PUBLIC SERVICE ENTERPRISE GROUP INC quarterly report, Q3 FY2012

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Public Service Enterprise Group Inc. (PSEG) — Q3 2012 Form 10-Q

Business context and reporting period

Combined filing for PSEG and its wholly owned subsidiaries PSEG Power and Public Service Electric and Gas Company (PSE&G), for the quarter and nine months ended September 30, 2012. PSEG operates wholesale generation and energy supply, regulated electric and gas transmission and distribution in New Jersey, and energy-related investments. All dollar amounts below are in millions unless noted.

Financial performance and position

  • Q3 consolidated: Revenue was $2,402, down 8% year over year; operating income was $594, up from $556. Continuing-operations income was $347 versus $265; net income was $347 versus $294. Diluted EPS from continuing operations was $0.68 versus $0.52; diluted net EPS was also $0.68 versus $0.58.
  • First nine months: Revenue was $7,375, down 13%; operating income was $1,810 versus $2,033. Continuing-operations income was $1,051, nearly unchanged from $1,047. Net income fell to $1,051 from $1,143, reflecting the absence of $96 of 2011 discontinued-operations income. Diluted EPS was $2.07 versus $2.25 for net income, and $2.07 versus $2.06 from continuing operations.
  • Segment results: Power earned $181 in Q3 and $538 year to date, down from $273 and $775, respectively. PSE&G earned $155 in Q3 and $453 year to date, compared with $154 and $422. Energy Holdings earned $7 in Q3 and $49 year to date, versus losses of $166 and $164 in 2011, largely reflecting the absence of the prior-year Dynegy lease charge and the 2012 IRS settlement benefit.
  • Cash flow and investment: Nine-month operating cash flow was $2,311 versus $2,409. Capital expenditures were $1,969 versus $1,479; investing cash outflow was $2,051. Financing cash outflow was $314, including $538 of common dividends. Cash declined $54 during the period to $780.
  • Balance sheet and liquidity: At September 30, total assets were $30,706 and total capitalization was $18,142. Debt, including current maturities and securitization debt, was approximately $8,309, compared with $8,094 at year-end 2011. PSEG reported $4,300 of total credit facilities, with $4,076 available. Common dividends paid were $1.065 per share year to date, up from $1.0275.

Material changes versus the prior comparable period

  • Management attributed weaker wholesale results mainly to lower electricity and gas prices, lower generation and customer-load volumes, and adverse mark-to-market movements. Power’s Q3 operating revenue fell 26%; nine-month revenue fell 23%.
  • PSE&G’s reported revenue declined with lower commodity prices and volumes, largely offset by corresponding lower energy costs; the company earns no margin on BGS and BGSS commodity supply. Higher transmission formula rates supported results, while customer migration reduced BGS sales.
  • Quarterly earnings were affected by $40 of after-tax NDT fund income versus $7 a year earlier and $76 of after-tax non-trading mark-to-market losses versus an $8 gain. PSEG realized $59 from restructuring part of the NDT fund in September.
  • Power generation volume was 40.8 terawatt-hours for the first nine months, down approximately 2.4%, primarily due to milder weather. Nuclear capacity factor was 92.5%.

Outlook, risks, contingencies and unusual items

  • Management identified continued low natural-gas and electricity prices, customer migration, weak demand and conservation, regulatory uncertainty, and subsidized generation as key challenges. It said cash from operations, cash on hand and financing activities were expected to fund capital spending and dividends. The filing does not provide a specific earnings guidance range.
  • The company forecast more than $6.7 billion of capital spending over the next three years, over 75% at PSE&G. Major transmission projects face permitting, litigation and schedule risks; Susquehanna–Roseland was estimated to cost up to $790 and have expected in-service dates in 2014 and 2015. Further delays were possible.
  • Hurricane Sandy subsequent event: The late-October storm caused extensive damage, with approximately 1.7 million PSE&G customers losing power. PSEG could not estimate the loss or range; costs could be material. PSE&G sought regulatory deferral of uninsured incremental restoration costs, and the companies intended to seek insurance recovery without assurance as to amount or timing.
  • Environmental and regulatory exposure: PSE&G recorded a $610 liability and matching regulatory asset for MGP remediation; estimated total remediation costs were $610–$697 through 2021. Other Passaic River and Newark Bay matters could be significant, but PSEG could not estimate its share of possible losses. Proposed cooling-water rules could require material upgrades; an earlier Salem cooling-tower estimate was approximately $1 billion total, including about $575 for Power’s share.
  • Counterparty and collateral risk: Power’s current exposure under guarantees was $214. A loss of investment-grade status could require up to $610 of additional collateral; available liquidity under PSEG and Power facilities to post collateral was $3,429. Energy Holdings also had lease exposure to financially distressed counterparties, including Edison Mission Energy and GenOn-related coal assets.
  • Tax settlement: IRS agreements concluded audits and the leveraged-lease dispute for tax years 1997–2006. The settlement produced a net $70 reduction in tax expense. PSEG expected to pay approximately $620 of tax and interest for 2004–2006 while seeking approximately $676 in refunds for 2007–2010, which could take years to process; an approximately $100 cash tax saving from a 2012 deduction was also expected.
  • Power de-designated certain commodity hedges in Q2 because they no longer met hedge-effectiveness requirements; subsequent fair-value changes are recognized immediately in earnings. PSEG had no trading VaR after discontinuing trading activities in 2011.

Most important facts for investors to verify

  • Whether lower wholesale power and gas prices, customer migration and mark-to-market volatility persist, and how they affect Power’s earnings and cash generation.
  • The estimated cost, insurance recovery and regulatory treatment of Hurricane Sandy restoration and asset damage.
  • Progress and final cost recovery for major transmission and solar investments, including regulatory approvals, litigation and construction timing.
  • Actual timing and cash impact of the IRS payments and refunds, and whether expected tax benefits are realized.
  • Developments in environmental proceedings, cooling-water requirements, and the creditworthiness and lease-payment capacity of leveraged-lease counterparties.