Public Service Enterprise Group Incorporated — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; filed November 1, 2011. PSEG is a holding company whose principal businesses are wholesale generation and energy supply (Power), regulated electric and gas transmission and distribution in New Jersey (PSE&G), and energy-related investments (Energy Holdings). Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenues | $2,620 | $3,114 | $8,443 | $9,048 |
| Operating income | $556 | $971 | $2,033 | $2,348 |
| Income from continuing operations | $265 | $547 | $1,047 | $1,267 |
| Net income | $294 | $567 | $1,143 | $1,282 |
| Diluted EPS, continuing operations | $0.52 | $1.08 | $2.06 | $2.50 |
| Diluted EPS, net income | $0.58 | $1.12 | $2.25 | $2.53 |
- Margins: Operating margin was approximately 21.2% in Q3 2011 versus 31.2% in Q3 2010; for the first nine months, approximately 24.1% versus 26.0%.
- Cash flow: Nine-month operating cash flow was $2,409, compared with $1,339 in 2010. Investing cash outflow was $827, including $1,479 of capital expenditures and $687 proceeds from Texas plant sales. Financing cash outflow was $620; cash dividends were $520. Cash at September 30 was $1,242, up from $280 at year-end 2010.
- Debt and liquidity: Debt carrying value, including current maturities, was approximately $8,969 at September 30. Cash was $1,242; current liabilities were $3,692 and current assets were $4,970. Credit facilities totaled $4,300, with $4,066 available after usage. The filing says available capacity exceeded anticipated maximum liquidity requirements through year-end.
- Dividend: Common dividends were $0.3425 per share for Q3 and $1.0275 per share for the nine-month period, unchanged from 2010.
Material changes and drivers
- Consolidated Q3 revenue fell 16% and nine-month revenue fell 7%. Management attributed pressure principally to lower wholesale electricity and gas prices, lower BGS prices and volumes, and customer migration from PSE&G supply contracts. Lower energy costs partly offset lower revenue.
- Power’s continuing-operations income fell to $273 in Q3 from $364, and to $775 for nine months from $937. Lower electricity pricing and volumes, planned fossil-plant outage and refurbishment costs, and increased depreciation contributed; NDT investment results partly offset the year-to-date decline.
- PSE&G’s Q3 income was $154 versus $155; nine-month income increased to $422 from $276. The year-to-date improvement chiefly reflects the absence of a $122 million 2010 market-transition-charge refund charge, higher delivery and transmission rates, and lower O&M expense.
- Energy Holdings recorded a $264 million gross reserve against Dynegy-related leveraged lease investments, producing an approximately $170 million after-tax charge. Energy Holdings reported losses of $166 in Q3 and $164 for nine months, versus income of $24 and $43 in the comparable 2010 periods.
- Reported net income includes discontinued Texas operations and sale gains. Power sold its 1,000 MW Guadalupe facility for $352 million in March, with a $54 million after-tax gain, and its 1,000 MW Odessa facility for $335 million in July, with a $25 million after-tax gain. The nine-month discontinued-operations result was $96, compared with $15 in 2010.
Outlook, management commentary and risks
- No specific earnings-per-share or full-year earnings guidance is stated in the provided filing text. Management said operating cash flow, cash on hand and financing activities were expected to fund capital spending and shareholder dividends. It expected approximately $800 million of cash benefits from accelerated tax depreciation, most anticipated in 2011.
- Management identified sustained low natural-gas and electricity prices, economic uncertainty, regulatory and political developments, and pressure on competitive markets—particularly in New Jersey—as key challenges. It emphasized cost control, reliability, recontracting Power’s open positions and executing capital investment.
- Capital projects include transmission upgrades, solar programs, nuclear uprates and new gas peaking units. Susquehanna-Roseland permitting delays put approvals no earlier than early 2013 under the then-current schedule; the project’s estimated construction cost was up to $750 million. Delays could defer transmission revenue.
- Environmental and regulatory exposure remains significant. PSE&G estimated remaining remediation costs for former manufactured-gas-plant sites of $643–$741 million through 2021, recorded a $643 million liability and an offsetting regulatory asset. PSEG and Power said they could not estimate their shares of potential Passaic River and Newark Bay losses; the EPA’s proposed lower Passaic remedy was estimated at $1.3–$3.7 billion overall.
- Possible Clean Water Act cooling-water requirements could materially affect generating facilities and future capital needs; the filing cites an older estimate of about $575 million for Power’s share of cooling towers at Salem. New Jersey NOx rules could require substantial controls or retirement of generating units. Management said CSAPR was not expected to require significant additional fleet spending, while implementation details remained uncertain.
- Dynegy’s restructuring, weak credit ratings and related litigation create uncertainty about lease recovery and guarantees. PSEG fully reserved its $264 million gross investment; a potential approximately $100 million cash tax obligation in a foreclosure scenario is reflected in its overall charge estimate.
- The IRS leveraged-lease tax dispute remains contingent. PSEG reported a $320 million IRS deposit and estimated about $266 million would become currently payable if deductions were conceded; potential litigation-related payments could be materially higher. PSEG said the deposit would be refundable with interest if it prevailed and had not reserved penalties, citing defenses.
- Hurricane Irene disrupted service to more than 800,000 customers. PSE&G deferred approximately $29 million of incremental storm O&M costs and sought regulatory recovery; the BPU investigation and recovery outcome were unresolved.
- Other risks include post-Fukushima nuclear reviews and potential added requirements, derivative-market rule changes that may increase collateral needs, counterparty credit exposure, pension funding and investment performance, and regulatory proceedings involving New Jersey’s subsidized generation program. Management reported nuclear capacity factor of 93% year to date and generation volumes 5% below the prior-year period.
Important facts for investors to verify
- How much of the earnings decline is recurring operating pressure versus the Dynegy charge, Texas disposal gains, and NDT and mark-to-market effects.
- Whether Dynegy lease recoveries, guarantees, litigation and potential tax-indemnity claims produce cash recoveries or further losses.
- Timing and amount of cash benefits from accelerated tax depreciation, and the outcome and possible payment schedule of the IRS leveraged-lease dispute.
- Regulatory recovery of Hurricane Irene costs and the $643 million MGP remediation liability, as well as the ultimate company-specific exposure for Passaic River and other environmental matters.
- Credit-facility availability, refinancing needs and collateral requirements if credit ratings decline or commodity-market rules change.
- Wholesale power-price, customer-migration and New Jersey market-policy effects on Power, alongside rate-case, transmission-project and environmental-permit outcomes affecting PSE&G.