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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant, State of Incorporation, I.R.S. Employer
File Address, and Telephone Number Identification
Number No.
---------- ------------------------------------------ ----------------
1-9120 PUBLIC SERVICE ENTERPRISE GROUP 22-2625848
INCORPORATED
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 1171
Newark, New Jersey 07101-1171
973 430-7000
http://www.pseg.com
1-973 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 22-1212800
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 570
Newark, New Jersey 07101-0570
973 430-7000
333-95697 PSEG ENERGY HOLDINGS, INC. 22-2983750
(A New Jersey Corporation)
80 Park Plaza-T22
Newark, New Jersey 07101-4194
973 456-3581
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Public Service Enterprise Group Incorporated Yes X No ___
Public Service Electric and Gas Company Yes X No ___
PSEG Energy Holdings Inc. Yes X No ___
As of October 31, 2000, Public Service Enterprise Group Incorporated had
outstanding 214,406,518 shares of its sole class of Common Stock, without par
value and Public Service Electric and Gas Company and PSEG Energy Holdings Inc.
had issued and outstanding 132,450,344 and 100 shares of common stock, without
nominal or par value, respectively, all of which were privately held,
beneficially and of record by Public Service Enterprise Group Incorporated.
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<PAGE>
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Public Service Enterprise Group Incorporated (PSEG).................. 1
Public Service Electric and Gas Company (PSE&G)...................... 5
PSEG Energy Holdings Inc. (Energy Holdings).......................... 9
Notes to Consolidated Financial Statements -- PSEG................... 13
Notes to Consolidated Financial Statements -- PSE&G................... 23
Notes to Consolidated Financial Statements -- Energy Holdings......... 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PSEG .............................................................. 25
PSE&G.............................................................. 38
Energy Holdings.................................................... 38
Item 3. Qualitative and Quantitative Disclosures About Market Risk..... 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 40
Item 5. Other Information.............................................. 40
Item 6. Exhibits and Reports on Form 8-K............................... 41
Signatures -- PSEG..................................................... 42
Signatures -- PSE&G.................................................... 42
Signatures -- Energy Holdings.......................................... 43
<PAGE>
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, except for Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
--------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric Revenues *
Bundled $ -- $ 494 $ -- $ 2,480
Generation 564 430 1,677 430
Transmission and Distribution 498 320 1,385 320
--------------- ---------------- ---------------- --------------
Total Electric Revenues 1,062 1,244 3,062 3,230
Gas Distribution 280 214 1,346 1,191
Other 183 148 562 416
--------------- ---------------- ---------------- --------------
Total Operating Revenues 1,525 1,606 4,970 4,837
--------------- ---------------- ---------------- --------------
OPERATING EXPENSES
Electric Energy Costs 302 312 798 775
Gas Costs 205 154 922 780
Operation and Maintenance 490 471 1,462 1,328
Depreciation and Amortization 90 122 266 410
Taxes Other Than Income Taxes 46 44 134 143
--------------- ---------------- ---------------- --------------
Total Operating Expenses 1,133 1,103 3,582 3,436
--------------- ---------------- ---------------- --------------
OPERATING INCOME 392 503 1,388 1,401
Other Income and Deductions 6 26 23 39
Interest Expense (148) (126) (422) (355)
Preferred Securities Dividend Requirements (24) (23) (71) (70)
--------------- ---------------- ---------------- --------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 226 380 918 1,015
Income Taxes (84) (159) (364) (425)
--------------- ---------------- ---------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 142 221 554 590
Extraordinary Item (net of tax of $345) -- (14) -- (804)
--------------- ---------------- ---------------- --------------
NET INCOME (LOSS) $ 142 $ 207 $ 554 $ (214)
=============== ================ ================ ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (000's) 214,623 219,225 215,465 220,413
=============== ================ ================ ==============
EARNINGS (LOSS) PER SHARE (BASIC
AND DILUTED):
INCOME BEFORE EXTRAORDINARY ITEM $ 0.66 $ 1.01 $ 2.57 $ 2.68
Extraordinary Item (net of tax) -- (0.06) -- (3.65)
--------------- ---------------- ---------------- --------------
NET INCOME (LOSS) $ 0.66 $ 0.95 $ 2.57 $ (0.97)
=============== ================ ================ ==============
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.54 $ 0.54 $ 1.62 $ 1.62
=============== ================ ================ ==============
*Note: Bundled revenues were recorded based on the bundled rates in effect
through 7/31/99. Commencing with the unbundling of rates on 8/1/99,
revenues are disaggregated between Generation Revenue and Transmission
and Distribution Revenue.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
September 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 115 $ 259
Accounts Receivable:
Customer Accounts Receivable 589 646
Other Accounts Receivable 298 371
Allowance for Doubtful Accounts (43) (40)
Unbilled Revenues 181 241
Fuel 279 311
Materials and Supplies, net of valuation reserves-- 2000 and 1999, $11 153 130
Prepayments 111 39
Other 142 86
------------------- -------------------
Total Current Assets 1,825 2,043
------------------- -------------------
PROPERTY, PLANT AND EQUIPMENT
Electric - Generation 2,430 2,355
Electric - Transmission and Distribution 5,264 5,113
Gas - Distribution 3,136 3,019
Other 580 534
------------------- -------------------
Total 11,410 11,021
Accumulated Depreciation and Amortization (4,094) (3,943)
------------------- -------------------
Net Property, Plant and Equipment 7,316 7,078
------------------- -------------------
NONCURRENT ASSETS
Regulatory Assets 4,958 5,041
Long-Term Investments, net of accumulated amortization and
valuation allowances-- 2000, $72; 1999, $65 4,489 3,848
Nuclear Decommissioning Fund 682 631
Other Special Funds 124 148
Other, net of accumulated amortization-- 2000, $19;
1999, $12 314 226
------------------- -------------------
Total Noncurrent Assets 10,567 9,894
------------------- -------------------
TOTAL ASSETS $ 19,708 $ 19,015
================== ===================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 779 $ 1,073
Commercial Paper and Loans 2,664 1,972
Accounts Payable 613 738
Other 419 394
------------------- -------------------
Total Current Liabilities 4,475 4,177
------------------- -------------------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 3,045 2,928
Regulatory Liabilities 522 604
Nuclear Decommissioning 682 631
OPEB Costs 433 390
Other 495 506
------------------- -------------------
Total Noncurrent Liabilities 5,177 5,059
------------------- -------------------
COMMITMENTS AND CONTINGENT LIABILITIES -- --
------------------- -------------------
CAPITALIZATION
LONG-TERM DEBT 4,706 4,575
------------------- -------------------
SUBSIDIARIES' PREFERRED SECURITIES
Preferred Stock Without Mandatory Redemption 95 95
Preferred Stock With Mandatory Redemption 75 75
Guaranteed Preferred Beneficial Interest in Subordinated Debentures 1,038 1,038
------------------- -------------------
Total Subsidiaries' Preferred Securities 1,208 1,208
------------------- -------------------
COMMON STOCKHOLDERS' EQUITY
Common Stock, issued: 231,957,608 shares 3,604 3,604
Treasury Stock, at cost: 2000--17,551,090 shares;
1999--15,540,390 shares (669) (597)
Retained Earnings 1,398 1,193
Accumulated Other Comprehensive Loss (191) (204)
------------------- -------------------
Total Common Stockholders' Equity 4,142 3,996
------------------- -------------------
Total Capitalization 10,056 9,779
------------------- -------------------
TOTAL LIABILITIES AND CAPITALIZATION $ 19,708 $ 19,015
=================== ===================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 554 $ (214)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Extraordinary Loss - net of tax -- 804
Depreciation and Amortization 266 410
Amortization of Nuclear Fuel 47 68
Recovery of Electric Energy and Gas Costs-- net 24 68
Provision for Deferred Income Taxes and ITC-- net 3 (227)
Investment Distributions 40 124
Equity Income from Partnerships (30) (50)
Unrealized Gains on Investments (9) (53)
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable and Unbilled Revenues 193 (127)
Prepayments (72) (102)
Accounts Payable (125) 174
Other Current Assets and Liabilities (22) 1
Other 60 79
----------------- -----------------
Net Cash Provided By Operating Activities 929 955
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment, excluding
Capitalized Interest and AFDC (574) (280)
Net Change in Long-Term Investments (536) (846)
Other (47) (51)
----------------- -----------------
Net Cash Used in Investing Activities (1,157) (1,177)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt 692 546
Issuance of Long-Term Debt 590 713
Redemption/Purchase of Long-Term Debt (777) (428)
Purchase of Treasury Stock (72) (309)
Cash Dividends Paid on Common Stock (348) (357)
Other (1) 1
----------------- -----------------
Net Cash (Used In) Provided By Financing Activities 84 166
----------------- -----------------
Net Change in Cash and Cash Equivalents (144) (56)
Cash and Cash Equivalents at Beginning of Period 259 140
----------------- -----------------
Cash and Cash Equivalents at End of Period $ 115 $ 84
================= =================
Income Taxes Paid $ 380 $ 426
Interest Paid $ 354 $ 345
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
-------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric Revenues *
Bundled $ -- $ 494 $ -- $ 2,480
Generation 135 430 1,248 430
Transmission and Distribution 884 320 1,771 320
-------------- --------------- --------------- ----------------
Total Electric Revenues 1,019 1,244 3,019 3,230
Gas Distribution 280 214 1,346 1,191
-------------- --------------- --------------- ----------------
Total Operating Revenues 1,299 1,458 4,365 4,421
-------------- --------------- --------------- ----------------
OPERATING EXPENSES
Electric Energy Costs 603 309 1,076 765
Gas Costs 202 141 881 730
Operation and Maintenance 185 382 958 1,141
Depreciation and Amortization 60 120 230 405
Taxes Other than Income Taxes 35 43 123 142
-------------- --------------- --------------- ----------------
Total Operating Expenses 1,085 995 3,268 3,183
-------------- --------------- --------------- ----------------
OPERATING INCOME 214 463 1,097 1,238
Other Income and Deductions 5 5 17 8
Interest Expense (52) (98) (246) (284)
Preferred Securities Dividend Requirements (11) (12) (34) (35)
-------------- --------------- --------------- ----------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 156 358 834 927
Income Taxes (57) (153) (333) (393)
-------------- --------------- --------------- ----------------
INCOME BEFORE EXTRAORDINARY ITEM 99 205 501 534
Extraordinary Item (net of tax of $345) -- (14) -- (804)
-------------- --------------- --------------- ----------------
NET INCOME (LOSS) 99 191 501 (270)
Preferred Stock Dividend Requirements (2) (2) (7) (7)
-------------- --------------- --------------- ----------------
EARNINGS (LOSS) AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP INCORPORATED $ 97 $ 189 $ 494 $ (277)
============== =============== =============== ================
* Note: Bundled revenues were recorded based on the bundled rates in
effect through 7/31/99. Commencing with the unbundling of rates on
8/1/99, revenues are disaggregated between Generation Revenue and
Transmission and Distribution Revenue.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
September 30, December 31,
2000 1999
---------------- ------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 26 $ 173
Accounts Receivable:
Customer Accounts Receivable 443 529
Other Accounts Receivable 62 313
Allowance for Doubtful Accounts (36) (35)
Unbilled Revenues 180 241
Fuel 229 308
Materials and Supplies, net of valuation reserves-- 2000 $0 and 1999, $11 55 130
Prepayments 94 34
Other 17 50
---------------- ------------------
Total Current Assets 1,070 1,743
---------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Electric - Generation -- 2,284
Electric - Transmission and Distribution 5,264 5,113
Gas - Distribution 3,136 3,019
Other 420 457
---------------- ------------------
Total 8,820 10,873
Accumulated Depreciation and Amortization (3,082) (3,911)
---------------- ------------------
Net Property, Plant and Equipment 5,738 6,962
---------------- ------------------
NONCURRENT ASSETS
Regulatory Assets 4,958 5,041
Notes Receivable - Affiliated Companies 2,786 --
Long-Term Investments 105 99
Nuclear Decommissioning Fund -- 631
Other Special Funds 84 148
Other 73 100
---------------- ------------------
Total Noncurrent Assets 8,006 6,019
---------------- ------------------
TOTAL ASSETS $ 14,814 $ 14,724
================ ==================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ -- $ 623
Commercial Paper and Loans 1,595 1,475
Accounts Payable 278 676
Other 223 281
------------------ ------------------
Total Current Liabilities 2,096 3,055
------------------ ------------------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 2,704 2,032
Regulatory Liabilities 522 604
Nuclear Decommissioning -- 631
OPEB Costs 425 390
Other 212 479
------------------ ------------------
Total Noncurrent Liabilities 3,863 4,136
------------------ ------------------
COMMITMENTS AND CONTINGENT LIABILITIES -- --
------------------ ------------------
CAPITALIZATION
LONG-TERM DEBT 3,391 3,099
------------------ ------------------
PREFERRED SECURITIES
Preferred Stock Without Mandatory Redemption 95 95
Preferred Stock With Mandatory Redemption 75 75
