PEG Barely Beats, Misses Sales

Public Service Enterprise Group Inc. (PEG - Analyst Report) or PSEG reported third quarter 2011 operating earnings per share of 83 cents, a penny above the Zacks Consensus Estimate. However, earnings were lower than the year-ago figure of $1.03 per share.

In the reported quarter, GAAP EPS was 52 cents, down from $1.08 per share in the year-ago period. The variance between GAAP and operating earnings was due to an after-tax charge of 34 cents per share related to the reserve for Energy Holdings’ lease receivable from Dynegy Inc. (DYN - Analyst Report), gain on NDT Fund Related Activity (“PSEG Power”) of 1 cent and gain on mark-to market gain of 2 cents per share.

Operational Performance

Revenue in the reported quarter was $2.6 billion, down from the year-ago figure of $3.1 billion. The top line was also lower than the Zacks Consensus Estimate by $407 million.

Public Service Enterprise Group generated operating income of $556 million, far lower than $971 million in the third quarter 2010. Net income for the reported quarter also declined to $420 million from $521 million in the year-ago period.

Residential sales were 4,683 million Kwh while Commercial & Industrial sales were 7,874 million Kwh in the reported quarter. Total sales were 12,621 million Kwh.

Segment Performance

PSEG Power: Segment operating earnings were $258 million in the quarter versus $338 million in the prior-year period. The results reflect a decline in realized energy and capacity prices, decline in volume, higher depreciation expense coupled with lower capitalized interest, increase in operation and maintenance expense and other miscellaneous items. These were, however, partially offset by trading related losses that were incurred in the year-ago quarter.

PSE&G: The segment generated operating earnings of $154 million versus $155 million in the year-ago quarter. The results reflect increased capital investment, steeper operation and maintenance expense, storm-related costs, tree trimming expense, depreciation expense and absence of gains that were generated in the year-ago quarter.

However, these were partially offset by an annualized increase in transmission revenue. Moreover, a return on investments made under capital adjustment clauses supporting investment in renewables and electric and gas infrastructure programs also added to earnings for the quarter.

PSEG Energy Holdings: Segment operating earnings were $4 million compared with $24 million in the prior-year period. The downside reflects the absence of gains in the current quarter from the termination of leases in third quarter 2010.

Outlook

Based on the performance of the company, exiting the third quarter, it expects full-year 2011 earnings per share on the higher end of the previously forecast $2.50–$2.75 range.

The company is focused on meeting its operational goals. The investments made thus far to replace inefficient, older generating units and upgrade the environmental profile of existing facilities place the company in a favorable position to meet stringent regulations and direct capital toward growth opportunities.

Our Take

Public Service Enterprise Group’s robust portfolio of regulated and non-regulated utility assets offers a steady earnings base and significant long-term growth prospects. The company remains focused on operational excellence, financial strength and disciplined investment. Going forward, the energy company’s growth will be driven by a low-cost nuclear fleet, assumed rate relief and added generating capacities.

However, the increasing cost of coal, higher pension and financial costs, power-price volatility and challenges from the Internal Revenue Service are areas of concern. We see shares of the company performing in line with the broader market. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Public Service Enterprise Group Incorporated, based in Newark, New Jersey, is a diversified utility holding company. Its operations are mostly located in the Northeastern and Mid-Atlantic parts of the U.S.

Public Service Enterprise principally operates through three key subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (PSEG Power) and PSEG Energy Holdings LLC (PSEG Energy). The company mainly competes with FirstEnergy Corporation (FE - Analyst Report) and Consolidated Edison Inc. (ED - Analyst Report).

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