Public Service Enterprise Group Inc. (PSEG) — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009; filed July 31, 2009. Amounts are in millions of dollars unless noted. PSEG is a holding company with wholesale generation and energy supply (PSEG Power), regulated New Jersey electric and gas transmission and distribution (PSE&G), and other energy investments (Energy Holdings).
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $2,561 | $2,550 | $6,482 | $6,342 |
| Operating income | $637 | $177 | $1,564 | $988 |
| Income from continuing operations | $311 | $(166) | $755 | $269 |
| Net income | $311 | $(150) | $755 | $298 |
| Diluted EPS | $0.61 | $(0.29) | $1.49 | $0.59 |
Operating margin was approximately 24.9% in Q2 2009 versus 6.9% in Q2 2008, and 24.1% for the first half versus 15.6%. The filing does not present these margins directly; they are calculated from reported operating income and revenue.
- Cash flow: First-half operating cash flow was $789, compared with $623 in 2008. Investing cash flow was $(210), including $816 of property, plant and equipment additions; financing cash flow was $(507). Cash ended the period at $393, up from $321 at year-end 2008.
- Debt and liquidity: At June 30, long-term debt was $7,805, with $746 due within one year and $333 of commercial paper and loans. Cash was $393. Reported available credit-facility liquidity totaled approximately $3.0 billion at June 30; Power added a $350 million facility on July 24.
- Dividend: First-half common dividends were $0.665 per share ($336 total), up from $0.645 ($328) in 2008. The indicated annual rate was $1.33 per share.
Material changes and business drivers
- PSEG’s Q2 and first-half earnings improved substantially from 2008, primarily because the comparison period included a large charge related to IRS-disputed leveraged-lease deductions. The filing details a $485 million reduction in operating revenue and a $130 million tax offset for that charge. Lower generation costs and prior-year contract pricing also supported Power’s results.
- Power’s first-half earnings rose to $575 from $515. Lower fuel costs and improved gas-supply margins helped, although lower fossil generation volumes and higher planned maintenance costs partly offset the gains. Nuclear output was higher year over year; fossil generation volumes were about 25% lower, reflecting cooler weather, economic weakness and higher-priced coal.
- PSE&G’s first-half earnings fell to $168 from $189. Lower electric margins and higher operating and pension-related costs outweighed improved gas margins and transmission-rate increases. First-half electric delivery volumes declined 3.7%; gas delivery volumes increased 5.6%, largely due to weather.
- Energy Holdings reported income of $17 for the first half, compared with a loss of $424 in 2008, chiefly reflecting the absence of the leveraged-lease charge and gains from lease and investment sales. These comparisons are affected by asset disposals and tax items.
Outlook, risks and unusual items
- Management said operations generated strong cash in the first half and expected operating cash, cash on hand and financing to fund capital expenditures and dividends. It did not provide a specific consolidated earnings forecast. Management noted that lower current market prices could make future generation contracting less attractive.
- PSE&G filed for electric and gas base-rate increases of $134 million and $97 million, respectively; a decision was expected in early 2010. The company also planned substantial regulated investment, including infrastructure, energy-efficiency and solar programs, with recovery mechanisms subject to regulatory terms.
- New Jersey NOx rules could require retirement of up to 102 combustion turbines (about 2,000 MW) and five older steam units (about 800 MW) by 2015. The financial impact was not yet predictable. Potential cooling-system requirements at Salem could involve an estimated $575 million PSEG Power share; these costs were not included in forecasted capital expenditures.
- Environmental exposures include a PSE&G estimate of $704 million for MGP remediation through 2021, within a stated $704–$804 million range, with a corresponding regulatory asset. Potential Passaic River cleanup proposals were estimated at $900 million–$2.3 billion, but PSEG said it could not predict its share or the timing. Costs could be material.
- The IRS leveraged-lease dispute remains significant. PSEG reported $630 million of potential cash exposure after $320 million of deposits, plus potential penalties; it anticipated possible tax, interest and penalty payments of $120–$280 million in the second half of 2009 and a further $220–$500 million for 2001–2003 tax years. The outcomes and timing remain uncertain.
- Power disclosed $1.897 billion of face-value commodity guarantees and $624 million of current exposure. A downgrade below investment grade could trigger approximately $1 billion of additional collateral requirements. Management reported $2.6 billion of liquidity available for collateral at June 30.
- Management identified recession-related demand weakness, weather, commodity prices, regulatory and environmental changes, nuclear operations, access to capital, credit quality, construction costs and pension-fund performance as risks. Disclosure controls were reported effective; PSE&G’s new customer-service system changed related internal controls, but was not implemented in response to an identified control deficiency.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring operating performance versus the prior-year leveraged-lease charge, investment sales and tax effects.
- Developments in the IRS lease dispute, including actual payments, settlements, litigation and changes in the stated exposure.
- Regulatory decisions and recoveries for PSE&G’s base-rate case and planned infrastructure, solar and efficiency spending.
- The costs and operational consequences of emissions rules, potential generation retirements, cooling-water requirements and environmental proceedings.
- Power’s collateral needs under commodity contracts and the availability of credit facilities, particularly if ratings or market conditions deteriorate.