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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2000, for Public Service Enterprise Group Inc. (PSEG) and its subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy Holdings). The reporting period is significantly impacted by the deregulation of the New Jersey energy market and the transfer of PSE&G's electric generation assets to an affiliate, PSEG Power LLC (Power), effective August 1, 2000. A planned $2.525 billion securitization financing to recover stranded costs has been delayed until at least the first quarter of 2001 due to an appeal pending before the New Jersey Supreme Court.

Key Financial Metrics (Nine Months Ended Sept 30, 2000)

Note: PSEG Consolidated figures include intercompany eliminations. PSE&G and Energy Holdings figures are standalone.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated operating revenues decreased slightly to $4,970 million from $4,837 million in the prior year. This was driven by a $168 million decrease in electric revenues due to a 5% rate reduction mandated by the New Jersey Board of Public Utilities (BPU) and a $52 million after-tax charge related to Market Transition Charge (MTC) recovery. Conversely, gas distribution revenues increased by $155 million due to higher natural gas prices.
• Profitability Improvement: Net income for PSEG was $554 million, a significant improvement from a net loss of $214 million in the prior year. The 1999 loss included an extraordinary charge of $804 million (after tax) related to the deregulation of electric generation and the write-down of generating assets. Excluding this extraordinary item, earnings per share decreased slightly from $2.68 to $2.57.
• Expense Structure: Depreciation and amortization expenses decreased by $149 million ($410 million to $266 million) primarily due to the amortization of the excess electric distribution depreciation reserve and the transfer of generation assets to Power. Operation and maintenance expenses increased by $134 million, largely due to Power's acquisitions and higher transmission costs.
• Segment Performance: Energy Holdings' contribution to earnings decreased for the nine-month period due to lower unrealized gains from its investment portfolio, though its EBIT contribution remained relatively stable compared to the prior year.

Guidance, Outlook, and Risks

• Regulatory Uncertainty: The primary risk is the outcome of the New Jersey Supreme Court review of the BPU's Final Order regarding stranded cost recovery. An adverse outcome or significant delay beyond Q1 2001 could materially impact financial condition, cash flows, and growth strategies.
• Liquidity and Financing: The delay in the $2.525 billion securitization transaction has forced PSEG and PSE&G to rely on medium-term financings and commercial paper to manage debt maturities. PSEG has authorized the repurchase of up to 30 million shares of common stock; approximately 17.8 million shares have been repurchased to date.
• Capital Expenditures: PSEG Power has announced significant capital commitments, including the purchase of 30 gas and steam turbines ($862.8 million) and the construction of new generating facilities at Linden and Bergen stations ($880 million combined).
• Market Risks: The company faces exposure to commodity price fluctuations, interest rate changes, and foreign currency risks related to international investments (approx. 13% of consolidated assets). Value-at-risk for commodity positions was estimated at $12 million as of September 30, 2000.
• Dividends: PSEG maintains a dividend of $1.62 per share for the nine-month period. Management believes future earnings and cash flows will support the current dividend level, though volatility may increase as the business shifts from regulated to competitive.

Investor Verification Checklist

• Securitization Status: Verify the timeline and outcome of the New Jersey Supreme Court appeal regarding the $2.525 billion transition bond financing.
• Debt Maturities: Review the schedule of debt maturities and the company's ability to refinance without the securitization proceeds in the short term.
• Asset Transfer Accounting: Confirm the treatment of the $2.786 billion promissory note from Power to PSE&G and the associated interest income/expense.
• Environmental Liabilities: Assess the potential costs associated with the Passaic River site remediation and the Manufactured Gas Plant Remediation Program, which are noted as potentially material.
• Foreign Currency Exposure: Monitor the impact of foreign currency devaluations on the reported value of international investments, which have reduced equity by approximately $188 million cumulatively.