Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this combined Form 10-K for the fiscal year ended December 31, 2009. It covers PSEG and its wholly owned subsidiaries PSEG Power LLC (Power), Public Service Electric and Gas Company (PSE&G), and Energy Holdings. Power is a wholesale generator and energy supplier; PSE&G operates regulated electric transmission and electric and gas distribution in New Jersey; Energy Holdings focuses mainly on leveraged leases and other investments. Amounts below are in millions of dollars unless stated otherwise.
Key financial metrics
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Operating revenues | $12,406 | $13,322 |
| Operating income | $3,121 | $2,613 |
| Income from continuing operations | $1,592 | $983 |
| Net income | $1,592 | $1,188 |
| Diluted EPS | $3.14 | $2.34 |
| Operating cash flow | $1,855 | $2,345 |
| Capital expenditures | $1,794 | $1,771 |
- Operating margin was approximately 25.2%, up from 19.6%; net margin was approximately 12.8%, up from 8.9%.
- Operating cash flow less property, plant and equipment additions was approximately $61 million, compared with $574 million in 2008. Cash and cash equivalents were $350 million at year-end, versus $321 million.
- At December 31, 2009, total assets were $28.7 billion. Long-term debt was $7.645 billion, with $521 million due within one year and $530 million of commercial paper and loans. Selected long-term obligations, including capital leases, were $7.679 billion, down from $8.044 billion.
- Available committed credit liquidity was $2.968 billion: $477 million at PSEG, $1.891 billion at Power, and $600 million at PSE&G. PSEG reported compliance with debt covenants.
- Common dividends paid were $1.33 per share, totaling $673 million. The board later approved a first-quarter 2010 quarterly dividend increase to $0.3425 per share.
Material changes versus the prior comparable period
- Revenue declined 7% as lower commodity prices and volumes reduced Power and pass-through utility commodity revenues. Energy costs fell 22%, contributing to higher consolidated operating income.
- Continuing-operations income rose 62%, substantially reflecting the absence of the $490 million after-tax leveraged-lease charge recorded in 2008. The 2009 result also benefited from lower impairment charges and improved Power results; it should not be read as solely an improvement in recurring operations.
- Power’s continuing income increased to $1.189 billion from $1.115 billion. Generation volume fell about 5%, but lower fuel costs and higher realized contract prices more than offset lower volumes. PSE&G income declined to $325 million from $364 million, mainly due to lower demand and higher pension expense. Energy Holdings returned to $72 million of continuing income from a $468 million loss, largely reflecting the nonrecurrence of the 2008 lease charge and gains on lease sales and terminations.
- Operating cash flow fell $490 million, primarily due to reduced collateral receipts, pension funding and Energy Holdings tax payments. PSEG contributed $364 million to qualified pension plans and made additional tax deposits related to disputed leveraged-lease deductions.
Outlook, management commentary, risks and unusual items
- Management said continued low market prices and reduced demand could pressure generation margins; no specific consolidated earnings guidance is provided in the filing text. Planned capital expenditures were $2.840 billion for 2010, $2.440 billion for 2011 and $2.390 billion for 2012.
- PSE&G’s electric and gas base-rate request sought annual increases of $148 million and $74 million, respectively; the case was pending, with a decision expected in the first half of 2010. PSEG also cited $23 million of increased 2010 transmission revenues under its FERC formula-rate update.
- Major investment plans include transmission reliability projects, environmental controls, solar and energy-efficiency programs, and new gas peaking capacity. Projects depend on regulatory approvals, permitting, construction costs and funding. The estimated PSE&G share of the Susquehanna-Roseland transmission project was approximately $750 million; local opposition and outstanding approvals remained relevant risks.
- The IRS challenged deductions on certain leveraged leases. The company disclosed $660 million that would become currently payable if it conceded all deductions through 2009; it had deposited $320 million with the IRS. Potential taxes, interest and penalties, and timing of any payments or recovery through litigation, remain uncertain.
- Environmental exposures include the Passaic River/Newark Bay matters, MGP remediation, and evolving rules on greenhouse gases, coal ash, cooling-water systems and emissions. PSE&G recorded $694 million of MGP remediation liabilities with an offsetting regulatory asset. Potential Salem cooling-tower costs were estimated at approximately $1 billion, of which Power’s share was about $575 million.
- Other key risks include wholesale power and fuel-price volatility, customer migration from BGS contracts, collateral needs following a credit downgrade, nuclear operational and licensing risks, pension funding, regulatory changes, and counterparty credit risk. A below-investment-grade Power rating could require approximately $986 million of additional collateral.
- Unusual items include the 2008 leveraged-lease charge; 2009 lease sales and terminations; $60 million of 2009 other-than-temporary impairments at Power; and approximately $47 million received in 2009 from the DOE for spent-fuel management costs. Deloitte & Touche issued unqualified opinions on the consolidated financial statements and PSEG’s internal controls.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus the absence of the 2008 leveraged-lease charge, 2009 lease transactions and other investment-related items.
- The status, likely cash impact and potential penalties of the IRS leveraged-lease dispute, including further tax deposits, settlements or litigation.
- Power’s realized margins, contracted generation and customer migration from BGS service as wholesale prices and demand change.
- Whether requested utility rate relief and major transmission, environmental and renewable-project approvals are obtained, and whether project costs remain recoverable.
- Cash generation, pension contributions, planned capital spending, debt maturities and available liquidity, especially if collateral requirements rise or customer collections weaken.