PUBLIC SERVICE ENTERPRISE GROUP INC annual report, FY2010

Public Service Enterprise Group Inc. — FY 2010 Form 10-K

Reporting period: Year ended December 31, 2010; filed February 25, 2011. The combined filing covers PSEG and its wholly owned subsidiaries PSEG Power (Power) and Public Service Electric and Gas (PSE&G). PSEG combines merchant power generation and wholesale energy operations, regulated New Jersey electric and gas transmission and distribution, and Energy Holdings’ lease and other investments.

Financial results and position

Metric	2010	2009
Operating revenue	$11.793 billion	$12.035 billion
Operating income	$2.937 billion	$3.116 billion
Income from continuing operations	$1.557 billion	$1.594 billion
Net income	$1.564 billion	$1.592 billion
Diluted EPS from continuing operations	$3.07	$3.14
Operating cash flow	$2.164 billion	$1.855 billion
Capital expenditures	$2.160 billion	$1.794 billion
Cash and cash equivalents at year-end	$280 million	$350 million

• Operating margin was approximately 24.9% of revenue, compared with 25.9% in 2009. Net margin was approximately 13.3%, versus 13.2%.
• Segment income from continuing operations: Power $1.136 billion (down $55 million); PSE&G $359 million (up $34 million); Energy Holdings $49 million (down $23 million). Power remained the largest earnings contributor.
• Year-end total assets were $29.909 billion and total stockholders’ equity was $9.641 billion. Consolidated long-term debt was $7.819 billion; adding debt due within one year and securitization debt due within one year gives approximately $8.940 billion of reported debt obligations.
• Available credit facilities totaled $3.650 billion, with $3.350 billion unused at year-end. The company reported compliance with debt covenants; credit ratings had stable outlooks.
• Common dividends were $1.37 per share for 2010, totaling $693 million. The board approved a first-quarter 2011 dividend of $0.3425 per share.

Changes versus 2009

• Revenue fell 2%, operating income fell 6%, continuing income fell 2%, and diluted continuing-operations EPS declined from $3.14 to $3.07. Net income decreased 2%.
• Management attributed weaker results chiefly to lower wholesale gas and electricity prices, customer migration from PSE&G’s default-supply contracts, losses on certain wholesale supply contracts, lower gas volumes, and a $122 million charge tied to refunds of prior Market Transition Charge collections.
• These pressures were partly offset by stronger summer-weather generation volumes and market pricing, PSE&G’s electric and gas base-rate increases, lower interest expense, and improved NDT investment results. PSE&G’s regulated earnings increased while Power earnings declined.
• Operating cash flow increased $309 million, while capital expenditures rose $366 million. Cash declined by $70 million during the year; the filing reports financing cash outflow of $565 million and investing cash outflow of $1.669 billion.

Outlook, risks, contingencies, and unusual items

• Management expected lower earnings in 2011, citing continued low gas and electricity prices, lower capacity prices, a slow economy, regulatory uncertainty, and pressure on competitive power markets. It expected operating cash flow to remain strong and forecast approximately $750 million of cash benefits from accelerated depreciation tax provisions, mostly in 2011. No specific 2011 earnings guidance was provided.
• Power’s forward sales helped protect 2010 results from falling wholesale prices, but management expected lower prevailing prices to weigh more heavily on results in 2011 and 2012 as older contracts roll off. Customer migration from BGS contracts may accelerate that exposure.
• New Jersey’s January 2011 LCAPP provides for 2,000 MW of subsidized generation. PSEG and other generators challenged the program at FERC and in federal court; the outcomes were pending. Management warned that the program could depress capacity-market prices.
• Power agreed in January 2011 to sell two Texas combined-cycle plants, totaling 2,000 MW, for approximately $687 million in separate transactions expected to close in the first half of 2011. Their results were presented as discontinued operations.
• Major investment commitments include PSE&G’s transmission and utility infrastructure programs and solar initiatives. The Susquehanna-Roseland transmission project, estimated at up to $750 million, faced permitting delays; the company did not expect its New Jersey portion in service before June 2014 or its Pennsylvania portion before June 2015. A modified Roseland-to-Hudson project was estimated at up to $700 million.
• Environmental exposure includes possible costly cooling-water requirements—the filing cites an older Salem cooling-tower estimate of approximately $1 billion, of which Power’s share was about $575 million—and pending air-emissions, coal-ash, and greenhouse-gas rules. New Jersey NOx requirements could require significant investment or retirement of generation by 2015.
• The IRS dispute over leveraged-lease tax deductions remained unresolved. The filing states approximately $260 million would become currently payable if deductions were conceded; PSEG had deposited $320 million with the IRS. Potential payments, penalties, and litigation exposure were described as uncertain and could be substantial.
• Environmental claims involving the Passaic River/Newark Bay complex and other sites remain contingent. The EPA’s proposed cleanup options for the lower Passaic River were estimated at $1.3 billion to $3.7 billion overall; PSEG said its share and ultimate costs could not be predicted and could be material. PSE&G recorded a $661 million MGP remediation liability, matched by a regulatory asset.
• Other notable items: PSE&G agreed to refund $122 million to electric customers over two years; a severe March 2010 storm disrupted service to more than 600,000 customers, with incremental costs deferred pending recovery. PSEG reported $40 million of consolidated other comprehensive loss, primarily from derivative hedge valuation changes.
• The independent auditor issued unqualified opinions on the 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 lower wholesale prices, capacity-market changes, and BGS customer migration materially reduce Power’s realized margins and earnings in 2011–2012.
• Completion, sale proceeds, and final closing terms for the Texas plant divestitures.
• Progress and cost recovery for major transmission projects, particularly Susquehanna-Roseland, and the effect of LCAPP and related legal proceedings.
• Developments in the IRS leveraged-lease dispute, including cash payment timing, penalties, and any change in reserves or tax exposure.
• Environmental rulemaking and litigation outcomes, including cooling-water requirements, emissions controls, coal ash, and Passaic River remediation costs.
• Whether the $750 million accelerated-depreciation cash benefit, expected operating cash flow, capital spending, pension funding, and dividend plans are realized as management anticipated.