Business Context and Reporting Period
Company: Public Service Enterprise Group Inc (PSEG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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, except per share) | Q2 2001 | Q2 2000 | 6 Mo 2001 | 6 Mo 2000 |
|---|---|---|---|---|
| Total Operating Revenues | $2,171 | $2,159 | $4,990 | $4,642 |
| Operating Income | $402 | $393 | $984 | $996 |
| Net Income | $143 | $142 | $404 | $412 |
| Earnings Per Share (Diluted) | $0.68 | $0.66 | $1.94 | $1.91 |
| Operating Cash Flow (6 Mo) | $680 | $696 | $680 | $696 |
| Long-Term Debt | $9,581 | $5,297 | $9,581 | $5,297 |
| Cash and Equivalents | $425 | $102 | $425 | $102 |
Note: Balance sheet figures for Long-Term Debt and Cash represent the period end (June 30, 2001) vs. prior year end (Dec 31, 2000) as comparative Q2 2000 balance sheet data is not provided in the text.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 1% in Q2 and 7% in the six-month period compared to 2000. Generation revenues rose 11% (Q2) and 8% (6 Mo) due to increased load served under Basic Generation Service (BGS) contracts as customers returned from third-party suppliers.
- Trading Decline: Trading revenues decreased 17% in Q2 and 11% in the six-month period due to lower volumes from market volatility. However, trading margins improved as costs decreased more significantly than revenues.
- Gas Costs: Gas distribution revenues and costs increased significantly (35% revenue increase for 6 months) due to higher natural gas costs passed through to customers.
- Debt Structure: Long-term debt increased substantially from $5.3 billion (Dec 2000) to $9.6 billion (June 2001). This reflects Power's issuance of $1.8 billion in Senior Notes in April 2001 to replace interim financing and PSE&G's issuance of $2.525 billion in transition bonds in January 2001.
- Accounting Changes: PSEG adopted SFAS 133 (Derivatives) on Jan 1, 2001, resulting in a $9 million cumulative effect gain. The company also began reporting physical bilateral energy sales on a gross basis per EITF 99-19.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Rate Reductions: PSE&G implemented an additional 2% electric rate reduction effective Feb 7, 2001, and another 2% reduction effective Aug 1, 2001, totaling a 9% decrease since 1999.
- Capital Needs: Energy Holdings requires significant capital for growth over the next five years, funded by operations, external financing, and equity infusions from PSEG. Power aims to increase its generating portfolio to 20,000 MW by 2005.
- Dividends: PSEG maintains a quarterly dividend of $0.54 per share but notes that future dividends depend on earnings and cash flows, which may become more volatile as the business shifts from regulated to competitive.
Risks and Contingencies
- Foreign Currency: Significant exposure to Latin American currencies. The Brazilian Real devalued ~18% and the Chilean Peso ~10% since year-end 2000. The Argentine peso remains pegged but faces economic instability. Net foreign currency devaluations reduced stockholder equity by $241 million (after-tax) as of June 30, 2001.
- California Utilities: Pacific Gas & Electric (PG&E) filed for Chapter 11 bankruptcy. PSEG affiliates (GWF, Hanford, Tracy) have receivables from PG&E. While post-petition payments are current, the ultimate resolution of pre-petition receivables ($62 million gross) remains uncertain, though claims have been elevated to administrative priority.
- Regulatory/Environmental: Ongoing disputes with the EPA regarding New Source Review (NSR) requirements for Hudson and Mercer units and Prevention of Significant Deterioration (PSD) rules for the Bergen 2 unit. Compliance costs could be material. Additionally, PSE&G faces long-term remediation costs for former manufactured gas plants, estimated at ~$20 million/year for 30 years.
- Legal Proceedings: Appeals regarding the New Jersey Energy Master Plan and securitization orders were largely affirmed by the NJ Supreme Court, though a petition for certiorari was filed with the US Supreme Court by a customer (Co-Steel).
Investor Verification Checklist
- Debt Servicing: Verify the impact of the $9.6 billion long-term debt load on interest coverage ratios, particularly given the recent refinancing of Power and PSE&G.
- Foreign Exposure: Assess the sensitivity of Energy Holdings' earnings to further devaluation of the Brazilian Real and Argentine Peso, and the stability of the Argentine currency peg.
- PG&E Receivables: Monitor the bankruptcy court proceedings regarding the collection of pre-petition receivables from PG&E ($37 million net receivable).
- Regulatory Compliance: Track the resolution of EPA enforcement actions regarding NSR and PSD rules, which could trigger significant capital expenditures or operational delays.
- Trading Margins: Evaluate the sustainability of improved trading margins in a volatile market environment where trading volumes have declined.