Public Service Enterprise Group Incorporated — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011; filed February 27, 2012. This is an annual report, not a standalone fourth-quarter filing. Figures below are consolidated unless otherwise identified; dollar amounts are in millions unless stated.
Business context
PSEG operates mainly in the Northeast and Mid-Atlantic through Power, its wholesale generation and energy-supply business; PSE&G, its regulated New Jersey electric and gas utility; and Energy Holdings, which manages lease investments and generation projects. Power supplied at least 70% of continuing-operations income over the past three years. PSE&G provides a steadier regulated earnings base.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Operating revenue | $11,079 | $11,793 | Down 6% |
| Operating income | $2,742 | $2,937 | Down 7% |
| Income from continuing operations | $1,407 | $1,557 | Down 10% |
| Net income | $1,503 | $1,564 | Down 4% |
| Diluted EPS, continuing operations | $2.77 | $3.07 | Down 10% |
| Diluted EPS, net income | $2.96 | $3.08 | Down 4% |
| Operating cash flow | $3,557 | $2,164 | Up $1,393 |
| Capital expenditures | $2,083 | $2,160 | Excludes nuclear fuel purchases |
| Cash and cash equivalents at year-end | $834 | $280 | |
| Total assets | $29,821 | $29,909 | |
| Long-term debt, including securitization and project-level debt | $7,461 | $7,819 | Balance-sheet classification; current maturities are separate |
Calculated from reported figures, operating margin was approximately 24.7% (26.3% in 2010) and net margin approximately 13.6% (13.3% in 2010). Operating cash flow less reported property, plant and equipment additions was approximately $1,474 million; this is a simple cash-flow measure, not company-reported free cash flow.
PSEG reported $4,202 million of total credit facilities, of which $4,015 million was available at year-end. Management said operating cash flow, cash on hand and financing activities were expected to fund capital spending and dividends. The current ratio was approximately 1.32, based on reported current assets and current liabilities.
Fourth-quarter 2011 consolidated revenue was $2,636 million, continuing-operations income $360 million and net income $360 million, compared with $2,745 million, $290 million and $282 million, respectively, in fourth-quarter 2010.
Material changes and notable items
- Power earnings weakened: continuing-operations income fell to $1,002 million from $1,136 million. Lower wholesale electricity and capacity prices, customer migration from BGS contracts, and lower generation volumes pressured results. Lower energy costs, hedge mark-to-market gains and new wholesale contracts partly offset the decline.
- PSE&G earnings improved: income rose to $521 million from $359 million, reflecting higher delivery and transmission rates, lower pension and OPEB costs, and the absence of a 2010 after-tax $72 million Market Transition Charge refund provision. Commodity revenues and costs are generally passed through, with no supply margin.
- Energy Holdings recorded a major loss: its continuing-operations loss was $134 million, versus income of $49 million in 2010, primarily due to a $170 million after-tax charge for Dynegy-related leveraged leases. The $264 million gross lease investment was fully reserved and subsequently written off following lease rejection in bankruptcy. A settlement provided a $7.5 million cash payment, received in January 2012, and a $110 million claim; ultimate recovery remains uncertain.
- Asset sales: Power sold two 1,000 MW Texas plants for total proceeds of $687 million, recognizing $79 million of after-tax gains. Energy Holdings sold a Denver office-building investment for $215 million gross proceeds and a $34 million after-tax gain.
- Cash flow benefited from tax timing: federal tax provisions for accelerated depreciation provided about $900 million of cash benefits through 2011. Operating cash flow also reflected working-capital and counterparty collection movements.
- Generation and utility operations: Power generated approximately 54 TWh, about 5% less than in 2010, primarily due to reduced demand. Its nuclear fleet achieved a 93% annual capacity factor. PSE&G reported historical 2007–2011 load growth of negative 0.5% for electric distribution and positive 2.2% for gas.
Outlook, capital plans and risks
- Management identified sustained low natural-gas and electricity prices, uncertain economic recovery, regulatory and environmental changes, and challenges to competitive wholesale markets as key forward-looking issues. The filing gives no specific 2012 earnings or EPS guidance.
- Projected construction and investment expenditures total approximately $6.86 billion for 2012–2014, with over 75% at PSE&G. The 2012 estimate is $2.565 billion. Major plans include transmission reliability projects, distribution upgrades, solar investment and generation maintenance and uprates.
- Transmission projects face permitting, opposition and schedule risks. PSE&G’s approximately $750 million Susquehanna–Roseland project was delayed; the anticipated in-service dates were June 2014 for the eastern segment and June 2015 for the western segment, with further delay possible.
- Environmental and regulatory exposure includes proposed cooling-water rules that could require substantial upgrades; the filing estimated PSEG’s share of cooling towers at Salem at approximately $575 million, an estimate not updated and not included in forecast capital expenditures. The EPA’s proposed rule could affect multiple generating stations.
- PSE&G recorded a $635 million liability and matching regulatory asset for manufactured-gas-plant remediation; its estimated total remediation cost range was $635–$733 million through 2021. For Passaic River and related claims, the company could not estimate its share or a loss range; EPA remedy estimates for the lower river stretch were $1.3–$3.7 billion.
- New Jersey’s LCAPP program subsidizes up to 2,000 MW of new generation through long-term capacity agreements. Legal challenges are pending, and the company warned that subsidized generation could depress competitive capacity prices. Implementation and possible ratepayer effects remain uncertain.
- Storm restoration costs of approximately $60 million from Hurricane Irene and the October 2011 snowstorm were deferred; recovery remains subject to regulatory proceedings. The storms disrupted service to more than 800,000 and 570,000 customers, respectively.
- Power’s commodity guarantees had a face value of $1,756 million, but current exposure was $315 million at year-end. A downgrade below investment grade could require approximately $812 million of additional collateral. Credit-facility availability was substantial, but collateral needs could rise with market prices or weaker credit.
- A January 2012 IRS settlement resolved the challenged lease deductions for specified tax years. For 2004–2008, PSEG estimated approximately $1.0 billion of tax and interest payable; for 2009–2010, the IRS owed approximately $1.0 billion in refunds. The company intended to seek simultaneous processing or offset, but noted it might need to pay first and wait years for refunds. It expected about $100 million of 2012 cash tax savings from an interest deduction.
- Management approved a first-quarter 2012 dividend of $0.355 per share, equivalent to an indicated annual rate of $1.42, versus $1.37 per share paid in 2011. The board retains discretion over future dividends.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and PSEG’s internal control over financial reporting. Management reported effective controls and no material weaknesses.
Important facts for investors to verify
- Whether Power’s margins stabilize amid lower wholesale prices, BGS customer migration and changing capacity-market rules.
- The timing and collectability of the $110 million Dynegy bankruptcy claim and the value of any securities received.
- The cash timing and net outcome of the IRS settlement, including whether the approximately $1.0 billion payment and refund can be offset.
- Permitting, final costs and in-service timing for major transmission projects, especially Susquehanna–Roseland.
- Regulatory outcomes and potential capital requirements for cooling-water, air-emissions and other environmental rules; also monitor remediation liabilities and rate recovery.
- Liquidity available after planned capital spending, debt maturities, pension funding and any increased collateral requirements; confirm dividend coverage under lower-market-price scenarios.