Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1999, for Public Service Enterprise Group Inc. (PSEG) and its primary subsidiary, Public Service Electric and Gas Company (PSE&G). The reporting period is defined by the implementation of the New Jersey Energy Master Plan, which deregulated the electric generation business effective August 1, 1999. This transition required the unbundling of rates, the discontinuation of SFAS 71 for generation assets, and the recording of a significant extraordinary charge related to asset impairments and stranded costs.
Key Financial Metrics (Nine Months Ended Sept 30, 1999)
| Metric | PSEG (Consolidated) | PSE&G (Subsidiary) |
|---|---|---|
| Total Operating Revenues | $4,837 million | $4,421 million |
| Operating Income | $1,401 million | $1,238 million |
| Net Income (Loss) | $(214) million | $(270) million |
| Income Before Extraordinary Item | $590 million | $534 million |
| Extraordinary Item (Net of Tax) | $(804) million | $(804) million |
| Earnings Per Share (Basic/Diluted) | $(0.97) | N/A |
| EPS Before Extraordinary Item | $2.68 | N/A |
| Cash Flow from Operating Activities | $955 million | $853 million |
| Cash Flow from Investing Activities | $(1,177) million | $(339) million |
| Cash Flow from Financing Activities | $166 million | $(532) million |
| Total Assets | $18,590 million | $14,545 million |
| Long-Term Debt | $4,711 million | $3,261 million |
| Common Stockholders' Equity | $4,059 million | $3,754 million |
Material Changes vs. Prior Period
- Extraordinary Charge: The primary driver of the net loss was an $804 million extraordinary charge (net of tax) recorded in the second and third quarters. This reflects the impairment of PSE&G's electric generation assets ($5.0 billion pre-tax) due to deregulation and the discontinuation of SFAS 71. This charge was offset by the creation of a $4.057 billion regulatory asset for future securitization proceeds.
- Revenue Presentation: Effective August 1, 1999, electric revenues were unbundled into Generation, Transmission, and Distribution. Total electric revenues increased 4% year-over-year for the nine-month period, driven by favorable weather and wholesale trading profits, partially offset by a mandated 5% rate reduction.
- Operating Expenses: Operation and Maintenance expenses increased 15% year-over-year due to restoration work from Tropical Storm Floyd, Year 2000 readiness costs, and changes in capitalization policies. Depreciation and Amortization decreased 15% due to the reduced net book value of generation assets following the impairment write-down.
- Foreign Currency Impact: Net foreign currency devaluations, primarily due to the Brazilian Real, reduced PSEG's total stockholders' equity by $160 million for the nine-month period.
Guidance, Outlook, and Risks
- Regulatory Proceedings: PSEG and PSE&G are awaiting the outcome of appeals filed by ratepayers against the New Jersey Board of Public Utilities' (BPU) Final Order and Finance Order. These appeals challenge the securitization of stranded costs and the sale of generation assets. Management believes the appeals are without merit but notes that an adverse outcome could materially impact financial condition.
- Securitization and Asset Sale: Assuming a favorable appeal outcome, PSE&G expects to sell generation assets to a new unregulated subsidiary (PSEG Power) and issue $2.525 billion in transition bonds in the first half of 2000. Proceeds will be used to retire debt and equity.
- Competitive Environment: PSEG anticipates that by July 2003, unregulated subsidiaries (Energy Holdings and Power) will contribute 60-70% of earnings. This shift increases exposure to wholesale market price volatility and commodity risks.
- Year 2000 Readiness: Management estimates total Y2K costs of $76 million. As of October 31, 1999, over 99% of mission-critical systems were Y2K ready. Contingency plans are in place for potential vendor failures or demand fluctuations.
- Environmental Liabilities: Significant uncertainties remain regarding the Passaic River site remediation and manufactured gas plant remediation costs, which could be material if not recoverable through regulatory mechanisms.
Investor Verification Checklist
- Appeal Outcomes: Monitor the status of the New Jersey Superior Court appeals regarding the BPU's Final Order and Finance Order, as these dictate the timing of the $2.5 billion securitization and asset sale.
- Wholesale Market Exposure: Verify the performance of PSEG Power in the competitive wholesale market, specifically the spread between Basic Generation Service (BGS) contract rates and market prices for energy/capacity.
- Foreign Currency Sensitivity: Assess the impact of continued devaluation of the Brazilian Real and other foreign currencies on the valuation of Global's international investments.
- Capital Structure Changes: Track the execution of the planned debt retirement and equity reduction using securitization proceeds to ensure capital ratios remain stable.
- Environmental Costs: Review updates on the Passaic River site and manufactured gas plant remediation to ensure costs remain within recoverable regulatory limits.