01—Abstract
Summary
Summary of the 10-K filed February 28, 2006. Cited figures are marked; the original filing is the authoritative source.
Public Service Enterprise Group Incorporated (PSEG) reported 2005 Net Income of $661 milliona, or $2.71 per diluted share, compared with $726 million, or $3.05 per diluted share, in 2004.
Operating Revenues rose to $12.43 billionb from $10.80 billion, driven largely by higher energy costs passed through in commodity prices. Income from Continuing Operations was $858 million, or $3.51 per diluted share, versus $770 million in 2004. The results include a $178 million after-tax loss on the sale of Power's Waterford plant and $43 million after-tax gain on the sale of Resources' Seminole interest.
The filing describes a pending merger with Exelon Corporation under which each PSEG share would convert into 1.225 Exelon shares. The filing states that closing is expected in the third quarter of 2006, that the Merger Agreement may be terminated if it is not consummated by June 20, 2006, and that the New Jersey BPU, the NRC and the Department of Justice approvals remained outstanding. Management guided 2006 Income from Continuing Operations to $3.45 to $3.75c per share, excluding Merger-related costs, with Power expected to drive the increase through higher margins and new Linden capacity.
Power's nuclear and coal-fired output was over 95 percent contracted for 2006 as of February 15, 2006. The filing also highlights significant regulatory exposure at PSE&G, including a pending $64 milliond electric distribution rate request, a 3.78 percent gas base rate increase request, and a Basic Generation Service auction clearing price of 10.251 cents per kWh for the June 2006 through May 2009 period. Net cash from operations fell to $940 million from $1.6 billion in 2004, mainly due to working capital requirements at Power, and the company's debt-to-capitalization ratio at PSEG was 59.9 percent as of year-end, compared with a 70.0 percent covenant ceiling.
02—Key points
Key Highlights
- Net Income of $661 million ($2.71 diluted EPS) in 2005, down from $726 million ($3.05) in 2004, including a $178 million after-tax loss on the Waterford sale.
- Operating Revenues of $12.43 billion in 2005, up from $10.80 billion; Energy Costs rose to $7.27 billion from $5.99 billion.
- Pending merger with Exelon: each PSEG share converts into 1.225 Exelon shares; closing expected in Q3 2006, with a June 20, 2006 termination date if not consummated.
- 2006 guidance of Income from Continuing Operations of $3.45 to $3.75 per share, excluding Merger-related costs; EPS growth above 10% per year expected for 2007 and 2008.
- Power's 2005 Income from Continuing Operations was $406 million; 2006 guidance is $475 million to $525 million, driven by the Linden plant and higher market prices.
- Operating cash flow fell to $940 million from $1.6 billion, primarily due to more than $500 million of working capital increases at Power from higher commodity prices.
- PSEG's debt to capitalization ratio was 59.9 percent at year-end, under the 70.0 percent covenant limit; the quarterly dividend was raised to $0.57 per share.
03—Questions
Frequently Asked Questions
What happens to PSEG shareholders if the Exelon merger closes?
Each share of PSEG Common Stock will be converted into 1.225 shares of Exelon Common Stock. The filing states that Exelon will increase its quarterly dividend so that the first post-closing dividend equals the amount PSEG shareholders received in the prior quarter based on the 1.225 exchange ratio, up to a maximum of $0.47 per share of Exelon stock.
What are the main regulatory approvals still pending for the merger?
As of the filing, the Nuclear Regulatory Commission proceeding was essentially complete with an order pending, and the Department of Justice review under the HSR Act and the New Jersey Board of Public Utilities approval were outstanding. The filing also notes that the BPU hearings were scheduled to finish around the end of March 2006, and that settlement discussions could affect timing.
How did Power's 2005 earnings and 2006 outlook compare?
Power's 2005 Income from Continuing Operations was $406 million, compared with $342 million in 2004. For 2006, Power expects Income from Continuing Operations of $475 million to $525 million, reflecting improved nuclear and fossil operations and higher market prices, partly offset by depreciation and interest from the Linden plant and lower earnings from the NDT Funds.
What regulatory items could affect PSE&G's earnings in 2006?
The BPU has not yet approved a requested increase of about $64 million in electric distribution rates, and the filing states that the impact of not receiving it reduces earnings and cash flows by more than $5 million pre-tax per month. A gas base rate case seeking a 3.78 percent increase, with a decision expected by September 2006, is also pending. The filing also cites a FERC Con Edison claim of $57 million in damages, which PSE&G disputes.
What were the key risks to Power's liquidity?
Rising commodity prices increased margin and collateral requirements. The filing states that if Power lost its investment-grade rating, ER&T could be required to post approximately $916 million of collateral to counterparties out of the money. The filing also notes that Power had $1.1 billion in new bilateral credit facilities added in Q4 2005 and that collateral requirements were reduced by about 50 percent after year-end commodity price declines.
04—Continue