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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for Public Service Enterprise Group Inc. (PSEG) and its principal subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power), and PSEG Energy Holdings LLC (Energy Holdings). PSEG operates as a diversified energy company with segments focused on regulated utility services (PSE&G), wholesale power generation and trading (Power), and international energy investments (Energy Holdings).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 79% to $3.36 billion, driven by a $1.3 billion increase at Power due to new Basic Generation Service (BGS) contracts and increased sales volumes at PSE&G due to colder weather.
• Accounting Change Impact: Net income was significantly boosted by a $370 million after-tax benefit resulting from the adoption of SFAS No. 143 (Asset Retirement Obligations). This primarily remeasured Power's nuclear decommissioning liabilities. Conversely, Q1 2002 included a $120 million charge for goodwill impairments under SFAS No. 142.
• Segment Performance:
  • Power: Income from Continuing Operations rose to $177 million (from $120 million) due to effective portfolio management and new BGS revenues.
  • PSE&G: Earnings increased to $100 million (from $67 million) driven by higher gas and electric sales volumes from favorable weather.
  • Energy Holdings: Income from Continuing Operations improved to $59 million (from $6 million) due to the timing of contractual payments and the absence of currency charges recorded in 2002.
• Discontinued Operations: Recorded a $15 million loss, including a $9 million loss on the disposal of Energy Technologies assets.

Guidance, Outlook, and Risks

• 2003 Guidance: PSEG expects full-year 2003 Income from Continuing Operations to range from $3.70 to $3.90 per share. Segment-specific projections include $210-$230 million for PSE&G, $475-$520 million for Power, and $145-$155 million for Energy Holdings.
• Regulatory Risks:
  • Nuclear Decommissioning: A pending New Jersey Board of Public Utilities (BPU) decision could determine if customers or Power bear the cost of nuclear decommissioning. An adverse ruling could reverse $244 million of the SFAS 143 benefit.
  • Rate Cases: PSE&G is awaiting a BPU decision on its electric base rate case, with the Ratepayer Advocate recommending a lower return on equity than requested.
• Legal and Operational Risks:
  • Argentina: PSEG formally abandoned its interest in EDEERSA due to government actions altering concession terms.
  • India: PPN Power Generating Company defaulted on debt payments due to non-payment by the Tamil Nadu Electricity Board, leading to a plant closure.
  • Collateral Requirements: If Power loses its investment-grade rating, it may be required to post approximately $652 million in additional collateral for trading contracts.

Investor Verification Checklist

• SFAS 143 Sustainability: Verify the outcome of the BPU petition regarding nuclear decommissioning costs, as a negative ruling could materially reduce earnings.
• Weather Normalization: Assess the extent to which Q1 2003 earnings were driven by unusually cold weather versus structural improvements.
• International Exposure: Monitor the resolution of the PPN default in India and the status of the GWF Energy litigation in California.
• Debt Covenants: Confirm continued compliance with debt-to-capitalization ratios, particularly for Power and Energy Holdings, given the high leverage in project financing.
• Discontinued Operations: Track the final sale of remaining Energy Technologies HVAC assets to confirm the write-down estimates.