Public Service Enterprise Group Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts are in millions of dollars unless stated otherwise. PSEG is a holding company with wholesale generation and energy supply (PSEG Power), regulated New Jersey electric and gas transmission and distribution (PSE&G), and energy-related investments (Energy Holdings).
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $2,098 | $2,469 | $4,973 | $5,823 |
| Operating income | $433 | $621 | $1,216 | $1,477 |
| Income from continuing operations | $211 | $320 | $704 | $782 |
| Net income | $211 | $323 | $704 | $849 |
| Diluted EPS | $0.42 | $0.63 | $1.39 | $1.67 |
| Operating margin | 20.6% | 25.2% | 24.4% | 25.4% |
Revenue fell 15% year over year in both periods. Lower wholesale power and gas prices, reduced sales volumes, customer migration from PSE&G’s Basic Generation Service supply, and milder winter weather weighed on results. Q2 continuing income declined $109 million; first-half continuing income declined $78 million. PSEG Power’s first-half continuing income fell to $357 million from $502 million, while PSE&G’s rose to $298 million from $268 million. PSE&G benefited from higher transmission revenues, weather normalization recoveries, and tax benefits; Power was hurt by lower realized power prices and sales and lower nuclear decommissioning trust gains. Prior-year net income included $67 million from discontinued operations, including a gain on sale.
Consolidated first-half operating cash flow was $1,378 million, versus $1,395 million a year earlier. Capital expenditures were $1,280 million, up from $1,002 million; dividends paid were $359 million. Cash declined to $765 million from $834 million at year-end. At June 30, current assets were $3,940 million and current liabilities $2,816 million. Long-term debt in capitalization was $7,336 million; additionally, $751 million of long-term debt and $221 million of securitization debt were due within one year, and commercial paper and loans were $16 million. Total credit facilities were $4.3 billion, with $4.051 billion available. Management said operating cash, cash on hand, and financing were expected to fund capital spending and dividends.
Common dividends were $0.355 per share for Q2, up from $0.3425. The board declared the same $0.355 quarterly dividend for Q3. PSEG reported first-half capital spending of approximately $1.3 billion and completed its planned $135 million pension and postretirement contributions for 2012.
Material changes, outlook, and notable items
- Management cited sustained lower gas and electricity prices, uncertain economic recovery, customer migration, regulatory and political uncertainty, and potential subsidized generation as key challenges. Power cleared approximately 9,000 MW in the May 2012 capacity auction at an average $167 per MW-day.
- The company forecast more than $6.7 billion of capital spending over the next three years, over 75% at PSE&G; projected construction and investment amounts through 2014 were not materially changed. Funding was expected from internally generated cash and external debt. The forecast excludes proposed Solar 4 All and Solar Loan III extensions, which require regulatory approval.
- PSE&G issued $450 million of 3.95% secured medium-term notes due 2042. Its $300 million of 5.13% notes mature in September 2012. PSEG and Power replaced credit facilities due in December 2012 with facilities expiring in 2017.
- IRS settlements concluded audits for tax years 1997–2006 and the leveraged-lease dispute. The net financial-statement effect was a $70 million decrease in tax expense after reserves. PSEG paid a net deficiency of about $4 million for 1997–2003; it may owe about $620 million for 2004–2006 while seeking about $676 million in refunds for 2007–2010, which could take years to process. A related tax deduction was expected to generate about $100 million of cash tax savings.
- Environmental exposure remains significant. PSE&G recorded a $616 million liability for former manufactured-gas-plant remediation, within an estimated $616–$714 million total range, with an offsetting regulatory asset. PSEG could not estimate its share of potential Passaic River and related natural-resource claims. Proposed federal cooling-water rules could require material investment; an earlier Salem cooling-tower estimate was approximately $1 billion, including about $575 million for Power’s share.
- Energy Holdings’ leveraged-lease portfolio faces counterparty and asset risks. Edison Mission Energy’s parent reported it would no longer provide financial support and that EME might be unable to meet a June 2013 debt obligation absent restructuring; potential bankruptcy could affect leases on coal assets. The Dynegy lease settlement became effective in June 2012, and related assets and debt were written off.
- Credit-rating changes were limited: Moody’s and Fitch upgraded PSE&G mortgage-bond ratings during 2012; PSEG and Power ratings were unchanged. A downgrade could increase collateral needs: Power estimated up to $705 million of additional collateral if it lost investment-grade status.
Key facts for investors to verify
- Whether lower wholesale prices, customer migration, and milder-weather effects persist, and how capacity-market and transmission revenues develop.
- Progress, costs, and approvals for the $6.7 billion capital program, major transmission projects, and proposed solar expansions.
- Timing and cash consequences of the IRS payments and refund claims, and whether expected tax savings are realized.
- Developments in environmental proceedings—especially cooling-water requirements, Passaic River claims, and PSE&G’s MGP remediation estimate and regulatory recovery.
- Credit quality and lease-payment capacity of counterparties, particularly EME/GenOn-related lessees, along with collateral requirements under stress.