Public Service Enterprise Group Incorporated — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2011, with comparisons to Q1 2010. PSEG is a holding company with wholesale generation and energy supply (PSEG Power), regulated electric and gas transmission and distribution (PSE&G), and energy-related investments (Energy Holdings). Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 or comparison |
|---|---|---|
| Operating revenue | $3,354 | $3,573; down 6% |
| Operating income | $856 | $946; down 10% |
| Income from continuing operations | $462 | $498; down 7% |
| Net income | $526 | $491; up 7% |
| Diluted EPS | $1.04 | $0.97 |
| Operating margin | Approximately 25.5% | Approximately 26.5% |
| Operating cash flow | $1,042 | $1,072 |
| Capital expenditures | $497 | $427 |
| Cash and cash equivalents | $900 at March 31 | $280 at December 31, 2010 |
| Total assets | $29,370 at March 31 | $29,909 at December 31, 2010 |
| Long-term debt, including securitization and non-recourse debt | $7,697 at March 31 | $7,819 at December 31, 2010 |
Net income benefited from $64 of discontinued-operations income, including a $53 after-tax gain on the sale of one Texas plant; continuing-operations earnings declined. PSEG paid $173 in common dividends ($0.3425 per share), unchanged from Q1 2010. Cash from operations less capital expenditures was approximately $545, versus $645 in Q1 2010. Current assets of $4,466 compared with current liabilities of $3,483, or approximately 1.28x; this measure includes assets and liabilities of discontinued operations.
Material changes versus the prior comparable period
- Power: Continuing-operations income fell to $298 from $371. Revenue declined 10%, reflecting weaker wholesale pricing and hedging results, lower BGS volumes as customers migrated to other suppliers, and lower gas prices. Lower fuel costs partly offset these pressures; maintenance, depreciation and interest costs increased.
- PSE&G: Net income rose to $163 from $118. Higher electric and gas delivery and transmission rates, increased gas volumes, and lower operation and maintenance expense contributed. Lower commodity revenues and energy costs largely offset each other, as the utility earns no margin on BGS and BGSS commodity supply.
- Energy Holdings: Income declined to a $3 loss from $7 income, primarily because Q1 2010 included gains from leveraged-lease asset sales.
- Consolidated operating cash flow decreased $30. Pension and postretirement plan funding was $446, compared with $276 in Q1 2010. PSEG completed its planned 2011 pension contribution of $415 and contributed $11 to postretirement healthcare plans during the quarter.
Outlook, commentary, risks and unusual items
- Management anticipated further pressure on Power from lower PJM capacity and BGS prices taking effect in Q2, alongside customer migration to lower-priced spot-market sales. Utility results were expected to benefit from a full year of 2010 distribution rate increases and 2011 transmission rate updates.
- Management expected approximately $750 of 2011 cash benefit from accelerated tax depreciation provisions, most of it in 2011. Together with operating cash and Texas sale proceeds, these funds were expected to support capital spending and dividends. The filing does not provide a specific earnings or EPS forecast.
- The sale of one 1,000 MW Texas generating facility closed in March for $351; the second sale was expected to close in Q2. The two transactions were expected to total approximately $687. The second closing remained pending.
- At March 31, available liquidity under credit facilities was $3,331. New five-year credit agreements signed April 15 increased total credit capacity to $4.3 billion. Management stated that operating cash, cash on hand and financing activities were expected to be sufficient for capital expenditures and dividends.
- Major uncertainties include sustained low energy prices, economic recovery, regulatory and political developments, environmental requirements, and competitive-market changes. EPA proposed cooling-water intake rules that could require material spending; potential Salem cooling-tower costs were previously estimated at approximately $1 billion, including an estimated $575 PSEG share, but that estimate had not been updated.
- Additional nuclear safety reviews followed the Fukushima events; the filing noted a petition seeking suspension of certain reactor licenses, including Hope Creek and Peach Bottom, and stated that outcomes and potential impacts were uncertain.
- Environmental contingencies include Passaic River and Newark Bay matters, with potential costs that could be material, and PSE&G’s estimated $658 liability for former manufactured-gas-plant remediation, offset by a regulatory asset. A proposed New Jersey capacity subsidy program and related legal and regulatory challenges also create market and financial uncertainty.
- Energy Holdings had $893 of lease receivables, net of non-recourse debt; Dynegy, a lease counterparty, was downgraded to CC and its auditors cited substantial doubt about its ability to continue as a going concern. Payments were current at quarter-end, but future collections were not assured.
- PSEG disputed IRS treatment of leveraged-lease tax deductions. It had deposited $320 with the IRS, which management said fully covered current cash exposure if the deductions were conceded, but potential tax, interest and penalties, litigation payments, and earnings effects remain uncertain.
Important facts for investors to verify
- Whether the second Texas plant sale closed in Q2 and the final proceeds and gain recognized.
- Whether lower PJM/BGS pricing, customer migration and wholesale contract losses materially affected subsequent Power results.
- The realization and timing of the anticipated approximately $750 tax cash benefit, and developments in the IRS leveraged-lease dispute.
- Final environmental and nuclear rules, associated compliance costs, and any impact on plant operations or capital plans.
- Developments in Dynegy’s credit condition and collections on lease receivables, as well as PSEG’s available liquidity and debt maturities.