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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 June 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
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 ___ No X
As of July 31, 2000, Public Service Enterprise Group Incorporated had
outstanding 214,406,518 shares of its sole class of Common Stock without
par value.
As of July 31, 2000, 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.............................................................. 37
Energy Holdings.................................................... 37
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............................... 42
Signatures -- PSEG..................................................... 43
Signatures -- PSE&G.................................................... 43
Signatures -- Energy Holdings.......................................... 44
<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 Six Months Ended
June 30, June 30,
--------------------------------- ------------------------------------
2000 1999 2000 1999
------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric Revenues *
Bundled $ -- $ 1,020 $ -- $ 1,986
Generation 555 -- 1,113 --
Transmission and Distribution 483 -- 887 --
------------- --------------- ---------------- ----------------
Total Electric Revenues 1,038 1,020 2,000 1,986
Gas Distribution 319 277 1,066 977
Other 164 139 379 268
------------- --------------- ---------------- ----------------
Total Operating Revenues 1,521 1,436 3,445 3,231
------------- --------------- ---------------- ----------------
OPERATING EXPENSES
Electric Energy Costs 280 238 496 463
Gas Costs 237 177 717 626
Operation and Maintenance 487 419 972 857
Depreciation and Amortization 86 122 176 288
Taxes Other Than Income Taxes 38 43 88 99
------------- --------------- ---------------- ----------------
Total Operating Expenses 1,128 999 2,449 2,333
------------- --------------- ---------------- ----------------
OPERATING INCOME 393 437 996 898
Other Income and Deductions 6 10 17 16
Interest Expense (137) (117) (274) (229)
Preferred Securities Dividend Requirements (23) (28) (47) (52)
------------- --------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 239 302 692 633
Income Taxes (97) (121) (280) (264)
------------- --------------- ---------------- ----------------
INCOME BEFORE EXTRAORDINARY ITEM 142 181 412 369
Extraordinary Item (net of tax of $345) -- (790) -- (790)
------------- --------------- ---------------- ----------------
NET INCOME (LOSS) $ 142 $ (609) $ 412 $ (421)
============= =============== ================ ================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (000's) 215,394 219,571 215,886 221,122
============= =============== ================ ================
EARNINGS (LOSS) PER SHARE (BASIC
AND DILUTED):
INCOME BEFORE EXTRAORDINARY ITEM
$ 0.66 $ 0.83 $ 1.91 $ 1.67
Extraordinary Item (net of tax) -- (3.60) -- (3.57)
------------- --------------- ---------------- ----------------
NET INCOME (LOSS) $ 0.66 $ (2.77) $ 1.91 $ (1.90)
============= =============== ================ ================
DIVIDENDS PAID PER SHARE OF COMMON STOCK
$ 0.54 $ 0.54 $ 1.08 $ 1.08
============= =============== ================ ================
<FN>
* 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.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
June 30, December 31,
2000 1999
---------------- ------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 133 $ 259
Accounts Receivable:
Customer Accounts Receivable 658 646
Other Accounts Receivable 490 371
Allowance for Doubtful Accounts (43) (40)
Unbilled Revenues 189 241
Fuel 294 311
Materials and Supplies, net of valuation reserves-- 2000 and 1999, $11 149 130
Prepayments 280 39
Other 191 86
---------------- ------------------
Total Current Assets 2,341 2,043
---------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Electric - Generation 2,508 2,355
Electric - Transmission and Distribution 5,214 5,113
Gas - Distribution 3,094 3,019
Other 596 534
---------------- ------------------
Total 11,412 11,021
Accumulated depreciation and amortization (4,195) (3,943)
---------------- ------------------
Net Property, Plant and Equipment 7,217 7,078
---------------- ------------------
NONCURRENT ASSETS
Regulatory Assets 5,067 5,041
Long-Term Investments, net of accumulated amortization and
valuation allowances -- 2000, $68; 1999, $65 3,957 3,848
Nuclear Decommissioning Fund 643 631
Other Special Funds 132 148
Other, net of accumulated amortization-- 2000, $19;
1999, $12 275 226
---------------- ------------------
Total Noncurrent Assets 10,074 9,894
---------------- ------------------
TOTAL ASSETS $ 19,632 $ 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)
June 30, December 31,
2000 1999
---------------- ------------------
<S> <C> <C>
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 778 $ 1,073
Commercial Paper and Loans 2,367 1,972
Accounts Payable 1,077 738
Other 445 394
---------------- ------------------
Total Current Liabilities 4,667 4,177
---------------- ------------------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 3,044 2,928
Regulatory Liabilities 564 604
Nuclear Decommissioning 643 631
OPEB Costs 420 390
Other 546 506
---------------- ------------------
Total Noncurrent Liabilities 5,217 5,059
---------------- ------------------
COMMITMENTS AND CONTINGENT LIABILITIES -- --
---------------- ------------------
CAPITALIZATION:
LONG-TERM DEBT 4,417 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 1,371 1,193
Accumulated Other Comprehensive Loss (183) (204)
---------------- ------------------
Total Common Stockholders' Equity 4,123 3,996
---------------- ------------------
Total Capitalization 9,748 9,779
---------------- ------------------
TOTAL LIABILITIES AND CAPITALIZATION $ 19,632 $ 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)
Six Months Ended
June 30,
----------------------------------------
2000 1999
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 412 $ (421)
Adjustments to reconcile net income to net cash flows from
operating activities:
Extraordinary Loss - net of tax -- 790
Depreciation and Amortization 176 288
Amortization of Nuclear Fuel 45 42
Recovery of Electric Energy and Gas Costs-- net 25 106
Provision for Deferred Income Taxes and ITC-- net 63 (206)
Investment Distributions 32 75
Equity Income from Partnerships (12) (45)
Unrealized Gains on Investments (18) --
Net Changes in certain current assets and liabilities:
Accounts Receivable and Unbilled Revenues (76) (160)
Fuel and Materials and Supplies (2) 64
Prepayments (241) (246)
Accounts Payable 339 137
Other Current Assets and Liabilities (54) 104
Other 7 75
---------------- ------------------
Net Cash Provided By Operating Activities 696 603
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment, excluding
Capitalized Interest and AFDC (350) (172)
Net Change in Long-Term Investments (68) (630)
Other (16) (68)
---------------- ------------------
Net Cash Used in Investing Activities (434) (870)
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt 395 232
Issuance of Long-Term Debt 300 713
Redemption/Purchase of Long-Term Debt (777) (203)
Purchase of Treasury Stock (72) (300)
Cash Dividends Paid on Common Stock (234) (238)
---------------- ------------------
Net Cash (Used in) Provided By Financing Activities (388) 204
---------------- ------------------
Net Change in Cash and Cash Equivalents (126) (63)
Cash and Cash Equivalents at Beginning of Period 259 140
---------------- ------------------
Cash and Cash Equivalents at End of Period $ 133 $ 77
================ ==================
Income Taxes Paid $ 323 $ 307
Interest Paid $ 234 $ 229
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 Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric Revenues *
Bundled $ -- $ 1,020 $ -- $ 1,986
Generation 555 -- 1,113 --
Transmission and Distribution 483 -- 887 --
