Business Context and Reporting Period
Company: Public Service Enterprise Group Inc (PSEG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: PSEG is an exempt public utility holding company with four principal subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power), PSEG Energy Holdings Inc. (Energy Holdings), and PSEG Services Corporation. Operations include regulated electric and gas distribution, competitive power generation, energy trading, and international energy investments.
Key Financial Metrics
| Metric (Millions, except per share) | Q1 2002 | Q1 2001 |
|---|---|---|
| Total Operating Revenues | $2,515 | $2,819 |
| Operating Income | $541 | $582 |
| Net Income | $180 | $261 |
| Earnings Per Share (Diluted) | $0.87 | $1.25 |
| Net Cash Provided by Operating Activities | $463 | $438 |
| Total Assets | $25,214 | $25,424 |
| Total Long-Term Debt | $10,178 | $10,301 |
| Cash and Cash Equivalents | $175 | $169 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased $304 million (11%) to $2,515 million. Gas distribution revenues dropped $267 million due to unusually warm winter weather and lower commodity rates. Trading revenues fell $157 million due to lower trading volumes.
- Profitability Impact: Net income decreased $81 million (31%) to $180 million. This decline includes a non-cash charge of $31 million (after-tax) or $0.15 per share related to the Argentine economic crisis.
- Argentina Charge: A $47 million pre-tax loss was recorded due to a change in the functional currency of EDEERSA (an Argentine subsidiary) from the U.S. Dollar to the Argentine Peso following the devaluation of the Peso.
- Segment Performance:
- Generation: Earnings increased $29 million to $102 million, driven by higher revenues and lower fuel costs.
- PSE&G: Earnings decreased $42 million to $67 million, primarily due to warm weather reducing gas demand.
- Global (Energy Holdings): Reported a loss of $10 million compared to $55 million income in the prior year, heavily impacted by the Argentina charge and the absence of a one-time gain from an Eagle Point withdrawal in 2001.
- Costs: Electric energy costs rose $90 million due to new acquisitions and increased load served under Basic Generation Service (BGS) contracts. Gas costs fell $260 million due to lower demand.
Guidance, Outlook, and Risks
- Full Year Guidance: Management expects full-year earnings to meet previous guidance of $3.90 to $4.10 per share, excluding accounting charges related to the Argentine crisis or the adoption of SFAS 142 (Goodwill). Long-term annual EPS growth target remains 7%.
- Argentina Exposure: Investment exposure in Argentina stands at approximately $585 million. Management is evaluating potential asset impairments. In a worst-case scenario, a complete impairment could result in a $735 million pre-tax charge ($2.29 per share) in 2002. Evaluation is expected to conclude in Q2 2002.
- Goodwill Impairment (SFAS 142): The company adopted SFAS 142 in Q1 2002. Goodwill associated with RGE, EDEERSA, Energy Technologies, and Tanir Bavi is being tested for impairment. Significant impairment is likely for EDEERSA and Energy Technologies.
- California Projects: GWF Energy (a joint venture) faces regulatory challenges in California regarding a 10-year power purchase agreement with the California Department of Water Resources. A force majeure claim was rejected, and FERC proceedings are ongoing.
- Liquidity: The company maintains strong liquidity with $175 million in cash and access to revolving credit facilities. Debt-to-capitalization ratio was 0.64 to 1 as of March 31, 2002, well within the 0.70 to 1 covenant limit.
- Regulatory Risks: Ongoing proceedings include a FERC complaint by Consolidated Edison regarding transmission service and EPA investigations regarding the Passaic River site and fly ash disposal.
Investor Verification Checklist
- Argentina Impairment Test: Verify the outcome of the Q2 2002 impairment testing for Argentine assets and goodwill, which could trigger a significant charge.
- California Contract Status: Monitor the resolution of the FERC proceedings regarding the GWF Energy contract with the California Department of Water Resources.
- Goodwill Valuation: Review the final impact of SFAS 142 adoption on the balance sheet, specifically regarding goodwill in Chile, Peru, and Energy Technologies.
- Power Segment Margins: Confirm that Power's earnings contribution from the New Jersey BGS auction offsets the lack of earnings from Argentina in the second half of the year.
- Debt Covenants: Ensure continued compliance with financial covenants, particularly the debt-to-capitalization ratio, given the volatility in foreign operations.