Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1997, for Public Service Enterprise Group Incorporated (Enterprise) and its principal subsidiary, Public Service Electric and Gas Company (PSE&G). Enterprise operates as a holding company for PSE&G, a regulated electric and gas utility in New Jersey, and Enterprise Diversified Holdings Incorporated (EDHI), which engages in non-utility energy and environmental businesses.
Key Financial Metrics
| Metric (Millions) | Q3 1997 | Q3 1996 | 9M 1997 | 9M 1996 |
|---|---|---|---|---|
| Total Operating Revenues | $1,568 | $1,335 | $4,623 | $4,470 |
| Net Income | $176 | $156 | $407 | $484 |
| Earnings Per Share (Diluted) | $0.76 | $0.64 | $1.75 | $1.98 |
| Operating Cash Flow (9M) | $778 (1997) vs $1,113 (1996) | |||
| Long-Term Debt | $4,623 (Sep 30, 1997) | |||
| Cash and Equivalents | $88 (Sep 30, 1997) | |||
| Dividends Paid Per Share (9M) | $1.62 |
Material Changes vs. Prior Period
- Earnings Volatility: While Q3 1997 EPS increased 19% year-over-year, the nine-month EPS decreased 12%. The Q3 increase was driven by the absence of a one-time $0.25 per share regulatory charge incurred in Q3 1996 related to the Salem Nuclear Generating Station. Conversely, the nine-month decline was impacted by a $53 million (after-tax) charge in Q1 1997 for the settlement of Salem litigation.
- Revenue Growth: Total operating revenues increased 17% in Q3 and 3% for the nine months ended September 30, 1997. Electric revenues rose primarily due to higher energy sales to wholesale customers and a change in unbilled revenue estimates. Gas revenues increased due to methodology refinements in unbilled estimates, partially offset by milder winter weather reducing fuel cost recovery.
- Expense Increases: Fuel expenses for electric generation rose 47% in Q3 and 26% for the nine months, largely due to increased wholesale sales. Other operating expenses increased due to refueling outage costs at Hope Creek and higher administrative costs for Year 2000 compliance and legal fees.
- Discontinued Operations: The 1996 results included earnings from Energy Development Corporation (EDC), which was sold in July 1996. The absence of EDC earnings reduced EDHI's contribution to consolidated income in 1997.
Outlook, Risks, and Management Commentary
- Nuclear Operations: Salem Unit 2 returned to service in August 1997. Salem Unit 1 is expected to return in Q1 1998, pending NRC approval. Failure to restart Salem 1 could materially adversely impact financial results. Hope Creek is undergoing a refueling outage with satisfactory preliminary inspection results.
- Regulatory Environment (Energy Master Plan): PSE&G filed a proposal with the New Jersey Board of Public Utilities (BPU) to implement retail competition, potentially requiring the separation of generation assets. The proposal includes a 5-10% rate decrease effective Jan 1, 1999, and the securitization of $2.5 billion in stranded costs. The outcome of this proceeding is uncertain and could fundamentally alter the business model.
- Legal and Environmental: PSE&G settled a lawsuit with Salem co-owners for $82 million. The company faces potential liability regarding the Passaic River site and manufactured gas plant remediation, with costs estimated at approximately $20 million annually over 30+ years.
- Year 2000 Compliance: Significant costs are being incurred to modify computer systems for Year 2000 compliance. Failure to meet this deadline could have a material adverse impact on operations.
- Investment Activity: In October 1997, a subsidiary acquired a 30.25% stake in a Brazilian electric distribution company for $498 million. EDHI's debt-to-equity ratio increased to approximately 1.83:1 as of October 31, 1997, approaching its 2.00:1 covenant limit.
Investor Verification Checklist
- Salem Unit 1 Restart: Verify the timeline and NRC approval status for the return of Salem Unit 1 to service in Q1 1998.
- Energy Master Plan Outcome: Monitor the BPU's decision on PSE&G's restructuring proposal, specifically regarding the approval of stranded cost securitization and the timeline for retail competition.
- EDHI Leverage: Track EDHI's debt-to-equity ratio to ensure compliance with the 2.00:1 covenant following recent financing for the Brazilian investment.
- Year 2000 Progress: Assess the status of system modifications and associated costs to mitigate operational risks.
- Environmental Liabilities: Review updates on the Passaic River remediation costs and the manufactured gas plant program, as these could result in material future expenditures.