-------------- ---------------- ---------------- --------------
Total Electric Revenues 1,038 1,020 2,000 1,986
Gas Distribution 319 277 1,066 977
-------------- ---------------- ---------------- --------------
Total Operating Revenues 1,357 1,297 3,066 2,963
-------------- ---------------- ---------------- --------------
OPERATING EXPENSES
Electric Energy Costs 268 235 473 456
Gas Costs 222 165 679 589
Operation and Maintenance 385 365 773 759
Depreciation and Amortization 82 120 170 285
Taxes Other than Income Taxes 39 43 88 99
-------------- ---------------- ---------------- --------------
Total Operating Expenses 996 928 2,183 2,188
-------------- ---------------- ---------------- --------------
OPERATING INCOME 361 369 883 775
Other Income and Deductions 2 -- 12 3
Interest Expense (97) (93) (194) (186)
Preferred Securities Dividend Requirements (12) (12) (23) (23)
-------------- ---------------- ---------------- --------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 254 264 678 569
Income Taxes (102) (107) (276) (240)
-------------- ---------------- ---------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 152 157 402 329
Extraordinary Item (net of tax of $345) -- (790) -- (790)
-------------- ---------------- ---------------- --------------
NET INCOME (LOSS) 152 $ (633) $ 402 $ (461)
Preferred Stock Dividend Requirements (2) (2) (5) (5)
-------------- ---------------- ---------------- --------------
EARNINGS (LOSS) AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP INCORPORATED
$ 150 $ (635) $ 397 $ (466)
============== ================ ================ ==============
<FN>
* 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.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
June 30, December 31,
2000 1999
---------------- ------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 29 $ 173
Accounts Receivable:
Customer Accounts Receivable 455 529
Other Accounts Receivable 457 313
Allowance for Doubtful Accounts (37) (35)
Unbilled Revenues 189 241
Fuel 288 308
Materials and Supplies, net of valuation reserves-- 2000 and 1999, $11 139 130
Prepayments 273 34
Other 159 50
---------------- ------------------
Total Current Assets 1,952 1,743
---------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Electric - Generation 2,298 2,284
Electric - Transmission and Distribution 5,214 5,113
Gas - Distribution 3,094 3,019
Other 446 457
---------------- ------------------
Total 11,052 10,873
Accumulated Depreciation and Amortization (4,150) (3,911)
---------------- ------------------
Net Property, Plant and Equipment 6,902 6,962
---------------- ------------------
NONCURRENT ASSETS
Regulatory Assets 5,067 5,041
Long-Term Investments 100 99
Nuclear Decommissioning Fund 643 631
Other Special Funds 132 148
Other 98 100
---------------- ------------------
Total Noncurrent Assets 6,040 6,019
---------------- ------------------
TOTAL ASSETS $ 14,894 $ 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)
June 30, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ -- $ 623
Commercial Paper and Loans 1,782 1,475
Accounts Payable 1,020 676
Other 285 281
------------------ ------------------
Total Current Liabilities 3,087 3,055
------------------ ------------------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 2,093 2,032
Regulatory Liabilities 564 604
Nuclear Decommissioning 643 631
OPEB Costs 418 390
Other 491 479
------------------ ------------------
Total Noncurrent Liabilities 4,209 4,136
------------------ ------------------
COMMITMENTS AND CONTINGENT LIABILITIES -- --
------------------ ------------------
CAPITALIZATION:
LONG-TERM DEBT 3,101 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
Retained Earnings 660 597
Accumulated Other Comprehensive Loss (3) (3)
------------------ ------------------
Total Common Stockholder's Equity 3,814 3,751
------------------ ------------------
Total Capitalization 7,598 7,533
------------------ ------------------
TOTAL LIABILITIES AND CAPITALIZATION $ 14,894 $ 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)
Six Months Ended
June 30,
----------------------------------------
2000 1999
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 402 $ (461)
Adjustments to reconcile net income to net cash flows from
operating activities:
Extraordinary Loss - net of tax -- 790
Depreciation and Amortization 170 285
Amortization of Nuclear Fuel 45 42
Recovery of Electric Energy and Gas Costs-- net 25 106
Provision for Deferred Income Taxes and ITC-- net 61 (193)
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable and Unbilled Revenues (16) (146)
Fuel and Materials and Supplies 11 64
Prepayments (239) (251)
Accounts Payable 379 126
Other Current Assets and Liabilities (105) 107
Other 23 69
---------------- ------------------
Net Cash Provided By Operating Activities 756 538
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment, excluding
Capitalized Interest and AFDC (230) (172)
Other (17) (57)
---------------- ------------------
Net Cash Used in Investing Activities (247) (229)
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt 307 90
Redemption/Purchase of Long-Term Debt (621) (17)
Cash Dividends Paid (339) (396)
---------------- ------------------
Net Cash Used in Financing Activities (653) (323)
---------------- ------------------
Net Change in Cash and Cash Equivalents (144) (14)
Cash and Cash Equivalents at Beginning of Period 173 42
---------------- ------------------
Cash and Cash Equivalents at End of Period $ 29 $ 28
================ ==================
Income Taxes Paid $ 387 $ 335
Interest Paid $ 190 $ 197
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 Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Income from Joint Ventures
and Partnerships $ 31 $ 30 $ 61 $ 58
Energy Service Revenues 80 36 153 57
Energy Supply Revenues 21 16 58 46
Income from Capital and Operating Leases 37 28 75 53
Net Investment Gains (Losses) (12) 22 18 41
Other 7 7 14 13
--------------- --------------- -------------- --------------
Total Operating Revenues 164 139 379 268
--------------- --------------- -------------- --------------
OPERATING EXPENSES
Cost of Energy Sales 24 16 58 45
Restructure Costs -- -- 7 --
Operation and Maintenance 102 55 194 99
Depreciation and Amortization 3 2 6 3
--------------- --------------- -------------- --------------
Total Operating Expenses 129 73 265 147
--------------- --------------- -------------- --------------
OPERATING INCOME 35 66 114 121
Other Income -- 4 2 7
Interest Expense-Net (36) (21) (72) (40)
--------------- --------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (1) 49 44 88
Income Taxes 1 (17) (13) (30)
Minority Interests 1 -- 1 --
--------------- --------------- -------------- --------------
NET INCOME 1 32 32 58
Preferred Stock Dividend Requirements (6) (6) (13) (13)
--------------- --------------- -------------- --------------
EARNINGS (LOSSES) AVAILABLE TO PUBLIC
SERVICE ENTERPRISE GROUP INCORPORATED $ (5) $ 26 $ 19 $ 45
=============== =============== ============== ==============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PSEG ENERGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
June 30, December 31,
2000 1999
------------------- --------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 16 $ 43
Accounts Receivable:
Trade 172 111
Other 36 31
Allowance for Doubtful Accounts (5) (5)
Assets Held for Sale 36 36
Notes Receivable 12 12
Other Current Assets 5 12
------------------- --------------------
Total Current Assets 272 240
------------------- --------------------
PROPERTY AND EQUIPMENT
Real Estate, net of valuation allowances 2000 and 1999, $22 89 34
Property and Equipment 57 45
------------------- --------------------
Total 146 79
Accumulated Depreciation and Amortization (45) (33)
------------------- --------------------
Net Property and Equipment 101 46
------------------- --------------------
INVESTMENTS
Capital Leases - Net 1,854 1,759