Subsidiaries' Preferred Securities:
Guaranteed Preferred Beneficial Interest in Subordinated Debentures 513 513
------------------ ------------------
Total Preferred Securities 683 683
------------------ ------------------
COMMON STOCKHOLDER'S EQUITY
Common Stock, issued: 132,450,344 shares 2,563 2,563
Contributed Capital 594 594
Basis Adjustment 986 --
Retained Earnings 641 597
Accumulated Other Comprehensive Loss (3) (3)
------------------ ------------------
Total Common Stockholder's Equity 4,781 3,751
------------------ ------------------
Total Capitalization 8,855 7,533
------------------ ------------------
TOTAL LIABILITIES AND CAPITALIZATION $ 14,814 $ 14,724
================== ==================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Nine Months Ended
September 30,
------------------------------------------
2000 1999
---------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 501 $ (270)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Extraordinary Loss - net of tax -- 804
Depreciation and Amortization 230 405
Amortization of Nuclear Fuel 36 68
Recovery of Electric Energy and Gas Costs-- net 24 68
Provision for Deferred Income Taxes and ITC-- net (9) (203)
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable and Unbilled Revenues 56 (126)
Prepayments (62) (107)
Accounts Payable (14) 138
Other Current Assets and Liabilities (20) (9)
Other 61 85
---------------- -------------------
Net Cash Provided By Operating Activities 803 853
---------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment, excluding
Capitalized Interest and AFDC (280) (280)
Other (2) (59)
---------------- -------------------
Net Cash Used in Investing Activities (282) (339)
---------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt 120 230
Issuance of Long-Term Debt 290 --
Redemption/Purchase of Long-Term Debt (621) (246)
Cash Dividends Paid on common stock (450) (510)
Other (7) (6)
---------------- -------------------
Net Cash Used in Financing Activities (668) (532)
---------------- -------------------
Net Change in Cash and Cash Equivalents (147) (18)
Cash and Cash Equivalents at Beginning of Period 173 42
---------------- -------------------
Cash and Cash Equivalents at End of Period $ 26 $ 24
================ ===================
Income Taxes Paid $ 509 $ 443
Interest Paid $ 303 $ 297
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Income from Joint Ventures
and Partnerships $ 47 $ 39 $ 108 $ 96
Energy Service Revenues 79 67 232 124
Energy Supply Revenues 9 15 66 61
Income from Capital and Operating Leases 47 29 122 82
Net Investment Gains (Losses) (9) (11) 9 31
Other 10 9 25 22
------------- ---------------- -------------- ---------------
Total Operating Revenues 183 148 562 416
------------- ---------------- -------------- ---------------
OPERATING EXPENSES
Cost of Energy Sales 9 14 67 59
Restructure Costs -- -- 7 --
Operation and Maintenance 103 90 297 190
Depreciation and Amortization 3 2 10 5
Write-down of Investments -- 44 -- 44
------------- ---------------- -------------- ---------------
Total Operating Expenses 115 150 381 298
------------- ---------------- -------------- ---------------
OPERATING INCOME (LOSS) 68 (2) 181 118
Other Income 1 65 3 72
Interest Expense-Net (31) (25) (102) (65)
------------- ---------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 38 38 82 125
Income Taxes (11) (14) (23) (44)
Minority Interests -- -- 1 1
------------- ---------------- -------------- ---------------
NET INCOME 27 24 60 82
Preferred Stock Dividend Requirements (6) (6) (19) (19)
------------- ---------------- -------------- ---------------
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
GROUP INCORPORATED $ 21 $ 18 $ 41 $ 63
============= ================ ============= ===============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
September 30, December 31,
2000 1999
------------------- --------------------
<S>
CURRENT ASSETS <C> <C>
Cash and Cash Equivalents $ 56 $ 43
Accounts Receivable:
Trade 121 111
Other 33 31
Allowance for Doubtful Accounts (7) (5)
Assets Held for Sale 36 36
Notes Receivable 19 12
Other Current Assets 6 12
------------------- --------------------
Total Current Assets 264 240
------------------- --------------------
PROPERTY AND EQUIPMENT
Real Estate, net of valuation allowances 2000 and 1999, $22 89 34
Property and Equipment 58 45
------------------- --------------------
Total 147 79
Accumulated Depreciation and Amortization (48) (33)
------------------- --------------------
Net Property and Equipment 99 46
------------------- --------------------
INVESTMENTS
Capital Leases - Net 2,274 1,759
Corporate Joint Ventures 1,477 1,428
Partnerships Interests 532 493
Other Investments 75 73
------------------- --------------------
Total Investments 4,358 3,753
------------------- --------------------
OTHER ASSETS 106 75
------------------- --------------------
TOTAL ASSETS $ 4,827 $ 4,114
=================== ====================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
2000 1999
------------------- ----------------------
<S> <C> <C>
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 204 $ 175
Notes Payable 370 351
Accounts Payable:
Trade 47 41
Interest 43 20
Other 59 43
Other Current Liabilities 15 11
------------------- ----------------------
Total Current Liabilities 738 641
------------------- ----------------------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 1,015 896
Other Noncurrent Liabilities 31 25
------------------- ----------------------
Total Noncurrent Liabilities 1,046 921
------------------- ----------------------
COMMITMENTS AND CONTINGENT LIABILITIES -- --
------------------- ----------------------
MINORITY INTERESTS 7 2
------------------- ----------------------
CAPITALIZATION
LONG-TERM DEBT 1,316 1,175
------------------- ----------------------
STOCKHOLDER'S EQUITY
Common Stock, issued: 100 shares -- --
Preferred Stock 509 509
Additional Paid-in Capital 1,090 790
Retained Earnings 309 276
Accumulated Other Comprehensive Loss (188) (200)
------------------- ----------------------
Total Stockholder's Equity 1,720 1,375
------------------- ----------------------
Total Capitalization 3,036 2,550
------------------- ----------------------
TOTAL LIABILITIES AND CAPITALIZATION $ 4,827 $ 4,114
=================== ======================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------------------
2000 1999
------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 60 $ 82
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and Amortization 18 13
Deferred Income Taxes (Other than Leases) 3 (17)
Income from Leasing Activities 24 (2)
Investment Distributions 40 124
Equity Income from Partnerships (30) (50)
Net Gains on Investments (9) (53)
Restructure Costs 7 --
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable (72) (75)
Taxes Payable -- 6
Accounts Payable 113 67
Interest Payable 12 9
Other Current Assets and Liabilities (28) 2
Other 5 (2)
------------------- ---------------------
Net Cash Provided By Operating Activities 143 104
------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in Partnerships and Joint Ventures (146) (709)
Investments in Capital Leases (459) (236)
Acquisitions, net of Cash Provided (16) (31)
Proceeds from Sales of Capital Leases 9 77
Additions to Property and Equipment (6) (5)
Proceeds from Sale of Real Estate and Equity Investments -- 71
(Addition to)/Reduction of Deferred Project Costs (2) 15
Return of Capital from Partnerships 72 27
Other (16) 8
------------------- ---------------------
Net Cash Used in Investing Activities (564) (783)
------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Additional Paid-in Capital 300 200
Cash Dividends Paid (27) (21)
Repayment of Borrowings (156) (180)
Proceeds from Borrowings 311 688
Other 6 (4)
------------------- ---------------------
Net Cash Provided By Financing Activities 434 683
------------------- ---------------------
Net Change in Cash and Cash Equivalents 13 4
Cash and Cash Equivalents at Beginning of Period 43 9
------------------- ---------------------
Cash and Cash Equivalents at End of Period $ 56 $ 13
=================== =====================
Income Tax Benefits $ (119) $ (12)
Interest Paid $ 31 $ 34
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
================================================================================
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Basis of Presentation
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in the
opinion of management, the disclosures are adequate to make the information
presented not misleading. Public Service Enterprise Group Incorporated's (PSEG)
and Public Service Electric and Gas Company's (PSE&G) consolidated financial
statements and Notes to Consolidated Financial Statements (Notes) should be read
in conjunction with their 1999 Annual Report on Form 10-K, the Quarterly Reports
on Form 10-Q for the quarters ended March 31, 2000 and June 30, 2000, the
Current Reports on Form 8-K filed August 21, 2000, September 5, 2000, October
18, 2000 and October 27, 2000 and the Amended Current Report on Form 8-K/A filed
November 1, 2000. PSEG Energy Holdings Inc.'s (Energy Holdings) consolidated
financial statements and Notes should be read in conjunction with its
Registration Statement on Form S-4 filed June 29, 2000, Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 and Current Reports on Form 8-K filed
October 18, 2000 and October 27, 2000. These Notes update and supplement matters
discussed in PSEG's and PSE&G's 1999 Annual Report on Form 10-K and Energy
Holdings' Registration Statement on Form S-4 filed June 29, 2000.
Effective August 1, 2000, the presentation of Electric Revenues and
Electric Energy Costs in the Consolidated Statements of Income has changed due
to PSE&G's transfer of its electric generating facilities to PSEG Power LLC
(Power) and wholesale power contracts to PSEG Energy Resources and Trade (ER&T)
(see Note 2. Regulatory Issues and Accounting Impacts of Deregulation), a
wholly-owned subsidiary of Power. Effective with the transfer, PSE&G entered
into a contract with Power to obtain the energy and capacity necessary to meet
PSE&G's basic generation service (BGS) obligation. As a result, PSE&G's Electric
Energy Costs will now reflect PSE&G's cost under the contracted price with Power
and Power's Electric Energy Costs will reflect the actual cost of generation.
PSEG eliminates these intercompany revenues and expenses in its consolidated
financial statements.
Under the BGS contract, PSE&G pays a fixed price for energy and capacity
provided by Power and charges such costs to its BGS customers. As a result,
PSE&G is no longer subject to price risk related to market exposures for its
estimated electric commitments. Following the generation asset transfer, Power
has entered into forwards, futures, swaps and options to manage price risk
exposure for its commitments to meet PSE&G's BGS obligation in addition to
Power's other supply contracts.
The unaudited financial information furnished reflects all adjustments
which are, in the opinion of management, necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated financial statements included in PSEG's
and PSE&G's 1999 Annual Report on Form 10-K and Energy Holdings' Registration
Statement on Form S-4 filed June 29, 2000. Certain reclassifications of prior
period data have been made to conform with the current presentation.
Note 2. Regulatory Issues and Accounting Impacts of Deregulation
New Jersey Energy Master Plan Proceedings and Related Orders
Following the enactment of the New Jersey Electric Discount and Energy
Competition Act (Energy Competition Act), the New Jersey Board of Public
Utilities (BPU) rendered its summary decision relating to PSE&G's rate
unbundling, stranded costs and restructuring proceedings (Summary Order) and
subsequently issued its Final Order in these matters, providing, among other
things, for the transfer to an affiliate of all of PSE&G's electric generation
facilities, plant and equipment for $2.443 billion and all other related
property, including materials, supplies and fuel at the net book value thereof,
together with associated rights and liabilities.
Also in the Final Order, the BPU concluded that PSE&G should recover up to
$2.94 billion (net of tax) of its generation-related stranded costs, through
securitization of $2.4 billion and an opportunity to recover up to $540 million
(net of tax) of its unsecuritized generation-related stranded costs on a net
present value basis. The $540 million is subject to recovery by various means,
including an explicit market transition charge (MTC). Following the issuance of
the Final Order, the BPU issued its order approving PSE&G's petition relating to
the proposed securitization transaction (Finance Order) which authorized, among
other things, the issuance and sale of $2.525 billion of transition bonds,
including an estimated $125 million of transaction costs.
The Energy Competition Act, the BPU's Summary Order and Final Order and the
related BPU proceedings, referred to as the Energy Master Plan Proceedings,
opened the New Jersey energy markets to competition by allowing all New Jersey
retail electric customers to, among other things, select their electric supplier
commencing August 1, 1999 and all New Jersey retail gas customers to select
their gas supplier commencing January 1, 2000.
In October and November 1999, two appeals of certain provisions of the
Final Order and two appeals of certain provisions of the related Finance Order
were filed in the Appellate Division of the New Jersey Superior Court (Appellate
Division) on behalf of several customers and the New Jersey Office of the
Ratepayer Advocate (Ratepayer Advocate). In a decision issued on April 13, 2000,
a three-judge Appellate Division panel unanimously affirmed the Final Order and
Finance Order. Thereafter, the appellants filed a Petition requesting
Certification and a Notice of Appeal with the New Jersey Supreme Court seeking
review of the Appellate Division decision. On July 14, 2000, the New Jersey
Supreme Court granted Certification with respect to both matters. Oral arguments
for all parties were held on November 8, 2000.
