as EWGs or FUCOs could subject PSEG and its subsidiaries to
regulation under PUHCA.
PURPA provides to QFs certain exemptions from Federal and state laws and
regulations, including organizational, rate and financial regulation. Global's
investments include QFs under PURPA. If any of the plants in which Global has an
interest lose their QF status or if amendments to PURPA are enacted that
substantially reduce the benefits currently afforded QFs, PSEG could lose its
exemption under PUHCA unless that generation plant was able to qualify for EWG
status.
In addition, actions of PSEG, Public Service Electric and Gas Company,
Resources or Energy Technologies could cause PSEG, and therefore its
subsidiaries, including us and our subsidiaries, to be no longer exempt from
regulation under PUHCA. At the present time, PSEG and its subsidiaries do not
expect to take any actions that would result in a loss of exemption under PUHCA.
If PSEG were no longer exempt from PUHCA, PSEG and its subsidiaries would be
subject to additional regulation by the SEC with respect to their 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 company.
Global's electric and gas distribution facilities in Latin America are
rate-regulated enterprises. Rates charged to customers are established by
governmental authorities, and are currently sufficient to cover all operating
costs and provide a fair return. We can give no assurances that future rates
will be established at levels sufficient to cover such costs, provide a return
on our investment or generate adequate cash flow to pay principal and interest
on its debt or to enable us to comply with the terms of our debt agreements.
Global and Energy Technologies are subject to regulation by the Federal
Energy Regulatory Commission with respect to certain matters, including
interstate sales and exchanges of electric transmission, capacity and energy.
Additionally, Global is subject to the rules and regulations of the United
States Environmental Protection Agency, Department of Transportation and
Department of Energy and state and foreign environmental rules and regulations.
INCOME TAXES
Energy Holdings and its subsidiaries file a consolidated federal income
tax return with PSEG. Energy Holdings and its subsidiaries have entered into tax
allocation agreements with PSEG which provide that Energy Holdings and its
subsidiaries will record their tax liabilities as though they were filing
separate returns and will record tax benefits to the extent that PSEG is able to
receive those benefits.
In a case affecting another utility in which PSEG, we and Public Service
Electric and Gas Company were not parties, the BPU considered the extent to
which tax savings generated by non-utility affiliates
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included in the consolidated tax return of that utility's holding company should
be considered in setting that utility's rates. The issue of PSEG sharing the
benefits of consolidated tax savings with Public Service Electric and Gas
Company or its ratepayers was addressed by the BPU in a July 28, 1995 letter
which informed Public Service Electric and Gas Company that the issue of
consolidated tax savings can be discussed in the context of Public Service
Electric and Gas Company's next base rate case or plan for an alternative form
of regulation.
While PSEG continues to account for its two wholly-owned subsidiaries on a
stand-alone basis, resulting in a realization of tax benefits by the entity
assuming the risk and generating the benefit, an ultimate unfavorable resolution
of the consolidated tax issue could reduce Public Service Electric and Gas
Company's and PSEG's revenues, net income or net cash flows. In addition, an
unfavorable resolution may adversely impact PSEG's non-utility investment
strategy. In that event, Resources would consider curtailing new leveraged lease
investments. PSEG believes that Public Service Electric and Gas Company's taxes
should be treated on a stand-alone basis for rate-making purposes, based on the
separate nature of the utility and non-utility businesses and on the fact that
shareholders, not utility customers, assume the risk of the investments.
However, neither we nor PSEG are able to predict what action, if any, the BPU
may take concerning consolidation of tax benefits in future proceedings.
EMPLOYEES
At December 31, 1999, we and our majority owned subsidiaries had 1,656
employees. We believe that we and our subsidiaries maintain satisfactory
relationships with employees.
ENVIRONMENTAL MATTERS
For a discussion of applicable environmental laws and regulations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental Matters".
PROPERTIES
Energy Holdings owns no real property. Energy Holdings subleases office
space for its corporate headquarters at 80 Park Plaza, Newark, New Jersey from
Public Service Electric and Gas Company. Our subsidiaries also lease office
space at various locations throughout the world to support business activities.
We maintain adequate insurance coverage for properties in which our subsidiaries
have an equity interest, to the extent that properties of a similar nature are
usually insured and insurance is available at a reasonable cost.
Global, a New Jersey corporation, has its principal executive offices at
35 Waterview Boulevard, Parsippany, New Jersey 07054. Resources, a New Jersey
corporation, has its principal executive offices at 80 Park Plaza, Newark, New
Jersey 07102. Energy Technologies, a New Jersey corporation, has its principal
executive offices at 499 Thornall Street, Edison, New Jersey 08837. EGDC, a New
Jersey corporation, has its principal executive offices at 80 Park Plaza,
Newark, New Jersey 07102. PSEG Capital, a New Jersey corporation, has its
principal executive offices at 80 Park Plaza, Newark, New Jersey 07102.
Legal Proceedings
Energy Holdings could be affected by litigation regarding electric
generation facilities owned and operated by Turboven in Venezuela in which
Global has invested. The proceeding which was instituted in January 2000 is
currently pending in the First Court for the litigation of administrative
matters of Venezuela. See page 41 for a more detailed description of the
proceedings.
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MANAGEMENT
As our sole stockholder, PSEG has the power to control the election of the
directors and all other matters submitted for stockholder approval and has
control over our management and affairs. Mr. E. James Ferland is a director of
Public Service Electric and Gas Company.
Following are our executive officers and directors of Energy Holdings:
Executive Officers
E. JAMES FERLAND has been a Director since June 1989 and was elected
Chairman of the Board and Chief Executive Officer of Energy Holdings in June
1989. Age 58. He was elected a Director of Global in 1986 and of Resources in
1985. Mr. Ferland has also been Chairman of the Board, President and Chief
Executive Officer of PSEG since July 1986 and Chairman of the Board and Chief
Executive Officer of Public Service Electric and Gas Company since September
1991.
ROBERT J. DOUGHERTY, JR. has been a Director since January 1997 and was
elected President and Chief Operating Officer of Energy Holdings in January
1997. Age 48. He was also elected Chairman of the Board of Energy Technologies
in 1997. Mr. Dougherty joined Public Service Electric and Gas Company in 1973
and was President of Enterprise Ventures and Services Corporation from February
1995 to December 1996. He was Senior Vice President -- Electric of Public
Service Electric and Gas Company from September 1991 to February 1995.
MICHAEL J. THOMSON was named President and Chief Executive Officer of
Global in January 1997. Age 42. Mr. Thomson had served as a Senior Vice
President for Global from July 1993 to February 1994 and was Chief Operating
Officer from February 1994 to December 1996. Before coming to Global, Mr.
Thomson was employed by Energy Holdings beginning in 1990, where he served as
Business Strategy Manager and then as Vice President of Business Development and
Planning.
EILEEN A. MORAN was elected President and Chief Executive Officer of
Resources in May 1990. Age 44. She also was elected President and Chief
Executive Officer of EGDC in January 1997. Prior to that, Ms. Moran had served
as Vice President -- Investments of Resources from 1986.
Ms. Moran joined Public Service Electric and Gas Company in 1977.
STANLEY M. KOSIEROWSKI was named President and Chief Executive Officer of
Energy Technologies in June 1999. Age 47. Previously he had been Executive Vice
President and Chief Operating Officer of Energy Technologies from February 1999
to June 1999. He had been Vice President -- Customer Operations of Public
Service Electric and Gas Company from January 1997 to February 1999. Mr.
Kosierowski joined Public Service Electric and Gas Company in 1974 and has held
a number of senior management positions.
BRUCE E. WALENCZYK was elected Vice President -- Finance of Energy
Holdings in March 1998. Age 48. He is also a Director and Vice President of PSEG
Capital. Prior to joining Energy Holdings, Mr. Walenczyk served as a Managing
Director at Paine Webber and Kidder, Peabody & Co., Inc., beginning in January
1991. He had been with Kidder, Peabody since 1983 and was primarily engaged in
capital raising and other financial advisory services for a variety of entities
including major electric and gas utilities and energy companies.
DEREK M. DIRISIO was elected Vice President and Controller of Energy
Holdings in June 1998. Age 35. He had been Director -- Accounting Services for
Energy Holdings since November 1997. Mr. DiRisio joined Public Service Electric
and Gas Company in September 1991, where he served in a number of positions in
corporate planning and accounting.
Directors
FRANK CASSIDY has been a Director since January 2000. Age 52. He has been
President of PSEG Power LLC, a subsidiary of PSEG, since July 1999. Previously
he had been President of Energy Technologies from November 1996 to July 1999,
Senior Vice President--Fossil Generation of Public Service Electric and Gas
Company from February 1995 to November 1996 and Vice President--Transmission
Systems of Public Service Electric and Gas Company from November 1989 to
February 1995.
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ROBERT C. MURRAY has been a Director since January 2000. Age 54. He has
been Vice President and Chief Financial Officer of PSEG since January 1992 and
Executive Vice President--Finance of Public Service Electric and Gas Company
since June 1997. He had been Senior Vice President and Chief Financial Officer
of Public Service Electric and Gas Company from January 1992 to June 1997.
R. EDWIN SELOVER has been a Director since January 2000. Age 54. He has
been Vice President and General Counsel of PSEG since April 1988 and Senior Vice
President and General Counsel of Public Service Electric and Gas Company since
January 1988.
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
In connection with the sale of the original notes, we entered into an
exchange and registration rights agreement with the initial purchasers. Under
the exchange and registration rights agreement, we agreed to use our reasonable
best efforts to complete the exchange offer and to file and cause to become
effective with the SEC a registration statement for the exchange of the original
notes for exchange notes.
The terms of the exchange notes are the same as the terms of the original
notes except that the exchange notes have been registered under the Securities
Act and will not be subject to some restrictions on transfer that apply to the
original notes. In that regard, the original notes provide, among other things,
that if a registration statement relating to the exchange offer has not been
filed and declared effective within the period specified in the original notes,
the interest rate on the original notes will increase by 0.25% per annum each
90-day period that such additional interest rate continues to accrue under any
such circumstance, up to an aggregate maximum increase equal to 1% per annum,
until the registration statement is filed or declared effective, as the case may
be.
Upon completion of the exchange offer, holders of original notes will not
be entitled to any further registration rights under the exchange and
registration rights agreement, except under limited circumstances. See "Risk
Factors -- Consequences of failure to exchange original notes" and "Description
of Exchange Notes". The exchange offer is not being made to holders of original
notes in any jurisdiction in which the exchange offer or the acceptance of the
notes would not comply with securities or blue sky laws. Unless the context
requires otherwise, the term "holder" with respect to the exchange offer means
any person who has obtained a properly completed bond power from the registered
holder, or any person whose original notes are held of record by The Depository
Trust Company (DTC) who desires to deliver such original notes by book-entry
transfer at DTC. We will exchange as soon as practicable after the expiration
date of the exchange offer the original notes for a like aggregate principal
amount of the exchange notes
Completion of the exchange offer is subject to the conditions that the
exchange offer not violate any applicable law or interpretation of the staff of
the Division of Corporate Finance of the SEC and that no injunction, order or
decree has been issued which would prohibit, prevent or materially impair our
ability to proceed with the exchange offer. The exchange offer is also subject
to various procedural requirements discussed below with which holders must
comply. We reserve the right, in our absolute discretion, to waive compliance
with these requirements subject to applicable law.
Terms of the Exchange Offer
We are offering, upon the terms and subject to the conditions described in
this prospectus and in the accompanying letter of transmittal, to exchange up to
$400,000,000 aggregate principal amount of exchange notes for a like aggregate
principal amount of original notes properly tendered on or before the expiration
date of the exchange offer and not properly withdrawn in accordance with the
procedures described below. We will issue, promptly after the expiration date of
the exchange offer, an aggregate principal amount of up to $400,000,000 of
exchange notes in exchange for a like principal amount of outstanding original
notes tendered and accepted in connection with the exchange offer. We will pay
all charges and expenses, other than certain applicable taxes described below,
in connection with the exchange offer. See "-- Fees and Expenses".
Holders may tender their original notes in whole or in part in any
integral multiple of $1,000 principal amount. The exchange offer is not
conditioned upon any minimum principal amount of original notes being tendered.
As of the date of this prospectus, $400,000,000 aggregate principal amount of
the original notes is outstanding. Holders of original notes do not have any
appraisal or dissenters' rights in connection with the exchange offer. Original
notes which are not tendered for or are tendered but not accepted in connection
with the exchange offer will remain outstanding and be entitled to the benefits
of the indenture, but will not be entitled to any further registration rights
under the exchange and registration rights agreement, except under limited
circumstances. See "Risk Factors -- Consequences
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of failure to exchange original notes" and "Description of exchange notes". If
any tendered original notes are not accepted for exchange because of an invalid
tender, the occurrence of other events described in this prospectus or
otherwise, appropriate book-entry transfer will be made, without expense, to the
tendering holder of the notes promptly after the expiration date of the exchange
offer. Holders who tender original notes in connection with the exchange offer
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the letter of transmittal, transfer taxes with respect to the
exchange of original notes in connection with the exchange offer.
Neither Energy Holdings nor the Board of Directors of Energy Holdings
makes any recommendation to holders of original notes as to whether to tender or
refrain from tendering all or any portion of their original notes in the
exchange offer. In addition, no one has been authorized to make any
recommendation as to whether holders should tender notes in the exchange offer.
Holders of original notes must make their own decisions whether to tender
original notes in the exchange offer and, if so, the aggregate amount of
original notes to tender based on the holders' own financial positions and
requirements.
Expiration Date; Extensions; Amendments
The term "expiration date" means 5:00 p.m., Eastern Standard Time, on ,
2000. However, if the exchange offer is extended by us, the term "expiration
date" will mean the latest date and time to which we extend the exchange offer.
We expressly reserve the right in our sole and absolute discretion,
subject to applicable law, at any time and from time to time:
o to delay the acceptance of the original notes for exchange,
o to extend the expiration date of the exchange offer and retain all
original notes tendered in the exchange offer, subject, however, to
the right of holders of original notes to withdraw their tendered
original notes as described under "-- Withdrawal Rights", and
o to waive any condition or otherwise amend the terms of the exchange
offer in any respect.
If the exchange offer is amended in a manner determined by us to
constitute a material change, we will promptly
o disclose the amendment in a prospectus supplement that will be
distributed to the registered holders of the original notes,
o we will file a post-effective amendment to the registration statement
filed with the SEC with regard to the exchange notes and the exchange
offer, and
o we will extend the exchange offer to the extent required by Rule 14e-1
under the Exchange Act.
We will promptly notify the exchange agent by making an oral or written
public announcement of any delay in acceptance, extension, termination or
amendment. This announcement in the case of an extension will be made no later
than 9:00 a.m., Eastern Standard Time, on the next business day after the
previously scheduled expiration date. Without limiting the manner in which we
may choose to make any public announcement and, subject to applicable law, we
will have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a release to an appropriate news
agency.
Acceptance for Exchange and Issuance of Exchange Notes
Upon the terms and subject to the conditions of the exchange offer, we
will exchange and issue to the exchange agent, exchange notes for original notes
validly tendered and not withdrawn promptly after the expiration date. In all
cases, delivery of exchange notes in exchange for original notes tendered and
accepted for exchange pursuant to the exchange offer will be made only after
timely receipt by the exchange agent of:
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- original notes or a book-entry confirmation of a book-entry transfer
of original notes into the exchange agent's account at DTC, including
an agent's message (as defined below) if the tendering holder has not
delivered a letter of transmittal,
- the letter of transmittal (or facsimile thereof), properly completed
and duly executed, with any required signature guarantees or (in the
case of a book-entry transfer) an agent's message instead of the
letter of transmittal, and
- any other documents required by the letter of transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of original notes into the exchange agent's account at DTC.
The term "agent's message" means a message, transmitted by DTC to and received
by the exchange agent and forming a part of a book-entry confirmation, which
states that DTC has received an express acknowledgment from the tendering DTC
participant. This acknowledgment states that the participant has received and
agrees to be bound by the letter of transmittal and that Energy Holdings may
enforce the letter of transmittal against the participant.
Subject to the terms and conditions of the exchange offer, we will be
deemed to have accepted for exchange, and therefore exchanged, original notes
validly tendered and not withdrawn as, if and when we give oral or written
notice to the exchange agent of our acceptance of such original notes for
exchange pursuant to the exchange offer. The exchange agent will act as agent
for us for the purpose of receiving tenders of original notes, letters of
transmittal and related documents, and as agent for tendering holders for the
purpose of receiving original notes, letters of transmittal and related
documents and transmitting exchange notes to validly tendering holders. This
exchange will be made promptly after the expiration date.
If, for any reason whatsoever, acceptance for exchange or the exchange of
any tendered original notes is delayed, whether before or after our acceptance
for exchange of original notes, or we extend the exchange offer or are unable to
accept for exchange or exchange tendered original notes, then, without prejudice
to the rights we have in the exchange offer, the exchange agent may,
nevertheless, on our behalf and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered original notes. These original notes may not be withdrawn except
to the extent tendering holders are entitled to withdrawal rights as described
under "-- Withdrawal Rights".
Under the letter of transmittal or agent's message, a holder of original
notes will warrant and agree that it has full power and authority to tender,
exchange, sell, assign and transfer original notes, that we will acquire good,
marketable and unencumbered title to the tendered original notes, free and clear
of all liens, restrictions, charges and encumbrances, and the original notes
tendered for exchange are not subject to any adverse claims or proxies. The
holder also will warrant and agree that it will, upon request, execute and
deliver any additional documents deemed by us or the exchange agent to be
necessary or desirable to complete the exchange, sale, assignment, and transfer
of the original notes tendered in the exchange offer.
Procedures for Tendering Original Notes
Valid Tender. Except as indicated below, in order for original notes to be
validly tendered in the exchange offer, an original copy or facsimile of a
properly completed and duly executed letter of transmittal, with any required
signature guarantees, or, in the case of a book-entry tender, an agent's message
instead of the letter of transmittal, and any other required documents, must be
received by the exchange agent at one of its addresses listed under "-- Exchange
Agent". In addition, either:
- tendered original notes must be received by the exchange agent,
- the tender of original notes must follow the procedures for book-entry
transfer described below and a book-entry confirmation, including an
agent's message if the tendering holder has not delivered a letter of
transmittal, must be received by the exchange agent, in each case on
or before the expiration date, or
- the guaranteed delivery procedures described below must be complied
with.
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If less than all of the original notes are tendered, a tendering holder
should fill in the amount of original notes being tendered in the appropriate
box on the letter of transmittal. The entire amount of original notes delivered
to the exchange agent will be deemed to have been tendered unless otherwise
indicated.
The method of delivery of certificates, the letter of transmittal and all
other required documents is at the option and sole risk of the tendering holder.
Delivery will be deemed made only when actually received by the exchange agent.
If delivery is by mail, we recommend properly insured registered mail, return
receipt requested, or an overnight delivery service. In all cases, you should
allow sufficient time to ensure timely delivery.
Book-Entry Transfer. The exchange agent will establish an account with
respect to the original notes at DTC for purposes of the exchange offer within
two business days after the date of this prospectus. Any financial institution
that is a participant in DTC's book-entry transfer facility system may make a
book-entry delivery of the original notes by causing DTC to transfer such
Original Notes into the exchange agent's account at DTC in accordance with DTC's
procedures for transfers. However, although delivery of original notes may be
effected through book-entry transfer into the exchange agent's account at DTC,
the letter of transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees, or an agent's message instead
of the letter of transmittal, and any other required documents, must in any case
be delivered to and received by the exchange agent at its address listed under
"-- Exchange Agent" on or before the expiration date. Alternatively, the
guaranteed delivery procedure described below must be complied with.