Corporate Joint Ventures 1,461 1,428
Partnerships Interests 463 493
Other Investments 80 73
------------------- --------------------
Total Investments 3,858 3,753
------------------- --------------------
OTHER ASSETS 82 75
------------------- --------------------
TOTAL ASSETS $ 4,313 $ 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)
June 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 204 $ 175
Notes Payable 249 351
Accounts Payable:
Trade 49 41
Interest 31 20
Other 54 43
Other Current Liabilities 12 11
----------------- ------------------
Total Current Liabilities 599 641
----------------- ------------------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 951 896
Other Noncurrent Liabilities 30 25
----------------- ------------------
Total Noncurrent Liabilities 981 921
----------------- ------------------
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 790 790
Retained Earnings 291 276
Accumulated Other Comprehensive Loss (180) (200)
----------------- ------------------
Total Stockholder's Equity 1,410 1,375
----------------- ------------------
Total Capitalization 2,726 2,550
----------------- ------------------
TOTAL LIABILITIES AND CAPITALIZATION $ 4,313 $ 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)
Six Months Ended
June 30,
----------------------------------------
2000 1999
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 32 $ 58
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization 12 8
Deferred Income Taxes (Other than Leases) (1) (9)
Income from Leasing Activities -- (5)
Investment Distributions 32 76
Equity Income from Partnerships (3) (19)
Net Gains on Investments (18) (40)
Restructure Costs 7 --
Net Changes in certain current assets and liabilities:
Accounts Receivable (87) (10)
Taxes Payable 1 (1)
Accounts Payable 66 40
Interest Payable 10 2
Other Current Assets and Liabilities (30) 2
Other 4 (3)
---------------- ------------------
Net Cash Provided By Operating Activities 25 99
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in Partnerships and Joint Ventures (61) (484)
Investments in Capital Leases (77) (133)
Proceeds from Sales of Capital Leases 9 --
Additions to Property and Equipment (5) (3)
Additions to Deferred Project Costs (2) (5)
Return on Capital from Partnerships 71 --
Other (10) (13)
---------------- ------------------
Net Cash Used in Investing Activities (75) (638)
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Additional Paid-in Capital -- 200
Cash Dividends Paid (17) (13)
Repayment of Borrowings (154) (180)
Proceeds from Borrowings 189 537
Other 5 (3)
---------------- ------------------
Net Cash Provided By Financing Activities 23 541
---------------- ------------------
Net Change in Cash and Cash Equivalents (27) 2
Cash and Cash Equivalents at Beginning of Period 43 9
---------------- ------------------
Cash and Cash Equivalents at End of Period $ 16 $ 11
================ ==================
Income Tax Benefits $ (57) $ (16)
Interest Paid $ 31 $ 33
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'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 and Quarterly Report on Form 10-Q for
the quarter ended March 31, 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. 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.
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 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 1999, 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 Office of the Ratepayer
Advocate. In an order
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. In a subsequent scheduling order, the New Jersey Supreme Court ordered
the appellants to file supplemental briefs supporting their positions by August
20, 2000 and the respondents, including the BPU and PSE&G, to file their
response briefs within 30 days thereafter. Oral arguments for all parties are
scheduled for November 8, 2000. PSE&G is unable to predict the timing or the
outcome of the Supreme Court review.
As a result of this review, PSE&G's $2.525 billion securitization
transaction has been delayed. Since the Energy Competition Act and the Orders
require PSE&G to apply the net proceeds of securitization to reduce its capital
structure, in anticipation of this transaction PSE&G has retired at maturity or
through open-market purchases $1.045 billion aggregate principal amount of its
long-term debt. Such retirements and purchases were funded with short-term
obligations, which at June 30, 2000 were approximately $1.8 billion. Due to the
delay in securitization, PSE&G has requested authority from the BPU to issue up
to $1.0 billion of long-term debt with maturities not to exceed 36 months. 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.
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.
Extraordinary Charge and Other Accounting Impacts of Deregulation
As a result of the BPU's issuance of the Summary Order 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, in the second quarter, PSE&G
recorded an extraordinary charge to earnings of $790 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". The extraordinary charge recorded in 1999 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.
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 the
business in the future. 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 June 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>
June 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...................................... 284 286
OPEB Costs................................................. 227 237
Societal Benefits Charges (SBC)............................ 136 130
Demand Side Management Costs............................... 11 7
Environmental Costs........................................ 108 94
Unamortized Loss on Reacquired Debt and Debt Expense....... 110 117
Other...................................................... 134 113
--------------- -----------------
Total Regulatory Assets................................ $5,067 $5,041
=============== =================
Regulatory Liabilities:
Excess Depreciation Reserve................................ $506 $569
Non-utility Generation Market Transition Charge (NTC)...... 18 20
Overrecovered Gas Costs.................................... 40 15
--------------- -----------------
Total Regulatory Liabilities........................... $564 $604
=============== =================
</TABLE>
Note 4. Commitments and Contingent Liabilities
Asset Purchases
In May 2000, PSEG's subsidiary, PSEG Power LLC (Power) purchased Niagara
Mohawk Power Corporation's (Niagara Mohawk) 400 megawatt (MW) oil and gas-fired
electric generating station in Albany, New York (Albany Steam Station) for $47.5
million. Under the terms of the acquisition, Niagara Mohawk has the potential to
receive up to an additional $9 million if Power chooses to pursue redevelopment
of the Albany Steam Station. Under a transition power supply contract in place
through September 2003, Niagara Mohawk will purchase electricity from Power's
subsidiary, PSEG Energy Resources and Trade LLC (ER&T) at prices consistent with
those established in Niagara Mohawk's regulatory agreement with the New York
Public Service Commission.
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. However, 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 until the time for appeal following the issuance of the second BPU
order has expired.
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 with
respect to these matters, or in such event, what costs PSE&G may incur to
address any such claims. However, such costs may be material.
Energy Holdings
Energy Holdings and/or 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 $419 million as of June 30, 2000. A
substantial portion of such guarantees will be eliminated upon funding of
project equity commitments. A subscription agreement for PSEG to purchase
Global's capital stock secures approximately $3 million of such obligations.
