Why did PSEG's earnings decline in 2004?

Income from continuing operations fell to $721 million from $852 million. The filing attributes the decline mainly to lower earnings at Power, which had decreased load under fixed-price BGS contracts, higher operation and maintenance costs from a longer-than-planned Hope Creek refueling outage, the loss of MTC revenues after the transition period ended in August 2003, and higher replacement power and congestion costs. Currency fluctuations at Global and lower earnings at Resources, from the termination of the Collins lease, also contributed. PSE&G's earnings improved, partly offsetting these declines.

What is the status of the Exelon merger and what happens if it fails?

PSEG and Exelon signed the merger agreement on December 20, 2004, and both boards unanimously approved it. Completion requires shareholder approval and approvals from FERC, the SEC, the NRC, the New Jersey BPU, the Pennsylvania PUC and other authorities; the filing states these approvals cannot be assured. If the agreement terminates under specified circumstances, Exelon may owe PSEG a $400 million termination fee plus up to $40 million in expenses, and PSEG may owe Exelon the same amounts. PSEG states it intends to remain positioned with a viable stand-alone strategy pending approvals.

What dividend and earnings outlook does PSEG provide for 2005?

PSEG raised its quarterly common dividend from $0.55 to $0.56 per share for the first quarter of 2005, reflecting an indicated annual rate of $2.24. It projects 2005 earnings from continuing operations of $3.15 to $3.35 per share and a target annual earnings per share growth rate of 4% to 6% from 2005 to 2009. Under the merger agreement, Exelon's dividend policy is expected to be 50% to 60% of earnings for the combined company.

What credit ratings pressures does the company face?

S&P downgraded PSEG's and PSE&G's commercial paper ratings from A2 to A3 on July 30, 2004, which limits PSEG's access to the commercial paper market. Fitch downgraded Energy Holdings' senior notes to BB from BBB- in April 2004, and S&P and Moody's rate them below investment grade with negative outlooks. If Power lost its investment-grade rating, ER&T could be required to post collateral of approximately $701 million to counterparties entitled to demand it. Dividend and interest impacts of downgrades are limited under most debt agreements, according to the filing.

What are the main risks in Energy Holdings' investment portfolio?

Energy Holdings' leveraged lease portfolio of about $1.2 billion net of deferred taxes depends on lessee credit, and 69% of counterparties were rated investment grade by both S&P and Moody's. Certain lessees, including UAL, Delta and Northwest, were in bankruptcy or financial distress. The Internal Revenue Service is reviewing 1997 to 2000 tax returns related to these leveraged lease transactions and has not proposed disallowances. If deductions were disallowed, PSEG estimates interest of approximately $100 million through December 31, 2004. International investments also face political, currency and contract risks, including the Brazilian Real devaluation and a disputed receivable from TNEB in India.

PEG 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2005. Cited figures are marked; the original filing is the authoritative source.

Public Service Enterprise Group Incorporated (PSEG) filed this combined 2004 Form 10-K with its subsidiaries PSE&G, PSEG Power LLC (Power) and PSEG Energy Holdings LLC (Energy Holdings).

PSEG reported 2004 net income of $726 million^a, or $3.05 per diluted share, down from $1.16 billion ($5.07 per diluted share) in 2003, which included a $370 million after-tax cumulative-effect benefit from adopting SFAS 143. Income from continuing operations fell to $721 million from $852 million, driven mainly by lower earnings at Power, which reflected reduced load under fixed-price BGS contracts, a longer-than-planned Hope Creek refueling outage, the loss of MTC revenues and higher replacement power and congestion costs. Operating revenues were $10.996 billion, compared with $11.139 billion in 2003.

The most significant event for investors is the December 20, 2004 agreement to merge PSEG into Exelon Corporation, under which each PSEG share converts into 1.225 Exelon shares. The filing states that completion depends on shareholder, FERC, NRC, SEC and state and foreign approvals, and it anticipates closing within 12 to 15 months of the announcement. Termination fees of $400 million plus expenses of up to $40 million^b apply in specified circumstances.

PSEG also raised its quarterly dividend to $0.56^c per share for the first quarter of 2005, and it projects 2005 earnings from continuing operations of $3.15 to $3.35 per share. The filing also details credit and risk exposures. S&P downgraded PSEG's commercial paper rating in 2004 and placed Power on negative outlook, and Energy Holdings' senior notes were rated BB- by S&P and Ba3 by Moody's with negative outlooks.

