Public Service Enterprise Group Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This combined filing covers PSEG and its wholly owned subsidiaries PSEG Power, PSE&G, and Energy Holdings. It is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
PSEG combines a competitive wholesale generation and energy-supply business (Power), a regulated New Jersey electric transmission and distribution and gas distribution utility (PSE&G), and an investment business focused mainly on leveraged leases and solar (Energy Holdings). Management said it was shifting investment toward regulated utility operations to provide more stable earnings as wholesale power prices remained low.
Financial results and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $9.781 billion | $11.079 billion |
| Operating income | $2.278 billion | $2.742 billion |
| Income from continuing operations | $1.275 billion | $1.407 billion |
| Net income | $1.275 billion | $1.503 billion |
| Diluted EPS from continuing operations | $2.51 | $2.77 |
| Operating cash flow | $2.787 billion | $3.557 billion |
| Capital expenditures | $2.574 billion | $2.083 billion |
| Dividends per share | $1.42 | $1.37 |
Revenue fell 12% and continuing income fell about 9%. Operating margin was approximately 23.3%, versus 24.7% in 2011; net margin was approximately 13.0%, versus 13.6%. Lower wholesale electricity and natural-gas prices, reduced generation and supply volumes, and unfavorable mark-to-market results weighed on performance. PSE&G’s commodity supply revenues and costs largely pass through to customers and generally provide no margin.
Segment continuing income: Power $647 million (down from $1.002 billion); PSE&G $528 million (up from $521 million); Energy Holdings $86 million, compared with a $134 million loss. The improvement at Energy Holdings reflected the absence of a prior-year $170 million after-tax leveraged-lease charge and 2012 tax-audit settlement benefits.
Net cash from operations declined $770 million, principally reflecting lower earnings and cash-flow movements, including reduced tax benefits from accelerated depreciation. Cash and equivalents were $379 million at year-end, compared with $834 million. Available credit facilities were $3.855 billion; including cash, reported year-end cash and credit availability totaled about $4.234 billion. Current assets were $3.869 billion and current liabilities $3.777 billion.
At year-end, the balance sheet reported $6.687 billion of long-term debt, including securitization and project-level debt; additional debt due within one year was $1.026 billion, securitization debt due within one year was $226 million, and commercial paper and loans were $263 million. Total assets were $31.725 billion and stockholders’ equity was $10.781 billion. PSEG reported compliance with debt covenants. Power’s $300 million of 2.50% senior notes matured in April 2013; PSE&G also had $725 million of long-term debt due within one year at December 31, 2012.
Material changes and notable events
- Power income declined $355 million, driven by lower realized power prices and volumes, weaker BGS results, lower wholesale-load and ancillary revenues, mark-to-market losses, and Sandy-related costs. Power revenue fell 21% to $4.865 billion.
- PSE&G income rose slightly as higher transmission revenues and tax benefits offset increased operating, storm, pension, and postretirement costs. Its revenue fell 10% to $6.626 billion, largely because lower commodity revenues were matched by lower supply costs.
- Superstorm Sandy caused substantial damage. Power recorded about $85 million of costs, net of $19 million of recognized insurance proceeds, and estimated up to $215 million of additional future costs. PSE&G incurred about $300 million in restoration and repair costs; $180 million was deferred as a regulatory asset, $75 million capitalized, and $40 million expensed, with $6 million of insurance proceeds recognized.
- Operations generated approximately 53,000 GWh. Nuclear fleet capacity factor averaged 91.1%. PSEG invested $1.1 billion in transmission infrastructure and reported $2.574 billion of gross additions to long-lived assets.
- The 2011 sale of two Texas generation plants resulted in $96 million of discontinued-operations income in 2011; there was none in 2012.
Outlook, risks, and contingencies
Management provided no specific 2013 earnings or EPS guidance in the supplied filing text. It identified sustained low gas and electricity prices, customer migration from BGS contracts, weak demand, coal-plant margin pressure, market-rule changes and subsidized generation, environmental regulation, and storm resilience as key challenges. It emphasized cost control, reliable operations, re-contracting open supply positions, and execution of its capital program.
- Investment plans: The three-year capital forecast for 2013–2015 was approximately $6.1 billion, about 80% at PSE&G. Separately, PSE&G sought approval for a proposed $3.9 billion, ten-year system-resilience program and expected to invest another $1.5 billion in transmission over ten years. These proposed investments are not included in the stated three-year forecast.
- Storm-cost recovery: The BPU allowed PSE&G to defer qualifying uninsured storm costs, but prudence and recovery remain subject to regulatory review. Further insurance proceeds were not estimable at year-end.
- Wholesale-market regulation: Legal challenges and regulatory proceedings concerning New Jersey’s subsidized-generation program, Maryland generation procurement, and revisions to PJM’s Minimum Offer Price Rule remained unresolved. Effects on future capacity-market revenues were uncertain.
- Environmental exposure: A proposed federal cooling-water-intake rule could materially affect certain generating stations; PSEG said potential impacts were not yet predictable. PSE&G recorded a $588 million liability for manufactured-gas-plant remediation, at the low end of an estimated $588–$675 million range, with a corresponding regulatory asset. The company could not estimate its share of potential Passaic River and related natural-resource claims.
- Leveraged leases: About 67% of Energy Holdings’ leveraged-lease investments were rated below investment grade by S&P. Edison Mission Energy filed for Chapter 11 in December 2012; scheduled rent of about $48 million on the Powerton and Joliet leases was not paid when due in January 2013. Lease impairment, foreclosure, and related tax consequences remain risks.
- Tax settlement and liquidity timing: IRS settlements resolved specified lease and audit matters. PSEG reported approximately $620 million of tax and interest payable for 2004–2006 and a $676 million refund claim for 2007–2010, which the IRS was processing. Management warned payment could precede receipt of the refund, potentially by several years; it also expected about $100 million of 2012 cash-tax savings from an accrued-interest deduction.
- Pension and market exposure: Pension and OPEB obligations were underfunded by $878 million and $1.285 billion, respectively, at year-end. Management estimated pension contributions of up to $145 million in 2013; actual expense and funding depend on market returns and actuarial assumptions.
- Controls and audit: Deloitte 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 wholesale power prices, generation volumes, customer migration, and mark-to-market results stabilize or further reduce Power’s earnings and cash flow.
- Final BPU treatment and timing of recovery for Sandy costs, including the amount and timing of any additional insurance proceeds.
- The progress and approved cost, recovery mechanism, and financing of PSE&G’s proposed resilience and transmission investments.
- Developments in the IRS refund processing and whether the expected tax payment and refund create a material interim cash requirement.
- Whether Edison Mission’s bankruptcy affects lease payments or recoveries, and how other below-investment-grade lease exposures evolve.
- Regulatory and litigation outcomes for capacity-market subsidies, cooling-water requirements, and environmental claims, including the company-specific exposure where the filing says it cannot be estimated.