Global and a partner, through an investment in Turboven, an independent
generation company in Venezuela, have constructed two gas-fired electric
generation facilities with an installed capacity of 120 MW and have plans for a
third of 80 MW to serve industrial customers in Venezuela. On January 28, 2000,
a lawsuit was filed against Turboven by Venezuela's state power distribution
company, charging that Turboven was damaging its distribution system through its
supply of independently generated power from one of its plants. Turboven was
ordered to cease operations by a superior court judge's decisions pending an
investigation into the claim filed by the power distribution company. On May 17,
2000, the First Court for the Litigation of Administrative Matters of Venezuela
issued an order lifting the injunction and rejecting the arguments of the
Venezuela state power distribution company. The period of appeal has expired. On
May 24, 2000, the Venezuela state power distribution company and Turboven
entered into an agreement to coordinate the operations and maintenance of their
respective installations. The two generation facilities have enetered commercial
operation.
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 from the third
quarter of 2000 to at least the first quarter of 2001.
Commodity-Related Instruments -- PSE&G (including Power)
At June 30, 2000 and December 31, 1999, PSE&G 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 uses futures, forwards, swaps and options to manage and hedge
price risk related to these market exposures.
At June 30, 2000, PSE&G had outstanding commodity financial instruments
with a notional contract quantity of 49.9 million mWh of electricity and 60.8
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 energy trading and related contracts have been marked to market and
gains and losses from such contracts were included in earnings. PSE&G recorded
$43.6 million and $18.5 million of gains in the six months ended June 30, 2000
and 1999, respectively, 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 June
30, 2000 there were no electric or gas commodity financial instruments
outstanding. Energy Holdings had recorded $1.7 million of gains in the six
months ended June 30, 2000 related to these instruments.
Equity Securities -- Energy Holdings
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 June 30, 2000 and December 31, 1999 were $142 million and $131
million, respectively. The increase in fair value was primarily due to higher
valuation of various securities within Resources' portfolio. The potential
change in fair value resulting from a hypothetical 10% change in quoted market
prices of these investments amounted to $12 million at June 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 $1.1 billion,
respectively, as of June 30, 2000.
Resources' international investments are primarily leveraged leases of
assets located in Australia, New Zealand, the Netherlands, Germany and the
United Kingdom 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, Peru 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, net foreign currency devaluations have reduced the reported amount
of PSEG's total stockholders' equity by approximately $180 million.
Global had consolidated project debt totaling approximately $94.5 million
associated with Global's 32% investment in a Brazilian distribution company that
is 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 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, so 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 United States 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 June 30, 2000, a hypothetical 10% change in market
interest rates would result in a $6 million, $13 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 Six Months Ended
June 30, June 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............................................... (0.3)% (0.9)% (0.4)% 0.7%
---------- ----------- ------------ -----------
Effective Income Tax Rate............................. 40.6% 40.0% 40.5% 41.6%
========== =========== ============ ===========
(A) Excludes the impact of the extraordinary charge recorded in the second
quarter of 1999.
</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 beginning with the third quarter of 1999. The generation and energy
trading portions of PSE&G's business are now separate reportable segments,
whereas they previously had been part of the Electric segment. Estimates have
been used to separate historical, pre-August 1, 1999, electric segment data into
the Generation, Energy Resources and Trade, and Transmission and Distribution
segments of PSE&G's business.
<PAGE>
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
June 30, 2000:
Total Operating Revenues... $523 $32 $802 $26 $33 $105 $-- $1,521
Segment Net Income (Loss).. 52 16 80 3 5 (6) (8) 142
======= ======= ======= ======= ======= ======= ======= =======
For the Quarter Ended
June 30, 1999:
Total Operating Revenues... $680 $17 $600 $51 $34 $54 $-- $1,436
Segment Income Before
Extraordinary Item...... 119 9 29 24 8 (2) (6) 181
Segment Net Income (Loss).. (3,071) 9 2,429 24 8 (2) (6) (609)
======= ======= ======= ======= ======= ======= ======= =======
For the Six Months Ended
June 30, 2000:
Total Operating Revenues... $1,047 $66 $1,953 $92 $71 $216 $-- $3,445
Segment Net Income (Loss).. 161 33 204 32 14 (11) (21) 412
======= ======= ======= ======= ======= ======= ======= =======
For the Six Months Ended
June 30, 1999:
Total Operating Revenues... $1,338 $35 $1,590 $97 $62 $109 $-- $3,231
Segment Income Before
Extraordinary Item...... 205 17 107 46 15 (4) (17) 369
Segment Net Income (Loss).. (2,985) 17 2,507 46 15 (4) (17) (421)
======= ======= ======= ======= ======= ======= ======= =======
As of June 30, 2000:
Total Assets............... $2,403 $581 $12,256 $2,201 $1,776 $296 $119 $19,632
======= ======= ======= ======= ======= ======= ======= =======
As of December 31, 1999:
Total Assets............... $3,055 $246 $11,423 $2,096 $1,715 $252 $228 $19,015
======= ======= ======= ======= ======= ======= ======= =======
(A) PSEG's other activities include amounts applicable to PSEG (parent
corporation), Energy Holdings (parent corporation), Enterprise Group
Development Corporation and intercompany eliminations. The net losses
primarily relate to financing and certain administrative and general costs
at the parent corporations.
</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 Six Months Ended
June 30, June 30, June 30, December 31,
----------------------- ----------------------- ----------- ---------------
2000 1999 2000 1999 2000 1999
--------- --------- ---------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
United States................. $1,476 $1,397 $3,352 $3,165 $17,091 $16,595
Foreign Countries (2)......... 45 39 93 66 2,541 2,420
--------- --------- ---------- --------- ----------- ---------------
Total.................... $1,521 $1,436 $3,445 $3,231 $19,632 $19,015
--------- --------- ---------- --------- ----------- ---------------
Identifiable investments in foreign countries include amounts from:
Netherlands $712 $623
Chile and Peru 519 520
Argentina 355 356
Brazil (3) 323 330
Other 632 591
----------- ---------------
Total $2,541 $2,420
=========== ===============
(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 $(200)
million (pretax) as of June 30, 2000 and $(222) million (pretax) as of
December 31, 1999.
(3) Amount is net of foreign currency translation adjustment of $(148) million
(pretax) as of June 30, 2000 and $(189) million (pretax) as of December 31,
1999.
</TABLE>
Note 8. Accounting Matters
In June 2000, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" (SFAS 138) modifying the requirements included in SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). PSEG,
PSE&G and Energy Holdings are currently evaluating the impact of SFAS 133 as
part of their implementation plan.
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.
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Concluded
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. SFAS 133 establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives, within the scope of this
statement, as assets or liabilities on the balance sheet at fair value. Also,
derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged asset, liability
or firm commitment through earnings or be recognized in other comprehensive
income until the hedged item is recognized in earnings, depending on the nature
of the hedge. The ineffective portion of a hedge will be immediately recognized
in earnings. PSEG, PSE&G and Energy Holdings are currently evaluating the impact
of SFAS 133 as part of their implementation plan.
