Public Service Enterprise Group Inc. — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Figures are in millions of dollars except per-share data. The filing covers PSEG and its subsidiaries PSEG Power and PSE&G.
Business context and financial performance
PSEG is an energy holding company with wholesale generation and energy supply operations (Power), regulated electric and gas transmission and distribution in New Jersey (PSE&G), and other energy investments (Energy Holdings).
| Consolidated metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Operating revenues | $3,041 | $3,718 | $9,523 | $10,060 |
| Operating income | $924 | $965 | $2,488 | $1,954 |
| Income from continuing operations | $488 | $476 | $1,243 | $746 |
| Net income | $488 | $656 | $1,243 | $954 |
| Diluted EPS, continuing operations | $0.96 | $0.94 | $2.45 | $1.47 |
| Diluted EPS, net income | $0.96 | $1.29 | $2.45 | $1.88 |
| Dividends per common share | $0.3325 | $0.3225 | $0.9975 | $0.9675 |
For the first nine months, cash provided by operations was $1,341 (versus $1,592 in 2008); investing cash use was $419, including $1,232 of property, plant and equipment additions; financing cash use was $1,113. Cash and equivalents ended September at $130, down from $321 at year-end 2008.
At September 30, PSEG reported $7,566 of long-term debt, $648 of long-term debt due within one year and $243 of commercial paper and loans. Total assets were $28,434 and stockholders’ equity was $8,685. Available committed credit-facility liquidity was approximately $3,117 across PSEG, Power and PSE&G; management said liquidity exceeded anticipated maximum requirements through 2010.
Material changes versus comparable periods
- Q3 continuing-operations income rose to $488 from $476, while net income fell from $656 because 2008 included $180 of discontinued-operations income from businesses subsequently sold.
- Nine-month continuing-operations income increased to $1,243 from $746. The comparison benefited from the absence of a substantial 2008 leveraged-lease charge and from improved Power earnings; 2008 also included $208 of discontinued-operations income.
- Power’s nine-month earnings increased to $922 from $843, supported by lower fuel costs, higher contract pricing and lower NDT impairment charges, partly offset by lower generation volumes and NDT gains.
- PSE&G’s nine-month earnings declined to $256 from $287, reflecting lower electric margins, higher operating and maintenance costs—including pension expense—and the absence of certain 2008 tax benefits.
- Consolidated revenue fell 5% year to date. Management attributed pressure to lower commodity prices, reduced demand, milder summer weather and customer migration from BGS supply contracts. Generation volumes were about 10% lower year over year; electric delivery volumes fell 4%, while gas delivery volumes rose 4%.
Outlook, management commentary and risks
- No specific consolidated earnings guidance is provided in the supplied filing text. Management expected continued lower market prices and reduced demand to pressure generation margins, and emphasized cost control, operational performance and disciplined investment.
- Management reported higher customer-payment delays: receivables outstanding more than 180 days were 15% of customer receivables in September 2009, versus 8% a year earlier.
- PSEG raised its quarterly common dividend to $0.3325 per share, an indicated annual rate of $1.33. Management stated this was consistent with a 40%–50% target payout ratio of operating earnings; future dividends remain subject to board discretion.
- Planned and approved investment programs include PSE&G’s $694 capital-stimulus program, approximately $166 of energy-efficiency investment, and the $515 Solar 4 All program. PSE&G’s projected construction and investment spending through 2011 increased by $1.5 billion from the prior annual-report forecast. Major generation projects include Kearny peaking capacity and Peach Bottom upgrades.
- Regulatory and environmental exposures include potential greenhouse-gas and coal-ash rules; New Jersey NOx requirements that could require retirement of up to approximately 2,800 MW by 2015; and possible cooling-system upgrades at once-through-cooled plants. Salem cooling towers were estimated at about $1 billion, with Power’s share approximately $575 million.
- PSE&G recorded a $702 environmental liability for its manufactured-gas-plant remediation program, with an offsetting regulatory asset. Passaic River cleanup options discussed by the EPA ranged from $900 million to $2.3 billion; PSEG could not predict its share or ultimate costs.
- Tax litigation over leveraged-lease deductions remains significant. PSEG disclosed approximately $780 of potential current tax payments if it conceded deductions, reduced to $460 after $320 of IRS deposits; possible penalties were $150. The company anticipated potential 2010 payments and litigation, but timing and outcome were uncertain.
- Power said a two-notch downgrade below investment grade could trigger approximately $850 of additional collateral requirements. Commodity prices, counterparty performance, credit ratings, regulatory decisions and construction approvals remain risks.
- On October 1, 2009, PSEG transferred PSEG Texas to Power. The filing also reports that PSE&G’s new customer-care system materially changed related internal controls; management stated disclosure controls were effective and was continuing to modify controls for the system.
Important facts for investors to verify
- Underlying Power earnings and margins after separating the effects of fuel prices, hedging, NDT investment results and lower generation volumes.
- Whether customer migration from BGS contracts and elevated overdue receivables persist, and the resulting effects on margins and cash collection.
- Progress and rate recovery for PSE&G’s capital programs, base-rate case, transmission projects and solar investments.
- Updated estimates, regulatory recovery and allocation of environmental remediation and emissions-compliance costs.
- Developments in the IRS leveraged-lease dispute, potential cash payments, penalties and tax-benefit exposures.
- Liquidity and collateral headroom under commodity contracts, especially under adverse credit-rating or market-price scenarios.