PUBLIC SERVICE ENTERPRISE GROUP INC quarterly report, Q2 FY2011

Public Service Enterprise Group Inc. — Q2 2011 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2011. The filing also covers PSEG Power LLC and Public Service Electric and Gas Company (PSE&G), its wholly owned subsidiaries. Unless stated otherwise, amounts are in millions of dollars.

Financial performance

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Operating revenues	$2,469	$2,361	$5,823	$5,934
Operating income	$621	$431	$1,477	$1,377
Income from continuing operations	$320	$222	$782	$720
Net income	$323	$224	$849	$715
Diluted EPS	$0.63	$0.44	$1.67	$1.41

Operating margin was approximately 25.2% in Q2 2011 versus 18.3% a year earlier; for the first half it was approximately 25.4% versus 23.2%.
First-half operating cash flow was $1,395, compared with $520 in 2010. Investing cash outflow was $673, including $1,002 of property, plant and equipment additions. Financing cash outflow was $843, including $347 of common dividends.
At June 30, cash was $159; current assets were $3,786 and current liabilities $3,530. Total assets were $28,789, versus $29,909 at year-end 2010.
Long-term debt, including securitization and project debt, totaled $7,063; an additional $976 of long-term debt and $211 of securitization debt were due within one year, and commercial paper and loans were $298. Total capitalization was $17,174. The filing reports $4,300 of credit facilities, with $3,718 in use and $582 available.
Common dividends were $0.3425 per share for the quarter, unchanged from 2010.

Changes and drivers

Q2 revenue rose 5% and net income increased to $323 from $224. First-half revenue declined 2%, while net income rose to $849 from $715; the comparison includes a $67 after-tax gain and operating results from discontinued Texas facilities, versus a $5 loss in the prior-year period.
Management attributed improved continuing earnings primarily to the absence of a $122 charge in 2010 for refunds of prior Market Transition Charge collections, higher PSE&G distribution and transmission rates, and lower operating and maintenance costs. Lower Power pricing and volumes under Basic Generation Service (BGS) contracts partly offset those benefits.
Power’s first-half income from continuing operations fell to $502 from $573, mainly reflecting lower BGS pricing and volumes, higher maintenance costs, and higher depreciation and interest costs. PSE&G’s rose to $268 from $121, largely due to the prior-year refund charge, rate increases and lower operating costs.
Power completed the $352 sale of its Guadalupe plant in March, recognizing a $54 after-tax gain. The Odessa plant sale for approximately $335 closed in July, after quarter-end, with an expected after-tax gain of approximately $25.

Outlook, risks and unusual items

Management identified potentially sustained low natural gas and electricity prices, uncertain economic recovery, regulatory and political uncertainty, and pressure on competitive energy markets as key challenges. No specific earnings guidance is provided in the supplied filing text.
Projected construction and investment expenditures, excluding nuclear fuel, are $2,335 for 2011, $2,370 for 2012 and $2,145 for 2013. Management said funding is expected from internally generated cash and external debt; it considered credit capacity sufficient for anticipated liquidity needs through year-end 2011.
Planned investments include utility transmission, distribution and reliability projects and generation upgrades. Delays in environmental approvals for the Susquehanna-Roseland transmission project could delay expected transmission revenues. PSE&G’s capital forecast increased by approximately $670 versus the prior plan, primarily due to program extensions and transmission spending revisions.
Environmental regulation is a significant uncertainty. The proposed Clean Water Act cooling-water rule could materially affect many generating stations using once-through cooling; the filing cites an older estimate of approximately $1 billion for cooling towers at Salem, including about $575 for Power’s share. The company had not included potential closed-cycle cooling costs in its capital forecast. Management said the Cross-State Air Pollution Rule was not expected to require significant generation-fleet capital spending, while the impact of proposed hazardous-air-pollutant requirements remained under review.
PSE&G recorded a $650 liability for former manufactured-gas-plant remediation, offset by a regulatory asset. Passaic River and Newark Bay matters, among other environmental proceedings, could result in material costs that the company could not estimate clearly.
Energy Holdings’ $264 gross investment in leases involving Dynegy-related facilities faced counterparty and litigation risk. A foreclosure could cause an estimated $170–$180 after-tax charge, including approximately $100 of cash taxes. The company’s request for a temporary restraining order was denied after quarter-end; it sought further review.
Disputed IRS tax treatment of leveraged leases remains a contingency. The filing describes possible tax, interest and penalty payments and litigation; a total loss under the IRS settlement position could produce an additional $120–$140 earnings charge. PSEG said it had deposited $320 with the IRS to defray potential interest costs.
In June, PSEG amended pension and OPEB provisions and remeasured the plans. Management estimated 2011 annual pension cost would be $32 lower and OPEB cost $6 lower than absent the remeasurement. PSEG had already made its planned 2011 pension and postretirement contributions of $415 and $11, respectively, in the first quarter.
Other notable developments: PSEG and subsidiaries entered into five-year credit agreements in April, increasing total credit capacity to $4.3 billion; rating outlooks improved to positive at S&P for the three companies and at Moody’s for PSE&G. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.

Investor verification priorities

Separate recurring earnings from the Texas asset-sale gains and discontinued-operation results, and confirm the Odessa sale’s final proceeds and gain in subsequent reporting.
Track Power’s exposure to lower wholesale and BGS prices, customer migration, and changes in capacity-market rules.
Assess the status and possible cost of environmental proceedings, especially cooling-water requirements and Passaic River remediation.
Monitor the Dynegy lease dispute and the IRS leveraged-lease tax matter for cash requirements, reserves and potential earnings charges.
Verify delivery of the capital program, associated regulatory cost recovery, and whether available liquidity remains adequate alongside debt maturities, dividends and pension funding.