Note 9. Comprehensive Income
Comprehensive Income (Loss), Net of Tax:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------
2000 1999 2000 1999
----------- ------------ --------- ----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Net income (loss)................................... $142 $(609) $412 $(421)
Foreign currency translation, net of tax (A)........ (8) (2) 21 (127)
----------- ------------ --------- ----------
Comprehensive income/(loss).................... $134 $(611) $433 $(548)
=========== ============ ========= ==========
(A) Net of tax of $(0.8) million and $(0.2) million for the quarters ended June
30, 2000 and 1999, respectively, and $2.2 million and $(14.1) million for
the six months ended June 30, 2000 and 1999, respectively.
</TABLE>
Note 10. Related Party Transactions
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 and $31 for the
quarter and six months ended June 30, 2000 and approximately $13 and $26 for the
quarter and six months ended June 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 Six Months Ended
June 30, June 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.............................................. (0.7)% (0.1)% (0.2)% 1.5%
---------- ----------- --------- -----------
Effective Income Tax Rate............................ 40.2% 40.8% 40.7% 42.4%
========== =========== ========= ===========
(A) Excludes the impact of the extraordinary charge recorded in the second
quarter of 1999.
</TABLE>
Note 9. Comprehensive Income
For the quarters ended June 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 29.3% and 35.1% for the six months
ended June 30, 2000 and six months ended June 30, 1999, respectively. Energy
Hodlings 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 June 30, 2000.
Note 9. Comprehensive Income
Comprehensive Income (Loss), Net of Tax:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Net income (loss).................................... $(5) $26 $19 $45
Foreign currency translation, net of tax (A)......... (8) (2) 21 (127)
----------- ----------- ------------ -----------
Comprehensive income/(loss)..................... $(13) $24 $40 $(82)
=========== =========== ============ ===========
</TABLE>
Net of tax of $(0.8) million and $(0.2) million for the quarters ended June 30,
2000 and 1999, respectively, and $2.2 million and $(14.1) million for the six
months ended June 30, 2000 and 1999, respectively.
<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 and
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and the PSEG
Energy Holdings Inc.'s (Energy Holdings) Registration Statement filed on Form
S-4 on June 29, 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 it'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 1999, 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. Beginning August 1, 1999, PSE&G instituted a 5% rate reduction
and implemented other applicable provisions of the Final Order.
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 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. In a subsequent scheduling order, the New Jersey
Supreme Court ordered the appellants to file supplemental briefs supporting
their positions by August 20, 2000 and the respondents, including the BPU and
PSE&G, to file their response briefs within 30 days thereafter. Oral arguments
for all parties are scheduled for November 8, 2000. PSE&G is unable to predict
the timing or the outcome of the Supreme Court review.
As a result of this review, PSE&G's $2.525 billion securitization
transaction has been delayed. Since the Energy Master Plan Proceedings require
PSE&G to apply the net proceeds of securitization to reduce its capital
structure, in anticipation of this transaction PSE&G has retired at maturity or
through open-market purchases $1.045 billion aggregate principal amount of its
long-term debt. Such retirements and purchases were funded with short-term
obligations, which at June 30, 2000 were approximately $1.8 billion. Due to the
delay in securitization, PSE&G has requested authority from the BPU to issue up
to $1.0 billion of long-term debt with maturities not to exceed 36 months. 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.
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.
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 Northeastern
and Middle Atlantic United States.
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 believes that all of the necessary approvals
to sell the generation business to Power have been obtained. In addition to the
anticipated acquisition of PSE&G's generation-related assets, Power has several
facilities which are in operation which it has acquired or constructed since its
formation in 1999. Due to the New Jersey Supreme Court's review of the Final
Order, a planned capital market financing for Power has been delayed.
To the extent that the discussion that follows reports on business
conducted under full monopoly regulation of the utility businesses, it must be
understood that such businesses have changed due to the deregulation of the
electric generation and natural gas commodity sales businesses. Past results are
not an indication of future business prospects or financial results.
Results of Operations
<TABLE>
<CAPTION>
Earnings (Losses)
--------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
PSE&G, Before Extraordinary Item............. $150 $155 $397 $324
PSE&G Extraordinary Item..................... -- (790) -- (790)
----------- ------------ ----------- ------------
Total PSE&G............................. 150 (635) 397 (466)
Energy Holdings.............................. (5) 26 19 45
PSEG*........................................ (3) -- (4) --
----------- ------------ ----------- ------------
Total PSEG.............................. $142 $(609) $412 $(421)
=========== ============ =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Contribution to Earnings Per Share (Basic and Diluted)
--------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
PSE&G, Before Extraordinary Item............. $0.69 $0.71 $1.84 $1.46
PSE&G Extraordinary Item..................... -- (3.60) -- (3.57)
------------ ----------- ----------- -----------
Total PSE&G............................. 0.69 (2.89) 1.84 (2.11)
Energy Holdings.............................. (0.02) 0.12 0.09 0.21
PSEG*........................................ (0.01) -- (0.02) --
------------ ----------- -----------
-----------
Total PSEG.............................. $0.66 $(2.77) $1.91 $(1.90)
============ =========== =========== ===========
*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 June 30, 2000, a decrease of $0.17 per share
from the comparable 1999 period, excluding the extraordinary charge. Basic and
diluted earnings per share of Common Stock were $1.91 for the six months ended
June 30, 2000, an increase of $0.24 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 contribution to earnings per share of Common Stock for the quarter ended
June 30, 2000 decreased $0.02 from the comparable 1999 period. The decrease for
the quarter ended June 30, 2000 was primarily due to the 5% rate reduction
required by the Final Order, which commenced on August 1, 1999, combined with
replacement power expenses that resulted from a scheduled refueling outage at
the Hope Creek Nuclear Generating Station. Higher electric and gas sales due to
more favorable weather and lower depreciation and amortization resulting from
the amortization of the Excess Depreciation Reserve beginning in January 2000
helped to offset some of the decrease.
Excluding the extraordinary charge from 1999, PSE&G's contribution to
earnings per share of Common Stock for the six months ended June 30, 2000
increased $0.38 from the comparable 1999 period. This increase was primarily due
to higher electric and gas sales due to more favorable weather and lower
depreciation and amortization resulting from the lower net book value of PSE&G's
generation related assets and the amortization of the Excess Depreciation
Reserve beginning in January 2000. These were partially offset by the 5% rate
reduction required by the Final Order combined with replacement power expenses
that resulted from the refueling outage at the Hope Creek Nuclear Generating
Station.
Energy Holdings' contribution to earnings per share of Common Stock for the
quarter and six months ended June 30, 2000 decreased $0.14 and $0.12,
respectively, from the comparable 1999 periods, primarily due to lower
unrealized gains from Resources' investment portfolio in the second quarter of
2000.
As a result of PSEG's stock repurchase program which began in September
1998, earnings per share of Common Stock for the quarter and six months ended
June 30, 2000 increased $0.01 and $0.05, respectively, from the comparable 1999
periods. A total of 17.8 million shares had been repurchased at a cost of
approximately $679 million under this program as of June 30, 2000.
