Public Service Enterprise Group Incorporated — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed October 29, 2010. Financial amounts below are in millions of dollars unless stated otherwise. PSEG is a holding company whose principal businesses are wholesale generation and energy supply (Power), New Jersey electric and gas transmission and distribution (PSE&G), and Energy Holdings.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $3,254 | $3,040 | $9,389 | $9,520 |
| Operating income | $1,002 | $924 | $2,373 | $2,488 |
| Net income | $567 | $488 | $1,282 | $1,243 |
| Diluted EPS | $1.12 | $0.96 | $2.53 | $2.45 |
| Operating margin | 30.8% | 30.4% | 25.3% | 26.1% |
For the nine-month period, operating cash flow was $1,339, essentially unchanged from $1,341 a year earlier. Investing cash outflow was $1,096, including $1,517 of capital additions; financing cash outflow was $261. Cash at September 30 was $332, compared with $350 at year-end 2009.
At September 30, total assets were $29,104 and total capitalization was $17,717, including reported long-term debt of $8,152, versus $7,645 at year-end 2009. Current liabilities included $800 of long-term debt due within one year and $204 of VIE securitization debt due within one year; commercial paper and loans were zero. PSEG reported $3,379 of available liquidity under credit facilities. Current assets of $3,671 compared with current liabilities of $3,018.
Common dividends paid were $0.3425 per share in Q3 and $1.0275 per share year to date. The board’s quarterly dividend increase implied an annual rate of $1.37 per share. Credit ratings and outlooks were reported as unchanged and stable.
Material changes and operating drivers
- Q3 revenue rose 7% and net income rose 16% year over year; year-to-date revenue declined 1%, while net income increased 3% and diluted EPS increased 3%.
- Q3 earnings improvement reflected stronger PSE&G results and higher electric volumes and market pricing associated with hotter summer weather. PSE&G net income was $155 versus $88; Power earnings were $384 versus $382. Year to date, PSE&G net income was $276 versus $256 and Power earnings were $952 versus $943.
- PSE&G’s 2010 base-rate settlement provided annual electric and gas revenue increases of $73.5 and $26.5, respectively, with a 10.3% allowed return on equity. New rates took effect in June and July.
- The nine-month results included a $122 pre-tax charge for customer refunds resolving a Market Transition Charge matter. $24 had been refunded through September.
- Property, plant and equipment additions increased to $1,517 from $1,232. PSE&G’s capital additions were $871 versus $580; the company cited investment in transmission and distribution reliability and ongoing generation and renewable projects.
Outlook, risks and unusual items
- Outlook: The filing provides no specific consolidated earnings guidance. Management warned that lower natural-gas and wholesale electricity prices, combined with the expiration of higher-priced forward sales, could pressure Power’s results in 2011 and 2012. Customer migration away from Basic Generation Service may also reduce Power’s earnings if market prices remain below BGS rates. Weaker economic conditions, lower demand, and delayed customer payments were additional concerns; receivables more than 180 days past due were 14% of total receivables.
- Environmental exposure: PSE&G estimated remaining remediation costs for former manufactured-gas-plant sites of $668–$774 through 2021 and recorded a $668 liability matched by a regulatory asset. Separately, proposed cleanup options for the lower Passaic River were estimated at $1.3–$3.7 billion overall; the company said its ultimate actions and share of costs could not be predicted and could be material.
- Tax dispute: The IRS challenged deductions for leveraged-lease transactions. PSEG reported a $320 deposit with the IRS against approximately $330 of potential currently payable amounts if deductions were conceded, leaving stated net cash exposure of about $10. The filing also discusses potentially substantial tax, interest, and penalty payments if litigation is required; outcomes and timing remain uncertain.
- Regulatory and operating risks: A BPU review of gas transportation rates charged to Power and a related FERC complaint could result in material consequences, including possible refunds or challenges to Power’s market-based rate authority. Environmental rules for air emissions, cooling-water intakes, greenhouse gases and coal combustion residuals may require investment or affect plant operations. Transmission project schedules are subject to permitting delays.
- Other notable items: Power’s Salem 1 nuclear unit had a 17-day unplanned outage in July. A March storm damaged PSE&G’s system, interrupting service to more than 600,000 customers; the company deferred incremental restoration costs and intended to seek recovery. PSEG also reported a $31 realized gain from restructuring Rabbi Trust investments.
Investor verification priorities
- Review the drivers and sustainability of Q3 earnings growth, especially weather effects, market prices, BGS customer migration, and gains from Rabbi Trust and nuclear decommissioning trust investments.
- Track Power’s 2011–2012 exposure as higher-priced forward sales expire and assess the effect of lower wholesale prices and customer switching.
- Monitor the IRS leveraged-lease dispute, including potential cash payments, the tax deposit, and any change in reserves or settlement prospects.
- Assess the scale and recoverability of PSE&G’s environmental remediation liabilities and the potential outcomes of Passaic River proceedings.
- Follow BPU and FERC proceedings on gas transportation rates, and confirm the timing, cost, and regulatory recovery of major capital projects.
- Reconcile reported debt, near-term maturities, available credit capacity, and capital spending against operating cash flow and dividend commitments.