Power could be asked to post approximately $701 million^d of collateral if it lost its investment-grade rating. The filing also discloses a contingent tax exposure related to leveraged lease transactions, with approximately $100 million of interest that would be assessed if deductions were disallowed.

02—Key points

Key Highlights

2004 net income was $726 million, or $3.05 per diluted share, versus $1.16 billion ($5.07 per diluted share) in 2003, which included a $370 million after-tax cumulative-effect benefit.
Income from continuing operations was $721 million ($3.03 per diluted share), compared with $852 million ($3.72) in 2003, mainly due to lower Power earnings.
Operating revenues were $10.996 billion in 2004, versus $11.139 billion in 2003.
Pending merger with Exelon Corporation: each PSEG share converts into 1.225 Exelon shares; closing expected within 12 to 15 months of the December 2004 announcement, subject to approvals.
Merger termination fees are $400 million, plus transaction expenses of up to $40 million, payable in specified circumstances by either party.
2005 earnings from continuing operations are projected at $3.15 to $3.35 per share for PSEG, with Power at $335 million to $385 million and PSE&G at $325 million to $345 million.
Quarterly dividend increased to $0.56 per share for the first quarter of 2005, an indicated annual rate of $2.24 per share.

03—Questions

Frequently Asked Questions

Why did PSEG's earnings decline in 2004?
Income from continuing operations fell to $721 million from $852 million. The filing attributes the decline mainly to lower earnings at Power, which had decreased load under fixed-price BGS contracts, higher operation and maintenance costs from a longer-than-planned Hope Creek refueling outage, the loss of MTC revenues after the transition period ended in August 2003, and higher replacement power and congestion costs. Currency fluctuations at Global and lower earnings at Resources, from the termination of the Collins lease, also contributed. PSE&G's earnings improved, partly offsetting these declines.
What is the status of the Exelon merger and what happens if it fails?
PSEG and Exelon signed the merger agreement on December 20, 2004, and both boards unanimously approved it. Completion requires shareholder approval and approvals from FERC, the SEC, the NRC, the New Jersey BPU, the Pennsylvania PUC and other authorities; the filing states these approvals cannot be assured. If the agreement terminates under specified circumstances, Exelon may owe PSEG a $400 million termination fee plus up to $40 million in expenses, and PSEG may owe Exelon the same amounts. PSEG states it intends to remain positioned with a viable stand-alone strategy pending approvals.
What dividend and earnings outlook does PSEG provide for 2005?
PSEG raised its quarterly common dividend from $0.55 to $0.56 per share for the first quarter of 2005, reflecting an indicated annual rate of $2.24. It projects 2005 earnings from continuing operations of $3.15 to $3.35 per share and a target annual earnings per share growth rate of 4% to 6% from 2005 to 2009. Under the merger agreement, Exelon's dividend policy is expected to be 50% to 60% of earnings for the combined company.
What credit ratings pressures does the company face?
S&P downgraded PSEG's and PSE&G's commercial paper ratings from A2 to A3 on July 30, 2004, which limits PSEG's access to the commercial paper market. Fitch downgraded Energy Holdings' senior notes to BB from BBB- in April 2004, and S&P and Moody's rate them below investment grade with negative outlooks. If Power lost its investment-grade rating, ER&T could be required to post collateral of approximately $701 million to counterparties entitled to demand it. Dividend and interest impacts of downgrades are limited under most debt agreements, according to the filing.
What are the main risks in Energy Holdings' investment portfolio?
Energy Holdings' leveraged lease portfolio of about $1.2 billion net of deferred taxes depends on lessee credit, and 69% of counterparties were rated investment grade by both S&P and Moody's. Certain lessees, including UAL, Delta and Northwest, were in bankruptcy or financial distress. The Internal Revenue Service is reviewing 1997 to 2000 tax returns related to these leveraged lease transactions and has not proposed disallowances. If deductions were disallowed, PSEG estimates interest of approximately $100 million through December 31, 2004. International investments also face political, currency and contract risks, including the Brazilian Real devaluation and a disputed receivable from TNEB in India.

04—Continue

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