<PAGE>
PSE&G -- Revenues
Electric
Revenues increased $18 million or 1.7% and $14 million or 0.7% for the
quarter and six months ended June 30, 2000 from the comparable periods in 1999,
respectively, primarily due to favorable weather in the second quarter of 2000
and higher profits from wholesale activities as compared to the same periods in
1999 plus adjustments made to revise estimated Demand Side Management (DSM) lost
revenues. These increases were substantially offset by the 5% rate reduction
required by the Final Order which decreased generation revenues for the quarter
and six months ended June 30, 2000 by approximately $50 million and $96 million,
respectively. Once the securitization transaction is completed, there will be an
additional 2% rate reduction.
In addition, customer migration from PSE&G could further reduce future
basic generation service (BGS) revenues. However, such customer migration also
creates the opportunity to sell available energy and capacity into the wholesale
market. As of June 30, 2000 approximately 7% of the customer load traditionally
served by PSE&G was being served by third party suppliers. Also, since PSE&G's
distribution customers have the ability to change energy suppliers, customers
could return to PSE&G for energy supply under the fixed-rate BGS tariff during
summer periods when energy costs are typically higher, which could have a
material adverse effect on Power and PSEG.
Gas
Revenues increased $42 million or 15% and $89 million or 9% for the quarter
and six months ended June 30, 2000 from the comparable periods in 1999,
respectively, due to several factors, including favorable weather and the
strength of the New Jersey economy. Customer migration due to the opening of
full competition in 2000 could reduce future revenues.
PSE&G -- Expenses
Electric Energy Costs
Electric Energy Costs increased $33 million or 14% and $17 million or 4%
for the quarter and six months ended June 30, 2000 from the comparable 1999
periods, respectively. The increase was primarily due to the replacement power
expenses that resulted from the refueling outage at the Hope Creek Nuclear
Generating Station.
Gas Costs
As a result of the increase in gas revenues discussed above, Gas Costs
increased $57 million or 35% and $90 million or 15% for the quarter and six
months ended June 30, 2000 from the comparable 1999 periods, respectively.
Operation and Maintenance
Operation and Maintenance expense increased $20 million or 5% and $14
million or 2% for the quarter and six months ended June 30, 2000 from the
comparable 1999 periods, respectively. These increases were primarily due to
higher transmission and distribution costs, including higher materials and
support services as well as higher costs related to wholesale activities.
<PAGE>
Depreciation and Amortization
Depreciation and Amortization expense decreased $38 million or 32% and $115
million or 40% for the quarter and six months ended June 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, which commenced on January 1, 2000, and reduced expenses
for the quarter and six months ended June 30, 2000 by approximately $31 million
and $63 million, respectively. In addition, for the six months ended June 30,
2000, the lower net book value balances of PSE&G's generation-related assets
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), resulting in a reduction of
expenses of approximately $60 million as compared to the same period in the
prior year.
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.
Income Taxes
Income Taxes decreased $5 million or 5% for the quarter ended June 30, 2000
from the comparable 1999 period, primarily due to lower pre-tax operating income
and increased $36 million or 15% for the six months ended June 30, 2000 from the
comparable 1999 period, primarily due to higher pre-tax operating income.
Energy Holdings
Energy Holdings--Revenues
Revenues increased $25 million for the quarter ended June 30, 2000 as
compared to the same period in 1999. The increase primarily resulted from an
increase at Energy Technologies due to the addition of revenues from
acquisitions of heating, ventilating and air conditioning (HVAC) and mechanical
service contracting companies in 2000 and 1999, offset by a decrease at
Resources due to lower income from existing financial investments. Revenues
increased $111 million for the six months ended June 30, 2000 as compared to the
same period in 1999. The increase was primarily due to additional revenues from
Energy Technologies acquisitions of HVAC and mechanical service contracting
companies.
Energy Holdings--Operating Expenses
Operating expenses increased $56 million and $118 million for the quarter
and six months ended June 30, 2000, respectively. The increases were primarily
due to the addition of operating expenses from the entities acquired by Energy
Technologies in 2000 and 1999.
Energy Holdings--Interest Expense and Preferred Dividends
Net financing expenses increased $15 million and $32 million for the
quarter and six months ended June 30, 2000. 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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
EBIT:
Global............................ $23 $22 $49 $40
Resources......................... 22 48 85 92
Energy Technologies............... (8) (2) (16) (5)
Other............................. (2) 2 (2) 1
----------- ----------- ----------- -----------
Total EBIT............................. $35 $70 $116 $128
=========== =========== =========== ===========
</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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Revenues.......................... $33 $34 $71 $62
Expenses.......................... 11 14 23 28
----------- ----------- ----------- -----------
Operating Income.................. 22 20 48 34
Other Income...................... 1 2 1 6
----------- ----------- ----------- -----------
Total EBIT............................. $23 $22 $49 $40
=========== =========== =========== ===========
</TABLE>
Global's EBIT contribution increased $1 million for the quarter ended June
30, 2000 from the comparable period in 1999. Revenues for the quarter were
stable as revenues from new investments in distribution companies in Chile and
Peru helped to offset lower revenue from Global's Argentine distribution
company, which were lower due to certain refinancings. Lower administrative and
general expenses in the second quarter related to new project development also
increased Global's EBIT contribution.
Global's EBIT contribution increased $9 million for the six months ended
June 30, 2000 from the comparable period in 1999. The increase was primarily due
to higher income from the above-mentioned new investments as well as improved
performance from Global's Brazilian distribution company, partially offset by
lower revenue from Global's Argentine distribution company, which were lower due
to certain refinancings.
<PAGE>
Resources
Resources derives its leveraged lease revenues primarily from rental
payments and tax benefits associated with such transactions. As a passive
investor in limited partnership project financing transactions, Resources
recognizes revenue from its pro-rata share of the income generated by these
investments. As an owner of beneficial interests in two leveraged buyout funds,
Resources recognizes revenue as the share prices of public companies in the
leveraged buyout funds fluctuate. In addition, revenue is recognized as
companies in the fund distribute dividend income through the fund to the
investors and as the fund liquidates its holdings.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Revenues................................... $26 $51 $92 $97
Expenses................................... 4 3 7 5
----------- ---------- ----------- -----------
Total EBIT...................................... $22 $48 $85 $92
=========== ========== =========== ===========
</TABLE>
Resources' EBIT contribution decreased $26 million for the quarter ended
June 30, 2000 from the comparable period in 1999. The decrease was primarily due
to fair value adjustments related to securities in leveraged buyout funds.
Revenues decreased $25 million for the quarter ended June 30, 2000 from the
comparable period in 1999. The decrease was primarily due to fair value
adjustments related to securities in leveraged buyout funds as well as a gain
recorded in the prior year from the sale of a leveraged lease, partially offset
by higher income from new leveraged lease investments. Operating expenses
remained relatively constant for both comparable periods.
Resources' EBIT contribution decreased $7 million for the six months ended
June 30, 2000 from the comparable period in 1999. The decrease was primarily due
to fair value adjustments related to securities in leveraged buyout funds.