While PSE&G continues to believe that the Appellate Division's unanimous
decision was correct, it can give no assurances with respect to the ultimate
timing or disposition of these matters by the New Jersey Supreme Court. An
adverse outcome to this review or substantial additional delays beyond the first
quarter of 2001, could have a material adverse impact on PSEG's, PSE&G's and
Energy Holdings' financial condition, results of operations and net cash flows
and could require revisions to financing plans, revisions to business plans
delaying or restricting current growth strategies and the imposition of other
operational and/or financial measures.
As a result of the Supreme Court's review, PSE&G's securitization
transaction has been delayed at least until the first quarter of 2001, causing a
delay in the implementation of the Securitization Transition Charge (STC) which
would have reduced the MTC. In order to recognize the recovery of the allowed
unsecuritized stranded costs over the transition period, PSEG has recorded a
charge to net income of $52 million, after tax, in the third quarter of 2000 for
the cumulative amount of estimated collections in excess of the allowed
unsecuritized stranded costs from August 1, 1999 through September 30, 2000. Any
such collections in excess of the allowed unsecuritized stranded costs at the
end of the transition period will be credited to the Societal Benefits Clause
(SBC) as required by the Final Order.
Asset Transfer to Power
PSE&G, pursuant to the Final Order, transferred its electric generating
facilities and wholesale power contracts to Power, an unregulated power
producing affiliate, on August 21, 2000 in exchange for a Promissory Note from
Power in an amount equal to the purchase price. Until such note is paid, the
assets transferred remain subject to the lien of PSE&G's First and Refunding
Mortgage.
The generating assets were transferred at the price specified in the BPU
order - $2.443 billion plus $343 million for other generating related assets and
liabilities. Because the transfer was between affiliates, PSE&G and Power
recorded the sale at the net book value of the assets and liabilities rather
than the transfer price. The difference between the total transfer price and the
net book value of the generation-related assets and liabilities was recorded as
a Basis Adjustment on PSE&G's and Power's Consolidated Balance Sheets. These
amounts are eliminated on PSEG's consolidated financial statements.
The parties have agreed to execute a supplemental agreement reflecting any
change in the value of the assets, if required as a result of the New Jersey
Supreme Court review discussed above.
Extraordinary Charge and Other Accounting Impacts of Deregulation
In April 1999, PSE&G determined that Statement of Financial Accounting
Standards (SFAS) 71 "Accounting for the Effects of Regulation" (SFAS 71) was no
longer applicable to the electric generation portion of its business in
accordance with the requirements of Emerging Issues Task Force Issue 97-4,
"Deregulation of the Pricing of Electricity - Issues Related to the Application
of FASB Statements No. 71 and No. 101" (EITF 97-4). Accordingly, PSE&G recorded
an extraordinary charge to earnings of $804 million (after tax). PSE&G accounted
for this charge consistent with the requirements of SFAS 101, "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71". This extraordinary charge consisted primarily of the
write-down of PSE&G's nuclear and fossil generating stations in accordance with
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). PSE&G performed a discounted cash flow
analysis on a unit-by-unit basis to determine the amount of the impairment. As a
result of this impairment analysis, the net book value of the generating
stations was reduced by approximately $5.0 billion (pre-tax) or approximately
$3.1 billion (net of tax). This amount was offset by the creation of a $4.057
billion (pre-tax), or $2.4 billion (net of tax) regulatory asset related to the
future receipt of securitization proceeds, as provided for in the Summary Order
and affirmed in the Final Order and Finance Order.
In addition to the impairment of PSE&G's electric generating stations, the
extraordinary charge consisted of various accounting adjustments to reflect the
absence of cost of service regulation in the electric generation portion of its
business. The adjustments primarily related to materials and supplies, general
plant items and liabilities for certain contractual and environmental
obligations.
Other accounting impacts of the discontinuation of SFAS 71 included
reclassifying the Accrued Nuclear Decommissioning Reserve and the Accrued Cost
of Removal for generation-related assets from Accumulated Depreciation to
Long-Term Liabilities. In accordance with the Final Order, PSE&G also
reclassified a $569 million excess depreciation reserve related to PSE&G's
electric distribution assets from Accumulated Depreciation to a Regulatory
Liability. Such amount will be amortized in accordance with the terms of the
Final Order over the period from January 1, 2000 to July 31, 2003.
Note 3. Regulatory Assets and Liabilities
At September 30, 2000 and December 31, 1999, respectively, PSEG and PSE&G
had deferred the following regulatory assets and liabilities on the Consolidated
Balance Sheets:
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
------------------ -----------------
(Millions of Dollars)
<S> <C> <C>
Regulatory Assets:
Stranded Costs to be Securitized $4,057 $4,057
SFAS 109 Income Taxes 280 286
OPEB Costs 237 237
SBC and Related Items 27 130
Demand Side Management Costs 14 7
Environmental Costs 90 94
Unamortized Loss on Reacquired Debt and Debt Expense 107 117
Other 146 113
------------------ -----------------
Total Regulatory Assets $4,958 $5,041
================== =================
Regulatory Liabilities:
Excess Depreciation Reserve $475 $569
Non-utility Generation Market Transition Charge (NTC) 6 20
Overrecovered Gas Costs 41 15
------------------ -----------------
Total Regulatory Liabilities $522 $604
================== =================
</TABLE>
Note 4. Commitments and Contingent Liabilities
Generation Asset Purchase
In September 1999, Power announced an agreement to acquire all of
Conectiv's interests in Salem Nuclear Generating Station (Salem) and Hope Creek
Nuclear Generating Station (Hope Creek) and half of Conectiv's interest in Peach
Bottom Atomic Power Station (Peach Bottom) for an aggregate purchase price of
$15.4 million plus the net book value of Conectiv's nuclear fuel at closing.
Payment of Power's obligation under such agreement has been guaranteed by PSEG.
The majority of regulatory approvals necessary for this acquisition have been
obtained, including the approval by the BPU. In order for Conectiv to complete
the sale, the BPU must issue a second order to address Conectiv's stranded cost
recovery. Conectiv has advised Power that it will not complete the transaction
during the time that the appeal on PSE&G's Final Order remains pending. However,
on October 6, 2000, Power entered into Wholesale Transaction Confirmation letter
agreements with Conectiv under which Power will obtain 544MW of generation
capacity and output representing the portion of Conectiv's interest in Salem,
Hope Creek and Peach Bottom to be acquired. Under this agreement, Power will
receive all revenue and pay all expenses associated with this 544MW of
generating capacity and output through the date that the purchase transaction
closes. Power has been advised by Conectiv that the Ratepayer Advocate, by
letter to the BPU dated October 26, 2000, has objected to and challenged this
financial transaction.
PSE&G Manufactured Gas Plant Remediation Program
PSE&G is currently working with New Jersey Department of Environmental
Protection (NJDEP) under a program (Remediation Program) to assess, investigate
and, if necessary, remediate environmental conditions at PSE&G's former
manufactured gas plant sites. To date, 38 sites have been identified. The
Remediation Program is periodically reviewed and revised by PSE&G based on
regulatory requirements, experience with the Remediation Program and available
remediation technologies. The long-term costs of the Remediation Program cannot
be reasonably estimated, but experience to date indicates that costs of
approximately $20 million per year could be incurred over a period of about 30
years and that the overall cost could be material. The costs for this
remediation effort are recovered through the SBC.
Passaic River Site
The U.S. Environmental Protection Agency (EPA) has determined that a six
mile stretch of the Passaic River in Newark, New Jersey is a "facility" within
the meaning of that term under the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 and that, to date, at least thirteen
corporations, including PSE&G, may be potentially liable for performing required
remedial actions to address potential environmental pollution at the Passaic
River "facility". PSE&G and certain of its predecessors operated industrial
facilities at properties within the Passaic River "facility", including the
former Harrison Gas Plant and the Essex Generating Station. PSE&G cannot predict
what action, if any, the EPA or any third party may take against PSE&G or Power,
as the transferee of PSE&G's generation assets and liabilities, with respect to
these matters, or in such event, what costs PSE&G and/or Power may incur to
address any such claims. However, such costs may be material.
PSEG Guarantees for ER&T
As of November 1, 2000, approximately $224 million in guarantees have been
either provided to or committed for trading counter-parties of Power's
subsidiary, ER&T, following assignment of PSE&G's wholesale power contracts to
ER&T to assure ER&T's creditworthiness in the marketplace.
Energy Holdings
Energy Holdings and/or its subsidiary, PSEG Global Inc. (Global), have
guaranteed certain obligations of Global's affiliates, including equity funding
for projects, performance or other obligations related to certain of their
projects in an aggregate amount of approximately $368 million as of September
30, 2000. A substantial portion of such guarantees will be eliminated upon
funding of project equity commitments. In addition, a subscription agreement for
PSEG to purchase Global's capital stock secures approximately $3 million of such
guarantees.
Note 5. Financial Instruments and Risk Management
PSEG's operations give rise to exposure to market risks from changes in
commodity prices, interest rates, foreign currency exchange rates and securities
prices. PSEG's policy is to use derivative financial instruments for the purpose
of managing market risk consistent with its business plans and prudent business
practices.
Forward Purchase Agreement-PSEG
In December 1999, as part of PSEG's share repurchase program, PSEG entered
into a Forward Purchase Agreement with a third party which has purchased
approximately 6.4 million shares at a cost of approximately $225 million. The
transaction may be settled in cash or with shares of Common Stock. Any
repurchase of these shares will not be reflected on PSEG's balance sheet until
settlement of the transaction. PSEG does not expect to settle this transaction
prior to the securitization financing which has been delayed to at least the
first quarter of 2001 (See Note 2. Regulatory Issues and Accounting Impacts of
Deregulation).
Commodity-Related Instruments -- PSE&G and Power
At September 30, 2000 and December 31, 1999, PSE&G and Power held or issued
commodity and financial instruments that reduce exposure to price fluctuations
from factors such as weather, environmental policies, changes in demand, changes
in supply, state and Federal regulatory policies and other events. These
instruments, in conjunction with owned electric generating capacity and physical
gas supply contracts, are designed to cover estimated electric and gas customer
commitments. PSE&G and Power use futures, forwards, swaps and options to manage
and hedge price risk related to these market exposures.
At September 30, 2000, Power had outstanding commodity financial
instruments with a notional contract quantity of 55.6 million mWh of electricity
and PSE&G had outstanding commodity financial instruments with a notional
contract quantity of 58.2 million MMBTU of natural gas. At December 31, 1999,
PSE&G had outstanding commodity financial instruments with a notional contract
quantity of 36.1 million mWh of electricity and 25.5 million MMBTU of natural
gas. Notional amounts are indicative only of the volume of activity and are not
a measure of market risk.
PSE&G's and Power's energy trading and related contracts have been marked
to market and gains and losses from such contracts were included in earnings.
PSE&G recorded $42 million and $3 million of unrealized gains in the nine months
ended September 30, 2000 and 1999, respectively, and Power recorded $6 million
of unrealized gains through September 30, 2000 related to these contracts.
Commodity-Related Instruments -- Energy Holdings
In June 2000, Energy Holdings' subsidiary, PSEG Energy Technologies Inc.
(Energy Technologies) outsourced certain supply services under its retail gas
service agreements. With this transaction, Energy Technologies has changed the
manner in which it operates its energy and gas commodity business and at
September 30, 2000 there were no electric or gas commodity financial instruments
outstanding. Energy Holdings had recorded $1.7 million of gains in the nine
months ended September 30, 2000 related to these instruments.
Equity Securities -- Energy Holdings
Energy Holdings' subsidiary, PSEG Resources Inc. (Resources) has
investments in equity securities and limited partnerships. 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 September 30, 2000 and December
31, 1999 were $132 million and $131 million, respectively. The potential change
in fair value resulting from a hypothetical 10% change in quoted market prices
of these investments amounted to $10 million at September 30, 2000 and $11
million at December 31, 1999.
Foreign Currencies -- Energy Holdings
In accordance with their growth strategies, Global and Resources have made
international investments of approximately $1.5 billion and $1.2 billion,
respectively, as of September 30, 2000.
Resources' international investments are primarily leveraged leases of
assets located in the Netherlands, Australia, the United Kingdom, Germany, China
and New Zealand with associated revenues denominated in U.S. dollars, and
therefore, not subject to foreign currency risk.
