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Public Service Enterprise Group Inc. (PEG - Analyst Report) or PSEG reported third quarter 2012 results before the opening bell today. During the quarter, operating earnings per share were 75 cents, above the Zacks Consensus Estimate of 72 cents. However, it was lower than the previous year figure of 83 cents per share.

In the reported quarter, GAAP earnings per share were 68 cents, up from 52 cents per share in the year-ago period.

The variance of 7 cents between GAAP and operating earnings was due to a gain of 8 cents on nuclear decommissioning trust (“NDT”) Fund Related Activity and mark-to-market loss of 15 cents at PSEG Power.

Operational Performance

Revenue in the reported quarter was $2.40 billion, down from the year-ago figure of $2.62 billion. The top line was also lower than the Zacks Consensus Estimate by $218 million.

Residential electric sales were 4,640 million kilowatt-hour (Kwh) while Commercial & Industrial sales were 7,833 million Kwh in the reported quarter. Total sales were 12,549 million Kwh.

Total operating expenses in the quarter under review were $1.81 billion, down 12.4% year over year. Lower revenues were offset by lower operating expenses, resulting in an operating income of $594 million, up 6.8% year over year.

Segment Performance

PSEG Power: Segment operating earnings were $217 million in the quarter, down from $258 million in the prior-year period. The downside reflects lower prices for energy, partially offset by an increase in capacity prices.

Production from Power’s combined cycle natural gas fleet was up 17% year over year with a capacity factor of 67% versus 57% in the year-ago quarter. Production from the nuclear fleet increased 2% year over year with average capacity factor of 92% compared with an average capacity factor of 90.6% in the year-ago quarter.

PSE&G: The segment generated operating earnings of $155 million, marginally up 0.65% year over year. The increase reflects a rise in transmission revenue, partially offset by unfavorable weather, increase in operating and maintenance expenses and depreciation expense.

PSEG Energy Holdings: Segment operating earnings were $10 million, up from the prior-year figure of $8 million. The results reflect the continued benefits of a reduction in financing costs, partially offset by a decline in income on the lease portfolio from the divestment of leases in late 2011.

Outlook

Based on the current quarter’s performance, the company expects earnings per share in the range of $2.25 to $2.50 for full-year 2012. The company expects double-digit compound annual growth in its regulated operations due to the Susquehanna – Roseland transmission line through 2014. Moreover, it expects the line to provide benefits in the long-term to New Jersey’s economy.

The company indicated that it is currently unable to estimate its losses from Hurricane Sandy, however, they would be material.

At the peer

Recently, one of the company’s peers, Xcel Energy Inc. (XEL - Analyst Report) posted operating earnings of 78 cents per share for the third quarter of 2012, up 9 cents from the year-ago quarter and 6 cents from the Zacks Consensus Estimate.

Xcel Energy reported total revenue of $2.72 billion in the reported quarter, down 3.9% from $2.83 billion in the year-ago period. The year-over-year decline was due to lower contributions from the Natural Gas and Electric segments. Reported quarter revenue was also lower than the Zacks Consensus Estimate of $3.01 billion.

Our Take

During the quarter, the company’s earnings could beat the Zacks Consensus Estimate, but the revenue fell short of our expectations. Going forward, Public Service’s robust portfolio of regulated and non-regulated utility assets provides a steady earnings base and significant growth prospects over the long run.

The company has been striving to optimize generation margins by improving cost-structure and through improvements in performance and reliability of its nuclear and fossil units. Management has taken several measures to improve financial stability and reduce the overall risk profile of the company. The company has been pursuing growth opportunities in the core U.S. market and is increasing capital allocation for projects that provide good risk-adjusted returns. Going forward, the low-cost nuclear fleet, assumed rate relief and added generating capacities will drive Public Service’s earnings growth.

However, we are concerned about the present unfavorable macro backdrop, the rising cost of coal, higher pension & financial costs, power-price volatility and the negative impacts from Sandy Hurricane. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Based in Newark, New Jersey, Public Service Enterprise Group Incorporated is a diversified utility holding company. The company’s 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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