01—Abstract
Summary
Summary of the 10-K filed February 25, 2010. Cited figures are marked; the original filing is the authoritative source.
Public Service Enterprise Group Incorporated (PSEG) reported 2009 Net Income of $1.59 billiona, or $3.14 per diluted share, up from $1.19 billion ($2.34 per diluted share) in 2008, on Operating Revenues of $12.41 billion versus $13.32 billion.
Income from Continuing Operations rose to $1.59 billionb from $983 million, largely because 2008 included an after-tax charge of $490 million on certain leveraged leases. Power, the wholesale generation business, contributed $1.19 billion of earnings, PSE&G contributed $325 million, and Energy Holdings contributed $72 million. The filing states that Power has contributed at least 70% of Income from Continuing Operations over the past three years, and that Energy Holdings' earnings have declined significantly as international investments were sold.
The filing describes a company facing lower demand and lower market prices. Power generation volumes fell about 5%c in 2009, driven by mild weather, the economic slowdown, and customer migration away from Basic Generation Service contracts. Management expects continued lower margins for the generation business.
PSE&G's earnings fell to $325 milliond from $364 million on lower customer demand and higher pension expense, partly offset by a transmission formula rate increase. Management reported 2009 operating cash flow of $1.86 billion, versus $2.35 billion in 2008, and projects total capital expenditures of $2.84 billion in 2010. The filing also discloses material contingencies.
The IRS has disallowed deductions on certain leveraged lease transactions, with $660 million potentially payable in tax and $150 million in penalties if the IRS prevails, against $320 million on deposit. Environmental exposure includes the Passaic River cleanup, estimated at $900 million to $2.3 billion for the lower eight miles of the river in one draft EPA study, and a New Jersey NOx rule that could require retirement of roughly 2,000 MW of combustion turbines and 800 MW of steam units by April 2015. The quarterly dividend was raised by $0.01 to $0.3425 per share for the first quarter of 2010.
02—Key points
Key Highlights
- Net Income rose to $1.59 billion ($3.14 per diluted share) in 2009 from $1.19 billion ($2.34) in 2008, with 2008 burdened by a $490 million after-tax leveraged lease charge.
- Operating Revenues declined 7% to $12.41 billion from $13.32 billion, reflecting lower gas prices, lower BGS volumes and reduced demand.
- Power earned $1.19 billion of Income from Continuing Operations, versus $1.12 billion in 2008; the filing states Power has contributed at least 70% of earnings over three years.
- PSE&G earnings declined to $325 million from $364 million on lower customer demand and higher pension expense.
- Energy Holdings earned $72 million, compared with a loss of $468 million in 2008, after selling nearly all international investments.
- The IRS disallowed leveraged lease deductions; $660 million would be payable if the company conceded, with $320 million deposited and $150 million in potential penalties.
- The quarterly dividend was increased to $0.3425 per share for first quarter 2010, an indicated annual rate of $1.37.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 25, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $12.04B$12.61B | −4.6% |
| Operating Expenses | $8.92B$10.13B | −11.9% |
| Operating Income | $3.12B$2.48B | +25.4% |
| Interest Expense | $521.00M$566.00M | −8.0% |
| Net Income | $1.59B$1.19B | +34.0% |
| EPS (Basic) | $3.15$2.34 | +34.6% |
| EPS (Diluted) | $3.14$2.34 | +34.2% |
| Shares Outstanding (Basic) | 505.99M507.69M | −0.3% |
| Shares Outstanding (Diluted) | 507.06M508.43M | −0.3% |
05—Questions
Frequently Asked Questions
What drove the improvement in net income in 2009?
Net income rose to $1.59 billion from $1.19 billion. The filing attributes the change mainly to the absence of the $490 million after-tax leveraged lease charge recorded in 2008, plus higher Power earnings from lower impairments on NDT Fund investments, higher realized prices and lower generation costs, and gains on sales of leveraged lease assets at Energy Holdings.
How did demand and market conditions affect the business?
The filing reports that mild weather and the economic slowdown reduced customer demand, with Power generation volumes about 5% lower than in 2008 and electric delivery volumes down 4%. It also notes that customers migrating to third-party suppliers reduced BGS volumes, and that continued lower market prices are likely to lower margins for the generation business.
What is the main tax risk for investors?
The IRS disallowed deductions taken on certain leveraged lease transactions for tax years 1997 through 2003. As of December 31, 2009, $660 million would become currently payable if the company conceded these deductions, and penalties of $150 million could also become payable. The company has deposited $320 million with the IRS to defray potential interest costs and is pursuing lease terminations to reduce cash tax exposure.
What major capital projects are planned?
Projected capital expenditures total $2.84 billion in 2010, $2.44 billion in 2011 and $2.39 billion in 2012. Major items include the Susquehanna-Roseland 500 kV line, estimated at approximately $750 million for PSE&G's portion, a $1.1 billion Branchburg-to-Hudson line, pollution control equipment at the Hudson and Mercer stations, and a $515 million Solar 4 All program to develop 80 MW of solar capacity over four years.
What environmental and regulatory risks could affect earnings?
The filing identifies several risks, including a New Jersey NOx rule that will likely require retirement of up to 102 combustion turbines (about 2,000 MW) and five steam units (about 800 MW) by April 30, 2015, a possible requirement for closed-cycle cooling at Power's once-through cooled plants, and the Passaic River cleanup, for which an EPA draft study estimated costs of $900 million to $2.3 billion for the lower eight miles. The company states that it cannot predict the financial impact of many of these matters.
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