Delivery of documents to DTC in accordance with DTC's procedures does not
constitute delivery to the exchange agent.
Signature Guarantees. Certificates for the original notes need not be
endorsed and signature guarantees on the letter of transmittal are unnecessary
unless
(1) a certificate for the original notes is registered in a name other
than that of the person surrendering the certificate or (2) such holder
completes the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" in the letter of transmittal. In the case of (1) or (2) above, the
certificates for original notes must be duly endorsed or accompanied by a
properly executed bond power, with the endorsement or signature on the bond
power and on the letter of transmittal guaranteed by a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as an "eligible guarantor
institution," including (as such terms are defined therein):
- a bank;
- a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer;
- a credit union;
- a national securities exchange, registered securities association or
clearing agency; or
- a savings association that is a participant in a Securities Transfer
Association (an "Eligible Institution"), unless surrendered on behalf
of that Eligible Institution. See Instruction 1 to the letter of
transmittal.
Guaranteed Delivery. If a holder desires to tender original notes in the
exchange offer and the certificates for the original notes are not immediately
available or time will not permit all required documents to reach the exchange
agent on or before the expiration date, or the procedures for book-entry
transfer cannot be completed on a timely basis, the original notes may
nevertheless be tendered, provided that all of the following guaranteed delivery
procedures are complied with:
(1) the tenders are made by or through an Eligible Institution;
(2) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying the letter of transmittal, is received by
the exchange agent, as provided below, on or before the expiration date; and
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(3) the certificates (or a book-entry confirmation) representing all
tendered original notes, in proper form for transfer, together with a properly
completed and duly executed letter of transmittal (or facsimile thereof), with
any required signature guarantees, or an agent's message instead of the letter
of transmittal, and any other documents required by the letter of transmittal,
are received by the exchange agent within three New York Stock Exchange trading
days after the date of execution of the Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the exchange agent and must include a guarantee by an
Eligible Institution in the form shown in the notice. Regardless of any other
provision in this prospectus, the delivery of exchange notes in exchange for
original notes tendered and accepted for exchange in the exchange offer will in
all cases be made only after timely receipt by the exchange agent of original
notes, or of a book-entry confirmation with respect to those original notes, and
an original copy or facsimile of a properly completed and duly executed letter
of transmittal, together with any required signature guarantees, or an agent's
message instead of the letter of transmittal, and any other documents required
by the letter of transmittal. Accordingly, the delivery of exchange notes might
not be made to all tendering holders at the same time, and will depend upon when
original notes, book-entry confirmations with respect to original notes and
other required documents are received by the exchange agent. Our acceptance for
exchange of original notes tendered under any of the procedures described above
will constitute a binding agreement between the tendering holder and us upon the
terms and subject to the conditions of the exchange offer.
Determination of Validity. All questions as to the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange of
any tendered original notes will be determined by us, in our sole discretion.
The interpretation by us of the terms and conditions of the exchange offer,
including the letter of transmittal and the accompanying instructions, will be
final and binding.
We reserve the absolute right, in our sole and absolute discretion, to
reject any and all tenders determined by us not to be in proper form or the
acceptance of which, or exchange for, may, in the opinion of our counsel, be
unlawful. We also reserve the absolute right, subject to applicable law, to
waive any condition or irregularity in any tender of original notes of any
particular holder whether or not similar conditions or irregularities are waived
in the case of other holders. No tender of original notes will be deemed to have
been validly made until all irregularities with respect to such tender have been
cured or waived. Neither we, any of our affiliates or assigns, the exchange
agent nor any other person will be under any duty to give any notification of
any irregularities in tenders or incur any liability for failure to give any
notification.
If any letter of transmittal, endorsement, bond power, power of attorney,
or any other document required by the letter of transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
that person should so indicate when signing, and unless waived by us, proper
evidence satisfactory to us, in our sole discretion, of that person's authority
must be submitted. A beneficial owner of original notes that are held by or
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or custodian is urged to contact that entity promptly if that
beneficial holder wishes to participate in the exchange offer.
Resales of Exchange Notes
We are making the exchange offer for the exchange notes in reliance on the
position of the staff of the Division of Corporation Finance of the SEC as
defined in certain interpretive letters addressed to third parties in other
transactions. However, we did not seek our own interpretive letter and we cannot
assure that the staff of the Division of Corporation Finance of the SEC would
make a similar determination with respect to the exchange offer as it has in
other interpretive letters to third parties. Based on these interpretations by
the staff of the Division of Corporation Finance of the SEC, and subject to the
two immediately following sentences, we believe that exchange notes issued
pursuant to this exchange offer in exchange for original notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
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exchange notes are acquired in the ordinary course of the holder's business and
that the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of the exchange notes.
However, any holder of original notes who is an "affiliate" of ours or who
intends to participate in the exchange offer for the purpose of distributing
exchange notes, or any broker-dealer who purchased original notes from us to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act,
(a) will not be able to rely on the interpretations of the staff of the
Division of Corporation Finance of the SEC defined in the above-mentioned
interpretive letters,
(b) will not be permitted or entitled to tender such original notes in the
exchange offer and
(c) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or other transfer of such
original notes unless such sale is made pursuant to an exemption from such
requirements.
In addition, as described below, if any broker-dealer holds original notes
acquired for its own account as a result of market-making or other trading
activities and exchanges those original notes for exchange notes, then that
broker-dealer must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of those exchange notes. Each
holder of original notes who wishes to exchange original notes for exchange
notes in the exchange offer will be required to represent that:
- it is not an "affiliate" of Energy Holdings,
- any exchange notes to be received by it are being acquired in the
ordinary course of its business,
- it has no arrangement or understanding with any person to participate
in a distribution (within the meaning of the Securities Act) of such
exchange notes, and
- if the tendering holder is not a broker-dealer, that holder is not
engaged in, and does not intend to engage in, a distribution (within
the meaning of the Securities Act) of its exchange notes.
In addition, we may require the holder, as a condition to that holder's
eligibility to participate in the exchange offer, to furnish to us (or an agent
of ours) in writing, information as to the number of "beneficial owners" (within
the meaning of Rule 13d-3 under the Exchange Act) on behalf of whom that holder
holds the original notes to be exchanged in the exchange offer.
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it acquired the original notes for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of those exchange notes. The letter
of transmittal states that by making that acknowledgement and delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the staff of the Division of Corporation Finance of the SEC in the
interpretive letters referred to above, we believe that participating
broker-dealers who acquired original notes for their own accounts as a result of
market-making activities or other trading activities may fulfill their
prospectus delivery requirements with respect to the exchange notes received
upon exchange of original notes (other than original notes which represent an
unsold allotment from the initial sale of the original notes) with a prospectus
meeting the requirements of the Securities Act, which may be the prospectus
prepared for this exchange offer so long as it contains a description of the
plan of distribution regarding the resale of the exchange notes.
Accordingly, this prospectus, as it may be amended or supplemented from
time to time, may be used by a participating broker-dealer in connection with
resales of exchange notes received in exchange for original notes where the
original notes were acquired by the participating broker-dealer for its own
account as a result of market-making or other trading activities. See "Plan of
Distribution". Subject to certain provisions contained in the exchange and
registration rights agreement, we have agreed that this prospectus, as it may be
amended or supplemented from time to time, may be used by
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a participating broker-dealer in connection with resales of exchange notes for a
period not exceeding 180 days after the expiration date. However, a
participating broker-dealer who intends to use this prospectus in connection
with the resale of exchange notes received in exchange for original notes
pursuant to the exchange offer must notify us on or before the expiration date,
that it is a participating broker-dealer. This notice may be given in the space
provided for that purpose in the letter of transmittal or may be delivered to
the exchange agent at one of the addresses set forth herein under "-- Exchange
Agent".
Any participating broker-dealer who is an "affiliate" of Energy Holdings
may not rely on these interpretive letters and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction. In that regard, each participating broker-dealer who
surrenders original notes in the exchange offer will be deemed to have agreed,
by execution of the letter of transmittal or an agent's message, that upon
receipt of notice from Energy Holdings of the occurrence of any event or the
discovery of:
(1) any fact which makes any statement contained or incorporated by
reference in this prospectus untrue in any material respect or
(2) any fact which causes this prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
in this prospectus, in light of the circumstances under which they were made,
not misleading, or
(3) the occurrence of other events specified in the exchange and
registration rights agreement,
that participating broker-dealer will suspend the sale of exchange notes under
this prospectus until we have amended or supplemented this prospectus to correct
the misstatement or omission and have furnished copies of the amended or
supplemented prospectus to the participating broker-dealer, or we have given
notice that the sale of the exchange notes may be resumed, as the case may be.
Withdrawal Rights
Except as otherwise provided in this prospectus, tenders of original notes
may be withdrawn at any time on or before the expiration date. In order for a
withdrawal to be effective a written, telegraphic, telex or facsimile
transmission of the notice of withdrawal must be timely received by the exchange
agent at its address listed under "-- Exchange Agent" on or before the
expiration date. Any notice of withdrawal must specify the name of the person
who tendered the original notes to be withdrawn, the aggregate principal amount
of original notes to be withdrawn, and, if certificates for the original notes
have been tendered, the name of the registered holder of the original notes, if
different from that of the person who tendered the original notes.
If original notes have been delivered or otherwise identified to the
exchange agent, then before the physical release of the original notes, the
tendering holder must submit the serial numbers shown on the particular original
notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of original notes
tendered for the account of an Eligible Institution. For original notes tendered
under the procedures for book-entry transfer described in "-- Procedures for
Tendering Original Notes", the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of original
notes, in which case a notice of withdrawal will be effective if delivered to
the exchange agent by written, telegraphic, telex or facsimile transmission.
Withdrawals of tenders of original notes may not be rescinded. Original notes
properly withdrawn will not be deemed validly tendered for purposes of the
exchange offer, but may be retendered at any subsequent time on or before the
expiration date by following any of the procedures described above under "--
Procedures for Tendering Original Notes". All questions as to the validity, form
and eligibility, including time of receipt, of withdrawal notices will be
determined by us, in our sole discretion, whose determination shall be final and
binding on all parties. Neither Energy Holdings, the exchange agent nor any
other person is under any duty to give any notification of any irregularities in
any notice of withdrawal nor will those parties incur any liability for failure
to give that notice. Any original notes which have been tendered but which are
withdrawn will be returned to the holder promptly after withdrawal.
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Interest on Exchange Notes
Interest on the notes is payable semi-annually on April 1 and October 1 of
each year, beginning April 1, 2000, at the rate of 10% per annum. The exchange
notes will bear interest from and including the last interest payment date on
the original notes, or if one has not yet occurred, the date of issuance of the
original notes. Accordingly, holders of original notes that are accepted for
exchange will not receive accrued but unpaid interest on original notes at the
time of tender. Rather, that interest will be payable on the exchange notes
delivered in exchange for the original notes on the first interest payment date
after the expiration date.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the
original notes for which they are exchanged, which is the aggregate principal
amount of the original notes, as reflected in our accounting records on the date
of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized in connection with the exchange offer. The cost of the exchange offer
will be amortized over the term of the exchange notes.
Exchange Agent
First Union National Bank has been appointed as exchange agent for the
exchange offer. Delivery of the letters of transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this prospectus or of the letter of transmittal should be directed to
the exchange agent as follows:
By Registered or Certified Mail:
First Union National Bank of North Carolina
First Union Customer Information Center
1525 West W.T. Harris Blvd.-3C3
Reorganization Department
Charlotte, North Carolina 28288
Attention: Michael Klotz (6110)
By Hand or Overnight Delivery Service:
First Union National Bank of North Carolina
First Union Customer Information Center
1525 West W.T. Harris Blvd.-3C3
Reorganization Department
Charlotte, North Carolina 28288
Attention: Michael Klotz (6110)
By Facsimile Transmission (for Eligible Institutions only):
(704) 590-7619
Confirm by Telephone:
(800) 829-8432 or (704) 590-7408
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
Fees and Expenses
We have agreed to pay the exchange agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses. We
will also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this prospectus and related documents to the beneficial owners of original
notes, and in handling or tendering for their customers. Holders who tender
their original notes for exchange will not be obligated to pay any transfer
taxes in connection with the transfer. If, however, exchange notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the original notes tendered, or if a transfer tax is
imposed for any reason other than the
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exchange of original notes in connection with the exchange offer, then the
amount of any such transfer taxes, whether imposed on the registered holder or
any other persons, will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the letter of transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder. We will not make any payment to brokers,
dealers or other nominees soliciting acceptances of the exchange offer.
DESCRIPTION OF EXCHANGE NOTES
Holders can find the definitions of some terms used in this description
under the subheading "Certain Definitions".
The terms of the exchange notes to be issued in the exchange offer are
identical in all material respects to the terms of the original notes, except
for the transfer restrictions relating to the original notes. The exchange notes
will be issued, and the original notes were issued, under an indenture dated
October 8, 1999, between Energy Holdings and First Union National Bank, as
trustee. The exchange notes will evidence the same debt as the original notes,
and both series of notes will be entitled to the benefits of the indenture and
will be treated as a single class of debt securities. Upon effectiveness of the
registration statement of which this prospectus is a part, the indenture will be
subject to and governed by the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
notes, the indenture and the exchange and registration rights agreement relating
to the notes. It does not restate those documents in their entirety. We urge
holders to read the notes, the indenture and the registration rights agreement
because they, and not this description, define your rights as holders of the
notes. Copies of the indenture, including a form of the notes, and the
registration rights agreement are available as described below under
"-- Additional Information".
Brief Description of the Notes
The notes are general senior unsecured obligations of Energy Holdings and
rank equally in right of payment with all of the other unsecured and
unsubordinated indebtedness of Energy Holdings. Although the notes are senior
unsecured obligations, Energy Holdings has not issued, and does not have any
current firm arrangements to issue, any significant additional indebtedness to
which the notes would be senior. In addition, the notes will be effectively
subordinate to any secured indebtedness issued by Energy Holdings. Energy
Holdings has not issued, and does not have any current firm arrangements to
issue, any secured obligations to which the notes would be effectively
subordinate.
Because Energy Holdings is a holding company that conducts all of its
operations through its subsidiaries, holders of the notes will generally have a
junior position to claims of creditors of those subsidiaries, including trade
creditors, debtholders, secured creditors and taxing authorities.
Principal, Maturity and Interest
The indenture does not limit the aggregate principal amount of debt
securities which may be issued under it. The exchange notes will initially be
limited to $400,000,000 and will be issued in registered form only, without
coupons, in minimum denominations of $1,000. Energy Holdings may "reopen" any
series of debt securities and issue additional debt securities of that series.
The notes will mature on October 1, 2009, the stated maturity date, unless
redeemed or repurchased prior to that date.
Interest on the notes accrues at the rate of 10% per annum and is payable
semi-annually in arrears on April 1 and October 1 of each year, beginning April
1, 2000. Energy Holdings will make each interest payment to the persons in whose
names the notes are registered at the close of business on the March 15 and
September 15 immediately preceding any interest payment date.
Interest on the exchange notes will accrue from the date of original
issuance or, if interest has already been paid, from the most recent interest
payment date to which interest was paid or duly provided for. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months. If
any interest payment date or the stated maturity date or date of earlier
redemption or
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repurchase is not a business day, the required payment shall be made on the next
succeeding day which is a business day, without any interest or other payment in
respect of the payment subject to delay, with the same force and effect as if
made on the interest payment date or stated maturity date or date of earlier
redemption or repurchase.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in Newark, New Jersey and The
City of New York are authorized or obligated by law or executive order to close.
Payment and Paying Agents
Interest on the notes is payable at any office or agency to be maintained
by Energy Holdings in Newark, New Jersey and The City of New York. At the option
of Energy Holdings, however, interest may be paid
o by check mailed to the address of the person entitled to the interest
payment at the address that appears in the "security register"
maintained by Energy Holdings or
o by wire transfer to an account maintained by the person entitled to
the interest payment as specified in the security register. (Sections
301, 1001 and 1002 of the Indenture).
Transfer and Exchange
Under the indenture, debt securities of any series, including the notes,
may be presented for registration of transfer and may be presented for exchange
o at each office or agency required to be maintained by Energy Holdings
for payment of such series as described in "--Payment and Paying
Agents", and
o at each other office or agency that Energy Holdings may designate from
time to time for such purposes.
No service charge will be made for any transfer or exchange of debt
securities, including the notes, but Energy Holdings may require payment of any
tax or other governmental charge payable in connection with the transfer or
exchange. (Section 305 of the indenture).
The indenture does not require Energy Holdings to
o issue, register the transfer of or exchange debt securities during a
period beginning at the opening of business 15 days before any
selection of debt securities of that series to be redeemed and ending
at the close of business on (A) if debt securities of the series are
issuable only in registered form, the day of mailing of the relevant
notice of redemption and (B) if debt securities of the series are
issuable in bearer form, the day of the first publication of the
relevant notice of redemption, or, if debt securities of the series
are also issuable in registered form and there is no publication, the
day of mailing of the relevant notice of redemption;
o register the transfer of or exchange any debt security in registered
form, or portion thereof, called for redemption, except the unredeemed
portion of any debt security in registered form being redeemed in
part;
o exchange any debt security in bearer form called for redemption,
except to exchange such debt security in bearer form for a debt
security in registered form of that series and like tenor that is
simultaneously surrendered for redemption; or
o issue, register the transfer of or exchange any debt security which
has been surrendered for repayment at the option of the holder, except
the portion, if any, of that debt security not to be repaid. (Section
305 of the Indenture).
The registered holder of a note will be treated as the owner of it for all
purposes.
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Optional Redemption
The notes will be redeemable at the option of Energy Holdings, in whole or
in part at any time, on at least 30 days but not more than 60 days prior written
notice mailed to the registered holders thereof, at a redemption price equal to
the greater of
o 100% of the principal amount of the notes to be redeemed, and
o the sum, as determined by the Quotation Agent (as defined below), of
the present values of the principal amount of the notes to be redeemed
and the remaining scheduled payments of interest thereon from the
redemption date to October 1, 2009, which we refer to as the remaining
life, discounted from their respective payment dates to the date of
redemption on a semiannual basis, assuming a 360-day year consisting
of twelve 30-day months, at the Treasury Rate (as defined below) plus
40 basis points
plus, in either case, accrued interest thereon to the date of redemption.
If money sufficient to pay the redemption price of and accrued interest on
all of the notes to be redeemed on the redemption date is deposited with the
trustee or paying agent on or before the redemption date and other conditions
under the indenture are satisfied, then on and after that redemption date,
interest will cease to accrue on those notes called for redemption.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
life that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity with the remaining life of the notes to be redeemed.
"Comparable Treasury Price" means, with respect to any redemption date,
the average of four Reference Treasury Dealer Quotations for such redemption
date, after excluding the highest and lowest of such Reference Treasury Dealer
Quotations, or, if the trustee obtains fewer than four Reference Treasury Dealer
Quotations, the average of all of the quotations.
"Quotation Agent" means the Reference Treasury Dealer appointed by Energy
Holdings. "Reference Treasury Dealer" means (i) Goldman, Sachs & Co., Banc of
America Securities LLC, Lehman Brothers Inc., and Merrill Lynch Government
Securities, Inc. and their respective successors; provided, however, that if any
of them shall cease to be a primary United States Government securities dealer
in New York City, which we refer to as a Primary Treasury Dealer, Energy
Holdings shall substitute therefor another Primary Treasury Dealer, and (ii) any
other Primary Treasury Dealer selected by Energy Holdings.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the trustee, of the bid and asked prices for the Comparable Treasury Issue,
expressed in each case as a percentage of its principal amount, quoted in
writing to the trustee by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding such redemption date.
