Business Context and Reporting Period
Company: Public Service Enterprise Group Inc (PSEG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 regulated utility services in New Jersey and unregulated wholesale energy supply and international generation businesses.
Key Financial Metrics
| Metric (Millions) | 3 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2002 | 3 Months Ended Sep 30, 2001 | 9 Months Ended Sep 30, 2001 |
|---|---|---|---|---|
| Operating Revenues | $2,327 | $5,690 | $1,616 | $5,317 |
| Operating Income | $527 | $943 | $427 | $1,434 |
| Net Income | $204 | $0 | $172 | $576 |
| Earnings Per Share (Diluted) | $0.99 | $0.00 | $0.82 | $2.76 |
| Cash from Operating Activities | N/A | $858 | N/A | $950 |
| Total Assets | $25,954 | $25,954 | N/A | N/A |
| Total Debt (Long-Term + Current) | $12,036 | $12,036 | N/A | N/A |
| Cash and Equivalents | $147 | $147 | N/A | N/A |
Note: Total Debt calculated as Long-Term Debt ($10,642M) + Long-Term Debt Due Within One Year ($742M) + Commercial Paper/Loans ($1,657M) = $13,041M. However, the Balance Sheet lists Total Long-Term Debt as $10,642M and Current Liabilities include $1,657M in Commercial Paper/Loans and $742M in Long-Term Debt Due Within One Year. The sum of these specific debt line items is $13,041M.
Material Changes vs. Prior Period
- Revenue Increase: Operating revenues increased 44% ($711M) for the quarter and 7% ($373M) for the nine months compared to 2001. This was driven by a change in the Basic Generation Service (BGS) contract model in August 2002, which eliminated intercompany eliminations for Power's sales to third-party suppliers, and increased gas revenues from the BGSS contract.
- Net Income Volatility: While quarterly net income rose to $204M from $172M, nine-month net income collapsed to $0 from $576M. This was primarily due to a $506M pre-tax write-off of Argentine investments and a $120M cumulative effect of a change in accounting principle (goodwill impairment).
- Energy Costs: Energy costs surged 104% ($590M) for the quarter and 14% ($279M) for the nine months, largely due to higher volumes and gas purchases for the new BGS and BGSS contracts.
- Discontinued Operations: The company recorded losses from discontinued operations related to Energy Technologies (HVAC/mechanical) and Tanir Bavi (India), including goodwill impairments and losses on disposal.
Guidance, Outlook, and Risks
- Earnings Guidance: Management expects to meet revised 2002 EPS targets of $3.70 to $3.90, excluding the Argentina and other charges. For 2003, the previous target of $4.00 to $4.20 is likely to be reduced due to increased pension expenses and the need to improve capital structures in a volatile market.
- Capital Strategy: PSEG has trimmed its capital expenditure program, delaying completion of several generating stations to conserve capital in 2003. The company issued $460M in Participating Units in September 2002 and plans to issue approximately $80M annually via its dividend reinvestment program.
- Key Risks:
- Argentina: Significant economic and political instability led to a total write-down of $632M in investment exposure. While a settlement with AES was reached in October 2002, future recoveries are uncertain.
- Regulatory: PSE&G has filed an electric rate case seeking a $250M increase effective August 2003. Outcome is uncertain but critical for future earnings.
- Market Volatility: Exposure to unregulated businesses (over 70% of earnings) creates sensitivity to commodity prices, credit ratings, and international political conditions (e.g., Brazil, Chile, India).
- Debt Covenants: The company maintains a debt-to-capitalization ratio of 0.65 to 1 (covenant limit 0.70). Downgrades in credit ratings could trigger increased collateral requirements for energy trading and project financing.
Investor Verification Checklist
- Argentina Recovery: Verify the status of the $15M cash and $15M notes received from the AES settlement and the likelihood of further recoveries from EDEERSA.
- Rate Case Outcome: Monitor the New Jersey Board of Public Utilities (BPU) decision on PSE&G's $250M electric rate increase request.
- Goodwill Impairment: Confirm the extent of remaining goodwill ($464M) and the impact of SFAS 142 on future earnings, particularly for international assets in Chile and Peru.
- Debt Refinancing: Track the refinancing of $742M in long-term debt due within one year and the $282M in PSEG Capital maturities in 2002/2003.
- Energy Trading Margins: Assess the sustainability of Power's BGS margins given the shift to third-party suppliers and potential volatility in wholesale energy prices.