Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2003, and the six months ended June 30, 2003, for Public Service Enterprise Group Incorporated (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 holding company with four reportable segments: PSE&G (regulated utility), Power (wholesale energy supply), Global (international energy projects), and Resources (leveraged leases and investments).
Key Financial Metrics
Consolidated Results (Six Months Ended June 30, 2003):
- Operating Revenues: $5,725 million (up 74% from $3,298 million in 2002).
- Net Income: $806 million (compared to a net loss of $204 million in 2002).
- Income from Continuing Operations: $471 million (compared to a loss of $46 million in 2002).
- Earnings Per Share (Diluted): $3.57 (compared to a loss of $0.99 in 2002).
- Operating Cash Flow: $628 million provided by operating activities.
- Total Assets: $26,570 million as of June 30, 2003.
- Total Long-Term Debt: $11,028 million.
- Common Stockholders' Equity: $4,662 million.
Material Changes Versus Prior Period
The significant improvement in financial results compared to the prior year is driven by several key factors:
- Accounting Changes: A one-time after-tax benefit of $370 million was recorded in the first quarter of 2003 due to the adoption of SFAS 143 (Asset Retirement Obligations), primarily related to the remeasurement of nuclear decommissioning liabilities. Conversely, the prior year included a $120 million after-tax charge for goodwill impairments under SFAS 142.
- Energy Holdings Performance: The current period excludes the massive losses from abandoned investments in Argentina recorded in 2002 ($374 million after-tax loss for the six months). Energy Holdings reported income from continuing operations of $92 million in 2003 versus a loss of $304 million in 2002.
- Revenue Recognition Changes: Operating revenues increased significantly due to a change in the Basic Generation Service (BGS) contracting process. Revenues from Power's sales to third-party suppliers are no longer eliminated in consolidation, adding approximately $847 million to consolidated revenues for the six-month period.
- Power Segment: Higher margins from electric load contracts and increased revenues from new Connecticut generation facilities contributed to a rise in Power's income from continuing operations to $286 million (from $203 million in 2002).
- Extraordinary Item: An $18 million after-tax extraordinary charge was recorded in Q2 2003 related to a regulatory refund decision by the New Jersey Board of Public Utilities (BPU).
Guidance, Outlook, and Risks
Guidance and Outlook:
- PSEG projects 2003 Income from Continuing Operations to remain within the original range of $3.70 to $3.90 per share.
- Initial 2004 guidance for Income from Continuing Operations is set at $3.75 to $3.95 per share.
- Management is reviewing its dividend policy and considering a potential increase, with a decision expected by the end of 2003.
Risks and Contingencies:
- Regulatory Risk: The BPU decision in the Electric Base Rate Case resulted in a $155 million regulatory liability and a $30 million refund obligation. Future rate relief and regulatory approvals remain critical.
- Market Risk: Power is exposed to volatility in energy prices and commodity markets. The company uses a Value-at-Risk (VaR) model to manage this, with a threshold of $50 million.
- International Exposure: Energy Holdings faces risks from foreign currency devaluation (Brazilian Real and Chilean Peso) and political/regulatory instability in Argentina, Peru, and Poland.
- Legal Proceedings: Ongoing matters include environmental remediation costs (MGP sites, Passaic River), disputes over nuclear fuel disposal fees with the DOE, and litigation regarding the sale of Argentine assets.
- Credit Ratings: Moody's placed PSEG's Preferred Securities and Power's/Energy Holdings' Senior Notes under review for possible downgrade in June 2003.
Investor Verification Checklist
- Verify the sustainability of the $370 million SFAS 143 accounting benefit and its impact on future earnings.
- Monitor the outcome of the BPU Electric Base Rate Case settlement and the impact of the $155 million regulatory liability amortization.
- Assess the resolution of the Argentine investment write-downs and the status of remaining international projects (Peru, Poland, Chile).
- Review the status of the Moody's credit rating review and potential impacts on borrowing costs and collateral requirements.
- Confirm the progress of the PSEG Power BGS auction results and the transition of load contracts effective August 1, 2003.
- Track the status of the Enron settlement and other energy trading counterparty exposures.