Revenues decreased $5 million for the quarter ended June 30, 2000 from the
comparable period in 1999. The decrease was primarily due to very strong
performance of Resources' investments in leveraged buyout funds in the first six
months of 1999 compared to moderate gains in the first six months of 2000.
Revenues were also impacted by higher income from new leveraged lease
investments as well as a gain recorded in the prior year from the sale of a
leveraged lease. Operating expenses remained relatively constant for both
comparable periods.
Energy Technologies
Energy Technologies derives its revenues from energy sales and the sale of
energy-related equipment and services.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Revenues................................... $105 $54 $216 $109
Expenses................................... 113 56 232 114
----------- ----------- ----------- -----------
Total EBIT...................................... $(8) $(2) $(16) $(5)
=========== =========== =========== ===========
</TABLE>
Energy Technologies' EBIT contribution decreased $6 million for the quarter
ended June 30, 2000 from the comparable period in 1999. Revenues increased $51
million and operating expenses increased $57 million primarily due to
acquisitions of HVAC and mechanical service contracting companies in 2000 and
1999.
Energy Technologies' EBIT contribution decreased $11 million for the six
months ended June 30, 2000 from the comparable period in 1999. Revenues
increased $107 million and operating expenses increased $118 million primarily
due to acquisitions of HVAC and mechanical service contracting companies in 2000
and 1999. Also included in the increased operating expenses, Energy Technologies
recognized a charge to income for approximately $6.6 million for the six months
ended June 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 transportation costs and $3.0 million related
to the write-off of computer hardware and software. As of June 30, 2000, of the
60 employees to be terminated, approximately 50 employees have been terminated
and there remains an outstanding liability of approximately $0.5 million related
to employee severance costs on Energy Holdings' consolidated balance sheet.
Liquidity and Capital Resources
PSEG and PSE&G
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 two direct
operating subsidiaries in 2000, PSE&G and Energy Holdings.
As noted above, 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 $2.5
billion securitization financing by PSE&G has been delayed from the third
quarter of 2000 to at least the first quarter of 2001, and a planned financing
of $1.5 billion 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. Following Power's initial external 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. The delay of the securitization financing could impact the ability of
PSEG to make equity infusions into Power which could affect 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. As previously noted, PSE&G filed a petition with the BPU on July 27,
2000 to approve the issuance of up to $1 billion of long-term debt with
maturities of up to three years.
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 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 such
sale. In accordance with the provisions of the Mortgage, the net proceeds from
the 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)
During the twelve months ended June 30, 2000, $723 million of Mortgage
Bonds matured and $318 million of Mortgage Bonds were purchased in the open
market. At June 30, 2000, PSE&G had a total of $3.1 billion of Mortgage Bonds
outstanding, of which $2.3 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 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 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 June 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 were $0.54 per share and totaled
approximately $234 million and $238 million for the six months ended June 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 $334 million and $392 million to PSEG for
the six months ended June 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 decreased $74 million from $99 million
to $25 million for the six months ended June 30, 2000 as compared to 1999
primarily due to an increase in days sales outstanding at Energy Technologies
resulting from a delay in billing due to the transition to outsource vendors and
due to lower income and investment distributions.
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 June 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
PSEG
Power
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 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 186
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 $47.5 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 discussion, see Note 4.
Commitments and Contingent Liabilities of Notes.
PSE&G
PSE&G has substantial commitments as part of its ongoing construction
program. PSE&G's construction program is 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 six months ended June 30, 2000 PSE&G had net plant additions of
$230 million, excluding Allowance for Funds Used During Construction (AFDC) and
capitalized interest, a $58 million increase from the corresponding 1999 period.
Energy Holdings
Investment activity in 2000 will be subject to periodic review and revision
and may vary significantly depending upon the opportunities presented. Factors
affecting actual expenditures and investments include availability of capital
and suitable investment opportunities, market volatility and local economic
trends.
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 June 30, 2000, PSEG had a committed $150 million revolving credit
facility which will expire in December 2002. At June 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
June 30, 2000, PSEG had $121 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 June 30, 2000, PSEG had commercial paper of $214
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 June 30, 2000 there were no borrowings outstanding under these facilities.
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 March 2000.
The interest rate through September 2000 is at three-month LIBOR plus 0.20%
reset quarterly. These Notes will again be automatically tendered and remarketed
in September 2000.
PSE&G
As of June 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.
On July 27, 2000, PSE&G filed a petition with the BPU requesting authority
to issue up to $1 billion of new long-term debt on the basis of previously
matured, redeemed or purchased debt.
On May 1, 2000, $288 million of PSE&G's 6.0% Bonds, Series QQ, matured.
On June 1, 2000, $235 million of PSE&G's 6.5% Bonds, Series XX, matured.
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 September 2000. These agreements
provide for borrowings with maturities of up to one year. As of June 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 June
30, 2000, PSE&G had $1.7 billion of short-term debt outstanding, including $313
million borrowed against its uncommitted bank lines of credit.
PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125
million revolving credit facility with a group of banks, which expires on June
28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations
under this program. As of June 30, 2000, Fuelco had commercial paper of $60
million outstanding. After the purchase of PSE&G's generation-related assets is
completed, it is anticipated that Fuelco's commercial paper program will be
discontinued and financing of Peach Bottom nuclear fuel will be funded through
Power.
Energy Holdings
Energy Holdings expects to complete 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.
In May 2000, Energy Holdings extended its $165 million 364-day revolving
line of credit to May 2001. As of June 30, 2000 there were no amounts
outstanding under this line.
Global
In June 2000, Global repaid at maturity a $71.0 million loan which was
incurred to partially finance its investment in EDEN/EDES, a distribution
company in Argentina.
In May 2000, Global refinanced a $94.5 million loan which financed a
portion of its investment in RGE, a distribution company in Brazil. The debt was
refinanced 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. For a further discussion, see Note 5. Financial
Instruments and Risk Management.
Foreign Operations
In accordance with their growth strategies, Global and Resources have made
approximately $1.5 billion and $1.1 billion, respectively, of international
investments. As of June 30, 2000, foreign investments represented 12.9% of
PSEG's consolidated assets and the revenues from those foreign investments
contributed 2.7% to consolidated revenues for the six months ended June 30,
2000. For discussion of the foreign currency risk, see Note 5. Financial
Instruments and Risk Management of Notes.
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 credits, 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 of Notes.
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 enters into derivative contracts,
including forwards, futures, swaps and options with approved counterparties, to
hedge its 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 June 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.
<PAGE>
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 Report on Form 10-Q for the
quarter ended March 31, 2000 and Energy Holdings' Registration Statement on Form
S-4, filed June 29, 2000, is updated below.
(1) Form 10-K, pages 5, 27, 33, 64 and 69 and March 31, 2000 Form 10-Q, pages 9
and 17. See Pages 13 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,
EO97070462 and EO97070463.
