PEG Beats Bottom Line, Sales Trail

Public Service Enterprise Group Inc. ( PEG - Analyst Report ) or PSEG reported first quarter 2012 results. During the quarter, operating earnings per share (“EPS”) were 85 cents, far above our expectation of 67 cents but in line with the year-ago figure.

In the reported quarter, GAAP EPS was 97 cents, up from 91 cents per share in the year-ago period.

The variance between GAAP and operating earnings was due to a 1 cent gain on each - NDT Fund Related Activity and Lease Related Activity - as well as a mark-to market gain of 10 cents.

Operational Performance

Revenue in the reported quarter was $2.88 billion, down from the year-ago figure of $3.35 billion. The top line was also lower than the Zacks Consensus Estimate by $355 million.

Residential sales were 2,990 million Kwh while Commercial & Industrial sales were 6,751 million Kwh in the reported quarter. Total sales were 9,834 million Kwh.

Total operating expenses in the quarter under review was $2.09 billion, down 16.3% year over year. Public Service Enterprise Group generated operating income of $783 million, down 8.5% year over year.

Segment Performance

PSEG Power: Segment operating earnings were $196 million in the quarter, down from $267 million in the prior-year period. The downside reflects warmer than normal weather conditions and price decline in energy and capacity as well as lower fuel costs. However, these negatives were partially compensated by continued strength in nuclear operations along with greater output from the combined cycle natural gas fleet.

PSE&G: The segment generated operating earnings of $197 million, up 20.9% year over year. The significant improvement was driven by higher transmission formula rates, return on investments in energy efficiency, solar and infrastructure programs, and settlement of tax audits for the period in between 1997 – 2006, which led to lowering of one-time tax expense. However, these positives were partially offset by warmer than normal weather, increase in depreciation expense and higher operating and maintenance expenses.

PSEG Energy Holdings: Segment operating earnings were $39 million, significantly up from the prior-year figure of $1 million. The results were driven by settlement with the Internal Revenue Service of the offshore lease transactions for all tax years, and a settlement of all federal audit issues for tax years 1997 – 2006.

Financial Update

At the end of March 31, 2012, long-term debt was $7 billion compared with $7.06 billion at the end of December 31, 2011.

Net cash provided by operating activities during the quarter was $1.09 billion compared with $1.04 billion in the prior-year quarter.

Outlook

The company indicated that fossil operations helped in controlling costs and thereby mitigated the impact of a warmer winter, lower demand and a decline in gas prices. Going forward, on the basis of this operational excellence, PEG expects to generate superior results. The company expects operating earnings in the range of $2.25 to $2.50 per share in fiscal 2012.

Our Take

We believe that Public Service Enterprise Group has a solid portfolio of regulated and non-regulated utility assets that offer a stable earnings base and substantial long-term growth potential. Key growth drivers of the company are higher levels of capital investment, hedging, a low-cost nuclear fleet, assumed rate relief and added generating capacities.

However, the increasing cost of coal, higher pension and financial costs, and power-price volatility are areas of concern.

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 Inc., 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 UIL Holdings Corporation ( UIL - Snapshot Report ) .