Public Service Enterprise Group Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless otherwise stated. Amounts are in millions of dollars except per-share data. The combined filing covers PSEG, PSEG Power LLC and Public Service Electric and Gas Company (PSE&G).
Business context and results
PSEG is a diversified energy holding company. Power operates wholesale generation and energy supply businesses; PSE&G is a regulated New Jersey electric and gas transmission and distribution utility. Energy Holdings owns energy-related investments and leveraged leases.
| Consolidated metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenues | $3,680 | $3,920 | Down 6% |
| Operating income | $934 | $927 | Up 1% |
| Income before tax | $847 | $748 | Up 13% |
| Net income | $491 | $444 | Up 11% |
| Diluted EPS | $0.97 | $0.88 | Up 10% |
| Operating margin | 25.4% | 23.6% | Higher |
| Net margin | 13.3% | 11.3% | Higher |
| Operating cash flow | $1,072 | $1,389 | Down $317 |
| Capital expenditures | $427 | $402 | Up $25 |
| Cash and equivalents, quarter-end | $312 | $350 at Dec. 31, 2009 | Down $38 during quarter |
| Total long-term debt, including securitization and project debt | $7,906 | $7,645 at Dec. 31, 2009 | Up $261 |
Operating cash flow less capital expenditures was approximately $645 million, versus $987 million in Q1 2009. The filing attributes much of the cash-flow decline to lower margins, lower collateral receipts and changes in deferred energy costs. Quarter-end total debt including current maturities was approximately $8.2 billion. PSEG reported $3.25 billion of available liquidity under committed credit facilities, against $3.55 billion of total facilities.
Business performance and changes
- Power: Earnings available to PSEG rose to $364 million from $314 million. Revenues fell 7% to $2,303 million, while lower energy costs and substantially smaller impairment charges supported earnings. Favorable NDT fund and non-trading mark-to-market results were important contributors.
- PSE&G: Earnings available to PSEG declined to $117 million from $123 million. Revenues fell 11% to $2,444 million, with lower gas and electric supply revenues largely offset by lower commodity costs; milder weather and customer migration affected volumes.
- Energy Holdings: Earnings declined to $7 million from $11 million, mainly due to lower gains on leveraged-lease dispositions and lower equity-method income.
- Consolidated energy costs declined 15% to $1,768 million, while operations and maintenance expense rose 4% and depreciation and amortization rose 12%. Interest expense fell to $116 million from $145 million. Other-than-temporary impairments decreased to $1 million from $61 million.
- The quarterly common dividend increased to $0.3425 per share from $0.3325; cash dividends paid were $173 million. The prior $750 million share-repurchase authorization expired in February 2010 and was not renewed.
Liquidity, debt and investment
- Operating cash flow remained positive but declined year over year. PSEG said operating cash, cash on hand and financing activities were expected to fund capital expenditures and dividends.
- During the quarter, PSE&G issued $300 million of 5.50% notes due 2040, repaid $300 million of floating-rate debt at maturity and redeemed $80 million of preferred stock. Power paid a $175 million dividend to PSEG. In April, after quarter-end, Power issued $550 million of senior notes and completed an exchange involving $195 million of 7.75% notes due 2011.
- Expected 2010 pension contributions were $415 million; $249 million had been contributed through March, and management reported $332 million contributed through April.
- Key investments include transmission upgrades, distribution reliability, solar programs, generation upgrades and new gas-fired peaking capacity. Management said projected construction and investment spending through 2012 remained consistent with the 2009 Form 10-K; the filing does not provide a consolidated numeric capital-spending forecast here.
Outlook, commentary and material risks
- Management cited mild weather, economic weakness and low natural-gas prices as ongoing pressures. Heating degree days were 10.5% lower than in Q1 2009; Power’s BGSS sales volumes fell about 11%, while PSE&G gas and electric delivery volumes declined 7% and 1%, respectively.
- Customers moving from PSE&G’s BGS supply contracts to third-party suppliers reduced Power’s contracted sales and could continue to pressure generation margins if market prices remain below BGS contract prices. Power generation volumes were nevertheless about 7% higher, with increased output sold into power pools and under new wholesale contracts at lower prices.
- A severe March storm damaged more than 1,000 poles and disrupted service to about 635,000 customers. PSE&G restored service within a week. Storm-related first-quarter costs exceeded $41 million, including $16 million capitalized and $9 million of incremental costs for which the company expected to seek deferral and recovery.
- A New Jersey distribution base-rate case remained pending. PSE&G sought a $204 million increase; the Rate Counsel recommended a much smaller net increase, and management anticipated a decision around mid-year if settlement talks failed. Outcomes were not assured.
- Environmental exposures include PSE&G’s estimated $690 million MGP remediation liability, offset by a regulatory asset, and potentially material Passaic River/Newark Bay claims. Power also faces uncertainty over future air-emissions and cooling-water requirements; the filing notes that cooling-system costs could be material and were not included in forecast capital expenditures.
- The IRS leveraged-lease tax dispute remains significant. PSEG reported approximately $600 million that could become currently payable if deductions were conceded, with $320 million deposited with the IRS. The company described possible substantial tax, interest and penalty payments and said a total-loss outcome could result in an additional $140–$160 million earnings charge.
- If Power fell below investment grade, counterparties could require additional collateral of about $968 million. PSEG said available liquidity under PSEG and Power credit facilities was $2.648 billion. Derivatives regulation, commodity-price volatility, counterparty nonperformance and credit-rating deterioration were also identified as risks.
- New health-care legislation resulted in a $9 million noncash after-tax charge, primarily at Power. PSE&G deferred a related $78 million as a regulatory asset for future recovery. Potential future costs from other provisions were still under evaluation.
- Management gave no specific consolidated earnings guidance in the supplied filing text. It described future margins as vulnerable to lower market prices, reduced demand and customer migration. The Susquehanna-Roseland transmission project, estimated at $750 million, remained subject to approvals and timing risks.
Most important facts for investors to verify
- How much of Q1 earnings growth came from recurring operations versus NDT fund gains, mark-to-market results and the year-over-year reduction in impairment charges.
- Whether BGS customer migration, lower wholesale prices and weather-related volume weakness continue to reduce Power margins and PSE&G earnings.
- The outcome and timing of PSE&G’s base-rate case and other regulatory proceedings, including the recovery of storm costs and deferred program expenditures.
- Developments in the leveraged-lease IRS dispute, including cash-tax timing, deposits, possible penalties and potential earnings exposure.
- Whether environmental and emissions requirements create costs beyond recorded liabilities and current capital plans, particularly for MGP remediation, river claims and cooling-water compliance.
- Operating cash flow, pension contributions, capital spending, debt maturities and available liquidity, especially if commodity-market collateral requirements rise.