Global's international investments are primarily in projects that generate
or distribute electricity in Argentina, Brazil, Chile, China, India, Italy,
Peru, Poland and Venezuela. Investing in foreign countries involves certain
additional risks. Economic conditions that result in higher comparative rates of
inflation in foreign countries are likely to result in declining values in such
countries' currencies. As currencies fluctuate against the U.S. dollar, there is
a corresponding change in Global's investment value in terms of the U.S. dollar.
Such change is reflected as an increase or decrease in the investment value and
other comprehensive income, a separate component of stockholders' equity.
Cumulatively through September 30, 2000, net foreign currency devaluations have
reduced the reported amount of PSEG's total stockholders' equity and Energy
Holdings' total stockholder's equity by approximately $188 million.
Previously, Global had consolidated project debt totaling approximately
$94.5 million associated with Global's 33% investment in a Brazilian
distribution company that was non-recourse to Global, Energy Holdings and PSEG.
The debt was denominated in the Brazilian Real and was indexed to a basket of
currencies, including the U.S. dollar. The debt was refinanced in May 2000 with
funds from Energy Holdings and a $190 million United States dollar denominated
loan at the Brazilian distribution company, of which Global's share is $62
million. The functional currency of the distribution company is the Brazilian
Real. Therefore its debt is subject to exchange rate risk as the Brazilian Real
fluctuates with the United States dollar. Changes in the exchange rate cause the
loan amount, as reported in the functional currency, to be marked upward or
downward, with an offset to the income statement. Global has entered into a $60
million currency collar expiring on December 29, 2000 to mitigate the potential
loss caused by a significant devaluation of the functional currency against the
U.S. dollar. By entering into the collar, Global's maximum exposure related to
the loan is limited to approximately $10 million in 2000.
Interest Rates
PSEG, PSE&G and Energy Holdings are subject to the risk of fluctuating
interest rates in the normal course of business. Their policies are to manage
interest rate risk through the use of fixed rate debt, floating rate debt and
interest rate swaps. As of September 30, 2000, a hypothetical 10% change in
market interest rates would result in a $9 million, $12 million and $2 million
change in annual interest costs related to short-term and floating rate debt at
PSEG, PSE&G and Energy Holdings, respectively.
Note 6. Income Taxes
PSEG's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2000 1999 (A) 2000 1999 (A)
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Federal tax provision at statutory rate................... 35.0% 35.0% 35.0% 35.0%
New Jersey Corporate Business Tax, net of Federal benefit. 5.9% 5.9% 5.9% 5.9%
Other-- net............................................... (3.7)% 0.6% (1.2)% 0.7%
---------- ----------- ------------ -----------
Effective Income Tax Rate............................. 37.2% 41.5% 39.7% 41.6%
========== =========== ============ ===========
<FN>
(A) Excludes the impact of the extraordinary charge recorded in 1999.
</FN>
</TABLE>
Note 7. Financial Information by Business Segments
Basis of Organization
The reportable segments disclosed herein were determined based on a variety
of factors including the regulatory environment of each of PSEG's lines of
business and the types of products and services offered. Effective with the
unbundling of PSE&G's rates on August 1, 1999 and the deregulation of the
electric generation portion of PSE&G's business, the basis of segment reporting
changed. Estimates have been used to separate historical, pre-August 1, 1999,
electric segment data into the Generation, ER&T and Transmission and
Distribution segments of PSE&G's business.
Information related to the segments of PSEG's business is detailed below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Energy Consolidated
Generation ER&T T & D Resources Global Technologies Other (A) Total
---------- ---- ----- --------- ------ ------------- --------- --------------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
September 30, 2000:
Total Operating Revenues... $529 $35 $1,164 $41 $48 $94 $(386) $1,525
Segment Net Income (Loss).. 33 18 69 9 21 -- (8) 142
========== ==== ====== ========= ====== ============ ========= ==============
----------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
September 30, 1999:
Total Operating Revenues... $729 $17 $712 $21 $40 $87 $-- $1,606
Segment Income Before
Extraordinary Item...... 169 7 29 6 20 (1) (9) 221
Extraordinary Item (14) -- -- -- -- -- -- (14)
Segment Net Income (Loss).. 155 7 29 6 20 (1) (9) 207
========== ==== ====== ========= ====== ============ ========= ==============
----------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 2000:
Total Operating Revenues... $1,576 $101 $3,117 $132 $119 $310 $(385) $4,970
Segment Net Income (Loss).. 198 51 273 41 34 (12) (31) 554
========== ==== ====== ========= ====== ============ ========= ==============
----------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 1999:
Total Operating Revenues... $2,067 $52 $2,302 $118 $102 $195 $ 1 $4,837
Segment Income Before
Extraordinary Item...... 393 24 117 51 35 (5) (25) 590
Extraordinary Item (3,204) -- 2,400 -- -- -- -- (804)
Segment Net Income (Loss).. (2,811) 24 2,517 51 35 (5) (25) (214)
========== ==== ====== ========= ====== ============ ========= ==============
----------------------------------------------------------------------------------------------------------------------------
As of September 30, 2000:
Total Assets............... $3,055 $304 $14,814 $2,611 $1,859 $290 $(3,225) $19,708
========== ==== ====== ========= ====== ============ ========= ==============
----------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999:
Total Assets............... $3,055 $246 $11,423 $2,096 $1,715 $252 $228 $19,015
========== ==== ====== ========= ====== ============ ========= ==============
----------------------------------------------------------------------------------------------------------------------------
<FN>
(A) PSEG's other activities include amounts applicable to PSEG (parent
corporation), Energy Holdings (parent corporation), Enterprise Group
Development Corporation and intercompany eliminations, primarily relating
to intercompany transactions between Power and PSE&G (see Note 1. Basis
of Presentation and Note 10. Related Party Transactions). The net losses
primarily relate to financing and certain administrative and general
costs at the parent corporations.
</FN>
</TABLE>
Geographic information for PSEG is disclosed below. The foreign investments and
operations noted below were made through Energy Holdings. PSE&G does not have
foreign investments or operations.
<TABLE>
<CAPTION>
Revenues (1) Identifiable Assets
-------------------------------------------------- -----------------------------------
Quarter Ended Nine Months Ended
September 30, September 30, September 30, December 31,
---------------------- ----------------------- ----------------- --------------
2000 1999 2000 1999 2000 1999
--------- -------- ---------- --------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
United States................. $1,478 $1,569 $4,830 $4,734 $17,065 $16,595
Foreign Countries (2)......... 47 37 140 103 2,643 2,420
--------- -------- ---------- --------- ----------------- --------------
Total.................... $1,525 $1,606 $4,970 $4,837 $19,708 $19,015
--------- -------- ---------- --------- ----------------- --------------
Identifiable investments in foreign countries include amounts from:
Netherlands $793 $623
Chile and Peru 522 520
Argentina 358 356
Brazil (3) 317 330
Other 653 591
----------------- --------------
Total $2,643 $2,420
================= ==============
<FN>
(1) Revenues are attributed to countries based on the locations of the
investments. Global's revenue includes its share of the net income
from joint ventures recorded under the equity method of accounting.
(2) Total assets are net of foreign currency translation adjustment of
$209 million (pretax) as of September 30, 2000 and $(222) million
(pretax) as of December 31, 1999.
(3) Amount is net of foreign currency translation adjustment of $152
million (pretax) as of September 30, 2000 and $(189) million (pretax)
as of December 31, 1999.
</FN>
</TABLE>
Note 8. Accounting Matters
In December 1999, the SEC released Staff Accounting Bulletin No. 101 (SAB
101) which provides guidance on the timing of revenue recognition in financial
statements. The basic guidelines on revenue recognition state that revenue
should not be recognized until it is realized or realizable and earned. SAB 101
provides specific criteria to assist in this determination. PSEG, PSE&G and
Energy Holdings are in the process of determining the possible effects of the
adoption of SAB 101 on existing revenue recognition practices. The adoption of
SAB 101 is not expected to have a material adverse effect on the financial
statements of PSEG, PSE&G or Energy Holdings.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137) to defer
the effective date of SFAS 133, for one year. Consequently, SFAS 133 will be
effective for all fiscal quarters beginning after January 1, 2001. The FASB also
decided to defer by one year the transition date regarding embedded derivatives
in SFAS 133. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (SFAS 138) which amends
certain provisions of SFAS 133 to clarify four areas causing difficulties in
implementation. The amendment included expanding the normal purchase and sale
exemption for supply contracts, permitting the offsetting of certain
intercompany foreign currency derivatives and thus reducing the number of third
party derivatives, permitting hedge accounting for foreign-currency denominated
assets and liabilities, and redefining interest rate risk to reduce sources of
ineffectiveness. A team has been appointed to implement SFAS 133 for PSEG, PSE&G
and Energy Holdings. This team has been educating both financial and
non-financial personnel, inventorying embedded derivatives and addressing
various other SFAS 133 related issues. PSEG, PSE&G and Energy Holdings will
adopt SFAS 133 and the corresponding amendments under SFAS 138 on January 1,
2001. Management is currently determining the impact of SFAS 133 on PSEG's,
PSE&G's and Energy Holdings' consolidated results of operations and financial
position. This statement should have no impact on consolidated cash flows. At
this time, the impacts of SFAS 133 and SFAS 138 have not been quantified;
however, all derivatives will be recognized at fair value and the impact on the
financial statements could be material. For derivatives that do not qualify for
hedge accounting treatment and for any ineffectiveness that will result from
hedging transactions, a cumulative amount will be recorded in the Income
Statement. For cash flow hedges that qualify for hedge accounting, PSEG, PSE&G
and Energy Holdings will recognize the appropriate amount in the equity section
of the balance sheet in Other Comprehensive Income. Finally, for derivatives
where gains or losses will be payable or recoverable through regulated rates, a
regulatory liability or asset will be established.
Note 9. Comprehensive Income
Comprehensive Income (Loss), Net of Tax:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------
2000 1999 2000 1999
----------- ------------ --------- ----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Net income (loss)................................... $142 $207 $554 $(214)
Foreign currency translation, net of tax (A)........ (8) (32) 12 (159)
----------- ------------ --------- ----------
Comprehensive income/(loss).................... $134 $175 $566 $(373)
=========== ============ ========= ==========
<FN>
(A) Net of tax of $0.9 million and $3.6 million for the quarters ended
September 30, 2000 and 1999, respectively, and $(1.3) million and $17.7
million for the nine months ended September 30, 2000 and 1999,
respectively.
</FN>
</TABLE>
Note 10. Related Party Transactions
PSE&G and Power
PSE&G's transfer of its electric generating assets was in exchange for a
Promissory Note from Power in an amount equal to the total purchase price of
$2.786 billion. Interest on the note is payable at an annual rate of 14.23%,
which represents PSE&G's weighted average cost of capital. From August 21, 2000
to September 30, 2000, Power has paid interest of approximately $44 million to
PSE&G.
Effective with the transfer, Power charges PSE&G for the energy and
capacity provided to meet PSE&G's BGS requirements. Through September 30, 2000,
Power has charged PSE&G approximately $386 million for PSE&G's BGS requirements.
As of September 30, 2000, PSE&G's payable to Power relating to these costs was
approximately $161 million. Also through September 30, 2000, PSE&G sold energy
and capacity to Power at the market price of approximately $29 million, which
PSE&G purchased under various non-utility generation (NUG) contracts at a cost
of approximately $66 million. PSE&G, as a result of the Final Order, has
established an NTC to recover the above market costs related to these NUG
contracts. The difference between PSE&G's cost and their recovery of costs
through the NTC and sales to Power, which are at the locational marginal price
(LMP) for energy and at wholesale market prices for capacity, is deferred as a
regulatory asset (see Note 3. Regulatory Assets and Liabilities).
Energy Holdings
Approximately 90% of the electricity generated by the Eagle Point Power
Plant, a 50% owned equity investment of Global, is sold to PSE&G under a 25-year
power purchase contract terminating in May 2016. Global's share of partnership
revenues received from PSE&G represented approximately $17 million and $48
million for the quarter and nine months ended September 30, 2000 and
approximately $14 million and $40 million for the quarter and nine months ended
September 30, 1999.
<PAGE>
================================================================================
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes to Consolidated Financial Statements of PSEG are incorporated by
reference insofar as they relate to PSE&G and its subsidiaries:
Note 1. Basis of Presentation
Note 2. Regulatory Issues
Note 3. Regulatory Assets and Liabilities
Note 4. Commitments and Contingent Liabilities
Note 5. Financial Instruments and Risk Management
Note 7. Financial Information by Business Segments
Note 8. Accounting Matters
Note 10. Related Party Transactions
Note 6. Income Taxes
PSE&G's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 (A) 2000 1999 (A)
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Federal tax provision at statutory rate.................. 35.0% 35.0% 35.0% 35.0%
New Jersey Corporate Business Tax, net of Federal benefit 5.9% 5.9% 5.9% 5.9%
Other-- net.............................................. (4.4)% 1.3% (1.0)% 1.4%
---------- ----------- ----------- -----------
Effective Income Tax Rate............................ 36.5% 42.2% 39.9% 42.3%
========== =========== ========= ===========
<FN>
(A) Excludes the impact of the extraordinary charge recorded in 1999.
