Electricity and natural gas utility Public Service Enterprise Group Inc. (PEG) on Wednesday reported a 26% decline in net income for the third quarter, impacted negatively by lower revenues and a year-ago divestiture gain. The company said cooler than normal weather and continued weak economic conditions combined to reduce demand and lower pricing. Excluding items, earnings per share declined, but topped analysts' consensus estimate.
Looking ahead, the company said that adverse factors that impacted its third-quarter results continue to challenge its ability to meet the upper end of its fiscal year 2009 earnings outlook.
While most industries are affected by the recession, utility companies seem concealed because of the indispensable services they provide. Also, utilities are highly regulated and have less turf competition. However, the economic crisis has forced people to be more prudent in their electricity usage and weakened consumer demand. The weather also has a key role in determining electricity usage, as cooler weather translates to less use of electricity.
The Newark, New Jersey-based Public Service Enterprise Group, or PSEG, operates through three principal direct wholly owned subsidiaries, namely, Public Service Electric and Gas Co., PSEG Power LLC and PSEG Energy Holdings LLC.
Third-Quarter Results
For the third quarter, the Newark, New Jersey-based company's net income declined to $488 million, or $0.96 per share, from $656 million, or $1.29 per share, in the year-ago quarter.
Income from continuing operations for the latest quarter increased to $488 million, or $0.96 per share, from $476 million, or $0.94 per share, in the same period last year, as the year-ago quarter had income from discontinued operations of $180 million, or $0.35 per share.
The results for the latest quarter include a gain of $7 million, or $0.01 per share, on investments in nuclear decommissioning trust funds and non-trading mark-to-market gains of $17 million, or $0.03 per share.
The year-ago quarter results include non-trading mark-to-market gains of $11 million, or $0.02 per share, and losses on investments in nuclear decommissioning trust funds of $12 million, or $0.02 per share.
Excluding items, operating earnings for the latest quarter declined to $464 million, or $0.92 per share, from $477 million, or $0.94 per share, in the year-ago quarter. On average, ten analysts polled by Thomson Reuters expected the company to report earnings of $0.89 per share for the quarter. Analysts' estimates typically exclude special items.
Operating revenues for the quarter declined 18.2% to $3.04 billion from $3.72 billion in the same period last year. Analysts had a consensus revenue estimate for the quarter of $4.67 billion, representing a 25.6% growth over last year.
Ralph Izzo, chairman, president and chief executive officer of PSEG, said, "We faced challenging market conditions in the third quarter. Cooler than normal weather and continued weak economic conditions combined to reduce demand and lower pricing. We were able to offset most of the decline in demand through our hedging strategy resulting in recontracting at higher prices, our asset mix, our employees' focus on cost reduction and sales in our lease portfolio, which were undertaken at favorable terms to reduce our tax risk."
Peer Performance
Among other utilities, Akron, Ohio-based FirstEnergy Corp. (FE) reported Tuesday a profit for the third quarter that more than halved from last year, reflecting weak revenues across all its business segments. Net income available to FirstEnergy for the third quarter was $234 million, or $0.77 per share, compared to $471 million, or $1.54 per share, in the prior-year quarter. Normalized non-GAAP earnings, excluding special items, were $1.11 per share, compared to $1.60 per share in the same period last year. Quarterly revenues declined to $3.41 billion from $3.91 billion in the previous-year quarter.
New York-based Consolidated Edison, Inc. (ED) is slated to release its financial results for the third quarter on November 2, with analysts projecting earnings of $1.04 per share on revenues of $3.59 billion.
Segmental Details
PSEG Power
PSEG Power, a supplier of electric energy in the NorthEast and Mid-Atlantic markets, reported a decline in operating earnings for the quarter to $339 million, or $0.67 per share, from $360 million, or $0.71 per share, in the prior-year quarter.
The segment's results were hurt by a decline in demand and a migration of customers away from full requirements contracts in a period of low commodity pricing. The company said that earnings were also affected by trading, which will reverse in the fourth quarter. Generation in the third quarter declined by 10% as a result of a contraction in economic activity and cooler than normal weather.
The company noted that Power's gross margins for the full year are benefiting from higher contracted prices, a decline in fuel costs and stronger performance from the nuclear fleet than originally forecast.