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semiannual yield to maturity of the Comparable Treasury
Issue, calculated on the third business day preceding the redemption date using
a price for the Comparable Treasury Issue, expressed as a percentage of its
principal amount, equal to the Comparable Treasury Price for such redemption
date.
Energy Holdings may at any time, and from time to time, purchase the notes
at any price or prices in the open market or otherwise.
Mandatory Redemption
Energy Holdings is not required to make mandatory redemption or sinking
fund payments with respect to the notes.
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Certain Definitions
The following is a summary of certain defined terms used in the indenture.
Article One of the indenture contains the full definition of all such terms.
"Attributable Debt" in respect of a Sale and Leaseback Transaction means,
as at the time of determination, the present value (discounted at a rate per
annum equal to the weighted average interest rate of all outstanding debt
securities, compounded semi-annually) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such Sale and
Leaseback Transaction (including any period for which such lease has been
extended).
"Capitalized Lease Obligations" means all rental obligations as lessee
which, under GAAP, are or will be required to be capitalized on the books of
Energy Holdings or any of its subsidiaries, in each case taken at the amount
thereof accounted for as indebtedness in accordance with such principles.
"Change of Control" means the occurrence of one or more of the following
events:
(1) PSEG (or its successors) shall cease to own a majority of the
outstanding voting stock of Energy Holdings,
(2) at any time following the occurrence of the event described in
clause (1), a person or group (as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934) of persons (other
than PSEG) shall have become, directly or indirectly, the beneficial
owner or shall have acquired the absolute power to direct the vote,
of more than 35% of the outstanding voting stock of Energy Holdings,
(3) during any twelve-month period, individuals who at the beginning of
such period constitute the Board of Directors of Energy Holdings
(together with any new directors whose election or nomination was
approved by a majority of the directors then in office who were
either directors at the beginning of such period or who were
previously so approved) shall cease for any reason to constitute a
majority of the Board of Directors of Energy Holdings, unless
approved by a majority of the Board of Directors in office at the
beginning of such period (including such new directors), or
(4) Energy Holdings shall have merged or consolidated with any other
corporation or the properties and assets of Energy Holdings shall
have been conveyed or transferred substantially as an entirety to
any person in accordance with Section 801 of the indenture as
described under "-- Merger or Consolidation".
However, regardless of whether one or more of the above events occurs or
circumstances exist, a Change of Control shall be deemed not to have occurred if
after giving effect to the event or circumstance, the debt securities, including
the notes, are rated no less than "BBB-" by Standard & Poor's Ratings Group and
"Ba1" by Moody's Investors Service.
"Consolidated Net Tangible Assets" means, as of any date of determination,
the total amount of assets, less accumulated depreciation or amortization,
valuation allowances, other applicable reserves and other properly deductible
items in accordance with GAAP, which would appear on a consolidated balance
sheet of Energy Holdings and its consolidated subsidiaries, determined on a
consolidated basis in accordance with GAAP, after giving effect to purchase
accounting and after deduction therefrom, to the extent otherwise included, the
amounts of
o consolidated current liabilities;
o deferred income taxes;
o minority interests in consolidated Subsidiaries held by persons other
than Energy Holdings or a subsidiary;
o excess of cost over fair value of assets of businesses acquired, as
determined by the Board of Directors; and
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o unamortized debt discount and expense and other unamortized deferred
changes, goodwill (including the amounts of investments in affiliates
that consist of goodwill), patents, trademarks, service names, trade
names, copyrights, licenses, deferred project costs, organizational or
other development expenses and other intangible items.
"Indebtedness" of any person means
o all indebtedness of such person for borrowed money, whether or not
represented by bonds, debentures, notes or other securities,
o the deferred purchase price of assets or services which in accordance
with GAAP would be shown on the liability side of the balance sheet of
such person,
o all Indebtedness of another person secured by any Lien on any property
owned by such person, whether or not such Indebtedness has been
assumed,
o all obligations of such person to pay a specified purchase price for
goods or services whether or not delivered, i.e., take-or-pay and
similar obligations,
o all Capitalized Lease Obligations of such person and
o all obligations of such person guaranteeing any Indebtedness, lease,
dividend or other obligation of any other person, directly or
indirectly, whether contingent or otherwise.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), preference, priority or
other security agreement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement, any
financing or similar statement or notice filed under the UCC or any other
similar recording or notice statute, and any lease having substantially the same
effect as any of the foregoing).
"Material Subsidiary" means any subsidiary of Energy Holdings the
consolidated assets of which, as of the date of any determination of those
assets, constitute at least 10% of the consolidated assets of Energy Holdings
and its subsidiaries, or the consolidated earnings before taxes of which
constituted at least 10% of the consolidated earnings before taxes of Energy
Holdings and its subsidiaries for the most recently completed fiscal year,
provided, however, that
o no subsidiary of a Material Subsidiary shall be a Material Subsidiary, and
o in all instances each of Global, Resources and PSEG Capital shall be a
Material Subsidiary.
"Sale and Leaseback Transaction" means an arrangement relating to property
or assets now owned or acquired after the date of the indenture whereby Energy
Holdings or a subsidiary transfers such property or assets to a person and
leases it back from such person, other than leases for a term of not more than
36 months or between Energy Holdings and a wholly-owned subsidiary or between
wholly-owned subsidiaries.
Certain Covenants
The notes and other series of debt securities issuable under the indenture
will have the benefit of the following covenants which may be waived by the
holders of at least a majority in principal amount of the notes outstanding.
These covenants may not be waived by us or the Trustee.
Limitation on Liens
Energy Holdings covenants in the indenture that it will not, and will not
permit any of its subsidiaries to create, incur, assume or suffer to exist any
Lien upon or with respect to any property or assets (real or personal, tangible
or intangible) of Energy Holdings or any of its subsidiaries, whether now owned
or acquired after the date of the indenture, to secure any Indebtedness that is
incurred, issued, assumed or guaranteed by Energy Holdings or any of its
subsidiaries without in any such case effectively providing, concurrently with
the incurrence, issuance, assumption or guaranty of any such Indebtedness, that
the debt securities shall be equally and ratably secured with any and all such
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Indebtedness; provided, however, that these restrictions shall not apply to or
prevent the creation, incurrence, assumption or existence of:
o Liens existing on the date of the indenture;
o Liens to secure or provide for the payment of all or any part of the
purchase price of any such property or assets or the cost of construction
or improvement thereof; provided that no such Lien shall extend to or
cover any other property or assets of Energy Holdings or such Subsidiary
of Energy Holdings;
o Liens granted or assumed by subsidiaries (other than Material
Subsidiaries) in connection with project financings or other Indebtedness
that is not guaranteed by or otherwise an obligation of a Material
Subsidiary;
o Liens on the equity interest of any subsidiary that is not a Material
Subsidiary in connection with project financings;
o Liens for taxes not yet due, or Liens for taxes being contested in good
faith and by appropriate proceedings for which adequate reserves have been
established;
o Liens incidental to the conduct of the business of or the ownership of
property by Energy Holdings or any of its subsidiaries which were not
incurred in connection with the borrowing of money or the obtaining of
advances of credit and which do not in the aggregate materially detract
from the value of its property or assets or materially impair the use
thereof in the operation of its business;
o Liens created in connection with worker's compensation, unemployment
insurance and other social security legislation;
o the replacement, extension or renewal (or successive replacements,
extensions or renewals), as a whole or in part, of any Lien, or of any
agreement, referred to above, or the replacement, extension or renewal
(not exceeding the principal amount of Indebtedness secured thereby
together with any premium, interest, fee or expense payable in connection
with any such replacement, extension or renewal) of the Indebtedness
secured thereby; provided that such replacement, extension or renewal is
limited to all or a part of the same property that secured the Lien
replaced, extended or renewed (plus improvements thereon or additions or
accessions thereto); or
o any other Lien not excepted by the foregoing clauses; provided that,
immediately after the creation or assumption of such Lien, the sum of (x)
the amount of outstanding Indebtedness of Energy Holdings secured by all
Liens created or assumed under the provisions of this clause plus (y) the
Attributable Debt with respect to all outstanding leases in connection
with Sale and Leaseback transactions entered into pursuant to the proviso
under "--Limitation on Sale and Leaseback Transactions" does not exceed an
amount equal to 10% of Consolidated Net Tangible Assets, as shown on the
consolidated balance sheet of Energy Holdings and its subsidiaries as of
the end of the most recent fiscal quarter for which financial statements
are available. (Section 1005 of the indenture).
Limitation on Sale and Leaseback Transactions
Energy Holdings covenants in the indenture that it will not, and will not
permit any Subsidiary to, enter into any Sale and Leaseback Transaction unless
(1) Energy Holdings or such Subsidiary would be entitled to create a
Lien on such property or assets securing Indebtedness in an amount
equal to the Attributable Debt with respect to such transaction
without equally and ratably securing the debt securities as
described under the preceding subsection "--Limitation on Liens" or
(2) the net proceeds of such sale are
o at least equal to the fair value (as determined by our board of
directors) of such property and
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o Energy Holdings or such Subsidiary shall apply or cause to be
applied an amount in cash equal to the net proceeds of such sale
to the retirement, within 90 days of the effective date of any
such arrangement, of debt securities or Indebtedness of Energy
Holdings which ranks senior or equal with the debt securities or
with Indebtedness of a Subsidiary (other than Indebtedness owed
to Energy Holdings or a Subsidiary or to PSEG).
However, in addition to the transactions permitted as described in the clauses
(1) and (2), Energy Holdings or any subsidiary may enter into a Sale and
Leaseback Transaction as long as the sum of
(x) the Attributable Debt with respect to such Sale and Leaseback
Transaction and all other Sale and Leaseback Transactions entered
into as described in this proviso, plus
(y) the amount of outstanding Indebtedness secured by Liens incurred as
described in the last bullet paragraph of the preceding subsection
"Limitation on Liens",
does not exceed an amount equal to 10% of Consolidated Net Tangible Assets, as
shown on the consolidated balance sheet of Energy Holdings and its subsidiaries
as of the end of the most recent fiscal quarter for which financial statements
are available. (Section 1006 of the indenture).
Repayment of Notes Upon a Change of Control
Upon a Change of Control, holders of the notes will have the right to
require Energy Holdings to repurchase their notes, in whole or in part, at a
repayment price of 101% of their principal amount plus accrued interest to the
repayment date. The holder of debt securities of each other series to be issued
under the indenture will have the right to require Energy Holdings to repurchase
its debt securities at a repayment price in cash equal to a specified percentage
of the principal amount of the notes to be repurchased established for that
series plus accrued interest, if any, to the date of repayment, in accordance
with the terms described below and in Article 13 of the indenture.
Within 30 days following any Change of Control, Energy Holdings will mail
a notice to each holder of debt securities of each series (with a copy to the
trustee) stating:
o that a Change of Control has occurred and that the holder has the right to
require Energy Holdings to repay that holder's debt securities, in whole
or in part, in not less than the minimum denomination required for debt
securities of that series, at a repayment price in cash equal to the
percentage of the principal amount of the debt securities established for
that series plus accrued interest, if any, to the date of repayment;
o the circumstances and relevant facts regarding such Change of Control,
including information with respect to pro forma historical income, cash
flow and capitalization of Energy Holdings after giving effect to the
Change of Control;
o the repayment date, which will be a Business Day and be not earlier than
45 days or later than 60 days from the date such notice is mailed;
o that any debt security of the series not tendered for purchase will
continue to accrue interest;
o that interest on any debt security of the series accepted for repayment
pursuant to the change of control offer shall cease to accrue after the
repayment of the debt security on the repayment date;
o that holders electing to have any debt security repaid pursuant to a
change of control offer will be required to surrender the debt security,
with the form entitled "Option to Elect Repayment" on the reverse of the
debt security completed, to the trustee at the address specified in the
notice not earlier than 45 days and not later than 30 days prior to the
repayment date;
o that holders will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the third business
day preceding the repayment date, or such shorter period as may be
required by applicable law, a telegram, telex, facsimile transmission or
letter providing the name of the holder, the principal amount of debt
securities the holder delivered for repayment, and a statement that the
holder is withdrawing its election to have those debt securities repaid;
and
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o that holders of the series that elect to have their debt securities
purchased only in part will be issued new debt securities of the series in
a principal amount equal to then unpurchased portion of the debt
securities surrendered.
Energy Holdings has covenanted to comply with the tender offer provisions
of Rule 14e-1 under the Securities Exchange Act of 1934 and any other applicable
laws and regulations in the event that a Change of Control occurs and Energy
Holdings is required to make a change of control offer. (Section 1007 of the
indenture).
Our $300 million 9 1/8% Senior Notes due 2004 rank equally with the notes
and contain the same change of control provisions.
Energy Holdings has change of control provisions in four bank agreements
(two revolving credit and two letters of credit) with an aggregate principal
amount of $1,000,000,000 and expiration dates from May 2000 through May 2003.
Borrowings under these agreements rank equally with the exchange notes.
Specific change of control provisions in the bank lending agreements are
as follows:
o Default if PSEG ceases to own at least 80% of Energy Holdings
o Default if Energy Holdings ceases to own 100% of Material Subsidiaries
(Global and Resources)
Energy Holdings' ability to repay its Indebtedness, including the exchange
notes, will depend upon the amount of debt outstanding at the time of the change
of control.
Events of Default and Remedies
The following will constitute events of default under the indenture:
o default in the payment of any interest upon any debt security, any coupon
appertaining thereto or any "additional amounts" (which, if the terms of
the particular series of debt securities so specify, will be payable upon
the occurrence of certain events of tax, assessment or governmental charge
with respect to payments on the debt securities) payable in respect of any
debt security of that series when such interest, coupon or additional
amounts become due and payable, and the continuance of such default for a
period of 30 days;
o default in the payment of the principal of (or premium, if any, on) any
debt security of that series, when the same becomes due and payable at
maturity, upon redemption;
o default in the deposit of any sinking fund payment when due by the terms
of any debt security of that series;
o default in the performance, or breach, of any covenant or agreement of
Energy Holdings in the indenture with respect to any debt security of that
series, and the continuance of such default for 60 days after written
notice of such default to Energy Holdings;
o acceleration of any bond, debenture, note or other evidence of
Indebtedness or under any mortgage, indenture, including the indenture, or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness by Energy Holdings or any subsidiary
in excess of $25,000,000 in the aggregate other than
(1) any Indebtedness arising from the obligation to make an equity
investment in a subsidiary or
(2) Indebtedness which is payable solely out of the property or assets
of a partnership, joint venture or similar entity of which Energy
Holdings or any such subsidiary is a participant, or which is
secured by a Lien on the property or assets owned or held by such
entity, without further recourse to or liability of Energy Holdings
or any such subsidiary,
whether such Indebtedness now exists or shall be created later;
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o certain events in bankruptcy, insolvency or reorganization affecting
Energy Holdings; and
o any other event of default provided with respect to debt securities of
that series. (Section 501 of the indenture).
Energy Holdings is required to file with the trustee, annually, an
officer's certificate as to Energy Holdings' compliance with all conditions and
covenants under the indenture. (Section 1008 of the indenture). The indenture
provides that the trustee may withhold notice to the holders of debt securities
of a series, including the notes, of any default (except payment defaults on the
debt securities of that series) if it considers it in the interest of the
holders of debt securities of the series to do so. (Section 601 of the
indenture).
If an event of default with respect to debt securities of a series,
including the notes, has occurred and is continuing, the trustee or the holders
of not less than 25% in principal amount of outstanding debt securities of that
series may declare the principal of all of the debt securities of that series to
be due and payable immediately, by a notice in writing to Energy Holdings.
However, if the debt securities of that series are issued with original issue
discount or are "indexed debt securities," the trustee or the holders of not
less than 25% of the debt securities may declare that portion of the principal
as may be specified in the terms of those debt securities due and payable
immediately. (Section 502 of the indenture). Indexed debt securities are debt
securities, the interest and principal payments on which are determined by
reference to a particular index, such as a foreign currency or commodity.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default with respect to debt securities of any
series, including the notes, has occurred and is continuing, the trustee is
under no obligation to exercise any of its rights or powers under the indenture
at the request, order or direction of the holders of debt securities of that
series, unless those holders have offered the trustee reasonable indemnity
against the expenses and liabilities which might be incurred by it in compliance
with such request. (Section 507 of the indenture).
Subject to the provisions for the indemnification of the trustee, the
holders of a majority in principal amount of the outstanding debt securities of
any series of debt securities, including the notes, will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or exercising any trust or power conferred on the
trustee with respect to the debt securities of that series. (Section 512 of the
indenture).
The holders of a majority in principal amount of the outstanding debt
securities of a series, including the notes, may, on behalf of the holders of
all debt securities of such series and any related coupons, waive any past
default under the indenture with respect to that series and its consequences,
except a default
o in the payment of the principal of (or premium, if any) or interest, if
any, on or additional amounts payable in respect of any debt security of
such series or any related coupons or
o in respect of a covenant or provision that cannot be modified or amended
without the consent of the holder of each outstanding debt security of
that series. (Section 513 of the indenture).
Repayment of Notes Upon Certain Events Involving Resources
If
(1) Energy Holdings shall no longer own 100% of the equity ownership
interest in Resources, or
(2) (a) a transaction or series of related transactions (a "Resources
Transaction") causes the assets of Resources immediately after
such Resources Transaction to be at least 20% less than the
assets of Resources immediately prior to such Resources
Transaction (as measured from the end of the month immediately
preceding the Resources Transaction (or in the case of a
Resources Transaction involving a series of transactions, the
month immediately preceding the first of such transactions))
and
(b) as a direct result of such Resources Transaction, either of
Standard & Poor's Ratings Group or Moody's Investors Service,
Inc. shall downgrade its respective rating of Energy Holdings
below BBB- or Ba1 (or if either of such ratings immediately
preceding the
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Resources Transaction is lower than BBB- or Ba1, such rating
shall as a direct result of such Resources Transaction be
downgraded),
then the holders of the notes shall have the right to require Energy Holdings to
repurchase their notes, in whole or in part, at a repayment price equal to the
greater of
o 100% of the principal amount of the notes to be repurchased, and
o the sum, as determined by the Quotation Agent (as defined on page 68), of
the present values of the principal amount of the notes to be repurchased
and the remaining scheduled payments of interest thereon from the
repayment date to October 1, 2009 discounted from their respective payment
dates to the date of repayment on a semiannual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Treasury Rate (as defined
on page 68), plus 40 basis points
plus, in either case, accrued interest on the notes to the date of repayment.
Merger or Consolidation
The indenture provides that Energy Holdings may not consolidate with or
merge with or into any other corporation or convey or transfer its properties
and assets substantially as an entirety to any person, unless either Energy
Holdings is the continuing corporation or such corporation or person assumes by
supplemental indenture all the obligations of Energy Holdings under the
indenture and the debt securities issued under it and immediately after the
transaction no default shall exist. (Section 801 of the indenture).
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future director, officer, employee, incorporator or
stockholder of Energy Holdings, as such, shall have any liability for any
obligations of Energy Holdings under the notes and the indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of notes by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. The waiver may not be effective to waive liabilities under the
federal securities laws. (Section 113 of the indenture).
Satisfaction and Discharge, Defeasance and Covenant Defeasance
According to the terms of the indenture, Energy Holdings may discharge
certain obligations to holders of any series of debt securities, including the
notes, that have not already been delivered to the trustee for cancellation and
that either have become due and payable or are by their terms due and payable
within one year, or scheduled for redemption within one year, by irrevocably
depositing with the trustee, in trust, funds in an amount sufficient to pay the
entire indebtedness on such debt securities for principal, and premium, if any,
and interest, if any, and any additional amounts with respect to the debt
securities, to the date of such deposit, if the debt securities have become due
and payable, or to the maturity date or redemption date, as the case may be.