</FN>
</TABLE>
Note 9. Comprehensive Income
For the quarters ended September 30, 2000 and 1999, PSE&G's comprehensive
income equaled the consolidated net income of PSE&G.
<PAGE>
================================================================================
PSEG ENERGY HOLDINGS INC.
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes to Consolidated Financial Statements of PSEG are incorporated by
reference insofar as they relate to Energy Holdings and its subsidiaries:
Note 1. Basis of Presentation
Note 2. Regulatory Issues
Note 3. Regulatory Assets and Liabilities
Note 4. Commitments and Contingent Liabilities
Note 5. Financial Instruments and Risk Management
Note 7. Financial Information by Business Segments
Note 8. Accounting Matters
Note 10. Related Party Transactions
Note 6. Income Taxes
Energy Holdings' effective tax rate was 28.5% and 35.4% for the nine months
ended September 30, 2000 and September 30, 1999, respectively. Energy Holdings'
effective tax rate differs from the statutory federal income tax rate of 35.0%
primarily due to the imposition of state taxes and the accruals at the rate of
10% of Global's foreign income due to the incremental cost associated with the
repatriation of foreign earnings. Energy Holdings does not consolidate foreign
projects and there is no foreign income tax reflected in income tax expense in
Energy Holdings' consolidated financial statements at September 30, 2000.
Note 9. Comprehensive Income
Comprehensive Income (Loss), Net of Tax:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ---------- --------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Earnings/(loss)...................................... $21 $18 $41 $63
Foreign currency translation, net of tax (A)......... (8) (32) 12 (159)
----------- ---------- ---------- --------
Comprehensive income/(loss)..................... $13 $(14) $53 $(96)
=========== ========== ========== ========
<FN>
(A) Net of tax of $0.9 million and $3.6 million for the quarters ended
September 30, 2000 and 1999, respectively, and $(1.3) million and $17.7
million for the nine months ended September 30, 2000 and 1999,
respectively.
</FN>
</TABLE>
<PAGE>
================================================================================
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following are the significant changes in or additions to information
reported in the Public Service Enterprise Group Incorporated (PSEG) and Public
Service Electric and Gas Company (PSE&G) 1999 Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000 and June
30, 2000, Current Reports on Form 8-K filed August 21, 2000, September 5, 2000,
October 18, 2000 and October 27, 2000 and Amended Current Report on Form 8-K/A
filed November 1, 2000 and the PSEG Energy Holdings Inc.'s (Energy Holdings)
Registration Statement filed on Form S-4 on June 29, 2000, Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 and Current Reports on Form 8-K
filed October 18, 2000 and October 27, 2000, affecting the consolidated
financial condition and the results of operations of PSEG, PSE&G, and Energy
Holdings and their subsidiaries. This discussion refers to the Consolidated
Financial Statements (Statements) and related Notes to Consolidated Financial
Statements (Notes) of PSEG, PSE&G and Energy Holdings and should be read in
conjunction with such Statements and Notes.
Overview and Future Outlook
Following the enactment of the New Jersey Electric Discount and Energy
Competition Act (Energy Competition Act), the New Jersey Board of Public
Utilities (BPU) rendered its summary decision relating to PSE&G's rate
unbundling, stranded costs and restructuring proceedings (Summary Order) and
subsequently issued PSEG's Final Order in these matters, providing, among other
things, for the transfer to an affiliate of all of its electric generation
facilities, plant and equipment for $2.443 billion and all other related
property, including materials, supplies and fuel at the net book value thereof,
together with associated rights and liabilities.
Also in the Final Order, the BPU concluded that PSE&G should recover up to
$2.94 billion (net of tax) of its generation-related stranded costs, through
securitization of $2.4 billion and an opportunity to recover up to $540 million
(net of tax) of its unsecuritized generation-related stranded costs on a present
value basis. The $540 million is subject to recovery by various means, including
an explicit market transition charge (MTC). Following the issuance of the Final
Order, the BPU issued its order approving PSE&G's petition relating to the
proposed securitization transaction (Finance Order) which authorized, among
other things, the issuance and sale of $2.525 billion of transition bonds,
including an estimated $125 million of transaction costs.
The Energy Competition Act, the BPU's Summary Order and Final Order and the
related BPU proceedings, referred to as the Energy Master Plan Proceedings,
opened the New Jersey energy markets to competition by allowing all New Jersey
retail electric customers to, among other things, select their electric supplier
commencing August 1, 1999 and all New Jersey retail gas customers to select
their gas supplier commencing January 1, 2000.
In October and November 1999, two appeals of certain provisions of the
Final Order and two appeals of certain provisions of the related Finance Order
were filed in the Appellate Division of the New Jersey Superior Court (Appellate
Division) on behalf of several customers and the New Jersey Office of the
Ratepayer Advocate. In an order issued April 13, 2000, a three-judge Appellate
Division panel unanimously affirmed the Final Order and Finance Order.
Thereafter, the appellants filed a Petition requesting Certification and a
Notice of Appeal with the New Jersey Supreme Court seeking review of the
Appellate Division decision. On July 14, 2000, the New Jersey Supreme Court
granted Certification with respect to both matters. Oral arguments for all
parties were held on November 8, 2000.
As a result of the Supreme Court's review, PSE&G's securitization
transaction has been delayed at least until the first quarter of 2001, causing a
delay in the implementation of the Securitization Transition Charge (STC) which
would have reduced MTC. In order to recognize the recovery of the allowed
unsecuritized stranded costs over the transition period, PSEG has recorded a
charge to net income of $52 million, after tax, in the third quarter of 2000 for
the cumulative amount of estimated collections in excess of the allowed
unsecuritized stranded costs from August 1, 1999 through September 30, 2000. Any
such collections in excess of the allowed unsecuritized stranded costs at the
end of the transition period will be credited to the Societal Benefits Clause
(SBC) as required by the Final Order.
While PSE&G continues to believe that the Appellate Division's unanimous
decision was correct, it can give no assurances with respect to the ultimate
timing or disposition of these matters by the New Jersey Supreme Court. An
adverse outcome to this review or substantial additional delays beyond the first
quarter of 2001, could have a material adverse impact on PSEG's, PSE&G's and
Energy Holdings' financial condition, results of operations and net cash flows
and could require revisions to financing plans, revisions to business plans
delaying or restricting current growth strategies and the imposition of other
operational and/or financial measures.
As a result of the Final Order, PSEG organized PSEG Power LLC (Power) and
its subsidiaries to, among other things, acquire, own and operate PSE&G's
electric generation assets. PSE&G, pursuant to the Final Order has transferred
its electric generating facilities to Power and its wholesale power contracts to
PSEG Energy Resources and Trade LLC (ER&T), a wholly-owned subsidiary of Power.
The generating assets were transferred at the price specified in the BPU order -
$2.443 billion plus $343 million for other generating related assets and
liabilities. The parties have agreed to execute a supplemental agreement
reflecting any change in the value of the assets if required as a result of the
New Jersey Supreme Court review, discussed above. The transfer, which was
effective August 1, 2000, was in exchange for a Promissory Note from Power in an
amount equal to the purchase price. Until such note is paid, the assets
transferred remain subject to the lien of PSE&G's First and Refunding Mortgage.
PSEG has positioned Energy Holdings as a major part of its planned growth
strategy. In order to achieve this strategy, PSEG Global Inc. (Global) will
focus on generation and distribution investments within targeted high-growth
regions. 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. PSEG Resources Inc. (Resources) will
utilize its market access, industry knowledge and transaction structuring
capabilities to expand its energy-related financial investment portfolio. PSEG
Energy Technologies, Inc. (Energy Technologies) will continue to provide
heating, ventilating and air conditioning (HVAC) contracting and other
energy-related services to industrial and commercial customers in the
Northeastern and Middle Atlantic United States.
Effective August 1, 2000, the presentation of Electric Revenues and
Electric Energy Costs in the Consolidated Statements of Income has changed, due
to PSE&G's transfer of its electric generating facilities to Power and wholesale
power contracts to ER&T. Effective with the transfer, PSE&G entered into a
contract with Power to obtain the energy and capacity necessary to meet PSE&G's
basic generation service (BGS) obligation. As a result, PSE&G's Electric Energy
Costs will now reflect PSE&G's cost under the contracted price with Power and
Power's Electric Energy Costs will reflect the actual cost of generation. PSEG
eliminates these intercompany revenues and expenses in their consolidated
financial statements.
Under the BGS contract PSE&G pays a fixed price for energy and capacity
provided by Power and charges such costs to its BGS customers. As a result,
PSE&G is no longer subject to price risk related to market exposures for its
estimated electric commitments. Following the transfer of generation assets,
Power has entered into forwards, futures, swaps and options to manage price risk
exposure for its commitments to meet PSE&G's BGS obligation in addition to
Power's other supply contracts.
Results of Operations
In the following discussion for the quarter and nine months ended September
30, 2000, as compared to the same periods in the prior year, Management has
combined certain current year results for PSE&G and Power, including
intercompany eliminations, to provide a better comparison to the prior year
results, prior to the generation asset transfer to Power, when operations were
centralized under PSE&G.
<TABLE>
<CAPTION>
Earnings (Losses)
--------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
PSE&G, Before Extraordinary Item............. $97 $203 $494 $527
PSE&G Extraordinary Item..................... -- (14) -- (804)
----------- ------------ ----------- ------------
Total PSE&G............................. 97 189 494 (277)
Energy Holdings.............................. 21 18 41 63
Power........................................ 21 -- 21 --
PSEG*........................................ 3 -- (2) --
-----------
------------ ----------- ------------
Total PSEG.............................. $142 $207 $554 $(214)
=========== ============ =========== ============
*Includes after tax effect of interest on certain financing transactions.
</TABLE>
<TABLE>
<CAPTION>
Contribution to Earnings Per Share (Basic and Diluted)
--------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
PSE&G, Before Extraordinary Item............. $0.45 $0.93 $2.29 $2.40
PSE&G Extraordinary Item..................... -- (0.06) -- (3.65)
------------ ----------- ----------- -----------
Total PSE&G............................. 0.45 0.87 2.29 (1.25)
Energy Holdings.............................. 0.10 0.08 0.19 0.28
Power........................................ 0.10 -- 0.10 --
PSEG*........................................ 0.01 -- (0.01) --
------------ ----------- ----------- -----------
Total PSEG.............................. $0.66 $0.95 $2.57 $(0.97)
============ =========== =========== ===========
*Includes after tax effect of interest on certain financing transactions.
</TABLE>
Basic and diluted earnings per share of PSEG common stock (Common Stock)
were $0.66 for the quarter ended September 30, 2000, a decrease of $0.35 per
share from the comparable 1999 period, excluding the extraordinary charge. Basic
and diluted earnings per share of Common Stock were $2.57 for the nine months
ended September 30, 2000, a decrease of $0.11 per share from the comparable 1999
period, excluding the extraordinary charge.
Excluding the extraordinary charge from 1999 relating to deregulation and
the discontinuation of Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71),
PSE&G's and Power's combined contributions to earnings per share of Common Stock
for the quarter and nine months ended September 30, 2000 decreased $0.38 and
$0.01 from the comparable 1999 periods, respectively. The decrease was primarily
due to the $52 million charge to income related to MTC recovery (See Overview
and Future Outlook). Lower depreciation and amortization resulting from the
amortization of the Excess Depreciation Reserve beginning in January 2000 helped
to offset some of the decrease.
Energy Holdings' contribution to earnings per share of Common Stock
increased $0.02 and decreased $0.09 for the quarter and nine months ended
September 30, 2000, respectively, from the comparable 1999 periods. The increase
for the quarter was primarily due to Resources' higher leveraged lease income
and a prior year write-down of other investments in Global's portfolio. The
decrease for the nine months ended September 30, 2000, as compared to the same
period in 1999, is primarily due to lower unrealized gains from Resources'
investment portfolio.
As a result of PSEG's stock repurchase program which began in September
1998, earnings per share of Common Stock for the quarter and nine months ended
September 30, 2000 increased $0.01 and $0.06, respectively, from the comparable
1999 periods. A total of approximately 17.8 million shares had been repurchased
at a cost of approximately $679 million under this program as of September 30,
2000.