Further, the company said that based on performance of the nuclear fleet during the first nine months of the year, the nuclear fleet's full-year capacity factor could advance to 92%-93% compared to a forecasted capacity factor of 91-92% and capacity factor of 92.6% in 2008.
PSE&G
PSE&G, engaged in the distribution of gas and electricity in New Jersey, reported operating earnings for the quarter of $87 million, or $0.17 per share, down from $97 million, or $0.19 per share, in the year-ago quarter. Electric revenues declined during the quarter by $0.02 per share as electric demand was heavily affected by a decline in economic activity and cooler than normal weather.
PSEG Energy Holdings
PSEG Energy Holdings reported operating earnings for the third quarter of $18 million, or $0.04 per share, down from $25 million, or $0.05 per share, in the same quarter last year. The company attributed the lower operating earnings to a decline in energy prices, in comparison to very strong pricing in the year ago period. Also, operating profit from the 2000 MW of gas-fired generating capacity in Texas declined by $0.02 per share.
However, the quarter's results were aided by the recognition of gains on the successful termination of three cross-border leveraged leases of $0.03 per share. Total proceeds for the sales were approximately $219 million in the quarter.
Year-To-Date Results
For the nine months of fiscal year 2009, PSEG's net income rose to $1.24 billion, or $2.45 per share, from $954 million, or $1.88 per share, in the year-ago period.
Income from continuing operations for the period was $1.24 billion, or $2.45 per share, up from $746 million, or $1.47 per share, in the same period last year.
Excluding items, operating earnings for the period increased to $1.26 billion, or $2.50 per share, from $1.23 billion, or $2.41 per share, in the year-ago period.
However, operating revenues for the nine-month period declined 5.4% to $9.52 billion from $10.06 billion a year ago.
Outlook
For fiscal year 2009, PSEG said that cooler than normal weather and continued weak economic conditions will continue to make it difficult to meet the upper end of its 2009 earnings guidance range of $3.00-$3.25 per share. Analysts expect the company to report earnings of $3.10 per share for the year.
The company noted that the guidance for the year reflects the transfer of the Texas gas-fired generating assets from Holdings to Power, which was effective on October 1, 2009. The guidance also reflects the impact of the Holdings debt exchange with Power which resulted in a premium payment of $20 million after-tax, or $0.04 per share. The premium was charged against Holdings results, but deferred at the Parent level, as this transaction was treated as a debt refinancing.
PSEG maintained its forecast for PSEG Power's full-year operating earnings in a range of $1.170 billion-$1.245 billion, stating that an improvement in gross margin for the full year is expected to offset a forecasted decline in fossil generation for the full year.
The company also maintained its outlook for PSE&G's full-year operating earnings in a range of $315 million-$335 million. The forecast continues to reflect an increase in pension expense as well as higher levels of depreciation expense, the company said.
PSEG, however, lowered the outlook for operating earnings at PSEG Energy Holdings to a range of $25 million-$45 million from the prior range of $40 million-$65 million. The company said that following the completion of a debt exchange during the quarter, the Holdings' segment transferred the Texas gas-fired assets to the Power segment on October 1, 2009. The transfer will result in the movement of operating earnings associated with the Texas generating assets from Holdings' to Power for the full year.
Utility is one of areas that the Obama Administration wants to strengthen, with the creation of a Smart Grid, making use of smart meters and load-controllers. President Barack Obama on Tuesday announced a $3.4 billion federal investment, most of which would go to utilities to install meters, transformers and other equipment that can control the flow of electricity and reduce power use and homeowner bills. According to the Electric Power Research Institute, the implementation of smart grid technologies could reduce electricity use by more than 4% by 2030.
According to the Energy Information Administration, the "Smart Grid" consists of devices connected to transmission and distribution lines that allow utilities and customers to receive digital information from and communicate with the grid. Such devices allow a utility to find out where an outage or other problem is on the line and sometimes even fix the problem by sending digital instructions.
Stock Quotes
In Wednesday's regular trading session, PEG is currently trading at $29.85, up $0.09 or 0.30% on a volume of 1.82 million shares. In the past 52 weeks, the stock has been trading in a range of $23.65-$34.02.
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