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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 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 distribution (PSE&G), wholesale power generation and trading (Power), and international energy investments (Energy Holdings).

Key Financial Metrics (Nine Months Ended Sept 30, 2003)

Note: 2002 Net Income was $0 due to a $120 million cumulative effect of a change in accounting principle (SFAS 142 goodwill impairment) and a $374 million write-down of Argentine investments in Energy Holdings.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 51% year-over-year. This was primarily driven by a change in the Basic Generation Service (BGS) model, where Power's revenues are no longer eliminated in consolidation, and increased volumes/prices in gas and electricity.
• Accounting Changes: Net Income for the nine months included a $370 million after-tax benefit from the adoption of SFAS 143 (Asset Retirement Obligations), which remeasured nuclear decommissioning liabilities. Conversely, 2002 included a $120 million charge for goodwill impairments under SFAS 142.
• Segment Performance:
  • PSE&G: Income from Continuing Operations increased $61 million due to higher electric base rates and favorable weather, offset by higher O&M costs.
  • Power: Income increased $71 million, driven by higher margins on BGS contracts and realized gains in the Nuclear Decommissioning Trust (NDT) Fund, partially offset by storm-related outages (Hurricane Isabel).
  • Energy Holdings: Income improved significantly compared to 2002, which was depressed by the $374 million Argentine investment write-down.
• Discontinued Operations: Energy Holdings completed the sale of its HVAC/mechanical operating companies (Energy Technologies), resulting in a $9 million loss on disposal in 2003.

Guidance, Outlook, and Risks

• Revised Guidance: PSEG reduced its 2003 Income from Continuing Operations projection to $3.60 to $3.75 per share (from $3.70 to $3.90) due to storm-related weather impacts and dilution from a recent stock issuance. The long-term annual earnings growth rate target was lowered from 7% to a range of 4% to 6%.
• Capital Actions: On October 7, 2003, PSEG issued 8.8 million shares of common stock for $356 million to strengthen its capital structure and repay short-term debt.
• Credit Ratings: Standard & Poor's and Moody's affirmed ratings for PSEG, PSE&G, and Power. However, Energy Holdings was downgraded to BB- (S&P) and Ba3 (Moody's), resulting in the requirement to post additional letters of credit for equity commitments.
• Key Risks:
  • Regulatory: Ongoing proceedings regarding the Passaic River Site environmental remediation (potential costs estimated at $950 million by NJDEP, though PSEG's share is undetermined) and the Electric Base Rate Case.
  • Market: Exposure to commodity price volatility, foreign currency devaluation (Brazilian Real, Chilean Peso), and credit risk in international markets (Argentina, Peru, India).
  • Operational: Storm-related outages affecting nuclear generation and transmission assets.

Investor Verification Checklist

• Accounting Impact: Verify the sustainability of the $370 million SFAS 143 benefit, as it is a one-time adjustment to asset retirement obligations.
• Environmental Liabilities: Monitor the status of the Passaic River Site natural resource damage assessment and potential settlement costs.
• Energy Holdings Liquidity: Assess the impact of the credit rating downgrade on Energy Holdings' ability to service debt and the cost of posting additional collateral.
• International Exposure: Review the status of receivables and operations in Argentina, Peru, and India, particularly regarding payment defaults by state-owned utilities (e.g., TNEB in India).
• Debt Covenants: Confirm compliance with debt-to-capitalization covenants, especially given the recent equity issuance and debt repayments.