PSE&G and Power--Revenues
Electric
<TABLE>
<CAPTION>
Electric Revenues
--------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
PSE&G........................................ $1,019 $1,244 $3,019 $3,230
Power........................................ 429 -- 429 --
Intercompany Eliminations*................... (386) -- (386) --
----------- ------------ ----------- ------------
Total Electric Revenues................. $1,062 $1,244 $3,062 $3,230
=========== ============ =========== ============
* Represents the revenue Power receives from PSE&G for BGS and MTC.
</TABLE>
Revenues decreased $182 million or 15% and $168 million or 5% for the
quarter and nine months ended September 30, 2000 from the comparable periods in
1999 primarily due to an $88 million pre-tax charge to income related to MTC
recovery combined with the effects of the 5% rate reduction required by the
Final Order which decreased generation revenues for the quarter and nine months
ended September 30, 2000 by approximately $27 million and $123 million,
respectively.
In addition, customer migration from PSE&G could further reduce PSE&G's
future basic generation service (BGS) obligation which would result in decreased
BGS revenues for Power. However, such customer migration also creates the
opportunity for Power to sell available energy and capacity into the wholesale
market. As of September 30, 2000, approximately 8% of the customer load
traditionally served by PSE&G was being served by third party suppliers.
Gas
Revenues increased $66 million or 23% and $155 million or 12% for the
quarter and nine months ended September 30, 2000 from the comparable periods in
1999, respectively, primarily due to the increasing prices for natural gas. This
is due to the fact that under certain transportation only contracts, PSE&G is
responsible only for delivery of gas to its customers. Such customers are
responsible for payment to PSE&G for the cost of the commodity and as PSE&G's
costs for these customers increase, the customer's rates will increase.
PSE&G and Power--Expenses
Electric Energy Costs
<TABLE>
<CAPTION>
Electric Energy Costs
--------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
PSE&G........................................ $603 $309 $1,076 $765
Power........................................ 82 -- 82 --
Intercompany Eliminations*................... (386) -- (386) --
----------- ------------ ----------- ------------
Total Electric Energy Costs............. $299 $309 $772 $765
=========== ============ =========== ============
* Represents the amount PSE&G pays to Power for BGS and MTC.
</TABLE>
Electric Energy Costs decreased $10 million or 3% and increased $7 million
or 1% for the quarter and nine months ended September 30, 2000 from the
comparable 1999 periods, respectively.
Gas Costs
Gas Costs increased $61 million or 30% and $151 million or 17% for the
quarter and nine months ended September 30, 2000 from the comparable 1999
periods, respectively, primarily due to the increasing prices for natural gas.
Operation and Maintenance
<TABLE>
<CAPTION>
Operation and Maintenance
--------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
PSE&G........................................ $185 $382 $958 $1,141
Power........................................ 212 -- 212 --
----------- ------------ ----------- ------------
Total Operation and Maintenance......... $397 $382 $1,170 $1,141
=========== ============ =========== ============
</TABLE>
Operation and Maintenance expense increased $15 million or 4% and $29
million or 3% for the quarter and nine months ended September 30, 2000 from the
comparable 1999 periods, respectively. The increases were primarily due to
increased costs related to Power's acquisitions in 2000 and higher transmission
and distribution costs including higher materials and support services.
Depreciation and Amortization
<TABLE>
<CAPTION>
Depreciation and Amortization
--------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
PSE&G........................................ $60 $120 $230 $405
Power........................................ 26 -- 26 --
----------- ------------ ----------- ------------
Total Depreciation and Amortization..... $86 $120 $256 $405
=========== ============ =========== ============
</TABLE>
Depreciation and Amortization expense decreased $34 million or 28% and $149
million or 37% for the quarter and nine months ended September 30, 2000 from the
comparable 1999 periods, respectively. The decrease was primarily due to the
amortization of the regulatory liability for the excess electric distribution
depreciation reserve at PSE&G, which commenced on January 1, 2000 and amounted
to approximately $31 million and $94 million for the quarter and nine months
ended September 30, 2000. Also contributing to the decrease for the nine months
ended September 30, 2000, as compared to the same period in 1999, was
approximately $60 million of lower depreciation resulting from the lower net
book value balances of the generation-related assets, which were transferred to
Power, which were reduced as of April 1, 1999 as a result of the impairment
recorded pursuant to SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121).
Once the securitization transaction is complete, PSE&G will begin to
amortize the regulatory asset recorded for stranded costs with such amortization
expense offsetting these decreases.
Interest Expense
PSE&G's interest expense decreased $46 million or 47% and $38 million or
13% for the quarter and nine months ended September 30, 2000 from the comparable
1999 periods, respectively. The decrease is primarily due to interest income
received from Power for the Promissory Note (See Note 10. Related Party
Transactions).
Income Taxes
Income Taxes decreased $96 million or 63% and $60 million or 15% for the
quarter and nine months ended September 30, 2000 from the comparable 1999
periods, primarily due to lower pre-tax operating income resulting from the
transfer of the generation portion of the business to Power.
Energy Holdings
Energy Holdings--Revenues
Revenues increased $35 million and $146 million for the quarter and nine
months ended September 30, 2000, respectively, as compared to the same periods
in 1999. The increases primarily resulted from Resources' higher leveraged lease
income from new leveraged lease investments, Energy Technologies' additional
revenues from acquisitions of HVAC and mechanical service contracting companies
in 2000 and 1999 and Global's higher income from partnerships.
Energy Holdings--Operating Expenses
Operating expenses decreased $35 million for the quarter ended September
30, 2000 from the comparable period in 1999 primarily due to Global's prior year
write-down of investments of $44 million. Operating expenses increased $83
million for the nine months ended September 30, 2000 from the comparable period
in 1999, primarily due to the addition of operating expenses from the HVAC and
mechanical service contracting companies acquired by Energy Technologies in 2000
and 1999. This increase in operating expenses was partially offset by the
write-down of Global's investments in 1999.
Energy Holdings--Interest Expense and Preferred Dividends
Net financing expenses increased $6 million and $37 million for the quarter
and nine months ended September 30, 2000, respectively. Both increases were
primarily due to higher levels of debt required to finance investment and
acquisition activities at Global and Resources and higher interest rates.
Energy Holdings - Earnings Before Interest and Taxes (EBIT) Contribution
The results of operations for each of Energy Holdings' business segments
are explained below with reference to the EBIT contribution. Energy Holdings
borrows on the basis of a combined credit profile to finance the activities of
its subsidiaries. As such, the capital structure of each of the businesses is
managed by Energy Holdings. Debt at each subsidiary is evidenced by demand notes
with Energy Holdings and PSEG Capital Corporation (PSEG Capital).
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
EBIT:
Global............................. $36 $44 $85 $85
Resources.......................... 35 19 120 111
Energy Technologies................ 1 (1) (15) (6)
Other.............................. (3) 1 (5) 1
----------- ----------- ----------- -----------
Total EBIT.............................. $69 $63 $185 $191
=========== =========== =========== ===========
</TABLE>
Global
Global's investments consist primarily 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
administrative and general 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.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Revenues........................... $48 $40 $119 $102
Expenses........................... 13 61 37 88
----------- ----------- ----------- -----------
Operating Income................... 35 (21) 82 14
Other Income....................... 1 65 3 71
----------- ----------- ----------- -----------
Total EBIT.............................. $36 $44 $85 $85
=========== =========== =========== ===========
</TABLE>
Global's EBIT contribution decreased $8 million for the quarter ended
September 30, 2000 from the comparable period in 1999. The decrease was
primarily due to the gain on sale of its interest in a Newark, New Jersey
co-generation facility in 1999, partially offset by the write-down of other
investments in Global's portfolio.
Global's EBIT contribution was $85 million for the nine months ended
September 30, 2000 and 1999. For the nine months ended September 30, 2000,
Global's EBIT contribution was primarily the result of higher income from its
new investments in domestic generation and foreign distribution companies.
Global's EBIT contribution for 1999 was primarily impacted by the gain on the
sale of its interest in a Newark, New Jersey co-generation facility, partially
offset by the write-down of other investments in Global's portfolio.
Resources
Resources earns 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.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Revenues.................................. $41 $21 $132 $118
Expenses.................................. 6 2 12 7
---------- ---------- ----------- -----------
Total EBIT..................................... $35 $19 $120 $111
========== ========== =========== ===========
</TABLE>
Resources' EBIT contribution increased $16 million for the quarter ended
September 30, 2000 from the comparable period in 1999. The increase was
primarily due to higher income from new leveraged lease investments.
Resources' EBIT contribution increased $9 million for the nine months ended
September 30, 2000 from the comparable period in 1999. The increase was
primarily due to higher income from new leveraged lease investments, partially
offset by lower investment gains due to sales in 1999 of securities in leveraged
buyout funds.
Energy Technologies
Energy Technologies earns its revenues from energy sales and the sale of
energy-related equipment and services.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Revenues................................... $94 $87 $310 $195
Expenses................................... 93 88 325 201
----------- ----------- ------------ ------------
Total EBIT...................................... $1 $(1) $(15) $(6)
=========== =========== ============ ============
</TABLE>
Energy Technologies' EBIT contribution increased $2 million for the quarter
ended September 30, 2000 from the comparable period in 1999. Revenues increased
$7 million and operating expenses increased $5 million primarily due to
acquisitions of HVAC and mechanical service contracting companies in 2000 and
1999.
Energy Technologies' EBIT contribution decreased $9 million for the nine
months ended September 30, 2000 from the comparable period in 1999. Revenues
increased $115 million and operating expenses increased $124 million primarily
due to acquisitions of HVAC and mechanical service contracting companies in 2000
and 1999. Also included in the increased operating expenses was a restructuring
charge to income for approximately $6.6 million for the nine months ended
September 30, 2000. Of this amount approximately $2 million related to employee
severance costs applicable to the termination of approximately 60 employees,
$1.6 million related to deferred commodity transportation costs and $3.0 million
related to the write-off of computer hardware and software.
Liquidity and Capital Resources
PSEG is a holding company and, as such, has no operations of its own. The
following discussion of PSEG's liquidity and capital resources is on a
consolidated basis, noting the uses and contributions of PSEG's three direct
operating subsidiaries in 2000, PSE&G, Power and Energy Holdings.
PSE&G and Power
As noted previously, on July 14, 2000, the New Jersey Supreme Court decided
to hear appeals of the BPU Energy Master Plan decision. As a result, a planned
$2.525 billion securitization financing by PSE&G has been delayed at least until
the first quarter of 2001, and a planned financing by Power has been similarly
delayed.
Going forward, cash generated from PSE&G's transmission and distribution
business is expected to provide the majority of the funds for PSE&G's business
needs. Power's initial external financing will be delayed until after the
securitization financing. Following this initial financing, Power's capital
needs will be funded with cash generated from operations and may be supplemented
with external financings and equity infusions from PSEG as dictated by Power's
growth strategy. Also as a result of the delay in securitization, PSEG and PSE&G
will utilize various medium-term financings to refinance existing debt and
maturities. The BPU has authorized PSE&G to issue through December 2001 up to $1
billion in long-term debt with maturities not to exceed three years for the
purposes of redeeming or refunding prior debt.
On September 17, 1999, the BPU issued its Finance Order which authorized,
among other things, the imposition of a non-bypassable transition bond charge on
PSE&G's customers; the sale of PSE&G's property right in such charge created by
the Energy Competition Act to a bankruptcy-remote financing entity; the issuance
and sale of $2.525 billion of transition bonds by such entity as consideration
for such property right, including an estimated $125 million of transaction
costs; and the application by PSE&G of the transition bond proceeds to retire
outstanding debt and/or equity. Pending a favorable resolution of matters now
before the New Jersey Supreme Court, PSEG and PSE&G do not expect such sale of
transition bonds and the receipt of proceeds prior to the first quarter of 2001.
Both the right of PSE&G to receive the bondable transition charge pursuant
to the securitization transaction and the proceeds from the Promissory Note
related to the transfer of its generation-related assets to Power are property
subject to the lien of PSE&G's First and Refunding Mortgage (Mortgage). All such
property will be released from the lien of the Mortgage at the time of receipt
of the cash proceeds from each such sale. In accordance with the provisions of
the Mortgage, the net proceeds from each sale of such released property will be
deposited with the Trustee.
The Mortgage authorizes PSE&G to exercise one or more of the following
options as to the application of proceeds of such released property, at its sole
discretion:
1. Withdraw funds for corporate use by utilizing additions and
improvements and/or retired bonds. (Option 1)
2. Direct the Trustee to invest the proceeds in U.S. Government
Securities. (Option 2)
3. Direct the Trustee to purchase its Mortgage Bonds at the lowest
prices obtainable, at or below par value. If the Trustee is
unable to purchase sufficient Mortgage Bonds to exhaust such
proceeds deposited with it, the balance may be applied on a pro
rata basis towards the redemption of eligible series of Mortgage
Bonds outstanding at par. (Option 3)
At September 30, 2000, PSE&G had a total of $3.4 billion of Mortgage Bonds
outstanding, of which $2.6 billion are taxable registered Mortgage Bonds subject
to the special redemption provisions outlined in Option 3 (Redeemable Bonds).
