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Analyst Blog

Before the bell, Public Service Enterprise Group Inc. (PEG - Analyst Report) or PSEG reported second quarter 2012 results. During the quarter, operating earnings per share (“EPS”) were 43 cents, 2 cents below the Zacks Consensus Estimate of 45 cents and far below the year-ago figure of 59 cents per share.

In the reported quarter, GAAP EPS was 42 cents, down from 63 cents per share in the year-ago period.

The variance between GAAP and operating earnings was due to a gain of 1 cent on nuclear decommissioning trust (“NDT”) Fund Related Activity and mark-to-market loss of 2 cents at PSEG Power.

Operational Performance

Revenue in the reported quarter was $2.1 billion, down from the year-ago figure of $2.47 billion. The top line was also lower than the Zacks Consensus Estimate by $295 million.

Residential electric sales were 3,052 million kilowatt Kwh while Commercial & Industrial sales were 6,857 million Kwh in the reported quarter. Total sales were 9,978 million Kwh.

Total operating expenses in the quarter under review were $1.67 billion, down 9.9% year over year. Lower operating expenses were offset by a decline in revenue, resulting in an operating income of $433 million, down 30.2% year over year.

Segment Performance

PSEG Power: Segment operating earnings were $110 million in the quarter, down from $186 million in the prior-year period. The downside reflects lower prices for energy and capacity.

Production from Power’s combined cycle natural gas fleet was up 10% year over year with a capacity factor of 57.0% versus 52% in the year-ago quarter. Production from the nuclear fleet was down 3% year over year with average capacity factor of 87.2% compared to an average capacity factor of 90.3% in the year-ago quarter.

PSE&G: The segment generated operating earnings of $101 million, down 3.8% year over year. The decline reflects warmer-than-normal winter weather, an increase in operating and maintenance expense and depreciation expense partially offset by an increase in transmission revenue.

PSEG Energy Holdings: Segment operating earnings were $4 million, down from the prior-year figure of $10 million. The results reflect lower earnings on leases.

Financial Update

At the end of June 30, 2012, long-term debt was $7.4 billion compared with $7.06 billion at the end of December 31, 2011. Commercial Paper and Loans were $0.016 billion versus no Commercial Paper and Loans at the end of December 31, 2011.

Outlook

Based on the operational focus and expanded capital program that makes the company well positioned for the long term, the company reaffirmed its earnings guidance. The company expects earnings per share in the range of $2.25 to $2.50 for full-year 2012.

Our Take

Though both the top- and bottom-line results trended down in the reported quarter, missing our forecast, it was in line with management‘s expectations. The results demonstrate the company’s effort to provide reliable service at a reasonable cost.

Going forward, the company’s robust portfolio of regulated and non-regulated utility assets offers a steady earnings base and significant long-term growth prospects. Moreover, approval of the $3.5 billion transmission investment program will improve the system’s reliability and will help to maintain the state’s commitment to renewable energy. The investment program also proves that the company remains focused on operational excellence and disciplined investment.

However, we remain concerned about the increasing cost of coal, higher pension & financial costs, and power-price volatility. The company presently retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.

One of the company’s peers, Xcel Energy Inc. (XEL - Analyst Report) is expected to release its earnings on August 2, 2012. The Zacks Consensus Estimates for the second quarter and full year 2012 are 35 cents and $1.78, respectively.

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).

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