Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2004, for Public Service Enterprise Group Inc. (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 generation and trading), and Energy Holdings (international projects and leveraged leases). The financial statements for PSEG and Energy Holdings for the comparable 2003 periods have been restated to correct foreign currency translation adjustments and other immaterial errors.
Key Financial Metrics (Six Months Ended June 30, 2004)
| Metric | 2004 (Restated) | 2003 (Restated) |
|---|---|---|
| Operating Revenues | $5,511 million | $5,689 million |
| Net Income | $395 million | $814 million |
| Income from Continuing Operations | $390 million | $480 million |
| Diluted EPS (Net Income) | $1.66 | $3.60 |
| Operating Cash Flow | $828 million | $582 million |
| Total Assets | $27,407 million | $28,061 million |
| Total Long-Term Debt | $12,523 million | $12,945 million |
| Cash and Cash Equivalents | $253 million | $452 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated operating revenues decreased 3% ($178 million) year-over-year. This was driven primarily by a 12% decrease in Power's revenues due to lower generation volumes, the expiration of Market Transition Charge (MTC) revenues, and the adoption of EITF 03-11 which requires net reporting of derivative gains/losses.
- Profitability Drop: Net income decreased significantly ($419 million) compared to 2003. The 2003 period included a one-time $370 million after-tax benefit from the adoption of SFAS 143 (Asset Retirement Obligations) and an $18 million extraordinary charge in 2003 related to a rate case settlement. Excluding these non-recurring items, the decline is attributed to lower earnings at Power due to unanticipated nuclear and fossil outages and higher replacement power costs.
- Segment Performance:
- PSE&G: Earnings increased due to higher electric base rates and favorable weather, offsetting lower gas sales volumes.
- Power: Earnings declined due to lower capacity factors at nuclear stations (77% vs. 89% planned), outages at fossil units, and high congestion costs ($20 million) related to a transformer derating.
- Energy Holdings: Earnings were impacted by the termination of the Collins leveraged lease and foreign currency devaluations, particularly the Brazilian Real.
- Cash Flow: Operating cash flow increased $246 million, driven by strong performance at PSE&G and Energy Holdings, partially offset by a decrease at Power.
Guidance, Outlook, and Risks
- Revised Guidance: PSEG has lowered its 2004 Income from Continuing Operations guidance to a range of $3.15 to $3.35 per share (previously $3.60 to $3.80). This reduction reflects lower-than-expected earnings from Power and ongoing impacts from transmission congestion and outages. No guidance is provided for 2005 at this time.
- Dividends: The Board approved a quarterly dividend of $0.55 per share, indicating an annual rate of $2.20. PSEG anticipates cash requirements of approximately $100 million for 2004 after dividends and capital expenditures.
- Credit Ratings: On July 30, 2004, S&P downgraded PSEG's and PSE&G's commercial paper ratings from A2 to A3 and placed PSEG, PSE&G, and Power on negative outlook. Fitch placed PSEG's Preferred Securities and Power's Senior Notes on negative credit watch. Fitch had previously downgraded Energy Holdings' Senior Notes to BB with a negative outlook.
- Key Risks:
- Operational: Unplanned outages at nuclear (Salem, Hope Creek) and fossil (Hudson, Mercer) facilities; transmission congestion costs.
- Market: Volatility in wholesale energy prices, oversupply of generation capacity, and low capacity prices.
- Regulatory/Legal: Environmental remediation costs (Passaic River, MGP sites); potential costs related to the DOE's failure to take possession of spent nuclear fuel; ongoing litigation with Old Dominion Electric Cooperative (ODEC).
- Foreign Exchange: Continued devaluation of the Brazilian Real and other foreign currencies impacting Energy Holdings' equity.
Investor Verification Checklist
- Restatement Impact: Verify the specific adjustments made to 2003 financials regarding foreign currency translation and the RGE investment to ensure accurate year-over-year comparisons.
- Power Segment Outages: Assess the duration and cost implications of the Salem, Hope Creek, Hudson, and Mercer outages, and the timeline for the transformer replacement causing congestion costs.
- Credit Facility Availability: Confirm the impact of the S&P downgrade on PSEG's ability to access the commercial paper market and the sufficiency of the $1.9 billion in available liquidity under committed credit facilities.
- Environmental Liabilities: Review the status of the Passaic River study and the MGP remediation program, as costs could be material and are subject to regulatory recovery.
- Foreign Currency Exposure: Monitor the Brazilian Real and other foreign currencies for Energy Holdings, as devaluations have already reduced member's equity by $276 million.