Business Context and Reporting Period
Company: Public Service Enterprise Group Inc (PSEG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 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. The company operates in regulated utility, competitive power generation, energy trading, and international energy markets.
Key Financial Metrics
| Metric (Millions, except per share) | Q2 2002 | Q2 2001 | 6M 2002 | 6M 2001 |
|---|---|---|---|---|
| Total Operating Revenues | $1,782 | $2,047 | $4,070 | $4,751 |
| Operating Income (Loss) | $(129) | $411 | $408 | $997 |
| Net (Loss) Income | $(264) | $143 | $(204) | $404 |
| Diluted EPS (Net) | $(1.28) | $0.68 | $(0.99) | $1.94 |
| Cash Flow from Operations (6M) | $726 | $771 | $726 | $771 |
| Cash and Equivalents (End of Period) | $246 | $167 | $246 | $425 |
| Total Debt (Long-Term + Current) | $11,728 | $11,377 | $11,728 | $11,377 |
Note: Total Debt calculated as Long-Term Debt ($10,341M) + Long-Term Debt Due Within One Year ($1,387M) as of June 30, 2002.
Material Changes vs. Prior Period
- Net Loss vs. Profit: The company reported a net loss of $264 million ($1.28/share) for Q2 2002, compared to net income of $143 million ($0.68/share) in Q2 2001. For the six months ended June 30, 2002, the net loss was $204 million ($0.99/share) versus $404 million ($1.94/share) in 2001.
- Revenue Decline: Total operating revenues decreased 13% year-over-year for the quarter ($1,782M vs $2,047M) and 14% for the six-month period ($4,070M vs $4,751M). Trading revenues dropped significantly (40% in Q2) due to lower volumes and prices.
- Asset Impairments: A pre-tax charge of $506 million was recorded for the write-down of project investments, primarily related to assets in Argentina (EDEERSA and assets held for sale to AES). This included a $412 million write-down of assets held for sale and a $94 million write-down of EDEERSA.
- Goodwill Impairment: Due to the adoption of SFAS 142, a cumulative effect of a change in accounting principle of $120 million (after-tax) was recorded, related to goodwill impairments in Argentina, Brazil, India, and Energy Technologies.
- Discontinued Operations: Losses from discontinued operations (Energy Technologies and Tanir Bavi in India) totaled $37 million for the quarter and six months.
Guidance, Outlook, and Risks
Management Commentary and Guidance
- Revised 2002 Outlook: Management revised full-year 2002 earnings per share guidance downward by 5% to a range of $3.70 to $3.90 (excluding charges). This revision reflects lower-than-expected Q2 results and warm weather impacts on gas sales.
- Segment Expectations (2002, excluding charges):
- Power: $460M - $500M
- PSE&G: $175M - $185M
- Energy Holdings: $145M - $155M
- 2003 Outlook: EPS is expected to increase to a range of $4.00 to $4.20, driven by Power's BGS contracts, a successful PSE&G rate case, and improved returns from Global's existing assets.
Risks and Contingencies
- Argentina Crisis: Significant exposure to economic and political instability in Argentina. EDEERSA defaulted on debt, and a lawsuit is pending against AES regarding the termination of a stock purchase agreement for Argentine assets.
- India (Tanir Bavi): Dispute with the Karnataka Power Transmission Company regarding tariff payments. Management has adopted a plan to exit the investment, with a sale expected in Q3 2002.
- California (GWF Energy): Dispute with the California Department of Water Resources (CDWR) regarding a force majeure claim for the Tracy Peaking Plant. FERC proceedings are ongoing regarding the pricing of long-term contracts.
- Regulatory: PSE&G has filed an electric rate case seeking a $250 million annual increase, effective August 2003. Outcome is uncertain.
- Market Risk: Exposure to commodity price volatility, foreign currency devaluation (Brazilian Real, Chilean Peso), and credit risk in energy trading and leveraged lease investments.
Investor Verification Checklist
- Argentina Exposure: Verify the status of the lawsuit against AES and the likelihood of recovering value from the $632 million impaired investment.
- Goodwill Impairment: Confirm the extent of remaining goodwill impairments in other international markets (Brazil, India) under SFAS 142.
- Rate Case Outcome: Monitor the New Jersey Board of Public Utilities' decision on PSE&G's $250 million rate increase request.
- Power Trading Margins: Assess the sustainability of Power's earnings given the slowdown in energy trading markets and reliance on BGS contracts.
- Debt Covenants: Review compliance with debt-to-capitalization ratios (currently 0.682:1) and potential impacts of future equity issuances or asset impairments.
- Discontinued Operations: Track the progress of the sale of Energy Technologies (HVAC) and Tanir Bavi assets to ensure realization of carrying values.