Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1997, for Public Service Enterprise Group Incorporated (Enterprise) and its principal subsidiary, Public Service Electric and Gas Company (PSE&G). Enterprise is a New Jersey corporation engaged in the electric and gas utility business, along with diversified energy investments through Enterprise Diversified Holdings Incorporated (EDHI). The filing includes unaudited consolidated financial statements for both the three and six months ended June 30, 1997, compared to the same periods in 1996.
Key Financial Metrics
Income Statement Highlights (Six Months Ended June 30, 1997)
- Total Operating Revenues: $3,055.5 million (Enterprise), down from $3,135.4 million in 1996.
- Net Income: $231.0 million (Enterprise), a decrease from $328.6 million in 1996.
- Earnings Per Share (EPS): $0.99 for the six months ended June 30, 1997, compared to $1.34 in 1996.
- Operating Income: $528.5 million (Enterprise), down from $547.0 million in 1996.
- Dividends Paid: $1.08 per share for the six-month period.
Balance Sheet Highlights (As of June 30, 1997)
- Total Assets: $17,247.5 million (Enterprise).
- Cash and Cash Equivalents: $53.7 million, a significant decrease from $278.9 million at year-end 1996.
- Total Capitalization: $10,543.7 million, consisting of 48.8% common equity, 44.7% long-term debt, and 6.5% preferred stock/securities.
- Long-Term Debt: $4,713.5 million.
- Current Liabilities: $2,393.4 million.
Cash Flow Highlights (Six Months Ended June 30, 1997)
- Net Cash Provided by Operating Activities: $299.0 million (Enterprise), down from $578.4 million in 1996.
- Net Cash Used in Investing Activities: $698.2 million, driven by additions to utility plant ($229.3 million) and a net increase in long-term investments ($384.8 million).
- Net Cash Provided by Financing Activities: $174.0 million.
Material Changes vs. Prior Period
Enterprise reported a 26% decrease in Net Income and a 29% decrease in EPS for the six months ended June 30, 1997, compared to the same period in 1996. Key drivers for these declines include:
- Weather Impact: Cooler weather in May and June 1997 and milder winter weather reduced electric and gas sales volumes.
- Salem Litigation Settlement: A one-time charge of $53.3 million (net of taxes) related to the settlement of a lawsuit regarding the Salem Nuclear Generating Station.
- Loss of Prior Year Gain: The 1996 period included an $18.5 million gain from the repurchase of preferred stock at a discount, which did not recur in 1997.
- EDHI Performance: Earnings from diversified holdings decreased due to lower leveraged buy-out fund gains and higher operating expenses at Energis Resources.
- Revenue Mix: Electric revenues decreased by $42 million, while Gas revenues decreased by $37 million for the six-month period, primarily due to weather and lower fuel cost recoveries.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management expects to internally generate funds for construction and capital requirements over the next five years, aiming to reduce debt by $1 to $2 billion, contingent on timely cost recovery. PSE&G has filed a proposal with the New Jersey Board of Public Utilities (BPU) regarding the New Jersey Energy Master Plan, proposing a 5% to 10% rate decrease effective January 1, 1999, and a transition to competitive energy markets.
Key Risks and Contingencies
- Deregulation and Stranded Costs: PSE&G estimates $3.9 billion in potentially stranded costs. The company proposes securitizing $2.5 billion of these costs, pending legislative approval expected in mid-1998. Failure to recover these costs could materially impact financial results.
- Nuclear Operations: The restart of Salem Units 1 and 2 is underway but subject to NRC approval. Unit 2 was authorized to restart in August 1997, with Unit 1 expected to return to service by year-end. Failure to restart could have a material adverse impact.
- Environmental Liabilities: PSE&G is a Potentially Responsible Party (PRP) for the Passaic River Site and is managing a Manufactured Gas Plant Remediation Program. Costs for the latter are estimated at over $20 million annually for more than 30 years.
- Accounting Changes: The company is monitoring EITF Issue No. 97-4 regarding the discontinuation of SFAS 71 (Regulated Enterprises) due to deregulation, which could require the write-off of regulatory assets.
Investor Verification Checklist
- Verify the status of the New Jersey Energy Master Plan proposal and the likelihood of legislative approval for securitizing stranded costs.
- Monitor the NRC approval process for the restart of Salem Units 1 and 2 and any associated operational delays.
- Review the cash flow trajectory, specifically the significant drawdown in cash equivalents ($225 million decrease) and the reliance on financing activities to fund investments.
- Assess the impact of weather normalization on future revenue projections compared to the mild 1997 conditions.
- Track the EDHI investment portfolio performance, particularly the leveraged leases and international acquisitions, given the reported decline in earnings.