(Section 401 of the indenture).
The indenture provides that, if the provisions of Article Fourteen of the
indenture are made applicable to the debt securities of or within any series,
including the notes, and any related coupons, Energy Holdings may elect either
(a) to defease and be discharged from any and all obligations with
respect to the debt securities and any related coupons, except for
the obligations to pay additional amounts, if any, upon the
occurrence of certain events of tax, assessment or governmental
charge with respect to payments on such debt securities and the
obligations to register the transfer or exchange of such debt
securities and any related coupons, to replace temporary or
mutilated, destroyed, lost or stolen debt securities and any related
coupons, to maintain an office or agency in respect of such debt
securities and any related coupons, and to hold moneys for payment
in trust (Section 1402 of the indenture) or
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(b) to be released from its obligations under any covenant specified
pursuant to Section 301 with respect to such debt securities and any
related coupons, and any omission to comply with such obligations
shall not constitute a default or an event of default with respect
to such debt securities and any related coupons (Section 1403 of the
indenture),
in either case upon the irrevocable deposit by Energy Holdings with the trustee,
in trust, of
(1) an amount in United States Dollars,
(2) Government Obligations (as defined below) applicable to such debt
securities and coupons that through the payment of principal and interest in
accordance with their terms will provide money in an amount, or
(3) a combination of the items referred to in (1) or (2)
in an amount, sufficient to pay the principal of, and premium, if any, and
interest, if any, on the debt securities and any related coupons, and any
mandatory sinking fund or analogous payments on them, on all scheduled due
dates.
Such a trust may only be established if, among other things, Energy
Holdings has delivered to the trustee an opinion of counsel to the effect that
the holders of such debt securities and any related coupons will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to United States
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance or covenant defeasance had not
occurred. The opinion of counsel, in the case of defeasance under clause (a)
above, must refer to and be based upon a ruling of the Internal Revenue Service
or a change in applicable United States federal income tax law occurring after
the date of the indenture. (Section 1404 of the indenture).
"Government Obligations" means securities which are
o direct obligations of the United States or
o obligations of a person controlled or supervised by and acting as an
agency or instrumentality of the United States, the payment of which
is unconditionally guaranteed as a full faith and credit obligation
by the United States, which are not callable or redeemable at the
option of the issuer of that obligation.
Government Obligations also include a depository receipt issued by a bank or
trust company as custodian with respect to any such Government Obligation or a
specific payment of interest on or principal of any such Government Obligation
held by such custodian for the account of the holder of a depository receipt;
provided that, except as required by law, such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from the amount received by the custodian in respect of the Government
Obligation or the specific payment of interest on or principal of the Government
Obligation evidenced by such depository receipt. (Section 101 of the indenture).
In the event Energy Holdings effects covenant defeasance with respect to
any debt securities and any related coupons and those debt securities and
coupons are declared due and payable because of the occurrence of any event of
default, other than the events of default described in clauses (4) or (8) of
Section 501 of the indenture, with respect to any covenant to which there has
been defeasance, the amount of Government Obligations and funds on deposit with
the trustee will be sufficient to pay amounts due on such debt securities and
coupons at the time of their stated maturity but may not be sufficient to pay
amounts due on such debt securities and coupons at the time of the acceleration
resulting from such event of default. In such case, Energy Holdings would remain
liable to make payment of such amounts due at the time of acceleration. (Section
501 of the indenture).
If the trustee or any paying agent is unable to apply any money in
accordance with the indenture by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then Energy Holdings' obligations under the indenture and such debt
securities and any related coupons shall be revived and reinstated as though no
deposit had occurred pursuant to the indenture, until such time as such trustee
or paying agent is permitted to apply
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all such money in accordance with the indenture. However, if Energy Holdings
makes any payment of principal of, or premium, if any, or interest, if any, on
any such debt security or any related coupon following the reinstatement of its
obligations, Energy Holdings shall be subrogated to the rights of the holders of
such debt securities and any related coupons to receive such payment from the
money held by such trustee or paying agent.
Amendment, Supplement and Waiver
Energy Holdings and the trustee may modify and amend the indenture with
the consent of the holders of a majority in principal amount of all outstanding
debt securities that are affected by the modification or amendment; provided
that no modification or amendment may, without the consent of the holder of each
outstanding debt security affected by the modification or amendment, among other
things:
o change the stated maturity date of the principal of, or premium, if any,
on, or any installment of principal of or interest on any debt security;
o reduce the principal amount of, or the rate or amount of interest in
respect of, or any premium payable upon the redemption of, any debt
security;
o change the manner of calculating the rate of interest;
o change any obligation of Energy Holdings to pay additional amounts in
respect of any debt security;
o reduce the portion of the principal of a debt security issued with the
original issue discount or an indexed debt security that would be due and
payable upon a declaration of acceleration of the maturity of the debt
security or provable in bankruptcy;
o adversely affect any right of repayment at the option of the holder of any
such debt security;
o change the place of payment of principal of, or any premium or interest
on, the debt security;
o impair the right to institute suit for the enforcement of any payment on
or after the stated maturity date of the debt security or on or after any
redemption date or repayment date for the debt security;
o adversely affect any right to convert or exchange any debt security;
o reduce the percentage in principal amount of such outstanding debt
securities, the consent of whose holders is required to amend or waive
compliance with certain provisions of the indenture or to waive certain
defaults under the indenture;
o reduce the requirements for voting or quorum described below; or
o modify any of the preceding requirements or any of the provisions relating
to waiving past defaults or compliance with certain restrictive
provisions, except to increase the percentage of holders required to
effect waiver or to provide that certain other provisions of the indenture
cannot be modified or waived without the consent of the holder of each
debt security affected by the modification or waiver. (Section 902 of the
indenture).
Energy Holdings and the trustee may modify and amend the indenture without
the consent of any holder, for any of the following purposes:
o to evidence the succession of another person to Energy Holdings and the
assumption by any successor of the covenants of Energy Holdings under the
indenture and the debt securities;
o to add to the covenants of Energy Holdings for the benefit of the holders
of all or any series of debt securities issued under the indenture,
including the notes, and any related coupons or to surrender any right or
power conferred upon Energy Holdings by the indenture;
o to add events of default for the benefit of the holders of all or any
series of debt securities, including the notes, issued under the
indenture;
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o to add to or change any provisions of the indenture to facilitate the
issuance of, or to liberalize the terms of, debt securities issued in
bearer form or to permit or facilitate the issuance of debt securities in
uncertificated form, provided that any such actions do not adversely
affect the interests of the holders of the debt securities issued under
the indenture or any related coupons in any material respect;
o to change or eliminate any provisions of the indenture, provided that any
change or elimination of this nature will become effective only when there
are no debt securities outstanding of any series created prior to the
change or elimination of the provision which are entitled to the benefit
of the provisions;
o to secure the debt securities, including the notes, under the indenture
pursuant to the requirements of Section 1005 of the indenture, or
otherwise;
o to establish the form or terms of debt securities of any series and any
related coupons;
o to evidence and provide for the acceptance of appointment by a successor
trustee or facilitate the administration of the trusts under the indenture
by more than one trustee;
o to cure any ambiguity, defect or inconsistency in the indenture, provided
such action does not adversely affect the interests of holders of debt
securities of a series, including the notes, issued under the indenture or
any related coupons in any material way; or
o to supplement any of the provisions of the indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series
of debt securities issued under the indenture, including the notes,
provided that the action does not adversely affect the interests of the
holders of the debt securities of that series, including the notes, and
any related coupons in any material way. (Section 901 of the indenture).
In determining whether the holders of the requisite principal amount of
outstanding debt securities have given any request, demand, authorization,
direction, notice, consent or waiver under the indenture or whether a quorum is
present at a meeting of holders of debt securities thereunder,
o the principal amount of a debt security issued with original issue
discount that will be deemed to be outstanding will be the amount of the
principal thereof that would be due and payable as of the date of such
determination upon acceleration of the maturity of the debt security,
o the principal amount of an indexed debt security that may be counted in
making the determination or calculation and that will be deemed
outstanding will be equal to the principal face amount of the indexed debt
security at original issuance, unless otherwise provided pursuant to
Section 301 of the indenture, and
o Debt securities owned by Energy Holdings or any other obligor upon the
debt securities or any affiliate of Energy Holdings or of such other
obligor shall be disregarded. (Section 101 of the indenture).
The indenture contains provisions for convening meetings of the holders of
debt securities of a series if debt securities of that series are issuable in
bearer form. (Section 1501 of the indenture) A meeting may be called at any time
by the trustee, and also, upon request, by Energy Holdings or the holders of at
least 10% in principal amount of the outstanding debt securities of that series,
in any such case upon notice given as provided in the indenture. (Section 1502
of the indenture) Except for any consent that must be given by the holder of
each debt security, as described above, any resolution presented at a meeting
(or an adjourned meeting duly reconvened) at which a quorum is present may be
adopted by the affirmative vote of the holders of a majority in principal amount
of outstanding debt securities of that series; provided, however, that any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage which is less than a majority in principal
amount of outstanding debt securities of a series may be adopted at a meeting
(or an adjourned meeting duly reconvened) at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the outstanding debt securities of that series. Any resolution passed or
decision taken at any
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meeting of holders of debt securities of a series duly held in accordance with
the indenture will be binding on all holders of debt securities of that series
and any related coupons. The quorum at any meeting called to adopt a resolution
will be persons holding or representing a majority in principal amount of the
outstanding debt securities of a series; provided, however, that, if any action
is to be taken at a meeting with respect to a consent or waiver which may be
given by the holders of not less than a specified percentage in principal amount
of the outstanding debt securities of a series, the persons holding or
representing the specified percentage in principal amount of the outstanding
debt securities of that series will constitute a quorum. (Section 1504 of the
indenture).
Regardless of the foregoing provisions, if any action is to be taken at a
meeting of holders of debt securities of a series, including the notes, with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that the indenture expressly provides may be made, given
or taken by the holders of a specified percentage in principal amount of all
outstanding debt securities affected by the action or of the holders of that
series and one or more additional series:
o there shall be no minimum quorum requirement for that meeting and
o the principal amount of the outstanding debt securities of the series that
vote in favor of request, demand, authorization, direction, notice,
consent, waiver or other action will be taken into account in determining
whether such request, demand, authorization, direction, notice, consent,
waiver or other action has been made, given or taken under the indenture.
(Section 1504 of the indenture).
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to Energy Holdings at 80 Park Plaza, T-22, Newark, NJ
07102, Attention: Treasurer.
Reports
Following the consummation of the exchange offer, to the extent required
by the SEC, Energy Holdings will file a copy of all of the information and
reports referred to in clauses (1) and (2) below with the SEC for public
availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing) and make such
information available to holders of the notes upon request:
(1) all quarterly and annual financial information required to be
contained in a filing with the SEC on Forms 10-Q and 10-K and, with respect to
the annual information only, a report on the annual financial statements
certified by Energy Holdings' independent auditors; and
(2) all information of the type contained in current reports required to
be filed with the SEC on Form 8-K.
The indenture requires Energy Holdings to file the documents referred to
in clauses (1) and (2) above with the trustee within 15 days of the filing of
those documents with the SEC. So long as any notes are outstanding, Energy
Holdings will furnish to the holders of notes the documents referred to in
clauses (1) and (2) above in the manner and to the extent required by the Trust
Indenture Act within 30 days of the filing of those documents with the SEC.
In addition, Energy Holdings has agreed that, for so long as any original
notes remain outstanding, it will furnish upon request to holders of the
original notes and prospective purchasers the information required to be
delivered pursuant to Rule 144A(d) (4) under the Securities Act.
Book-Entry, Delivery and Form
The exchange notes initially will be represented by one or more notes in
registered, global form without interest coupons (collectively, global notes).
Except as set forth below, the global notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"-- Exchange of Book-Entry Notes for Certificated Notes". Except in the limited
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circumstances described below, owners of beneficial interests in the global
notes will not be entitled to receive physical delivery of certificated notes
(as defined below).
Initially, the trustee will act as paying agent and registrar. The notes
may be presented for registration of transfer and exchange at the offices of the
registrar.
Depository Procedures
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to changes by them from time to time. Energy Holdings takes no responsibility
for these operations and procedures and urges investors to contact the system or
their participants directly to discuss these matters.
DTC has advised Energy Holdings that DTC is a limited-purpose trust
company created to hold securities for its participating organizations
(collectively, participants) and to facilitate the clearance and settlement of
transactions in those securities between participants through electronic
book-entry changes in accounts of its participants. The participants include
securities brokers and dealers (including the initial purchasers of the original
notes), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
(collectively, indirect participants). Persons who are not participants may
beneficially own securities held by or on behalf of DTC only through the
participants or the indirect participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the participants and indirect participants.
DTC has also advised Energy Holdings that, pursuant to procedures
established by it, (i) upon deposit of the global notes, DTC will credit the
accounts of participants designated by the Initial Purchasers of the original
notes with portions of the principal amount of the global notes and (ii)
ownership of such interests in the global notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC (with respect to the participants) or by the participants and the
indirect participants (with respect to other owners of beneficial interest in
the global notes).
Investors in the global notes may hold their interests therein directly
through DTC, if they are participants in such system, or indirectly through
organizations which are participants in such system. All interests in a global
note may be subject to the procedures and requirements of DTC. Those interests
held through Euroclear or Cedel may also be subject to the procedures and
requirements of such systems. The laws of some states require that certain
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a global note to
such persons will be limited to that extent. Because DTC can act only on behalf
of participants, which in turn act on behalf of indirect participants and
certain banks, the ability of a person having beneficial interests in a global
note to pledge such interests to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interest in the global notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
"holders" thereof under the indenture for any purpose.
Payments in respect of the principal of, premium, if any, and interest on
a global note registered in the name of DTC or its nominee will be payable to
DTC in its capacity as the registered holder under the Indenture. Under the
terms of the indenture, Energy Holdings and the trustee will treat the persons
in whose names the notes, including the global notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither Energy Holdings, the trustee
nor any agent of Energy Holdings or the trustee has or will have any
responsibility or liability for
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o any aspect of DTC's records or any participant's or indirect participant's
records relating to or payments made on account of beneficial ownership
interest in the global notes, or for maintaining, supervising or reviewing
any of DTC's records or any participant's or indirect participant's
records relating to the beneficial ownership interests in the global notes
or
o any other matter relating to the actions and practices of DTC or any of
its participants or indirect participants.
DTC has advised Energy Holdings that its current practice, upon receipt of
any payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in the principal amount of beneficial interest in the relevant security
as shown on the records of DTC unless DTC has reason to believe it will not
receive payment on such payment date. Payments by the participants and the
indirect participants to the beneficial owners of notes will be governed by
standing instructions and customary practices and will be the responsibility of
the participants or the indirect participants and will not be the responsibility
of DTC, the trustee or Energy Holdings. Neither Energy Holdings nor the trustee
will be liable for any delay by DTC or any of its participants in identifying
the beneficial owners of the notes, and Energy Holdings and the Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Interest in the global notes are expected to be eligible to trade in DTC's
same-day funds settlement system and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its participants.
DTC has advised Energy Holdings that it will take any action permitted to
be taken by a holder of notes only at the direction of one or more participants
to whose account DTC has credited the interests in the global notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such participant or participants has or have given such direction.
However, if there is an event of default under the notes, DTC reserves the right
to exchange the global notes for legended notes in certificated form, and to
distribute such notes to its participants.
Exchange of Book-Entry Notes for Certificated Notes
If
o DTC is at any time unwilling, unable or ineligible to continue as
depository and a successor depository is not appointed by Energy Holdings
within 90 days following notice to Energy Holdings,
o DTC determines, in its sole discretion, not to have any of the notes
represented by one or more global notes, or
o an event of default under the indenture has occurred and is continuing,
then Energy Holdings will issue individual notes in certificated form in
exchange for the relevant global notes. In any such instance, an owner of a
beneficial interest in a global note will be entitled to physical delivery of
individual notes in certificated form of like tenor and rank, equal in principal
amount to such beneficial interest and to have such notes in certificated form
registered in its name. In all cases, notes in certificated form delivered in
exchange for any global note or beneficial interests therein will be registered
in the names, and issued in any approved denominations, requested by or on
behalf of the depositary (in accordance with its customary procedures).
FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of the material United States federal income
tax consequences resulting from the exchange offer and from the ownership of the
exchange notes. It deals only with exchange notes held as capital assets and not
with special classes of noteholders, such as dealers in securities or
currencies, life insurance companies, tax exempt entities, and persons that hold
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an exchange note in connection with an arrangement that completely or partially
hedges the exchange note. The discussion is based upon the Internal Revenue Code
of 1986, as amended, and regulations, rulings and judicial decisions thereunder
as of the date hereof. Such authorities may be repealed, revoked or modified so
as to produce federal income tax consequences different from those discussed
below.
Noteholders tendering their original notes or prospective purchasers of
exchange notes should consult their own tax advisors concerning the United
States federal income tax and any state or local income or franchise tax
consequences in their particular situations and any consequences under the laws
of any other taxing jurisdiction.
Consequences of Tendering Original Notes
The exchange of original notes for the exchange notes pursuant to the
exchange offer will not be treated as an "exchange" for United States federal
income tax purposes because the exchange notes will not be considered to differ
materially in kind or extent from the original notes. Rather, the exchange notes
received by a noteholder will be treated as a continuation of the original notes
in the hands of such noteholder. As a result, there will be no United States
federal income tax consequences to noteholders exchanging the original notes for
the exchange notes pursuant to the exchange offer. The noteholder must continue
to include stated interest in income as if the exchange had not occurred. The
adjusted basis and holding period of the exchange notes for any noteholder will
be the same as the adjusted basis and holding period of the original notes.
Similarly, there would be no United States federal income tax consequences to a
holder of original notes that does not participate in the exchange offer.
United States Holders
For purposes of this discussion, a "United States Holder" means:
(1) a citizen or resident of the United States;
(2) a partnership, corporation or other entity treated as a corporation or
partnership for United States federal income tax purposes, created or organized
in or under the law of the United States or of any State of the United States
including the District of Columbia;
(3) an estate the income of which is subject to United States federal
income tax regardless of its source;
(4) a trust, if either:
(a) a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more United
States persons have the authority to control all substantial decisions of
the trust; or
(b) the trust was in existence on August 20, 1996 and elected to be
treated as a United States person at all times thereafter;
(5) any other person that is subject to United States federal income tax
on interest income derived from a note as a result of such income being
effectively connected with the conduct by such person of a trade or business
within the United States; or
(6) certain former citizens of the United States whose income and gain on
the exchange notes will be subject to U.S. income tax.
Payments of Interest
Interest on an exchange note will be taxable to a United States Holder as
ordinary interest income at the time it is received or accrued, depending on the
noteholder's method of accounting for tax purposes.
Disposition of an Exchange Note
Upon the sale, exchange or retirement of an exchange note, a United States
Holder generally will recognize taxable gain or loss equal to the difference
between the amount realized on the sale,
82
<PAGE>
exchange or retirement (other than amounts representing accrued and unpaid
interest, which will be treated as ordinary income) and such holder's adjusted
basis in the exchange note. Such gain or loss generally will be long-term
capital gain or loss if the holder's holding period in the exchange note was
more than one year at the time of disposition.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply with respect to
non-corporate United States Holders to payments of principal and interest on an
exchange note and the proceeds of the sale of an exchange note before maturity.
A 31% "backup withholding" tax will apply to such payments if the United States
Holder fails to provide an accurate taxpayer identification number or to report
all interest and dividends required to be shown on its federal income tax
returns.