Further, $777 million of the Mortgage Bonds outstanding are tax-exempt Pollution
Control Bonds and $15 million are two series of taxable coupon Mortgage Bonds
due 2037 (Coupon Bonds). Neither the Pollution Control Bonds nor the Coupon
Bonds are subject to the special redemption provisions outlined in Option 3.
PSE&G has not yet made a final decision as to the amount and the manner in
which it will retire or redeem its Mortgage Bonds. Such a decision will be made
on or about the time the proceeds from securitization and the payment of the
Promissory Note related to the sale of the generation-related assets to Power
are deposited with the Trustee, on the basis of market conditions and other
factors existing at that time (see Overview and Future Outlook). Based on
current information, a likely utilization of the options available to PSE&G, as
noted above, could be as follows:
A. Withdraw $2.4 billion of net proceeds from securitization under
Option 1, above. These proceeds would be used to:
i. Redeem $123.5 million of Pollution Control Bonds now
redeemable;
ii. Retire PSE&G's outstanding short-term debt; and
iii. Reduce PSE&G common and/or preferred securities with the
balance of proceeds.
B. Withdraw the proceeds from the payment of the Promissory Note
related to the generation-related asset sale to Power under
Option 1. These proceeds will be used to reduce PSE&G common
and/or preferred securities.
As previously reported, in anticipation of securitization, PSEG's Board of
Directors has authorized the repurchase of up to an aggregate of 30 million
shares of Common Stock in the open market. At September 30, 2000, PSEG had
repurchased approximately 17.8 million shares of Common Stock, at a cost of
approximately $679 million. The repurchased shares have been held as treasury
stock or used for other corporate purposes. In December 1999, PSEG entered into
a Forward Purchase Agreement with a third party which has purchased
approximately 6.4 million shares at a cost of approximately $225 million. The
transaction may be settled in cash or with shares of Common Stock. Any
repurchase of these shares will not be reflected on PSEG's balance sheet until
settlement of the transaction. Market conditions and the availability of
alternative investments will dictate if and when more shares of Common Stock
will be repurchased under this authorization.
Dividend payments on Common Stock for the nine month periods ended
September 30, 2000 and 1999 were $1.62 per share and totaled approximately $348
million and $357 million for the nine months ended September 30, 2000 and 1999,
respectively. PSEG has not increased its dividend rate in eight years in order
to retain additional capital for reinvestment and to reduce its payout ratio as
earnings grow. Since 1986, PSE&G has made regular cash payments to PSEG in the
form of dividends on outstanding shares of PSE&G's common stock. PSE&G paid
common stock dividends of $450 million and $510 million to PSEG for the nine
months ended September 30, 2000 and 1999, respectively. These amounts were used
to fund PSEG's Common Stock dividends and to support a portion of PSEG's stock
repurchase program.
PSEG believes that it will have adequate earnings and cash flow in the
future from PSE&G and Power to maintain Common Stock dividends at the current
level. However, the amounts and dates of such dividends declared in the future
will necessarily be dependent upon PSEG's future earnings, cash flows, financial
requirements and other factors. Earnings and cash flows required to support the
dividend will become more volatile as PSEG's business changes from one that is
principally regulated to one that is principally competitive.
Energy Holdings
It is intended that Global and Resources will provide the earnings and cash
flow for Energy Holdings' long-term growth. 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. In
addition to cash generated from operations, Energy Holdings' growth will be
funded through external financings and equity infusions from PSEG. The delay of
the securitization financing could impact the ability of PSEG to continue to
make equity infusions into Energy Holdings which could affect Energy Holdings'
growth strategy.
Cash flow from operating activities increased $39 million from $104 million
to $143 million for the nine months ended September 30, 2000 as compared to
1999, primarily due to a decrease in accounts receivable in Global as a result
of a partner's reimbursement for their share of project costs.
Regulatory Restrictions
As a result of a 1992 BPU proceeding concerning the relationship of PSE&G
to PSEG's non-utility businesses (Focused Audit), the BPU approved a plan which,
among other things, provided that: (1) PSEG would not permit PSEG's non-utility
assets to exceed 20% of PSEG's consolidated assets without prior notice to the
BPU (as of September 30, 2000, these assets were in excess of the 20% limit and
such notice had been given); (2) the PSE&G Board of Directors would provide an
annual certification that the business and financing plans of Energy Holdings
will not adversely affect PSE&G; (3) PSEG would (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 by May 2003;
and (4) Energy Holdings would pay PSE&G an affiliation fee of up to $2 million a
year to be applied by PSE&G to reduce utility rates.
As a result of the accounting impacts resulting from the Final Order and
the deregulation of the electric generation business in New Jersey, PSEG and
PSE&G no longer believe that the 20% non-utility asset limitation remains
appropriate and believe further that modifications to the Focused Audit
limitations will be required. The Final Order addressed the Focused Audit,
noting that PSEG's non-regulated assets would likely exceed 20% and that, due to
significant changes in the industry and, in particular, PSEG's corporate
structure as a result of the Final Order, modifications to or relief from the
Focused Audit might be warranted. The BPU directed PSE&G to file a petition
addressing the Focused Audit prior to the end of the first quarter of 2000. In
March 2000, PSE&G submitted a letter to the BPU as its initial compliance with
this filing requirement in which it notified the BPU of its intention to make a
filing to modify the terms of the Focused Audit within 120 days after the Final
Order becomes final and non-appealable. Energy Holdings believes that, if still
required, it is capable of eliminating PSEG support of PSEG Capital debt within
the time period set forth in the Focused Audit.
Regulatory oversight by the BPU to ensure that there is no harm to utility
customers from PSEG's non-utility investments is expected to continue. PSEG and
PSE&G believe that these issues will be satisfactorily resolved, although no
assurances can be given. In addition, if PSEG were no longer exempt under the
Public Utility Holding Company Act (PUHCA), PSEG and its subsidiaries would be
subject to additional regulation by the SEC with respect to financing and
investing activities, including the amount and type of non-utility investments.
PSEG believes, however, that this would not have a material adverse impact on it
and its subsidiaries.
Capital Requirements
PSE&G and Power
On October 31, 2000 Power announced that it had entered into an agreement
with a third party to purchase 30 gas and steam turbines with a total combined
generating capacity of 4,390 MW for $862.8 million. The turbines will be used at
projects in the Northeast and Midwest.
In September 2000, Power announced that it will assume responsibility of
four Midwest generation projects being developed by Global and will be
responsible for all future generation projects and development in the United
States. The four projects will have a combined generating capacity of 2,830 MW.
Power will reimburse Global for their project costs through 2000.
On July 19, 2000, Power announced that it will construct a two-unit, 1,186
MW natural-gas fired combined-cycle generating facility at its Linden Generating
Station at a cost of approximately $590 million with completion expected in May
2003. Three existing oil-fired steam units at Linden with a total capacity of
436 MW will be retired upon completion of the new facility.
Also in 2000, Power announced that it will construct a 500 MW natural
gas-fired, combined-cycle electric generating plant at its Bergen Generating
Station at a cost of approximately $290 million with completion expected in June
2002. Power has also installed four new combustion turbines at Burlington
Generating Station and two new combustion turbines at Linden Generating Station,
adding 168 MW and 164 MW, respectively, of electric generating capacity, at a
cost of approximately $151 million. The new combustion turbines were all
operational as of July 2000.
In May 2000, Power acquired Niagara Mohawk Power Corporation's (Niagara
Mohawk) 400 MW oil and gas-fired electric generating station in Albany, New York
(Albany Steam Station) for $49.9 million. Under the terms of the acquisition
agreement, Niagara Mohawk could also receive up to an additional $9 million if
Power chooses to pursue redevelopment of the Albany Steam Station.
In September 1999, Power announced that it had signed an agreement to
acquire all of Conectiv's interests in the Salem Nuclear Generating Station
(Salem) and the Hope Creek Nuclear Generating Station (Hope Creek) and half of
Conectiv's interest in the Peach Bottom Atomic Power Station (Peach Bottom),
totaling 544 MW for an aggregate purchase price of $15.4 million plus the net
book value of nuclear fuel at closing. For further information and discussion of
the Wholesale Transaction Confirmation letter agreements between Power and
Conectiv, see Note 4. Commitments and Contingent Liabilities.
PSE&G and Power have substantial commitments as part of their ongoing
construction programs. These programs are continuously reviewed and periodically
revised as a result of changes in economic conditions, revised load forecasts,
business strategies, site changes, cost escalations under construction
contracts, requirements of regulatory authorities and laws, the timing of and
amount of electric and gas transmission and/or distribution rate changes and the
ability of PSE&G to raise necessary capital.
For the nine month periods ended September 30, 2000 and 1999 PSE&G had net
plant additions of $280 million, excluding Allowance for Funds Used During
Construction (AFDC) and capitalized interest. Power had net plant additions for
the nine months ended September 2000 of $288 million, excluding AFDC and
capitalized interest.
Energy Holdings
Future investment activity will be subject to periodic review and revision
and may vary significantly depending upon the opportunities presented. Factors
affecting actual expenditures and investments include availability of capital
and suitable investment opportunities, market volatility and local economic
trends.
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 (see Liquidity and Capital Resources-Regulatory Restrictions above).
External Financings
PSEG
At September 30, 2000, PSEG had a committed $150 million revolving credit
facility which will expire in December 2002. At September 30, 2000, there were
no borrowings under this revolving credit facility. On September 8, 1999, PSEG
entered into an uncommitted line of credit with a bank with no stated limit. At
September 30, 2000, PSEG had $145 million outstanding under this line of credit.
PSEG has an $850 million commercial paper program to provide funds for
general corporate purposes and, until securitization proceeds are received,
provide funds for Power. On September 30, 2000, PSEG had commercial paper of
$557 million outstanding.
To provide liquidity for its commercial paper program, PSEG has a $570
million revolving credit facility expiring in March 2001 and a $280 million
revolving credit facility expiring in March 2005. These agreements are with a
group of banks and provide for borrowings with maturities of up to one year. As
of September 30, 2000 there were no borrowings outstanding under these
facilities.
On October 10, 2000 PSEG filed a registration statement with the SEC to
register $500 million of additional debt.
In 1998, PSEG issued $100 million of Extendible Notes, Series A, due
November 22, 2000. These Notes were automatically tendered and remarketed in
February 2000. The interest rate through maturity is at the three-month London
Interbank Offered Rate (LIBOR) plus 0.22%, reset quarterly.
Also in 1998, PSEG issued $175 million of Extendible Notes, Series B, due
November 22, 2000. These Notes were automatically tendered and remarketed in May
2000. The interest rate through maturity is at the three-month LIBOR plus 0.32%,
reset quarterly.
In 1999, PSEG issued $300 million of Extendible Notes, Series C, due June
15, 2001. These Notes were automatically tendered and remarketed in September
2000. The interest rate through maturity is at the three-month LIBOR plus
0.375%, reset quarterly.
PSE&G
As of September 30, 2000, the Mortgage would permit up to $2.9 billion
aggregate principal amount of new Mortgage Bonds to be issued against previous
additions and improvements, the level of which will be impacted by the actions
ultimately taken in connection with securitization and the sale of
generation-related assets to Power (see Liquidity and Capital Resources - PSEG
and PSE&G). In addition to the refinancing of existing long-term debt authorized
by the BPU in the Final Order, PSE&G will need to obtain BPU authorization to
issue any incremental debt financing necessary for its capital program. PSE&G
expects to apply for and receive necessary BPU authorization for external
financings to meet its requirements over the next five years, as needed. While
PSE&G expects such authority to be granted, no assurances can be given. Failure
to receive such authority on a timely basis could have a material adverse effect
on the financial condition, results of operations and net cash flows of PSE&G
and PSEG.
The BPU has authorized PSE&G to issue up to $1 billion of new long-term
debt on the basis of previously matured, redeemed or purchased debt through
December 31, 2001
On September 6, 2000, PSE&G issued $290 million of secured Medium Term
Notes, Series A at 7.19%, due September 6, 2002.
PSE&G maintains a $1.5 billion commercial paper program. To provide
liquidity for this program, PSE&G has a $450 million revolving credit agreement
expiring in June 2001, a $650 million credit facility expiring in June 2002 and
a $400 million credit facility expiring in June 2001. These agreements provide
for borrowings with maturities of up to one year. As of September 30, 2000,
there were no borrowings outstanding under these facilities.
