Earnings Preview: PEG

Public Service Enterprise Group Inc. (PEG - Analyst Report), a regulated electric and natural gas distributor, is expected to release its third quarter 2012 results on November 1, 2012, before the bell. The Zacks Consensus Estimate for the third quarter of 2012 is 71 cents per share (year-over-year decrease of 14.46%) on revenues of $2,771 million (year-over-year increase of 5.76%).

Second-quarter 2012, a Synopsis

Public Service Enterprise’s second-quarter 2012 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 second quarter of 2012, 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.

Revenue in the second quarter of 2012 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.

Read our full coverage on this earnings report: PEG Misses on All Counts

Guidance for 2012

Public Service Enterprise expects earnings in the range of $2.25 to $2.50 per share for full year 2012. It 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, it expects to generate good results.

Zacks Consensus

The analysts covered by Zacks expect Public Service Enterprise Group to post third-quarter 2012 earnings of 71 cents per share, lower than 83 cents delivered in the prior-year quarter. Currently, the Zacks Consensus Estimate ranges between earnings of 66 cents and 76 cents a share.

For 2012, the Zacks Consensus Estimate stands at $2.39 per share, lower than its prior-year earnings of $2.74 per share. The current Zacks Consensus Estimate ranges between $2.25 and $2.50 per share.

Estimate Revisions Trend

Agreement

We see a flat trend for estimates for the third quarter of 2012. Among the 9 estimates, no estimate moved upward or downward over the last 30 days. The flattish trend is also reflected for full-year 2012.

Magnitude

The Zacks Consensus Estimate for the third quarter 2012 inched up by a penny to 71 cents over the last 30 days. For full year 2012 the consensus estimate remained static at $2.39 for the last 30 days.

Surprise History

With respect to earnings surprises, Public Service Enterprise Group has topped the Zacks Consensus Estimate in three out of the last four quarters in the range of (4.44)% to 26.87%. The average surprise over the last four quarter remained a positive 6.46%. The earnings miss in the last quarter was the lowest at (4.44)%.

Our Recommendation

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. Going forward, we believe that the low-cost nuclear fleet, assumed rate relief and added generating capacities will drive Public Service’s earnings growth. Public Service has been pursuing growth opportunities in the core U.S. market and increasing capital allocation in projects that provide good risk-adjusted returns.

Like its peer, Northeast Utilities (NU - Analyst Report), the company presently retains a short-term Zacks #2 Rank (Buy) providing investors with a window of opportunity for short-term gains.

However, over the longer run, we are concerned about the increasing cost of coal, higher pension & financial costs, and power-price volatility. Thus, we maintain our long-term Neutral recommendation on the stock.

Based in Newark, New Jersey, Public Service Enterprise Group Incorporated 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).