Payments to United States Aliens
As used herein, a "United States Alien" is a person or entity that, for
United States federal income tax purposes, is not a United States Holder (as
defined above).
Under current United States federal income and estate tax law:
(1) payments of principal and interest on an exchange note by us or any
paying agent to a noteholder that is a United States Alien will not be subject
to withholding of United States federal income tax, provided that the
noteholder:
(a) does not actually or constructively own 10% or more of the
combined voting power of our stock;
(b) is not a controlled foreign corporation related to us through
stock ownership;
(c) is not a bank receiving interest described in Section
881(c)(3)(A) of the Internal Revenue Code; and
(d) provides a statement, under penalties of perjury (such as Form
W-8BEN), to us that the holder is a United States Alien and provides its
name and address;
(2) a noteholder that is a United States Alien will not be subject to
United States federal income tax on gain realized on the sale, exchange or
redemption of such note, unless:
(a) the gain is effectively connected with the conduct of a trade or
business within the United States by the United States Alien; or
(b) in the case of a United States Alien who is a nonresident alien
individual and holds the exchange note as a capital asset, such holder is
present in the United States for 183 or more days in the taxable year and
certain other requirements are met; and
(3) an exchange note will not be subject to United States federal estate
tax as a result of the death of a noteholder who is not a citizen or resident of
the United States at the time of death, provided that:
(a) such noteholder did not at the time of death actually or
constructively own 10% or more of the combined voting power of all classes
of our stock; and,
(b) at the time of such noteholder's death, payments of interest on
such exchange note would not have been effectively connected with the
conduct by such noteholder of a trade or business in the United States.
United States information reporting requirements and backup withholding
tax will not apply to payments on an exchange note made outside the United
States by us or any paying agent (acting in its capacity as such) to a
noteholder that is a United States Alien provided that a statement described
in(1)(c) above has been received and neither we nor our paying agent has actual
knowledge that the payee is not a United States Alien.
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of an exchange note effected
outside the United States by a foreign office of a "broker" (as defined in
applicable Treasury regulations), provided that such broker:
83
<PAGE>
(1) is a United States Alien;
(2) derives less than 50% of its gross income for certain periods from the
conduct of a trade or business in the United States; and
(3) is not a controlled foreign corporation as to the United States (a
person described in (1), (2) and (3) above being hereinafter referred to as a
"foreign controlled person"). Payment of the proceeds of the sale of an exchange
note effected outside the United States by a foreign office of any broker that
is not a foreign controlled person will not be subject to backup withholding
tax, but will be subject to information reporting requirements unless such
broker has documentary evidence in its records that the beneficial owner is a
United States Alien and certain other conditions are met, or the beneficial
owner otherwise establishes an exemption.
New regulations governing backup withholding and information reporting are
generally scheduled to become effective for payments made after December 31,
2000. Rules under these regulations will have essentially the same substantive
effect, but will unify current certification procedures and forms.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for original notes where
such original notes were acquired as a result of market-making activities or
other trading activities. We have agreed that, for a period not to exceed 180
days after the exchange offer has been completed, we will make this prospectus,
as amended or supplemented, available to any broker-dealer that reasonably
requests such document for use in connection with any such resale. Broker
dealers who acquired original notes directly from us may not rely on the staff's
interpretations and must comply with the registration and prospectus delivery
requirements of the Securities Act, including being named as a selling security
holder, in order to resell the original notes or the exchange notes.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the exchange offer has been completed, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such document
in the letter of transmittal. We have agreed to pay certain expenses incident to
the exchange offer, other than commission or concessions of any brokers or
dealers, and will indemnify the holders of the exchange notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
By acceptance of this exchange offer, each broker-dealer that receives
exchange notes for its own account pursuant to the exchange offer agrees that,
upon receipt of notice from Energy Holdings of the happening of any event which
makes any statement in the prospectus untrue in any material respect or requires
the making of any changes in the prospectus in order to make the statements
therein not
84
<PAGE>
misleading (which notice we agree to deliver promptly to such broker-dealer),
such broker-dealer will suspend use of the prospectus until we have amended or
supplemented the prospectus to correct such misstatement or omission and have
furnished copies of the amended or supplemental prospectus to such
broker-dealer.
LEGAL OPINIONS
The validity of the notes and the information contained in Federal Income
Tax Considerations will be passed upon for Energy Holdings by James T. Foran,
Esquire, Associate General Counsel of PSEG or R. Edwin Selover, Esquire, Vice
President and General Counsel of PSEG.
EXPERTS
The consolidated balance sheets as of December 31, 1999 and 1998 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, 1999 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, which relies on the work
of other auditors, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
85
<PAGE>
(This page intentionally left blank)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
PSEG Energy Holdings Inc.:
We have audited the accompanying consolidated balance sheets of PSEG
Energy Holdings Inc. and its subsidiaries (the "Company") as of December 31,
1999 and 1998, 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, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of certain general and limited partnership and joint
venture investments of the Company, which are accounted for by use of the equity
method. The Company's equity investment of $150,351,000 and $655,107,000 in the
general and limited partnerships' and joint ventures' net assets at December 31,
1999 and 1998, respectively, and its $50,422,000, $88,336,000 and $71,872,000
share of such general and limited partnerships' and joint ventures' net income
for the respective three years in the period ended December 31, 1999, are
included in the accompanying consolidated financial statements. The financial
statements of these general and limited partnerships and joint ventures were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for such partnership and
joint venture interests, is based solely on the reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, based on our audits and the reports of other auditors,
such consolidated financial statements present fairly, in all material respects,
the financial position of the Company at December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
April 7, 2000
F-1
<PAGE>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
REVENUES
Income from joint ventures and partnerships .......................... $134,635 $132,257 $107,566
Energy service revenues .............................................. 196,143 73,954 21,071
Energy supply revenues ............................................... 85,782 81,905 77,485
Income from capital leases ........................................... 111,798 75,801 65,443
Net investment gains ................................................. 60,548 41,858 46,331
Other revenues ....................................................... 28,867 34,509 23,694
-------- -------- --------
Total Revenues ..................................................... 617,773 440,284 341,590
-------- -------- --------
OPERATING EXPENSES
Cost of energy sales ................................................. 81,659 80,758 76,374
Operation and maintenance ............................................ 291,376 164,367 115,917
Depreciation and amortization ........................................ 7,462 5,414 4,171
-------- -------- --------
Total Operating Expenses ........................................... 380,497 250,539 196,462
-------- -------- --------
OPERATING INCOME ....................................................... 237,276 189,745 145,128
OTHER INCOME (LOSS) .................................................... 33,433 (1,818) 685
INTEREST EXPENSE-NET ................................................... 94,685 90,367 72,363
-------- -------- --------
INCOME BEFORE INCOME TAXES ............................................. 176,024 97,560 73,450
-------- -------- --------
INCOME TAXES
Current .............................................................. 11,176 (1,480) (103,636)
Deferred ............................................................. 58,735 32,760 130,540
Investment and energy tax
credits-net ........................................................ (969) (1,120) (1,088)
-------- -------- --------
Total Income Taxes ................................................. 68,942 30,160 25,816
MINORITY INTERESTS ..................................................... (917) (1,804) (239)
-------- -------- --------
NET INCOME ............................................................. 107,999 69,204 47,873
Preferred Stock Dividends ............................................ 25,007 17,478 598
-------- -------- --------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDER ................................................... $ 82,992 $ 51,726 $ 47,275
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands of Dollars)
December 31,
--------------------------
1999 1998
----------- -----------
CURRENT ASSETS
Cash and temporary cash investments ............ $ 43,306 $ 8,962
Accounts Receivable:
Trade (less allowance for doubtful accounts of
$5,228 and $6,091 respectively) ............ 105,542 47,923
Other ........................................ 27,222 13,094
Affiliated companies ......................... 4,099 7,557
Assets held for sale ........................... 35,700 --
Notes receivable ............................... 11,845 --
Inventory ...................................... 2,036 1,656
Restricted cash ................................ 4,910 3,756
Prepayments .................................... 5,321 8,554
----------- -----------
Total Current Assets ....................... 239,981 91,502
----------- -----------
PROPERTY AND EQUIPMENT
Real estate (net of valuation allowances of
$21,547 and $10,318, respectively) ........... 34,261 53,844
Property and equipment ......................... 44,726 25,753
Accumulated depreciation and amortization ...... (33,125) (20,459)
----------- -----------
Property and Equipment - net ............... 45,862 59,138
----------- -----------
INVESTMENTS
Capital leases - net ........................... 1,758,714 1,388,871
Corporate joint ventures ....................... 1,427,997 874,286
Partnership interests .......................... 493,201 602,710
Other investments .............................. 73,343 97,948
----------- -----------
Total Investments .......................... 3,753,255 2,963,815
----------- -----------
OTHER ASSETS ..................................... 75,287 54,075
----------- -----------
TOTAL ASSETS ............................... $ 4,114,385 $ 3,168,530
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS'S EQUITY
(Thousands of Dollars)
December 31,
--------------------------
1999 1998
----------- -----------
CURRENT LIABILITIES
Accounts Payable:
Trade ...................................... $ 41,289 $ 26,879
Other ...................................... 63,371 50,043
Notes payable ................................ 351,000 206,000
Other current liabilities .................... 10,925 3,886
Current portion of long-term debt ............ 174,856 317,725
----------- -----------
Total Current Liabilities ................ 641,441 604,533
----------- -----------
LONG-TERM DEBT ................................. 1,175,332 443,948
----------- -----------
DEFFERRED TAXES AND OTHER LIABILITIES
Deferred income taxes ........................ 887,463 846,302
Deferred investment and energy tax credits ... 8,935 9,394
Other long-term liabilities .................. 24,941 20,686
----------- -----------
Total Deferred Taxes and Other Liabilities 921,339 876,382
----------- -----------
COMMITMENTS AND CONTINGENCIES .................. -- --
MINORITY INTERESTS ............................. 1,408 1,338
----------- -----------
STOCKHOLDER'S EQUITY
Common stock ................................. 100 100
Preferred stock .............................. 509,200 509,200
Additional paid-in capital ................... 789,608 579,070
Retained earnings ............................ 276,182 196,974
Accumulated other comprehensive loss ......... (200,225) (43,015)
----------- -----------
Total Stockholder's Equity ............... 1,374,865 1,242,329
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY ......................... $ 4,114,385 $ 3,168,530
=========== ===========
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 107,999 $ 69,204 $ 47,873
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................................... 18,340 28,106 13,782
Deferred income taxes (other than leases) ............................. (31,717) (9,588) 6,204
Income from leasing activities ........................................ 6,420 (19,726) 68,061
Investment distributions .............................................. 134,079 88,592 82,028
Equity income from partnerships ....................................... (53,084) (41,410) (33,290)
Gains on investments .................................................. (72,520) (44,867) (29,861)
Other ................................................................. (2,769) 1,851 (587)
(Increase) decrease in accounts receivable ............................ (33,114) 16,064 (27,107)
Decrease (increase) in prepayments .................................... 4,830 (414) (611)
Increase in inventory ................................................. (380) (1,656) --
(Decrease) increase in accounts payable ............................... (9,801) (36,202) 4,571
Increase (decrease) in taxes payable .................................. 8,748 1,427 (438)
Increase (decrease) in interest payable ............................... 15,448 (1,275) 5,314
(Decrease) increase in other current liabilities ...................... (83) 2,674 1,118
--------- -------- ---------
Net Cash Provided By Operating Activities ............................... 92,396 52,780 137,057
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in partnerships and joint ventures ........................... (725,352) (89,242) (844,443)
Investments in capital leases ......................................... (378,390) (253,417) (156,006)
Proceeds from sales of capital leases ................................. 125,512 71,253 22,883
Additions to property and equipment ................................... (9,472) (9,865) (6,166)
Proceeds from sales of real estate and
equity investments .................................................. 71,431 145,449 269
Additions to deferred project costs ................................... (6,604) (17,401) (12,364)
Acquisitions, net of cash acquired ................................... (48,546) (8,056) --
Return of capital from partnerships ................................... 11,480 5,183 325
Additions to other assets ............................................. (431) (4,037) (2,922)
--------- -------- ---------
Net Cash Used In Investing Activities ................................... (960,372) (160,133) (998,424)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from additional paid-in capital .............................. 199,700 -- --
Proceeds from sale of preferred stock ................................. -- 509,200 75,000
Redemption of preferred stock ......................................... -- (75,000) --
Dividends paid ........................................................ (28,791) (18,076) --
Repayment of borrowings ............................................... (249,826) (310,991) (124,500)
Proceeds from borrowings .............................................. 992,432 -- 774,013
Other ................................................................. (11,195) -- (1,681)
--------- -------- ---------
Net Cash Provided By Financing Activities ............................... 902,320 105,133 722,832
--------- -------- ---------
Net Increase (Decrease) In Cash And Temporary
Cash Investments ........................................................ 34,344 (2,220) (138,535)
--------- -------- ---------
Cash And Temporary Cash Investments,
Beginning Of Year ........................................................ 8,962 11,182 149,717
--------- -------- ---------
Cash And Temporary Cash Investments,
End Of Year .............................................................. $ 43,306 $ 8,962 $ 11,182
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid (received) for:
Interest expense ........................................................ $ 64,414 $ 83,334 $ 59,206
========= ======== =========
Income taxes ............................................................ $ 9,136 $ 7,396 $(129,310)
========= ======== =========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of PSEG stock for companies acquired ............................. $ 10,871 $ -- $ --
Debt assumed with companies acquired ...................................... $ 5,500 $ -- $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Thousands of Dollars)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Preferred Paid-in Retained Comprehensive
Stock Stock Capital Earnings Income (Loss) Total
------- --------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997 ...................... $100 $ -- $579,070 $ 97,973 $ -- $ 677,143
---- -------- -------- -------- --------- ----------
Net income ....................................... -- -- -- 47,873 -- 47,873
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment (net of tax
of $1,613) ................................... -- -- -- -- (14,519) (14,519)
---- -------- -------- -------- --------- ----------
Other comprehensive income (loss) ................ -- -- -- 47,873 (14,519) 33,354
---- -------- -------- -------- --------- ----------
Issuance of cumulative
preferred stock ................................ -- 75,000 -- -- -- 75,000
Preferred stock dividends ........................ -- -- -- (598) -- (598)
---- -------- -------- -------- --------- ----------
Balance as of December 31, 1997 .................... 100 75,000 579,070 145,248 (14,519) 784,899
---- -------- -------- -------- --------- ----------
Net income ....................................... -- -- -- 69,204 -- 69,204
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment (net of tax
of $3,166) ................................... -- -- -- -- (28,496) (28,496)
---- -------- -------- -------- --------- ----------
Other comprehensive income (loss) ................ -- -- -- 69,204 (28,496) 40,708
---- -------- -------- -------- --------- ----------
Issuance of cumulative
preferred stock ................................ -- 509,200 -- -- -- 509,200
Redemption of preferred stock .................... -- (75,000) -- -- -- (75,000)
Preferred stock dividends ........................ -- -- -- (17,478) -- (17,478)
---- -------- -------- -------- --------- ----------
Balance as of December 31, 1998 .................... 100 509,200 579,070 196,974 (43,015) 1,242,329
---- -------- -------- -------- --------- ----------
Net income ....................................... -- -- -- 107,999 -- 107,999
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment (net of tax
of $17,449) .................................. -- -- -- -- (157,038) (157,038)
Net unrealized loss on marketable
securities(net of tax of $93) (172) (172)
---- -------- -------- -------- --------- ----------
Other comprehensive income (loss) ................ -- -- -- 107,999 (157,210) (49,211)
---- -------- -------- -------- --------- ----------
Additional paid-in capital ....................... -- -- 210,538 -- -- 210,538
Preferred stock dividends (25,007) (25,007)
Common stock dividends ........................... -- -- -- (3,784) -- (3,784)
---- -------- -------- -------- --------- ----------
Balance as of December 31, 1999 .................... $100 $509,200 $789,608 $276,182 $(200,225) $1,374,865
==== ======== ======== ======== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
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 primarily makes
investments 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 to industrial and
commercial customers; Enterprise Group Development Corporation (EGDC), a
non-residential real estate property management business; PSEG Capital
Corporation (PSEG Capital), which serves as a financing vehicle for Energy
Holdings' subsidiaries, 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 our financing vehicle on the basis
of our consolidated financial position. EGDC has been conducting a controlled
exit from the real estate business since 1993.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Energy
Holdings and all direct and indirect subsidiaries in which Energy Holdings has a
controlling interest. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash and Temporary Cash Investments
Energy Holdings classifies cash and investments, with maturities of three
months or less, as cash and temporary cash investments.
Property 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. Equipment used by Public Service Conservation Resources
Corporation (PSCRC), a wholly-owned subsidiary of Energy Technologies, is
depreciated on a straight line basis over 10 to 15 years and is included in Cost
of Energy Sales in the Consolidated Statements of Income. Maintenance and
repairs are expensed when incurred.
Capital Leases
Resources leases property and equipment, through leveraged leases, with
terms ranging from 8 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 any 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 and Resources' currently own less than 50% interests in active
joint ventures and partnerships. These investments are accounted for under the
equity method of accounting where significant influence over joint venture or
partnership operating and management decisions exist. The pro-rata share of
income is recorded in the Income from joint ventures and partnerships line of
the income statement 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
F-7
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
balance sheets. For investments in which significant influence does not exist,
the cost method of accounting is applied. Interest is capitalized on investments
during construction and development of qualifying assets. The capitalized
interest is amortized over the operating lives of the projects upon the date of
commercial operation. The amount of interest capitalized was $8,484,000,
$1,181,000 and $5,065,000 for the years ended December 31, 1999, 1998 and 1997,
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 the Company's invested liquid position
in such securities. Changes in fair value are recorded in Net investment gains
in the Consolidated Statements of Income. (See Note 4. Investments in Corporate
Joint Ventures and Partnerships).
Income Taxes
Energy Holdings and its subsidiaries file a consolidated Federal income
tax return with PSEG. Energy Holdings and its subsidiaries have entered into tax
allocation agreements with PSEG which provide that Energy Holdings and its
subsidiaries will record their tax liabilities as though they were filing
separate returns and will record tax benefits to the extent that PSEG is able to
receive those benefits. Deferred income taxes 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. Energy Holdings defers and amortizes
investment and energy tax credits over the lives of the related properties.
Public Service Electric and Gas Company, a wholly-owned subsidiary of
PSEG, is an operating public utility providing electric and gas service in
certain areas in the State of New Jersey and is subject to regulation by the New
Jersey Board of Public Utilities (BPU). In a case affecting another utility in
which Public Service Electric and Gas Company was not a party, the BPU approved
an order treating certain consolidated tax savings generated after June 30, 1990
by that utility's nonutility affiliates as a reduction of that utility's rate
base. In 1992, the BPU issued an order resolving Public Service Electric and Gas
Company's 1992 base rate proceeding without separate quantification of the
consolidated tax issue. Such order did not provide final resolution of the
consolidated tax issue for any subsequent base rate filing. The issue of PSEG
sharing the benefits of consolidated tax savings with Public Service Electric
and Gas Company or its ratepayers was addressed by the BPU in its July 28, 1995
letter which informed Public Service Electric and Gas Company that the issue of
consolidated tax savings can be discussed in the context of Public Service
Electric and Gas Company's next base rate case or plan for an alternate form of
regulation. Energy Holdings is not able to predict what action, if any, the BPU
may take concerning consolidation of tax benefits in future rate proceedings. An
unfavorable resolution may adversely impact Resources' investment strategy.