(2) Form 10-K, pages 8, 27, 34 and 69 and March 31, 2000 Form 10-Q, pages 9 and
17. See Pages 13 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.
(3) Form S-4 pages 41, 42, F-33 and F-38. See Page 16. Proceedings before the
First Court for the Litigation of Administrative Matters of Venezuela
regarding electric generation facilities owned and operated by Turboven in
Venezuela in which Global has invested.
ITEM 5. OTHER INFORMATION
Certain information reported under PSEG's and PSE&G's 1999 Annual Report on
Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
and Energy Holdings' Registration Statement on Form S-4, filed June 29, 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.
Investment in Pantellos Corporation
New Matter. In June 2000, Resources invested $4 million in Pantellos
Corporation, a company founded by 21 leading North American energy and utility
companies to operate and manage an open, independent internet marketplace for
the purchase of goods and services between the energy industry and its
suppliers. It is expected that PSEG's operating companies will utilize this
exchange with the goal of reducing their total cost of procurement.
Metering, Billing and Account Services
Form 10-K, page 8 and March 31, 2000 Form 10-Q, page 29. In accordance with
the Energy Competition Act, the BPU has reached a settlement with the electric
utilities and suppliers, in determining the extent to which metering, billing
and customer services may become competitive. As a result of the settlement,
competition is limited to consolidated billing for energy services. The metering
and other support functions will remain with PSE&G until August 2003, although
proceedings on these issues will commence in 2002. The effects of competition in
the consolidated billing process for energy services is not expected to have a
material effect on the results of operations, cash flows or financial position
of PSE&G or PSEG.
Gas Unbundling
Form 10-K, page 9. In January 2000, the BPU issued a verbal order
approving, with certain modifications, PSE&G's stipulation regarding its gas
unbundling filing. The verbal order provided for the unbundling of firm rate
schedules into commodity and transportation components. It also provides for
changes in existing rate schedules. On July 31, 2000, the BPU issued a written
order memorializing the verbal order which calls for the new rates to be
implemented for all service provided on and after August 1, 2000.
Levelized Gas Adjustment Clause (LGAC)
Form 10-K, page 9. On July 27, 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, excercisable 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. PSE&G cannot predict the outcome of this matter at this time.
Affiliate Standards
Form 10-K, page 9 and March 31, 2000 Form 10-Q, page 29. On March 15, 2000,
the BPU issued a written order, Affiliate Relations, Fair Competition and
Accounting Standards and Related Reporting Requirements (Affiliate Standards),
as required by the Energy Competition Act. PSE&G filed a compliance plan on June
15, 2000 to describe the internal policy and procedures necessary to ensure
compliance with such Affiliate Standards. The BPU will subsequently conduct an
audit of utilities' competitive activities and compliance with such Affiliate
Standards. Management believes that the adoption of Affiliate Standards will not
have a material adverse effect on PSEG's or PSE&G's financial condition, results
of operations or net cash flows.
PJM Interconnection LLC (PJM)
Form 10-K, page 12. To establish PJM as an Independent System Operator, it
was necessary for the Office of Interconnection of PJM to have access to certain
computer hardware and software. Accordingly, the PJM transmission owners jointly
paid for the development and/or acquisition of certain information systems,
intellectual property and other related assets for this purpose. PJM and the PJM
transmission owners have filed with the FERC for the sale of these assets to
PJM. Since PJM will recover its costs from its customers over several years,
PSE&G's estimated $23 million of proceeds from this sale, which is expected to
occur in 2000, will be largely offset by the increased costs.
Nuclear Fuel Disposal
Form 10-K, page 15. Pursuant to NRC rules, spent nuclear fuel generated in
any reactor can be stored in reactor facility storage pools or in independent
spent fuel storage installations located at or away-from-reactor sites for at
least 30 years beyond the licensed life for reactor operation (which may include
the term of a revised or renewed license). As a result of reracking the two
spent fuel pools at Salem, the availability of adequate spent fuel storage
capacity is estimated through 2012 for Salem 1 and 2016 for Salem 2, prior to
losing an operational full core discharge reserve. The Hope Creek pool is also
fully racked and it is expected to provide storage capacity until 2007, prior to
losing an operational full core discharge reserve. PSE&G is currently assessing
available options which could satisfy the potential need for additional storage
capacity, including the option of constructing an on-site storage facility that
would satisfy the spent fuel storage needs of both Salem and Hope Creek. PECO
Energy has advised PSE&G that it has constructed an on-site dry storage facility
at Peach Bottom which is now operational to provide additional storage capacity
through the end of the current licenses for the two Peach Bottom units.
Under the Nuclear Waste Policy Act of 1982 (NWPA), the United States
Department of Energy (DOE) is required to begin taking possession of all spent
nuclear fuel generated by the Company's nuclear units for disposal by no later
than 1998. DOE construction of a permanent disposal facility has not begun and
DOE has announced that it does not expect a facility to be available earlier
than 2010. PECO Energy has advised PSE&G that it had signed an agreement with
the DOE applicable to Peach Bottom under which PECO would be reimbursed for
costs resulting from the DOE's delay in accepting spent nuclear fuel. The
agreement allows PECO to reduce the charges paid to the Nuclear Waste Fund to
reflect costs reasonably incurred due to the DOE's delay. Past and future
expenditures associated with Peach Bottom's recently completed on-site dry
storage facility would be eligible for this reduction in future DOE fees.
Negotiations of settlements relating to other plants will be conducted on a
plant-by-plant basis.
Low Level Radioactive Waste
Form 10-K, page 16. On July 1, 2000, New Jersey, Connecticut and South
Carolina formed the Atlantic Compact. This arrangement gives New Jersey nuclear
generators, including PSE&G, continued access to the Barnwell LLRW disposal
facility (Barnwell), which is owned by South Carolina. PSEG and PSE&G believe
that the formation of the Atlantic Compact will provide for adequate radioactive
waste disposal for Salem and Hope Creek through the end of their current
licenses, although no assurances can be given.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) A listing of exhibits being filed with this document is as follows:
-------------- --------------------------------------------------------------------------
Exhibit Document
Number
--------------------------- -------------- --------------------------------------------------------------------------
<S> <C>
12 Computation of Ratios of Earnings to Fixed Charges (PSEG)
PSEG
27(A) Financial Data Schedule (PSEG)
--------------------------- -------------- --------------------------------------------------------------------------
3b(1) By Laws of PSE&G
12(A) Computation of Ratios of Earnings to Fixed Charges (PSE&G)
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)
--------------------------- -------------- --------------------------------------------------------------------------
12(C) Computation of Ratios of Earnings to Fixed Charges (Energy Holdings)
ENERGY HOLDINGS
27(C) Financial Data Schedule (Energy Holdings)
--------------------------- -------------- --------------------------------------------------------------------------
</TABLE>
(B) Reports on Form 8-K
None.
<PAGE>
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: August 8, 2000
<PAGE>
PSEG ENERGY HOLDINGS INC.
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.
PSEG ENERGY HOLDINGS INC.
(Registrant)
By: DEREK DIRISIO
----------------------------
Derek DiRisio
Vice President and Controller
(Principal Accounting Officer)
Date: August 8, 2000
