01—Abstract
Summary
Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.
Public Service Enterprise Group Incorporated (PSEG) reported 2006 Net Income of $739 milliona, or $2.93 per diluted share, compared with $661 million, or $2.71 per diluted share, in 2005.
Operating Revenues were $12.164 billionb in both 2006 and 2005. Results were shaped by a $178 million after-tax loss on the sale of Rio Grande Energia (RGE), a $208 million after-tax estimated loss on the pending sale of the Lawrenceburg generating facility, and a $226 million after-tax gain on the disposal of Elcho and Skawina, which were reported in Discontinued Operations. Power, the wholesale generation subsidiary, had Net Income of $276 million, while PSE&G, the regulated New Jersey utility, earned $265 million, down from $348 million, due to delayed base rate decisions and lower delivery volumes.
Energy Holdings earned $275 millionc, helped by the Elcho and Skawina gain. The filing describes a company in transition. Exelon terminated the 2004 merger agreement on September 14, 2006.
PSEG ended 2006 with total assets of $28.570 billiond, long-term obligations of $10.417 billion, and cash from operations of $1.929 billion, up from $970 million. Management expects margin improvements at Power in 2007 from higher nuclear and coal prices and from new capacity market designs, which the company estimates could add $100 million to $150 million of incremental margin. Power is also moving to resume direct management of the Salem and Hope Creek nuclear stations on January 1, 2007.
Investors should weigh several contingent exposures. The IRS disallowed deductions on certain leveraged lease transactions, and the filing states that if all were sustained, approximately $773 million of deferred tax liabilities would become payable, with interest and penalties potentially adding further amounts. The Hudson and Mercer coal plant emissions agreement requires future capital spending estimated at $1.0 billion to $1.25 billion.
Cooling tower costs at Salem could reach approximately $1 billion, with Power's share about $575 million, if required. Credit ratings were affirmed, but Moody's and S&P revised outlooks to negative for PSEG.
02—Key points
Key Highlights
- 2006 Net Income was $739 million ($2.93 diluted EPS), up from $661 million ($2.71) in 2005; Operating Revenues were flat at $12.164 billion.
- Power Net Income rose to $276 million from $192 million, driven by higher BGS contract prices, improved nuclear operations and the Linden and Bethlehem plants entering service.
- PSE&G Net Income fell to $265 million from $348 million, primarily reflecting delayed base rate decisions and lower gas and electric delivery volumes.
- Discontinued operations were significant: a $208 million after-tax estimated loss on the pending sale of Lawrenceburg (about $325 million sale price) offset a $226 million after-tax gain from the sale of Elcho and Skawina.
- The Exelon merger was terminated on September 14, 2006; the quarterly dividend was raised to $0.585 per share for Q1 2007, an indicated annual rate of $2.34.
- Power expects margin improvements in 2007 and an incremental $100 million to $150 million of margin from the PJM RPM capacity market change.
- The IRS disallowed deductions on certain leveraged leases; if fully sustained, about $773 million of deferred tax liabilities would become payable, plus interest of about $124 million after tax and penalties of $155 million.
03—Questions
Frequently Asked Questions
How did PSEG's earnings change in 2006?
Net Income rose to $739 million, or $2.93 per diluted share, from $661 million, or $2.71, in 2005. Operating Revenues were $12.164 billion in both years. Results included a $178 million after-tax loss on the sale of RGE and discontinued-operations items, including a $208 million estimated loss on the pending Lawrenceburg sale and a $226 million after-tax gain on the sale of Elcho and Skawina.
Which business drove the 2006 results?
Power, the wholesale generation business, had Net Income of $276 million, up $84 million from 2005, on higher BGS contract prices, higher pool sales volumes and improved nuclear operations. PSE&G's Net Income declined to $265 million from $348 million because of delayed base rate decisions and lower delivery volumes caused by warmer weather.
What regulatory or tax risks does the filing highlight?
The IRS disallowed deductions on certain leveraged lease transactions for tax years 1997 through 2000 and imposed a 20% penalty. PSEG filed a protest in February 2007. The filing states that if all related deductions were successfully challenged, approximately $773 million of deferred tax liabilities would become currently payable, with about $124 million of after-tax interest and up to $155 million of penalties. PSEG says it believes its position is proper and will aggressively contest the disallowance.
What major capital and environmental commitments does Power face?
Under the amended EPA and NJDEP agreement, Power must complete emissions control projects at Mercer and Hudson, with estimated costs of $400 million to $500 million for Mercer and $600 million to $750 million for Hudson, incurred in 2007 through 2010. Cooling tower costs at Salem, if required, are estimated at about $1 billion, with Power's share about $575 million. These costs are not included in forecasted capital expenditures for the Salem cooling tower scenario.
What is the outlook for Power and Energy Holdings in 2007?
Power expects margin improvements from higher nuclear and coal prices as its forward hedges roll and from capacity market changes, which it estimates could add $100 million to $150 million of incremental margin. Energy Holdings expects lower margins at Global in 2007, reflecting the absence of mark-to-market gains and anticipated maintenance outages at TIE, and anticipates an earnings reduction of $25 million to $35 million in 2007 from FIN 48 and FSP 13-2.
04—Continue