Business Context and Reporting Period
Company: Public Service Enterprise Group Inc (PSEG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 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 regulated transmission/distribution, competitive generation, energy trading, and international energy investments.
Key Financial Metrics
| Metric (Millions) | Q3 2001 | Q3 2000 | 9M 2001 | 9M 2000 |
|---|---|---|---|---|
| Total Operating Revenues | $2,401 | $2,207 | $7,391 | $6,848 |
| Operating Income | $431 | $392 | $1,415 | $1,388 |
| Net Income | $172 | $142 | $576 | $554 |
| Earnings Per Share (Diluted) | $0.82 | $0.66 | $2.76 | $2.57 |
| Operating Cash Flow (9M) | $844 (2001) vs $929 (2000) | |||
| Long-Term Debt | $10,143 (Sep 30, 2001) vs $5,297 (Dec 31, 2000) | |||
| Cash & Equivalents | $371 (Sep 30, 2001) vs $102 (Dec 31, 2000) |
Margins: Operating margin for the quarter ended September 30, 2001, was approximately 18.0% ($431M / $2,401M), compared to 17.8% in the prior year quarter. Net income margin was 7.2% for the quarter.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 8.8% for the quarter and 7.9% for the nine-month period compared to 2000. This was driven by warmer weather increasing transmission/distribution demand and higher generation revenues due to customers returning from third-party suppliers.
- Profitability: Net income increased 21% for the quarter and 4% for the nine-month period. The quarterly increase was aided by higher trading margins and nuclear generation performance, partially offset by rate reductions.
- Debt Expansion: Long-term debt increased significantly from $5.3 billion to $10.1 billion year-over-year, primarily to finance Power's acquisition of generation assets and new construction projects (Waterford, Lawrenceburg, Bergen).
- Accounting Changes: Adoption of SFAS 133 (Derivatives) resulted in a cumulative effect of a change in accounting principle of $9 million (net of tax) included in the nine-month net income. Revenue reporting for physical bilateral energy sales was changed to a gross basis per EITF 99-19.
Outlook, Risks, and Management Commentary
Management Commentary
- Regulatory Environment: PSE&G continues to implement rate reductions mandated by the New Jersey Board of Public Utilities (BPU), totaling 9% since 1999, with an additional 4.9% reduction scheduled for August 2002. The company is participating in a BGS auction for supply starting August 2002.
- Capital Allocation: Significant capital expenditures are underway for new generation plants in Ohio, Indiana, and New Jersey. The company maintains a stock repurchase program, having re-authorized the purchase of 5.7 million shares in September 2001.
- Foreign Operations: Energy Holdings continues to expand internationally, with recent acquisitions in Chile (SAESA) and Peru (Electroandes). However, the company faces currency devaluation risks, particularly in Brazil and Chile.
Risks and Contingencies
- California Energy Crisis: PSEG has exposure to Pacific Gas & Electric (PG&E) regarding pre-petition receivables of approximately $62 million. While PG&E has elevated these to administrative priority in bankruptcy, final resolution and payment timing remain uncertain.
- Environmental & Regulatory: The company faces potential material costs related to the Passaic River site remediation, New Source Review enforcement actions at Hudson and Mercer stations, and PSD permit requirements for the Bergen 2 plant.
- Market Risks: Exposure to commodity price volatility, foreign currency fluctuations (specifically the Brazilian Real and Chilean Peso), and interest rate changes. Value-at-risk for commodity positions was estimated at $11 million as of September 30, 2001.
- Post-9/11 Impact: Management is evaluating the economic consequences of the September 11 terrorist attacks, including potential impacts on energy prices, capital markets, and airline lease defaults.
Investor Verification Checklist
- Debt Servicing: Verify the sustainability of the increased debt load ($10.1B) against cash flows, particularly given the reliance on external financing for Power's growth.
- PG&E Receivables: Monitor the status of the $62 million receivable from PG&E and the likelihood of full recovery given the bankruptcy proceedings.
- Regulatory Approvals: Track the outcome of the BPU Gas Base Rate Case and the BGS auction results, which directly impact PSE&G's revenue stability.
- Foreign Currency Exposure: Assess the impact of continued devaluation of the Brazilian Real and Chilean Peso on the valuation of Energy Holdings' international assets.
- Environmental Liabilities: Review updates on the Passaic River remediation costs and the resolution of EPA enforcement actions regarding New Source Review.