Use of Derivative Financial Instruments
Energy Holdings' market risk sensitive instruments and positions relate to
potential losses arising from adverse changes in interest rates and foreign
currency exchange rates. Energy Holdings' policy is to use derivatives to manage
these risks consistent with its business plans and prudent practices.
Gains and losses on hedges of existing assets or liabilities are included
in the carrying amounts of those assets and liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains and losses related
to qualifying hedges of firm commitments are deferred and recognized in income
when the hedged transaction occurs. (See Notes 8. Long-Term Debt and 13.
Financial Instruments and Risk Management for additional information.)
F-8
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency
Energy Holdings' financial statements are prepared using the United States
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 United States 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 (See the Consolidated Statements of Stockholder's Equity).
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 a hedge of an
identifiable foreign currency commitment, a hedge of a foreign currency
investment position, 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 other
comprehensive income.
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. Resources also recognizes investment gains or losses when
leveraged lease interests are sold at an amount either greater or less than the
book carrying amount, respectively. Losses are also recognized if management
determines that there has been immediate 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 carrying value, respectively.
Revenue and Cost Recognition on Contracts
Energy Technologies' revenues 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. Revenues 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. Contract costs
include all direct labor and benefits, material purchased for or installed in
the project, subcontract costs and allocations of indirect construction costs.
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
revenue 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
Energy Technologies receives revenues from the sale of natural gas and
electricity to customers. Energy Technologies may receive different quantities
of gas and electricity from suppliers than the volumes sold to its customers.
This results in imbalance receivables and payables to the local distribution
company which delivers the gas and electricity to the customer. Such imbalances
are valued at the lower of cost or market and accounted for on the first-in
first-out basis and are included in accounts receivable-other or accounts
payable-other on the balance sheets.
F-9
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Energy Technologies enters into long-term fixed price natural gas sales
contracts. Energy Technologies also enters into long-term transportation
agreements as required to serve such contracts. The costs of transportation vary
based upon seasonality. In order to properly match revenues with expenses,
Energy Technologies records transportation costs related to the fixed price
contracts based on average unit transportation costs. (See Note 18. Subsequent
Events for a discussion of Energy Technologies' change in strategy related to
the gas and electric commodity business.)
Deferred Project Costs
Global capitalizes all direct external and incremental internal costs
related to project development once a project reaches certain milestones. These
milestones are used to assess the probability of success for the project. 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. 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.
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. CAPITAL LEASES
Resources' net investment in leveraged leases is composed of the following
elements:
December 31,
--------------------------------
1999 1998
-------------- --------------
Lease rents receivable ..................... $2,643,447,000 $1,924,212,000
Estimated residual value of leased assets .. 653,596,000 658,066,000
-------------- --------------
3,297,043,000 2,582,278,000
Less - unearned and deferred income ........ 1,538,329,000 1,193,407,000
-------------- --------------
Investment in leveraged leases ............. 1,758,714,000 1,388,871,000
Less - deferred taxes arising from leveraged
leases ................................... 843,810,000 731,109,000
-------------- --------------
Net investment in leveraged leases ......... $ 914,904,000 $ 657,762,000
============== ==============
F-10
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Resources' pre-tax income and income tax effects related to investments in
leveraged leases are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pre-tax income ....................................... $111,798,000 $75,801,000 $65,443,000
============ =========== ===========
Income tax effect of pretax income ................... $ 40,852,000 $27,038,000 $23,535,000
Amortization of investment tax credits ............... $ (510,000) $ (850,000) $ (604,000)
</TABLE>
Resources' leases property and equipment, through leveraged leases, with
terms ranging from 8 to 45 years. The types of property placed under leveraged
leases consisted of:
December 31,
--------------------
1999 1998
---- ----
Energy-related ................................. 72% 64%
Aircraft ....................................... 11% 18%
Real Estate .................................... 11% 12%
Commuter rail cars ............................. 5% 5%
Industrial ..................................... 1% 1%
Resources' initial investment in leveraged leases represents approximately
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 1998, Resources restated two leveraged lease investments due to a
permanent decline in the market value of properties subject to the master
leases, and accrued lease rents that management determined were uncollectible.
As a result of this restatement, a $17,090,000 charge was recorded to Net
investment gains and a $9,123,000 charge was recorded to Income from capital
leases on the Consolidated Statements of Income.
NOTE 4. INVESTMENTS IN CORPORATE JOINT VENTURES AND PARTNERSHIPS
Global
Global's investments include domestic qualifying facilities (QFs) under
the Public Utility Regulatory Policies Act of 1978, foreign 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. Global's share of income and
cash flow distribution percentages currently range from 4.78% to 50%. Interest
is earned on loans made to various projects. Such loans earned rates of interest
ranging from 7.5% to 15% during 1999 and 1998.
As of December 31, 1999, Global's portfolio consisted of investments in 36
cogeneration or independent power projects (including 17 under construction or
advanced development) which range in gross production capacities from 15 to
1,000 megawatts (MWs) of electricity, and 6 electric distribution ventures. As
of December 31, 1999 and 1998, Global's net investment and share of project MWs
by region were as follows:
F-11
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
1999 MW 1998 MW
----------------------------------------------------------------
Generation
<S> <C> <C> <C> <C>
North America .................................. $ 208,040,000 1,292 $ 185,203,000 367
Latin America .................................. 90,784,000 502 20,914,000 128
Asia Pacific ................................... 89,629,000 161 79,380,000 150
EAMS(1) ........................................ 86,996,000 832 14,038,000 66
Distribution
Latin America .................................. 1,159,051,000 N/A 759,954,000 N/A
-------------- ----- -------------- ----
Total Investment ............................... $1,634,500,000 2,787 $1,059,489,000 711
</TABLE>
(1) Europe, Africa, Middle East and India.
As part of a comprehensive review of assets and development activities,
Global recognized a $43,971,000 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. (See Note 11. Other Income (Loss)).
Investments in net assets of affiliated companies accounted for under the
equity method of accounting by Global amounted to $1,629,237,000 and
$1,053,909,000 at December 31, 1999 and 1998, respectively. During the three
years ended December 31, 1999, 1998 and 1997, the amount of dividends from these
investments were $81,794,000, $91,752,000 and $39,591,000, respectively. Energy
Holdings' after tax share of undistributed earnings of affiliates included in
consolidated retained earnings was approximately $31,000,000, $14,000,000 and
$22,000,000, respectively for the years ended December 31, 1999, 1998 and 1997.
Summarized results of operations and financial position of all affiliates
in which Global uses the equity method of accounting are presented below:
<TABLE>
<CAPTION>
Foreign Domestic Total
----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
December 31, 1999
Condensed Income Statement Information
Revenue ............................................ $ 1,177,469 $ 423,651 $1,601,120
Gross Profit ....................................... 408,280 264,980 673,260
Minority Interest .................................. (22,808) (79) (22,887)
Net Income ......................................... 110,198 154,705 264,903
Condensed Balance Sheet Information
Assets:
Current Assets .................................... 509,463 121,934 631,397
Property, Plant & Equipment ....................... 2,494,261 794,385 3,288,646
Other Assets ...................................... 1,529,643 86,990 1,616,633
----------- --------- ----------
Total Assets ....................................... 4,533,367 1,003,309 5,536,676
Liabilities:
Current Liabilities ............................... 563,412 114,327 677,739
Debt* ............................................. 564,333 460,817 1,025,150
Other Non Current Liabilities ..................... 505,917 23,608 529,525
Minority Interest ................................. 231,990 490 232,480
----------- --------- ----------
Total Liabilities .................................. 1,865,652 599,242 2,464,894
Equity ............................................. 2,667,715 404,067 3,071,782
----------- --------- ----------
Total Liabilities & Equity ......................... 4,533,367 1,003,309 5,536,676
</TABLE>
F-12
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Foreign Domestic Total
-----------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
December 31, 1998
Condensed Income Statement Information
Revenue ....................................................... $1,123,169 $ 441,228 $1,564,397
Gross Profit .................................................. 587,241 276,724 863,965
Minority Interest ............................................. (2,474) (55) (2,529)
Net Income .................................................... 173,603 139,199 312,802
Condensed Balance Sheet Information
Assets:
Current Assets ............................................... 333,071 129,428 462,499
Property, Plant & Equipment .................................. 1,780,266 705,602 2,485,868
Other Assets ................................................. 1,224,915 111,972 1,336,887
---------- --------- ----------
Total Assets .................................................. 3,338,252 947,002 4,285,254
Liabilities:
Current Liabilities .......................................... 440,915 95,483 536,398
Debt* ........................................................ 166,329 463,002 629,331
Other Non Current Liabilities ................................ 502,742 30,679 533,421
Minority Interest ............................................ 29,157 442 29,599
---------- --------- ----------
Total Liabilities ............................................. 1,139,143 589,606 1,728,749
Equity ........................................................ 2,199,109 357,396 2,556,505
---------- --------- ----------
Total Liabilities & Equity .................................... 3,338,252 947,002 4,285,254
December 31, 1997
Condensed Income Statement Information
Revenue ....................................................... $ 572,695 $ 462,042 $1,034,737
Gross Profit .................................................. 283,459 272,949 556,408
Minority Interest ............................................. (1,498) (39) (1,537)
Net Income .................................................... 76,153 127,761 203,914
</TABLE>
(*)Debt is non-recourse to Global and Energy Holdings.
- --------------------------------------------------------------------------------
Global's investments in the following companies comprised 85% and 93% of
Global's total investment balance as of December 31, 1999 and 1998,
respectively, and comprised 91% of Global's total equity earnings from
partnerships/joint ventures for the years ended December 31, 1999 and 1998.
F-13
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized results of operations and financial position and the respective
ownership interests of these companies are presented below:
<TABLE>
<CAPTION>
%
Ownership 1999 1998 1997
--------- ---- ---- ----
(Thousands of Dollars)
Investments
<S> <C> <C> <C> <C>
FOREIGN
RGE - Brazil (A) ..................... 31%
Condensed Income Statement Information
Revenue .............................. $ 432,777 $ 600,752 $ 263,245
Gross Profit ......................... 147,676 443,626 204,008
Net Income ........................... 29,057 112,406 48,423
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 68,328 104,940
Property, Plant & Equipment ......... 585,160 815,371
Other Assets (C) .................... 594,793 896,310
--------- ---------
Total Assets ......................... 1,248,281 1,816,621
Liabilities:
Current Liabilities ................. 120,831 130,667
Debt (D) ............................ 86,877 80,254
Other Non Current Liabilities ....... 291,169 465,848
--------- ---------
Total Liabilities .................... 498,877 676,769
Equity ............................... 749,404 1,139,852
--------- ---------
Total Liabilities & Equity ........... 1,248,281 1,816,621
EDEN/EDES (Combined) - Argentina (A) . 30%
Condensed Income Statement Information
Revenue .............................. $ 258,528 $ 285,018 $ 166,596
Gross Profit ......................... 71,954 78,036 42,391
Net Income ........................... 36,702 35,927 15,895
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 101,531 134,419
Property, Plant & Equipment ......... 457,018 431,415
Other Assets (C) .................... 205,548 213,849
--------- ---------
Total Assets ......................... 764,097 779,683
Liabilities:
Current Liabilities ................. 156,024 168,925
Other Non Current Liabilities ....... 11,056 10,444
--------- ---------
Total Liabilities .................... 167,080 179,369
Equity ............................... 597,017 600,314
--------- ---------
Total Liabilities & Equity ........... 764,097 779,683
</TABLE>
F-14
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
%
Ownership 1999 1998 1997
-------------- -------- -------- -------
(Thousands of Dollars)
Investments (Continued)
<S> <C> <C> <C> <C>
EDELAP - Argentina (A) ............... 30%
Condensed Income Statement Information
Revenue .............................. $ 98,058 $ 95,402 --
Gross Profit ......................... 30,710 21,154 --
Net Income ........................... 12,529 7,101 --
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 34,077 28,721
Property, Plant & Equipment ......... 339,220 327,283
Other Assets (C) .................... 5,738 3,209
-------- --------
Total Liabilities & Equity ........... 379,035 359,213
Liabilities:
Current Liabilities ................. 59,944 64,674
Debt (D) ............................ 40,000 20,000
Other Non Current Liabilities ....... 17,173 12,334
-------- --------
Total Liabilities .................... 117,117 97,008
Equity ............................... 261,918 262,205
-------- --------
Total Liabilities & Equity ........... 379,035 359,213
POC - Peru (A) (E) ................... 50%
Condensed Income Statement Information
Revenue .............................. $ 6,562 $ -- $ --
Gross Profit ......................... 6,562 -- --
Net Income ........................... 6,029 -- --
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 12,023 --
Property, Plant & Equipment ......... -- --
Other Assets (C) .................... 202,559 --
-------- -------
Total Assets ......................... 214,582 --
Liabilities:
Current Liabilities ................. -- --
Debt (D) ............................ -- --
Other Non Current Liabilities ....... -- --
Minority Interest ................... -- --
Total Liabilities .................... -- --
Equity ............................... 214,582 --
-------- --------
Total Liabilities & Equity ........... 214,582 --
</TABLE>
F-15
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
%
Ownership 1999 1998 1997
------------- -------- -------- -------
(Thousands of Dollars)
Investments (Continued)
<S> <C> <C> <C> <C>
Inversiones - Chile (A) (F) .......... 50%
Condensed Income Statement Information
Revenue .............................. $ 238,040 $ -- --
Gross Profit ......................... 113,371 -- --
Minority Interest .................... (19,795) -- --
Net Income 11,559 -- --
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 194,877 --
Property, Plant & Equipment ......... 740,302 --
Other Assets (C) .................... 370,173 --
---------
Total Assets ......................... 1,305,352 --
Liabilities:
Current Liabilities ................. 130,787 --
Debt (D) ............................ 367,956 --
Other Non Current Liabilities ....... 149,073 --
Minority Interest ................... 199,343 --
----------
Total Liabilities .................... 847,159 --
Equity ............................... 458,193 --
----------
Total Liabilities & Equity ........... 1,305,352 --
MPC - China (B) ...................... 50%
Condensed Income Statement Information
Revenue .............................. $ 15,141 $ 10,383 $ 7,912
Gross Profit ......................... 7,569 7,000 4,996
Minority Interest .................... (1,277) (834) (77)
Net Income ........................... 1,844 6,319 7,999
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 37,738 31,864
Property, Plant & Equipment ......... 132,430 66,650
Other Assets (C) .................... 109,920 102,513
---------- --------
Total Assets ......................... 280,088 201,027
Liabilities:
Current Liabilities ................. 22,010 22,669
Debt (D) ............................ 69,500 42,075
Other Non Current Liabilities ....... 9,869 5,170
Minority Interest ................... 19,833 18,079
---------- --------
Total Liabilities .................... 121,212 87,993
Equity ............................... 158,876 113,034
---------- --------
Total Liabilities & Equity ........... 280,088 201,027
</TABLE>
F-16
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
%
Ownership 1999 1998 1997
-------------- ---------- ---------- --------
(Thousands of Dollars)
Investments (Continued)
<S> <C> <C> <C> <C>
DOMESTIC
GWF Power Systems Company Inc. (B) ... 50%
Condensed Income Statement Information
Revenue .............................. $ 2,023 $ 1,941 $ 1,869
Gross Profit ......................... 1,593 1,720 1,818
Net Income ........................... 950 1,026 1,219
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 980 518
Property, Plant & Equipment ......... -- 261
Other Assets (C) .................... 15,132 17,981
--------- ---------
Total Assets ......................... 16,112 18,760
Liabilities:
Current Liabilities ................. 594 690
Other Non Current Liabilities ....... 3,958 4,109
--------- ---------
Total Liabilities .................... 4,552 4,799
Equity ............................... 11,560 13,961
--------- ---------
Total Liabilities & Equity ........... 16,112 18,760
GWF Power Systems, L.P. (B) .......... 49%
Condensed Income Statement Information
Revenue .............................. $ 114,359 $ 118,796 $ 118,477
Gross Profit ......................... 88,640 91,147 87,963
Net Income ........................... 70,436 64,386 57,827
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 43,223 41,893
Property, Plant & Equipment ......... 204,106 211,543
Other Assets (C) .................... 7,534 14,415
--------- ---------
Total Assets ......................... 254,863 267,851
Liabilities:
Current Liabilities ................. 14,542 43,338
Debt (D) ............................ 24,540 35,540
Other Non Current Liabilities ....... 284 1,920
--------- ---------
Total Liabilities .................... 39,366 80,798
Equity ............................... 215,497 187,053
--------- ---------
Total Liabilities & Equity ........... 254,863 267,851
</TABLE>
F-17
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
%
Ownership 1999 1998 1997
----------- -------- -------- -------
(Thousands of Dollars)
Investments (Continued)
<S> <C> <C> <C> <C>
Hanford L.P. (B) ..................... 49%
Condensed Income Statement Information
Revenue .............................. $ 30,443 $ 29,628 $ 30,159
Gross Profit ......................... 20,974 19,392 20,423
Net Income ........................... 14,779 12,398 12,963
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 13,784 13,486
Property, Plant & Equipment ......... 51,795 56,769
Other Assets (C) .................... 131 322
--------- ---------
Total Assets ......................... 65,710 70,577
Liabilities:
Current Liabilities ................. 7,224 8,096
Debt (D) ............................ 2,293 8,441
Other Non Current Liabilities ....... -- 26
--------- ---------
Total Liabilities .................... 9,517 16,563
Equity ............................... 56,193 54,014
--------- ---------
Total Liabilities & Equity ........... 65,710 70,577
Eagle Point - (B) .................... 50%
Condensed Income Statement Information
Revenue .............................. $ 130,561 $ 124,531 $ 125,770
Gross Profit ......................... 67,629 64,413 61,455
Net Income ........................... 43,380 39,100 34,708
Condensed Balance Sheet Information
Assets:
Current Assets ...................... 32,216 28,042
Property, Plant & Equipment ......... 125,647 129,883
Other Assets (C) .................... 3,137 3,609
--------- ---------
Total Assets ......................... 161,000 161,534
Liabilities:
Current Liabilities ................. 25,324 22,957
Debt (D) ............................ 75,675 90,525
--------- ---------
Total Liabilities .................... 100,999 113,482
Equity ............................... 60,001 48,052
--------- ---------
Total Liabilities & Equity ........... 161,000 161,534
</TABLE>
(A) Distribution Assets.
(B) Generation Assets.
(C) Other Assets is primarily goodwill.
(D) Long-Term Debt is non-recourse to Global and Energy Holdings.
(E) The 1999 results of operations of POC represents the period from September
15, 1999 (the date of formation) through December 31, 1999.
(F) The 1999 results of operations of Inversiones represents the period from
June 9, 1999 (the date of formation) through December 31, 1999.
F-18
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Resources
Resources has limited partnership investments in two leveraged buyout
funds, an ethylene production facility, a clean air facility and solar electric
generating systems. Resources' total investment in limited partnerships was
$279,286,000 and $383,284,000 at December 31, 1999 and 1998, respectively.
Included in these amounts are limited partnership interests in two leveraged
buyout funds that hold publicly traded securities to which Resources applies
fair value accounting as described in Note 2. Summary of Significant Accounting
Policies. Approximately $130,546,000 and $204,303,000 represent the fair value
of Resources' share of the publicly traded securities in the funds as of
December 31, 1999 and 1999, respectively. (See Note 13. Financial Instruments
and Risk Management.)
EGDC
As of December 31,1999 and 1998, EGDC has partnership investments of
$19,673,000 and $29,288,000, respectively in developed commercial real estate
and in land held for development. EGDC has been conducting a controlled exit
from the real estate business since 1993. In 1997, EGDC recorded a pre-tax
charge of approximately $10,318,000 to write down to net realizable value
certain properties in its portfolio held for sale. In 1999, a pre-tax charge of
approximately $11,229,000 was also recorded for one property held for sale.