The BPU has authorized PSE&G to issue and have outstanding at any one time
through January 2, 2001, not more than $2.0 billion of short-term obligations,
consisting of commercial paper and other unsecured borrowings from banks and
other lenders. PSE&G has several uncommitted lines of credit with banks. On
September 30, 2000, PSE&G had $1.6 billion of short-term debt outstanding,
including $423 million borrowed against its uncommitted bank lines of credit.
PSE&G has filed a petition with the BPU to extend its authority to issue
short-term debt through January 2, 2003.
PSE&G Fuel Corporation had a $125 million commercial paper program to
finance a 42.49% share of Peach Bottom nuclear fuel. This commercial paper
program was supported by a $125 million revolving credit facility with a group
of banks. As a result of the transfer of generation assets from PSE&G to Power,
the PSE&G Fuel Corporation commercial paper program has been discontinued. All
commercial paper outstanding under this program was paid down on August 17,
2000. The credit facility supporting this program was terminated on September
11, 2000.
Energy Holdings
A registration statement was declared effective September 5, 2000 regarding
an exchange offer for the $300 million of 9.125% Senior Notes due February 2004.
The exchange offer was completed on October 18, 2000 with substantially all
notes being exchanged.
Energy Holdings completed an exchange offer in August 2000 exchanging $400
million of publicly traded 10.0% Senior Notes due October 2009 for notes which
were issued in October 1999 in a private placement.
Foreign Operations
In accordance with their growth strategies, Global and Resources have made
approximately $1.5 billion and $1.2 billion, respectively, of international
investments. As of September 30, 2000, foreign investments represented 13% of
PSEG's consolidated assets and the revenues from those foreign investments
contributed 3% to consolidated revenues for the nine months ended September 30,
2000. For discussion of foreign currency risk, see Note 5. Financial Instruments
and Risk Management.
PSE&G and Energy Holdings
The information required by this item is incorporated herein by reference
to the following portions of PSEG's Management's Discussion and Analysis of
Financial Condition and Results of Operations, insofar as they relate to PSE&G
and Energy Holdings and their subsidiaries: Overview and Future Outlook; Results
of Operations; Liquidity and Capital Resources; External Financings and Foreign
Operations.
Forward Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used herein, the words
"will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential", variations of such words and similar expressions
are intended to identify forward-looking statements. PSEG, PSE&G and Energy
Holdings undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following review of factors should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by
PSEG, PSE&G and Energy Holdings prior to the effective date of the Private
Securities Litigation Reform Act of 1995.
In addition to any assumptions and other factors referred to specifically
in connection with such forward-looking statements, factors that could cause
actual results to differ materially from those contemplated in any
forward-looking statements include, among others, the following: deregulation
and the unbundling of energy supplies and services and the establishment of a
competitive energy marketplace for products and services; managing rapidly
changing wholesale energy trading operations in conjunction with electricity and
gas production, transmission and distribution systems; managing foreign
investments and electric generation and distribution operations in locations
outside of the traditional utility service territory; political and foreign
currency risks; an increasingly competitive energy marketplace; sales retention
and growth potential in a mature PSE&G service territory; ability to complete
development or acquisition of current and future investments; partner and
counterparty risk; exposure to market price fluctuations and volatility of fuel
and power supply, power output, marketable securities, among others; ability to
obtain adequate and timely rate relief, cost recovery, and other necessary
regulatory approvals; ability to obtain securitization proceeds; Federal, state
and foreign regulatory actions; regulatory oversight with respect to utility and
non-utility affiliate relations and activities; operating restrictions,
increased cost and construction delays attributable to environmental
regulations; nuclear decommissioning and the availability of storage facilities
for spent nuclear fuel; licensing and regulatory approval necessary for nuclear
and other operating stations; the ability to economically and safely operate
nuclear facilities in accordance with regulatory requirements; environmental
concerns; and market risk and debt and equity market concerns associated with
these issues.
ITEM 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
The market risk inherent in PSEG's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in commodity
prices, pollution credit prices, equity security prices, interest rates and
foreign currency exchange rates as discussed below. PSEG's policy is to use
derivatives to manage risk consistent with its business plans and prudent
practices. PSEG has a Risk Management Committee comprised of executive officers
which utilizes an independent risk oversight function to ensure compliance with
corporate policies and prudent risk management practices.
PSEG is exposed to credit losses in the event of non-performance or
non-payment by counterparties. PSEG also has a credit management process which
is used to assess, monitor and mitigate counterparty exposure for PSEG and its
subsidiaries. In the event of non-performance or non-payment by a major
counterparty, there may be a material adverse impact on PSEG's and its
subsidiaries' financial condition, results of operations or net cash flows. For
discussion of interest rates, commodity-related instruments, equity securities
and foreign currency risks, see Note 5. Financial Instruments and Risk
Management.
Commodity-Related Instruments
The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
supply and demand and state and Federal regulatory policies. To reduce price
risk caused by market fluctuations, PSE&G and Power enter into derivative
contracts, including forwards, futures, swaps and options with approved
counterparties, to hedge anticipated demand. These contracts, in conjunction
with owned electric generating capacity and physical gas supply contracts, are
designed to cover estimated electric and gas customer commitments.
PSEG uses a value-at-risk model to assess the market risk of its commodity
business. This model includes fixed price sales commitments, owned generation,
native load requirements, physical and financial contracts. Value-at-risk
represents the potential gains or losses for instruments or portfolios due to
changes in market factors, for a specified time period and confidence level.
PSEG estimates value-at-risk across its commodity business using a model with
historical volatilities and correlations.
The measured value-at-risk using a variance/co-variance model with a 95%
confidence level over a one-week time horizon at September 30, 2000 was
approximately $12 million, compared to the December 31, 1999 level of $3
million. PSEG's calculated value-at-risk represents an estimate of the potential
change in the value of its portfolio of physical and financial derivative
instruments. These estimates, however, are not necessarily indicative of actual
results, which may differ due to the fact that actual market rate fluctuations
may differ from forecasted fluctuations and due to the fact that the portfolio
of hedging instruments may change over the holding period.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain information reported under Item 3 of Part I of PSEG's and PSE&G's
1999 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2000 and June 30, 2000 and Energy Holdings'
Registration Statement on Form S-4, filed June 29, 2000 and Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, is updated below.
(1) Form 10-K, pages 5, 27, 33, 64 and 69, March 31, 2000 Form 10-Q,
pages 9 and 17 and June 30, 2000 Form 10-Q, pages 13 and 25. See
Pages 14 and 25. Proceedings before the BPU in the matter of the
Energy Master Plan Phase II Proceeding to investigate the future
structure of the Electric Power Industry, Docket Nos.
EX94120585Y, EO97070461, EO97070462 and EO97070463.
(2) Form 10-K, pages 8, 27, 34 and 69, March 31, 2000 Form 10-Q,
pages 9 and 17 and June 30, 2000 Form 10-Q, pages 13 and 25. See
Pages 14 and 25. Appeals of the BPUs Final Order and Finance
Order in the Energy Master Plan Proceedings, Docket Nos.
C1263-99, C-1265-99 and C-1413-99.
ITEM 5. OTHER INFORMATION
Certain information reported under PSEG's and PSE&G's 1999 Annual Report on
Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31,
2000 and June 30, 2000 and Energy Holdings' Registration Statement on Form S-4,
filed June 29, 2000 and Quarterly Report on Form 10-Q for the quarter ended June
30, 2000, is updated below. References are to the related pages on the Form
10-K, Form 10-Q or Form S-4, as appropriate, as printed and distributed.
PSE&G agreement with El Paso Merchant Energy
New Matter. PSE&G and El Paso Merchant Energy, a business unit of El Paso
Energy Corporation, have announced the restructuring of a long-term power sales
agreement, a non-utility generation (NUG) contract between its Newark Bay
generating project and PSE&G. The BPU approved the agreement. As required by
state and federal regulation, PSE&G entered into a long-term agreement to
purchase the output of the plant at prices that are now above market. Under the
new agreement, El Paso Merchant Energy will supply a fixed amount of electricity
to PSE&G at reduced rates. PSE&G expects that the new agreement will save its
customers $75 million over the remaining 13-year term of the agreement, with no
impact on earnings.
Levelized Gas Adjustment Clause (LGAC)
Form 10-K, page 9 and June 30, 2000 Form 10-Q page 41 . On July 31, 2000,
PSE&G filed an amended motion with the BPU requesting interim authorization by
September 1, 2000 to change the monthly pricing mechanism in PSE&G's LGAC to
cover currently estimated price increases on a per month basis, exercisable in
any month with no annual limit. The change will also allow PSE&G to decrease
prices if the expected increases in gas costs do not occur. Currently, PSE&G has
been given limited authority to change the monthly pricing mechanism during the
months of November 2000 through April 2001. On October 3, 2000, PSE&G filed an
emergent motion for provisional relief with the BPU.
On November 1, 2000, the BPU issued a written order granting PSE&G a
provisional rate increase of 16% with a 2% monthly potential flexing mechanism
during the upcoming winter for the amounts that PSE&G is permitted to charge
customers.
Energy Efficiency and Renewable Energy (Formerly DSM)
Form 10-K, page 9. On October 10, 2000, the BPU approved, on an interim
basis, $7.5 million of statewide funding for new energy efficiency programs and
$2.5 million of statewide funding for renewable energy programs to be
administered by the BPU pending the BPU's final order in the Comprehensive
Resource Analysis (CRA) proceeding. PSE&G is waiting for the BPU to issue a
written order with details on how the interim CRA program is to be administered
and how much of the cost of this funding will be collected from each of the New
Jersey's seven utilities.
PJM Interconnection LLC (PJM)
Form 10-K, page 12. In October 2000, PJM and nine PJM transmission owners,
including PSE&G, made a filing with the Federal Energy Regulatory Commission
(FERC) stating that PJM is a Regional Transmission Organization (RTO) that meets
or exceeds the requirements of the Final Rule promulgated by FERC in the RTO
rulemaking proceeding (Order 2000). Included in this filing was a PJM rate
proposal designed to provide reasonable, risk-adjusted returns on new
transmission investments in the PJM region.
Gas Operations and Supply
Form 10-K, page 16. On August 11, 2000, PSE&G filed a gas merchant
restructuring plan with the BPU which provides for, among other things, the
transfer of PSE&G's gas supply, transportation, storage and peaking contracts to
a subsidiary of Power and a requirements contract between PSE&G and Power's
subsidiary enabling PSE&G to fulfill its basic gas supply service. PSE&G cannot
predict the outcome of this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) A listing of exhibits being filed with this document is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Exhibit Document
Number
----------------- ----------- -----------------------------------------------------------------------
<S> <C> <C>
PSEG 10A(19) Employment Agreement with Frank Cassidy dated October 17, 2000
10A(20) Employment Agreement with Robert J. Dougherty dated October 17, 2000
10A(21) Employment Agreement with Alfred C. Koeppe dated October 17, 2000
10A(22) Employment Agreement with Robert C. Murray dated October 17, 2000
12 Computation of Ratios of Earnings to Fixed Charges (PSEG)
27(A) Financial Data Schedule (PSEG)
----------------- ----------- -------------------------------------------------------------------------
PSE&G 12(A) Computation of Ratios of Earnings to Fixed Charges (PSE&G)
12(B) Computation of Ratios of Earnings to Fixed Charges plus Preferred
Stock Dividend Requirements (PSE&G)
27(B) Financial Data Schedule (PSE&G)
----------------- ----------- -------------------------------------------------------------------------
ENERGY HOLDINGS 12(C) Computation of Ratios of Earnings to Fixed Charges (Energy Holdings)
27(C) Financial Data Schedule (Energy Holdings)
-------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Reports on Form 8-K and Form 8-K/A
Registrant Date of Report Items Reported
---------- -------------- --------------
PSEG and PSE&G August 21, 2000 Items 2 and 7
PSEG and PSE&G September 5, 2000 Items 2 and 7
PSEG, PSE&G and Energy Holdings October 18, 2000 Items 5 and 7
PSEG, PSE&G and Energy Holdings October 27, 2000 Item 9
PSEG and PSE&G November 1, 2000 Item 7
<PAGE>
================================================================================
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused these reports to be signed on their respective
behalf by the undersigned thereunto duly authorized.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
PUBLIC SERVICE ELECTRIC and GAS COMPANY
(Registrants)
By: PATRICIA A. RADO
_________________________________
Patricia A. Rado
Vice President and Controller
(Principal Accounting Officer)
Date: November 13, 2000
<PAGE>
================================================================================
PSEG ENERGY HOLDINGS INC.
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSEG ENERGY HOLDINGS INC.
(Registrant)
By: DEREK DIRISIO
_________________________________
Derek DiRisio
Vice President and Controller
(Principal Accounting Officer)
Date: November 13, 2000
