Business Context and Reporting Period
Company: Public Service Enterprise Group Inc (PSEG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2001
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 electric generation, transmission, distribution, gas distribution, and energy trading.
Key Financial Metrics
| Metric (Millions of Dollars) | Q1 2001 | Q1 2000 |
|---|---|---|
| Total Operating Revenues | $2,814 | $2,483 |
| Operating Income | $577 | $603 |
| Net Income | $261 | $270 |
| Earnings Per Share (Diluted) | $1.25 | $1.25 |
| Operating Cash Flow | $623 | $767 |
| Total Assets | $21,694 | $21,526 |
| Total Long-Term Debt | $8,294 | $5,297 |
| Cash and Cash Equivalents | $183 | $102 |
Note: Q1 2000 figures have been restated for comparability due to the adoption of EITF 99-19 (gross vs. net revenue reporting).
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 13% ($331 million) year-over-year. This was driven primarily by a 45% increase in Gas Distribution revenues ($1,082M vs $747M) due to higher natural gas prices passed through to customers and colder weather. Generation revenues also rose 6% due to increased load served.
- Expense Increases: Gas costs surged 64% ($307 million increase) reflecting higher commodity prices. Energy costs decreased 3% due to lower trading volumes. Operating expenses totaled $2,237 million, up from $1,880 million.
- Profitability: Net income decreased slightly by 3% ($9 million) to $261 million. This decline was offset by a $9 million cumulative effect of a change in accounting principle (SFAS 133) and a $2 million extraordinary loss on debt retirement. Without these items, income before extraordinary items was $254 million, down from $270 million.
- Debt Structure: Total long-term debt increased significantly by $3 billion to $8,294 million. This includes $2.466 billion in subsidiary securitization debt (transition bonds) issued in January 2001 to refinance stranded costs.
- Cash Flow: Net cash provided by operating activities decreased 19% to $623 million, primarily due to changes in working capital and lower trading activity cash flows.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Regulatory Resolution: The New Jersey Supreme Court affirmed the Final Order regarding PSE&G's restructuring and stranded cost recovery. PSEG successfully issued $2.525 billion in transition bonds in January 2001. A petition for certiorari was filed with the U.S. Supreme Court by a customer group, but management believes reconsideration is unlikely.
- Capital Strategy: PSEG continues its stock repurchase program (24.2 million shares repurchased to date). Power plans to grow its generating portfolio to 20,000 MW by 2005. Energy Holdings is pursuing international growth, including a recent agreement to acquire a 94% stake in SAESA (Chile) for approximately $460 million.
- Dividends: Dividends paid per share remained stable at $0.54.
Risks and Contingencies
- California Power Crisis: PSEG has exposure to Pacific Gas & Electric (PG&E), which filed for Chapter 11 bankruptcy. As of April 6, 2001, PSEG's pro-rata share of net receivables from PG&E was approximately $20 million. While PG&E has begun paying for post-bankruptcy deliveries, the recovery of past-due amounts remains uncertain.
- Environmental Liabilities: Significant potential costs exist regarding the Passaic River site remediation and New Source Review (NSR) compliance for Hudson and Mercer coal units. NSR compliance costs could approximate $300 million and are not currently included in business plans.
- Accounting Changes: Adoption of SFAS 133 (Derivatives) resulted in a $9 million cumulative effect on earnings. Future impacts depend on market volatility and the resolution of tentative guidance on normal purchases and sales exceptions.
- Foreign Currency: Net foreign currency devaluations reduced Energy Holdings' stockholder equity by $205 million, with $154 million attributed to the Brazilian Real.
Investor Verification Checklist
- PG&E Exposure: Verify the status of receivables from PG&E and the likelihood of recovering the $20 million net exposure given the bankruptcy proceedings.
- Environmental Costs: Assess the potential financial impact of the EPA's New Source Review enforcement actions, which could require up to $300 million in capital expenditures.
- Debt Refinancing: Monitor the ability of Power and Energy Holdings to refinance maturing debt and secure external capital at reasonable rates, particularly given the increased leverage from the transition bond issuance.
- Regulatory Certainty: Confirm that the U.S. Supreme Court denies the petition for certiorari regarding the New Jersey Supreme Court's affirmation of the stranded cost recovery plan.
- Trading Volatility: Evaluate the impact of continued market volatility on trading revenues and the effectiveness of hedging strategies under SFAS 133.