NOTE 5. FOREIGN OPERATIONS
As of December 31, 1999, Global has approximately $1,443,581,000 including
deferred project costs, of international investments ($167,714,000 in
construction) in projects that generate or distribute energy primarily in
Brazil, Argentina, Chile, Peru and China. Global is expected to continue to make
international investments. Where possible, Global structures 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 $200,053,000 and
$43,015,000 as of December 31, 1999 and 1998, respectively (see Consolidated
Statements of Stockholder's Equity).
In January 1999, Brazil abandoned its managed devaluation strategy and
allowed the Real to float against other currencies. As of December 31, 1999, the
Real had devalued approximately 33% against the United States Dollar since
January 1, 1999. For the year ended December 31, 1999 the devaluation has
resulted in a charge of $145,783,000 to other comprehensive income, a separate
component of Stockholder's Equity. Energy Holdings cannot predict to what
extent, if any, further devaluation may occur, and therefore, cannot predict the
impact of potential devaluation of currencies on Energy Holdings' results of
operations, financial condition and net cash flows.
Energy Holdings' 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:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1999 % 1998 % 1997 %
------------- --- -------------- --- --------------- ---
<S> <C> <C> <C> <C> <C> <C>
Income from capital leases $ 88,757,000 $ 58,518,000 $ 33,943,000
Income from joint ventures 52,601,000 46,617,000 13,949,000
Interest and dividends 407,000 411,000 404,000
Operator/Management fees 7,227,000 3,676,000 2,820,000
-------------- -------------- ---------------
Total foreign revenues $ 148,992,000 24% $ 109,222,000 25% $ 51,116,000 15%
-------------- -------------- ---------------
Foreign assets (A) $2,420,277,000 59% $1,602,790,000 51% $ 1,327,828,000 44%
============== ============== ===============
</TABLE>
(A) Amount is net of pre-tax foreign currency translation adjustment of
$222,281,000, $47,794,000 and $16,132,000 as of December 31, 1999, 1998
and 1997, respectively.
F-19
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
IPE Energia (IPE), a wholly-owned subsidiary of Global, whose functional
currency is the United States Dollar, has non-recourse debt of $90,075,000 and
$122,834,000 as of December 31, 1999 and 1998, respectively (see Note 8.
Long-Term Debt), denominated in Brazilian Reals, which is indexed to a basket of
currencies including United States Dollars. As a result, the debt is subject to
foreign currency exchange rate risk due to the effect of exchange rate movements
between the indexed foreign currencies and the Brazilian Real and between the
Brazilian Real and the United States Dollar. Exchange rate changes ultimately
impact the debt level outstanding in the denominated currency and result in
foreign currency transaction gains or losses, which are included in net income.
The net foreign currency transaction gains (losses) for the years ended December
31, 1999, 1998 and 1997 were $3,083,000, $(3,031,000) and $685,000,
respectively, and are recorded in Other Income (Loss) in the Consolidated
Statements of Income.
NOTE 6. 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:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax expense at statutory rate ......... $ 61,608,000 $ 34,146,000 $ 25,708,000
State income taxes, net of Federal income
tax benefit ........................................ 15,782,000 4,470,000 3,110,000
Amortization of investment and energy
tax credits ........................................ (807,000) (1,105,000) (1,251,000)
Dividends received deduction ......................... (807,000) (755,000) (651,000)
Tax effect of tax benefit transfer expense ........... 192,000 878,000 505,000
Tax effects attributable to foreign operations ....... (7,204,000) (1,120,000) (68,000)
Tax credits .......................................... -- (6,923,000) --
Other ................................................ 178,000 569,000 (1,537,000)
------------ ------------ ------------
Income tax expense ................................... $ 68,942,000 $ 30,160,000 $ 25,816,000
============ ============ ============
</TABLE>
The following is an analysis of Deferred Income Taxes:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets - non-current:
Development expenses $ 16,074,000 $ 14,786,000
Foreign currency translation 22,228,000 4,779,000
Bad debt reserve 5,578,000 5,456,000
Other 7,847,000 7,371,000
------------ ------------
Total Assets 51,727,000 32,392,000
============ ============
Liabilities - non-current:
Leasing activities 796,570,000 702,258,000
Partnership activities 117,593,000 154,411,000
Income from foreign operations 6,200,000 3,008,000
State income tax deferrals 18,827,000 19,017,000
------------ ------------
Total Liabilities 939,190,000 878,694,000
------------ ------------
Net Liabilities $887,463,000 $846,302,000
============ ============
</TABLE>
As of December 31, 1999 and 1998, the amount due PSEG for federal income
tax was $754,000 and $159,000, respectively.
F-20
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES PAYABLE
In May 1999, Energy Holdings closed on two separate senior revolving
credit facilities, with a syndicate of banks, a $165,000,000, 364 day revolving
credit facility and a $495,000,000, five year revolving credit and letter of
credit facility. These facilities, totaling $660,000,000 replaced Funding's two
revolving credit and reimbursement agreements of $300,000,000 and $150,000,000.
As of December 31, 1999 and 1998, borrowings outstanding under the
revolving credit and reimbursement agreements were $351,000,000 and
$206,000,000, respectively. The effective interest rates on the December 31,
1999 and 1998 revolving credit facility borrowings were 6.67% and 6.70%,
respectively, plus related fees. The interest expense incurred related to
short-term borrowings amounted to $11,242,000, $8,060,000 and $9,826,000 as of
December 31, 1999, 1998 and 1997, respectively. Due to the short-term nature of
this debt and the related interest rates, the recorded amounts are a reasonable
estimate of fair value as of December 31, 1999 and 1998.
F-21
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. LONG-TERM DEBT
Long-Term Debt was comprised of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
Year Due 1999 1998
-------- -------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Energy Holdings
Senior Notes
10.00% ....................................................... 2009 $ 400,000 $ --
Net unamortized discount ..................................... (4,914) --
---------- --------
Total long-term debt of Energy Holdings ...................... 395,086 --
---------- --------
PSEG Capital
Medium-Term Notes (MTNs) (A)
8.95% - 9.93% ................................................ 1999 -- 155,000
6.54% ........................................................ 2000 78,000 78,000
6.73% - 6.74% ................................................ 2001 170,000 135,000
6.80% - 7.00% ................................................ 2002 130,000 130,000
6.25% ........................................................ 2003 252,000 --
---------- --------
Principal amount outstanding ................................. 630,000 498,000
Amounts due in one year ...................................... (78,000) (154,973)
Net unamortized discount ..................................... (1,794) (1,195)
---------- --------
Total long-term debt of PSEG Capital ......................... 550,206 341,832
---------- --------
Funding
Senior Notes
7.58% - Series G ............................................. 1999 -- 45,000
---------- --------
Principal amount outstanding ................................. -- 45,000
Amounts due in one year ...................................... -- (45,000)
---------- --------
Total long-term debt of Funding .............................. -- --
---------- --------
Global
Non-recourse Debt
7.721% - Bank Loan ....................................... 1999 -- 87,044
11.08% - 13.73% - Bank Loan .................................. 2000 96,919 --
9.04% - 13.73% - Bank Loan .................................. 2001 126,027 --
9.42% - 13.73% - Bank Loan .................................. 2002 45,025 122,834
9.42% - Bank Loan ........................................... 2003 28,995 --
9.42% - Bank Loan ........................................... 2004 20,003 --
14.00% - Minority Interest Loan .............................. 2027 9,990 9,990
---------- ---------
Principal amount outstanding ................................. 326,959 219,868
Amounts due in one year ...................................... (96,919) (117,752)
---------- ---------
Total long-term debt of Global ............................... 230,040 102,116
---------- ---------
Total long-term debt ......................................... $1,175,332 $ 443,948
========== =========
</TABLE>
(A) PSEG Capital's MTN program permits borrowings up to $750,000,000.
Effective January 31, 1995, PSEG Capital determined that it will not have more
than $650,000,000 of debt outstanding at any time (See Note 14. Commitments and
Contingencies).
F-22
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the borrowing rates currently available to Energy Holdings for
debt with similar terms and remaining maturities, the fair value of Energy
Holdings' long-term debt was as follows:
December 31,
-----------------------------
1999 1998
-------- ---------
(Thousands of Dollars)
Senior Notes - Energy Holdings ............... $407,592 $ --
MTNs - PSEG Capital .......................... 611,889 503,830
Senior Notes - Funding ....................... -- 45,000
Non-recourse debt - Global ................... 326,959 219,868
The fair value of our Senior Notes and Medium-term notes is based on
information obtained quarterly from market sources with extensive knowledge of
prices at which the notes are trading.
Substantially all non-recourse debt is floating rate that is reset several
times during the year to various market indices. As such, book approximates
market value.
Annual Principal Requirements
The scheduled principal maturities during the years following December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Energy Holdings PSEG Capital Global Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 ................................ $ -- $ 78,000,000 $ 96,919,000 $ 174,919,000
2001 ................................ -- 170,000,000 126,027,000 296,027,000
2002 ................................ -- 130,000,000 45,025,000 175,025,000
2003 ................................ -- 252,000,000 28,995,000 280,995,000
Thereafter .......................... 400,000,000 -- 29,993,000 429,993,000
----------------------------------------------------------------------------------
.................................... $400,000,000 $630,000,000 $326,959,000 $1,356,959,000
==================================================================================
</TABLE>
Senior Notes-- Energy Holdings
In October 1999, Energy Holdings issued $400 million of 10.0% Senior Notes
due October 2009. The proceeds were used for the repayment of short-term debt
outstanding under revolving credit facilities. Borrowings under the revolving
credit facilities were used to finance investments and acquisitions and for
general corporate purposes. Interest Expense incurred during the year related to
such borrowings amounted to $9,222,000.
Bank Loan -- BNDES
In October 1997, IPE and The National Economic and Social Development Bank
(BNDES), entered into a credit agreement (the BNDES Loan) which matures on
November 15, 2002. The loan proceeds are denominated in Brazilian Reals which
are indexed to a basket of currencies, including U.S. dollars. In total, IPE
received the U.S. dollar equivalent of approximately $135,580,000, which was
used to partially finance the Company's acquisition of RGE in 1997.
F-23
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the terms of the BNDES Loan, the outstanding principal is reset on a
daily basis based on exchange rate movements between the indexed foreign
currencies and the Brazilian Real and between the Brazilian Real and the U.S.
dollar. The loan balance is subject to a base variable interest rate plus 4.5%.
The variable interest rate reflects the BNDES borrowing rate and is adjusted on
a quarterly basis. The interest rate in effect as of December 31, 1999 and 1998
was 13.73% and 13.23% respectively. Interest expense during 1999, 1998 and 1997
was approximately $14,946,000, $17,246,000 and $3,223,000, respectively. Both
principal and interest are payable over a five year period in nine equal
installments, beginning in November 1998. However, Energy Holdings cannot
predict the amount, if any, of such additional funding requirements (See Note 5.
Foreign Operations).
Bank Loan -- ING
In May 1997, PSEG Americas Operating Company (PSEG Americas), a
wholly-owned subsidiary of Global and ING Bank and ING Capital Corporation
(collectively, ING), as lender and as agent for a consortium of lenders, entered
into a credit agreement for approximately $87,044,000 which matured on May 30,
1999 (1997 ING Agreement). The loan proceeds were used to partially fund the
acquisition of EDEN/EDES in Argentina. In June 1999, PSEG Americas entered into
a new credit agreement with ING for approximately $66,894,000 (1999 ING
Agreement). Interest is payable quarterly and accrues at LIBOR plus 6%. Interest
expense incurred during 1999, 1998 and 1997 related to such borrowings amounted
to $7,356,000, $7,042,000 and $4,003,000, respectively.
Under the terms of the ING Agreements, PSEG Americas must maintain an
interest reserve for a minimum amount equal to six months of projected interest
payments. Additionally, a receipts account must be maintained into which all
revenues and other payments are deposited. Both accounts are administered by
U.S. Trust Company of New York and are restricted as to their use and
disbursements in accordance with the provisions of the ING Agreements. As of
December 31, 1999, restricted cash of $4,100,000 and $75,000 was included in the
interest reserve and receipts accounts, respectively. As of December 31, 1999,
restricted cash also included $550,000 held on deposit with ING Capital
Corporation and $185,000 held in trust with Banco de la Provincia, an Argentine
banking institution. As of December 31, 1998, restricted cash of $3,387,000 and
$369,000 was included in the interest reserve and receipts accounts,
respectively.
In June 1997, PSEG Americas entered into an interest rate swap agreement,
which effectively converted a portion of the floating rate obligations under the
1997 ING Agreement into fixed rate obligations. The interest differential to be
received or paid under the interest rate swap agreement is recorded over the
life of the agreement as an adjustment to interest expense. The swap terminated
on May 28, 1999, when the 1997 ING Agreement expired. PSEG Americas entered into
a new interest rate swap in conjunction with the 1999 ING Agreement. The
notional amounts and interest rates associated with the swaps are as follows:
1999 1998
------------------------------
Notional Amount ............................. $33,447,000 $43,522,000
Pay Rate .................................... 5.79% 6.65%
Average Receive Rate ........................ 5.23% 5.68%
Year End Receive Rate ....................... 6.09% 5.13%
F-24
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Bank Loan -- Chase Manhattan Bank
In June 1999, PSEG Global Funding II L.L.C., a wholly-owned subsidiary of
Global and Chase Manhattan Bank, as lender and as agent for a consortium of
lenders, entered into a $160,000,000 non-recourse debt financing under the
following terms: Tranche A for $85,000,000 maturing June 9, 2001 at a rate of
LIBOR plus 3.25%; and Tranche B for $75,000,000 maturing June 9, 2004, in
increasing percentages every six months commencing on the 24th month following
the closing date (June 9, 1999) at a rate of LIBOR plus 3.625%. The loan
proceeds were used to partially fund the acquisition of Chilquinta Energia S.A.
in Chile. Interest expense incurred during 1999 related to such borrowings
amounted to $7,881,000.
Minority Interest Loan
PSEG Americas also entered into a $9,990,000 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/EDES in Argentina in 1997 by
PSEG Americas (see Note 5. Investments in Partnerships and Corporate Joint
Ventures). Amounts borrowed under the Shareholder Loan are unsecured and
subordinated to amounts borrowed under the ING Agreement.
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. In 1999, 1998
and 1997, interest expense related to such borrowings totaled $1,418,000,
$1,418,000 and $839,000, respectively.
NOTE 9. STOCKHOLDER'S EQUITY
Common Stock
Energy Holdings had 100 shares of no-par common stock issued and
outstanding as of December 31, 1999 and 1998, all of which was held by PSEG. The
total authorized amount as of December 31, 1999 and 1998 was 1,000,000 shares.
Preferred Stock
Energy Holdings has authorized 1,000,000 shares of preferred stock. The
issuance of preferred stock is as follows:
<TABLE>
<CAPTION>
Number
Par value of December 31,
Date Description per share shares 1999
- -------- ----------- --------- ------ ------------
<S> <C> <C> <C> <C>
January 1998 5.01% Cumulative $500,000 435 $217,500,000
June 1998 4.80% Series B Cumulative $100,000 1,467 146,700,000
July 1998 4.875% Series C Cumulative $100,000 1,450 145,000,000
------------
Total $509,200,000
============
</TABLE>
During 1999 and 1998, Energy Holdings paid preferred dividends from
retained earnings of $25,007,000 and $18,076,000 to PSEG.
A portion of the proceeds from the 5.01% Cumulative Preferred Stock was
used to retire the $75,000,000 of 4.10% Cumulative Preferred Stock issued in
1997.
Additional Paid-in Capital
In June 1999, PSEG invested approximately $200,000,000 of equity in Energy
Holdings to pay down short term debt. No capital contributions were made by or
returned to PSEG during 1998.
F-25
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividends on Common Stock
Energy Holdings paid $3,784,000 in common stock dividends to PSEG in 1999
and $0 in 1998.
Subscription Agreement
Global and PSEG have entered into a subscription agreement (the Agreement)
pursuant to which a subscription was outstanding as of December 31, 1999 for
PSEG to purchase up to 333 shares of Global's capital stock at a purchase price
of $10,000 per share, or an aggregate purchase price of $3,330,000. Excluding
financial obligations which have been recorded, funded or otherwise fulfilled,
the remaining obligations under existing subscription agreements as of December
31, 1999 were approximately $3,330,000. The Agreement supports the financial
obligation of Global relative to a specific project. In December 1996, the
investment value of this project was reduced to zero. In addition, Global
recorded a $3,330,000 provision for the aforementioned financial obligation. The
Agreement has been assigned to an outside party who has the right to require
PSEG to perform thereunder and make direct payments to the assignee in the event
of default (See Note 14. Commitments and Contingencies).
NOTE 10. 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 partnerships and joint ventures 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 $12,007,000, $8,653,000 and $12,072,000 were included in Revenues -
Other Revenues in the Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997, respectively.
Income from Partnerships
Approximately 90% of the electricity generated by the Eagle Point Power
Plant, a 50% owned equity investment of Global, is sold to Public Service
Electric and Gas Company under a 25-year power purchase contract terminating in
May 2016. Global's share of partnership revenues received from Public Service
Electric an Gas represented approximately $55,000,000, $54,000,000 and
$48,000,000 for the years December 31, 1999, 1998 and 1997, respectively.
Administrative Costs
Public Service Electric and Gas Company provides and bills administrative
services to Energy Holdings on a monthly basis. These costs amounted to
approximately $10,715,000, $13,146,000 and $13,023,000 for 1999, 1998 and 1997,
respectively. In addition, Energy Holdings was billed administrative overheads
of $2,170,000, $2,554,000 and $2,524,000 by PSEG during 1999, 1998 and 1997,
respectively.
Employees of Energy Holdings and its subsidiaries are participants in a
non-contributory pension plan administered by Public Service Electric and Gas
Company and costs related to such employees are billed on a monthly basis. Such
costs amounted to approximately $2,426,000, $3,622,000, and $3,442,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
F-26
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. OTHER INCOME(LOSS)
Other income (loss) is comprised of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1999 1998 1997
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Net gain on sale of investments (1) ................ $68,972 $ 1,948 $ --
Write down of investments (2) ...................... (43,971) -- --
Foreign currency gain (loss) ....................... 3,083 (3,031) 685
Other .............................................. 5,349 (735) --
------- ------- ----
Total ................................... $33,433 $(1,818) $685
======= ======= ====
</TABLE>
(1) Primarily the sale of the Newark Bay Cogeneration Facility by Global.
(2) Write down of three equity investments by Global. (See Note 4. Investments
in Corporate Joint Ventures and Partnerships).
NOTE 12. MINIMUM LEASE PAYMENTS
Energy Holdings and its subsidiaries lease administrative office space and
equipment under operating leases, which expire prior to the end of 2003. Total
future minimum lease payments as of December 31, 1999 are:
2000 ........................................... $ 5,944,000
2001 ........................................... 5,912,000
2002 ........................................... 5,605,000
2003 ........................................... 3,989,000
2004 ........................................... 2,595,000
-----------
Total minimum lease payments ................... $24,045,000
===========
Rent expense for 1999, 1998 and 1997 was approximately $7,306,000,
$5,971,000 and $4,808,000, respectively.
NOTE 13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Energy Holdings' operations give rise to exposure to market risks from
changes in natural gas prices, interest rates, foreign exchange rates and
security prices of investments recorded at fair value. Energy Holdings' policy
is to use derivatives for the purpose of managing market risk consistent with
its business plans and prudent practices. Energy Holdings does not hold or issue
financial instruments for trading 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. The amounts exchanged, under the terms of the
derivatives, are calculated on the basis of the notional amounts. Energy
Holdings limits its exposure to credit-related losses in the event of
nonperformance by counterparties by limiting its counterparties to those with
high credit ratings.
Hedging
In order to limit Energy Technologies' exposure to price fluctuations
related to fixed price sales commitments, Energy Technologies, pursuant to its
internal trading policy, may not have an outstanding net balance of unhedged
fixed price sales commitments in excess of levels established by management.
Energy Technologies purchases futures contracts in addition to physical purchase
commitments, to ensure compliance with the trading policy. The futures contracts
are accounted for as
F-27
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
hedges for book purposes and, accordingly, gains and losses are deferred until
the related sales are made.
During 1999 and 1998, Energy Technologies entered into futures contracts
to buy natural gas related to fixed price sales commitments. Such contracts,
together with physical purchase contracts, hedged approximately 64% and 90% of
Energy Technologies' fixed price sales commitments at December 31, 1999 and
1998, respectively. Energy Technologies had a net deferred unrealized hedge loss
of $(550,000) and $(5,160,000) at those respective dates.
During 1999 and 1998, Energy Technologies entered into fixed price
electricity sales commitments. Physical purchase contracts hedged approximately
85% and 63% of such fixed price sales commitments at December 31, 1999 and 1998,
respectively. Energy Technologies had a net deferred unrealized hedge gain of
$414,000 at December 31, 1999 and had no unrealized position related to hedges
of electric sales of December 31, 1998.
Resources has investments in equity securities and partnerships, in which
Resources is a limited partner, which invest in equity securities. 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 available market prices at December 31,
1999, and 1998 was $130,546,000 and $204,303,000, respectively. The portfolio
has exposure to market price risk. As such, a sensitivity analysis has been
prepared to estimate Energy Holdings' 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 amounted to $11,000,000
and $17,000,000 at December 31, 1999 and 1998, respectively.
NOTE 14. COMMITMENTS AND CONTINGENCIES
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 $341,165,000 as of December 31, 1999. A substantial portion of
such guarantees is eliminated upon successful completion, performance and/or
refinancing of construction debt with non-recourse project term debt. A
subscription agreement for PSEG to purchase Global's capital stock secures
$3,330,000 of such obligations (See Note 9. Stockholder's Equity).
Global has been advised by Turboven that litigation has been instituted
against it by a subsidiary of CA de Administracion y Fomento Electrico (CADAFE),
a Venezuelan state-owned electricity company. CADAFE alleges that Turboven's
operation of the Cagua plant interferes with its installations and that Turboven
does not meet certain Venezuelan legal requirements. On February 4, 2000, the
Superior Court in Maracay, Venezuela issued an injunction prohibiting the
start-up of the Cagua plant. Global believes Turboven has met all legal
requirements for operation of Cagua. Global is advised by Turboven that it has
appealed this decision and will vigorously defend its right to operate such
facility. The appeal of this decision is pending before the First Court for the
litigation of administrative matters of Venezuela. A final court decision
preventing operation of Cagua would likely also affect Turboven's ability to
operate Maracay and its planned development of the Valencia project. Global's
total indirect investment to date in the Cagua and Maracay facilities is
approximately $42,388,000. Turboven, and consequently Global, cannot predict the
outcome of this matter.
F-28
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 1993, following a 1992 audit of Energy Holdings, which concluded
that Energy Holdings' businesses had not harmed PSEG's wholly-owned, operating
public utility subsidiary, Public Service Electric and Gas Company, the BPU
accepted a Focused Audit Implementation Plan in which PSEG agreed, among other
things, that it will not permit Energy Holdings assets, as defined in the
agreement, to exceed 20% of its consolidated assets without prior notice to the
BPU, and that debt supported by a support agreement between PSEG and PSEG
Capital will be limited to $750,000,000, with a good faith effort to eliminate
such support within six to ten years. Effective January 31, 1995, PSEG Capital
determined that it will not have more than $650,000,000 of debt outstanding at
any time. At December 31, 1999 and 1998, Energy Holdings' assets represented 22%
and 18% of PSEG's consolidated assets and PSEG Capital's debt outstanding was
$630,000,000 and $498,000,000, respectively.
NOTE 15. 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 Public Service Electric and Gas
Company. See Note 10. Related Party Transactions for Energy Holdings' pension
costs for the years 1999, 1998, and 1997.
In addition, Public Service Electric and Gas Company sponsors two defined
contribution plans. Represented employees of Energy Holdings are eligible for
participation in the Public Service Electric and Gas Company's Employee Savings
Plan while all other employees of Energy Holdings are eligible for participation
in the Public Service Electric and Gas Company's Tax-Deferred Savings 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 8% for all employees are matched with employer contributions
of cash or PSEG common stock equal to 50% of such employee contributions.
Employer contributions in excess of 6% and up to 8% are made in shares of PSEG
common stock for all employees. Public Service Electric and Gas Company billed
Energy Holdings for its portion of employer contributions. The amount expensed
for the matching provision of the plans was approximately $750,000, $803,000,
and $573,000 in 1999, 1998, and 1997, respectively.
NOTE 16. 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 receives its revenues from its investment in and operation of
projects in the generation and distribution of energy, both domestically and
internationally.
Resources
Resources receives revenues from its passive investments in leveraged
leases, limited partnerships, leveraged buyout funds and marketable securities.
Energy Technologies
Energy Technologies receives revenues from energy sales and a variety of
energy related services to industrial and commercial customers to reduce costs
and improve related energy efficiencies.
F-29
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Activities
Other Activities include amounts applicable to Energy Holdings (the
parent), EGDC and intercompany eliminations.
Information related to the segments of Energy Holdings' business is
detailed below:
<TABLE>
<CAPTION>
Energy Other Consolidated
Global Resources Technologies Activities (A) Total
-------- ----------- ------------- --------------- ------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1999:
Total Revenues $ 141,505 $ 178,939 $297,046 $ 283 $ 617,773
Interest Expense-- Net 48,115 46,061 252 257 94,685
Income Taxes 23,562 49,937 (2,020) (2,537) 68,942
Net income from equity
investments 128,926 77,573 -- 171 206,670
Income Before Income Taxes 69,143 122,688 (8,558) (7,249) 176,024
EBIT 117,258 168,749 (8,306) (6,992) 270,709
Segment Net Income (Loss)
available for Common Stock $ 28,056 $ 66,186 $ (6,538) $(4,712) $ 82,992
---------- ---------- --------- -------- ----------
As of December 31, 1999:
Total Assets $1,715,497 $2,095,688 $251,883 $51,317 $4,114,385
Investments in equity method
affiliates $1,628,264 $ 279,286 $ -- $10,035 $1,917,585
---------- ---------- -------- ------- ----------
For the Year Ended December 31, 1998:
Total Revenues $ 123,935 $ 145,115 $170,840 $ 394 $ 440,284
Interest Expense-- Net 40,672 48,727 0 968 90,367
Income Taxes 12,296 26,624 (5,193) (3,567) 30,160
Net income from equity investments 113,900 34,537 -- 297 148,734
Income Before Income Taxes 31,246 86,364 (16,364) (3,686) 97,560
EBIT(B) 71,918 135,091 (16,364) (2,718) 187,927
Segment Net Income (Loss)
available for Common Stock $ 7,477 $ 55,523 $(11,171) $ (103) $ 51,726
========== ========== ======== ======= ==========
As of December 31, 1998:
Total Assets $1,124,160 $1,809,295 $196,610 $38,465 $3,168,530
Investments in equity method
affiliates $1,058,688 $ 383,284 $ -- $34,223 $1,476,195
========== ========== ======== ======= ==========
For the Year Ended December 31, 1997:
Total Revenues $ 90,886 $ 144,334 $104,076 $ 2,294 $ 341,590
Interest Expense--Net 21,926 45,921 2,846 1,670 72,363
Income Taxes 10,276 28,998 (9,783) (3,675) 25,816
Net income from equity investments 77,986 48,929 -- 165 127,080
Income Before Income Taxes 23,794 88,140 (27,984) (10,500) 73,450
EBIT(B) 45,720 134,061 (25,138) (8,830) 145,813
Segment Net Income (Loss)
available for Common Stock $ 13,733 $ 59,142 $(18,201) $(7,399) $ 47,275
========== ========== ======== ======= ==========
As of December 31, 1997:
Total Assets $1,169,948 $1,616,122 $177,361 $59,525 $3,022,956
Investments in equity method
affiliates $1,118,642 $ 407,166 $ -- $33,841 $1,559,649
========== ========== ======== ======= ==========
</TABLE>
(A) Other Activities include amounts applicable to Energy Holdings (the
parent), EGDC and intercompany eliminations.
(B) EBIT is defined as Income before income taxes and interest expense.
F-30
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Geographic Information for Energy Holdings is disclosed below.
<TABLE>
<CAPTION>
Revenues(1)
----------------------------------------------------
Years Ended December 31,
----------------------------------------------------
1999 1998 1997
----------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
United States ................................... $468,780 $331,062 $290,474
Foreign Countries:
Argentina .................................... 16,820 16,407 7,464
Brazil ....................................... 19,664 30,669 3,500
Chile and Peru ............................... 18,047 -- --
Netherlands .................................. 64,521 38,718 19,716
Other ........................................ 29,941 23,428 20,436
-------- -------- --------
Total Foreign ................................... 148,993 109,222 51,116
-------- -------- --------
Total ..................................... $617,773 $440,284 $341,590
======== ======== ========
</TABLE>
(1) Revenues are attributed to countries based on the locations of the
investments.
<TABLE>
<CAPTION>
Identifiable Assets
---------------------------------------------------
December 31,
---------------------------------------------------
1999 1998 1997
---------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
United States .................................. $1,694,108 $1,565,740 $1,695,128
Foreign Countries:
Argentina ................................... 356,286 306,724 239,411
Brazil(1) ................................... 330,453 480,411 505,010
Chile and Peru .............................. 519,840 -- --
Netherlands ................................. 622,634 399,655 192,827
Other ....................................... 591,064 416,000 390,580
---------- ---------- ----------
Total Foreign ............................... 2,420,277 1,602,790 1,327,828
---------- ---------- ----------
Total .................................... $4,114,385 $3,168,530 $3,022,956
========== ========== ==========
</TABLE>
(1) Amount is net of foreign pre-tax currency translation adjustment of
$188,806,000, $43,022,000 and $6,862,000 for the periods ended December
31, 1999, 1998 and 1997, respectively.
NOTE 17. ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended, which is
effective for financial statements for all fiscal quarters beginning January 1,
2001. SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize as assets
or liabilities on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If a derivative is a
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability or firm commitment
through earnings or be recognized in other comprehensive income until the hedged
item is recognized in earnings, depending on the nature of the hedge. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
The Company is currently evaluating the impact of SFAS 133.
F-31
<PAGE>
PSEG ENERGY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18. Subsequent Events
Energy Holdings
In February 2000, Energy Holdings issued $300,000,000 of 9.125% Senior
Notes due February 2004. The proceeds were used for the repayment of short-term
debt.
Also in February 2000, Energy Holdings closed on a $190,000,000 letter of
credit facility to support a future equity investment in a generation project in
Texas.
In February 2000, Energy Technologies entered into a business arrangement
with Enermetrix.com to provide an internet-based auction exchange that will
allow customers an alternative method in purchasing their energy requirements.
As a result of this new strategic direction, Energy Technologies will
discontinue the business of buying and selling gas and electricity. As a result,
Energy Technologies will recognize a charge to income of approximately
$6,700,000 for the year ending December 31, 2000 relating to severance costs and
the write down of fixed assets
F-32
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article 6 of Energy Holdings' Certificate of Incorporation provides as
follows:
To the full extent from time to time permitted by law, directors and
officers of the corporation shall not be personally liable to the corporation or
its shareholders for damages for breach of any duty owed to the corporation or
its shareholders. No amendment or repeal of this provision shall adversely
affect any right or protection of a director of officer of the corporation
existing at the time of such amendment or repeal.
Section 24 of Energy Holdings' By-laws provides as follows:
The corporation shall indemnify to the full extent from time to time
permitted by law any person made, or threatened to be made, a party to any
pending, threatened or completed civil, criminal, administrative or arbitrative
action, suit or proceeding and any appeal therein (and any inquiry or
investigation which could lead to such action, suit or proceedings) by reason of
the fact that he is or was a director, officer or employee of the corporation or
serves or served any other enterprise as a director, officer or employee at the
request of the corporation. Such right of indemnification shall inure to the
benefit of the legal representative of any such person.
The directors and officers of Energy Holdings are insured under policies
of insurance, within the limits and subject to the limitations of the policies,
against claims made against them for acts in the discharge of their duties, and
Energy Holdings is insured to the extent that it is required or permitted by law
to indemnify the directors and officers for such loss. The premiums for such
insurance are paid by Energy Holdings.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
Exhibit
Number Description
- ------- ----------
3.1 -- Certificate of Incorporation, as amended.*
3.2 -- By-Laws.*
4.1 -- Indenture dated October 8, 1999 between Energy Holdings and First
Union National Bank.*
4.2 -- Exchange and Registration Rights Agreement dated October 8, 1999
between Energy Holdings and the purchasers named in Schedule I of
the purchase agreement.*
4.3 -- Form of Exchange Note.*
5 -- Opinion of James T. Foran, Esquire.**
8 -- Opinion of James T. Foran, Esquire regarding tax matters.**
12 -- Statement regarding computation of ratios of earnings.
21 -- Subsidiaries of the Registrant.*
23.1 -- Consent of James T. Foran, Esquire (contained in Exhibits 5 and
8).**
23.2 -- Independent Auditors' Consent.
24 -- Power of Attorney.*
25 -- Statement of Eligibility of Trustee on Form T-1.*
27 -- Financial Data Schedule
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
- ---------------
* Previously filed.
** To be filed by amendment.
II-1
<PAGE>
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
The undersigned registrant hereby undertakes (a):
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required bySection 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change in such information in the
registration statement; provided, however, that the registrant
need not file a post-effective amendment to include the
information required to be included by subsection (a)(1)(i) or
(a)(l)(ii) if such information is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act that are incorporated by reference
in the registration statement.
2. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, PSEG Energy Holdings Inc., certifies that it has reasonable grounds
to believe it meets all of the requirements for filing on Form S-4 and has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark,
State of New Jersey, on this 12th day of April, 2000.
PSEG ENERGY HOLDINGS INC.
By: /s/ ROBERT J. DOUGHERTY
-------------------------------------
Robert J. Dougherty, Jr
President and Chief Operating Officer
II-3
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ---- ----
<S> <C> <C>
/s/ E. James Ferland Principal Executive April 12, 2000
- --------------------------------------- Officer and Director
E. James Ferland
/s/ Bruce E. Walenczyk Principal Financial Officer April 12, 2000
- ---------------------------------------
Bruce E. Walenczyk
/s/ Derek M. DiRisio Principal Accounting Officer April 12, 2000
- ---------------------------------------
Derek M. DiRisio
</TABLE>
This Registration Statement has also been signed by Bruce E. Walenczyk,
Attorney-in-Fact, on behalf of the following Directors on April 12, 2000.
Frank Cassidy
Robert J. Dougherty
Robert C. Murray
R. Edwin Selover
By: /s/ BRUCE E. WALENCZYK
-----------------------------
Bruce E. Walenczyk
Attorney-in-Fact
II-4
<PAGE>
Exhibit Index
Exhibit
Number Description
- ------- -----------
3.1 -- Certificate of Incorporation, as amended.*
3.2 -- By-Laws.*
4.1 -- Indenture dated October 8, 1999 between Energy Holdings and First
Union National Bank.*
4.2 -- Exchange and Registration Rights Agreement dated October 8, 1999
between Energy Holdings and the purchasers named in Schedule I of
the purchase agreement.*
4.3 -- Form of Exchange Note.*
5 -- Opinion of James T. Foran, Esquire.**
8 -- Opinion of James T. Foran, Esquire regarding tax matters.**
12 -- Statement regarding computation of ratios of earnings.
21 -- Subsidiaries of the Registrant.*
23.1 -- Consent of James T. Foran, Esquire (contained in Exhibits 5 and
8).**
23.2 -- Independent Auditors' Consent.
24 -- Power of Attorney.*
25 -- Statement of Eligibility of Trustee on Form T-1.*
27 -- Financial Data Schedule
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
- -------------
* Previously filed.
** To be filed by amendment.
EXHIBIT 12
PSEG ENERGY HOLDINGS INC.
Computation of Ratios of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings as Defined in Regulation S--K (A):
Pre-tax income from Continuing
Operations ................................... $ 176,024 $ 97,560 $ 73,450 $ 73,370 $ 70,646
(Income)/Loss from equity
investees net of distributions ............... 8,622 30,228 (35,318) 49,718 13,107
Fixed Charges .................................. 106,092 93,936 79,351 60,714 60,761
Amortization of capitalized
interest ....................................... 668 2,049 1,990 1,737 1,672
Capitalized interest ........................... (8,484) (1,181) (5,065) (1,301) (1,896)
--------- --------- --------- --------- ---------
Earnings ....................................... $ 282,922 $ 222,592 $ 114,408 $ 184,238 $ 144,290
========= ========= ========= ========= =========
Fixed Charges as Defined in Regulation S--K (B):
Total interest expensed and
capitalized .................................. $ 103,169 $ 91,548 $ 77,428 $ 59,562 $ 58,790
Interest in rental expense ..................... 2,923 2,388 1,923 1,152 1,971
--------- --------- --------- --------- ---------
Total Fixed Charges ............................ $ 106,092 $ 93,936 $ 79,351 $ 60,714 $ 60,761
========= ========= ========= ========= =========
Ratio of Earnings to Fixed
Charges ...................................... 2.67 2.37 1.44 3.03 2.37
========= ========= ========= ========= =========
</TABLE>
(A) The term "earnings" shall be defined as pre-tax income from continuing
operations before adjustment for minority interests or income or loss from
equity investees. Add fixed charges adjusted to exclude and (a) the amount
of any interest capitalized during the period, (b) amortization of
capitalized interest and (c) distributed income of equity investees. From
the total, subtract interest capitalized.
(B) Fixed Charges represent (a) interest, whether expensed or capitalized, (b)
amortization of debt discount, premium and expense, and (c) an estimate of
interest implicit in rentals.
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-95697 of PSEG Energy Holdings Inc. of our report dated April 7, 2000
appearing in the Prospectus, which is a part of this Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Parsippany, New Jersey
April 12, 2000
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Dec-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 45,862
<OTHER-PROPERTY-AND-INVEST> 3,753,255
<TOTAL-CURRENT-ASSETS> 239,981
<TOTAL-DEFERRED-CHARGES> 22,335
<OTHER-ASSETS> 52,952
<TOTAL-ASSETS> 4,114,385
<COMMON> 100
<CAPITAL-SURPLUS-PAID-IN> 789,608
<RETAINED-EARNINGS> 276,182
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,065,890
0
509,200
<LONG-TERM-DEBT-NET> 1,175,332
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 174,856
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,189,107
<TOT-CAPITALIZATION-AND-LIAB> 4,114,385
<GROSS-OPERATING-REVENUE> 617,773
<INCOME-TAX-EXPENSE> 68,942
<OTHER-OPERATING-EXPENSES> 379,580
<TOTAL-OPERATING-EXPENSES> 448,522
<OPERATING-INCOME-LOSS> 237,276
<OTHER-INCOME-NET> 33,433
<INCOME-BEFORE-INTEREST-EXPEN> 270,709
<TOTAL-INTEREST-EXPENSE> 94,685
<NET-INCOME> 107,999
25,007
<EARNINGS-AVAILABLE-FOR-COMM> 82,992
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 92,396
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
