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| PEG > SEC Filings for PEG > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
This combined MD&A is separately filed by PSEG, Power and PSE&G. Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each make representations only as to itself and make no representations whatsoever as to any other company.
PSEG's business consists of three reportable segments, which are:
• Power, our wholesale energy supply company that integrates its generating asset operations with its wholesale energy, fuel supply, energy trading and marketing and risk management activities primarily in the Northeast and Mid Atlantic U.S.;
• PSE&G, our public utility company which provides transmission and distribution of electricity and gas in New Jersey; and
• Energy Holdings, which owns our other generation assets and holds other energy-related investments.
OVERVIEW OF 2009 AND FUTURE OUTLOOK
Our business discussion in Part I Item 1 Business of our 2008 Annual Report on Form 10-K provides a review of the regions and markets where we operate and compete, as well as our strategy for conducting our businesses within these markets, focusing on operational excellence, financial strength and making disciplined investments. The following discussion supplements that discussion and the discussion included in the Overview of 2008 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 2009 and any changes to the key factors that will drive our future performance. The following discussion refers to the Condensed Consolidated Financial Statements (Statements) and the Related Notes to Condensed Consolidated Financial Statements (Notes). This information should be read in conjunction with such Statements, Notes and the 2008 Annual Report on Form 10-K.
Operational Excellence
Our generating assets continued to perform with strong operations in the first quarter of 2009. Our nuclear capacity factor for the first quarter 2009 was slightly higher than in the comparable period in 2008. Our fossil fleet also performed well in the first quarter 2009, although generation volumes were negatively impacted by lower electric prices than in the recent past, and the general economic slowdown. The largest reduction in volume was at our coal units which are burning higher-priced coal in 2009 than in 2008. Continued lower electric prices and recessionary conditions could prolong this trend for the foreseeable near-term future. Our hedging strategy has resulted in higher average prices than a year ago, thus largely offsetting our reduced generation. The increase in prices was due to comparably higher-priced contracts that replaced older, lower-priced contracts, such as the 2005 Basic Generation Service (BGS) auction contracts which expired in May 2008, that were replaced with higher priced contracts.
Our utility operations experienced a 2% decline in total electric volumes and 3% increase in total gas volumes in the first quarter of 2009 as compared to the same period in 2008. Residential sales contribute approximately 45% of our electric margin and 75% of our gas margin. In the Commercial and Industrial Segments, billings to customers are not based on total energy consumption as measured by kilowatt-hours or deka-therms, but are based on fixed, monthly demand charges that are set by the highest electric and gas demand for an hour period during the previous 12- month period or, in the case of some electric rates, by the peak demand during the current month. Therefore, any changes in energy usage over comparative periods may not impact sales margin.
During 2008 and the first quarter of 2009, we undertook a project to update our customer service system. In April 2009 our customer service system was fully integrated into our utility operations.
• On March 26, 2009, the Federal Energy Regulatory Commission (FERC) issued an order regarding PJM's Reliability Pricing Model (RPM). The effect of this order upon our generation fleet in PJM is generally positive, particularly the increase in the cost of new entry value which more accurately reflects construction and equipment costs. This should incent both new build and continued operation of existing facilities. For additional information, see Part II, Item 1. Legal Proceedings.
• On April 1, 2009, the U.S. Supreme Court concluded that the U.S. Environmental Protection Agency (EPA) permissibly relied upon cost-benefit analysis in setting the national performance standards and in providing for cost-benefit variances from those standards as part of the Phase II Section 316(b) regulations of the Federal Water Pollution Control Act. This is important to us in that it allows the EPA to continue to use the site-specific cost-benefit test in determining best technology available for minimizing adverse environmental impact. For additional information, see Note 5. Commitments and Contingent Liabilities.
There continue to be significant developments addressing the need to promote clean and renewable energy, energy efficiency and the reduction of greenhouse gases which may impact our operations in the future as new rules and regulations are adopted.
• In April 2009 the EPA released a proposed finding under the Clean Air Act concluding that CO2 is one type of six specific greenhouse gases which cause or contribute to the climate change problem and constitute air pollution which endangers both public health and welfare. If applied to fossil fuel generation facilities additional regulation of CO2 emissions could impact our operations, ability to renew permits and licenses, and could result in material compliance costs.
• Legislation has been introduced in Congress to promote clean energy, energy efficiency, and reduce greenhouse gases. The bill sets forth major initiatives which include establishing a national renewable energy standard. This would provide for setting maximum pollution levels and creating a market mechanism for the sale and purchase of pollution allowances (cap-and-trade programs). While the proposed regulation would not eliminate individual state-level renewable portfolio standards, it could reduce or eliminate regional inconsistencies in environmental regulations.
Financial Strength
In 2009, we have continued to focus on managing costs while maintaining our safety and reliability standards and believe that our financial position remains strong.
Our businesses continue to generate strong cash from operations in 2009. In addition, Power established a program for the issuance of up to $500 million of unsecured medium-term notes (MTNs) to retail investors in January and to date has issued $209 million under this program. We used these funds, cash from operations and cash on hand to:
• contribute $257 million of the approximately $370 million we expect to contribute into our pension plans in 2009,
• pay $250 million of Power's 3.75% Senior Notes at maturity,
• redeem $280 million of non-recourse debt at our Texas plants at the end of February and
• repurchase $10 million of Energy Holdings remaining Senior Notes.
In addition, the Board of Directors has approved an increase in the quarterly dividends from $0.3225 per share to $0.3325 per share for the first and second quarters of 2009 with an indicated annual dividend of $1.33 per share. This increase is consistent with maintaining our target payout ratio of 40% to 50% of Operating Earnings.
During 2009, we expect to continue to pursue investments focusing on areas that complement our existing businesses and provide prudent growth opportunities. These areas include responding to climate change and continuing to improve environmental performance, upgrading critical energy infrastructure and providing new energy supplies. During 2009:
• We were assigned construction and operating responsibility for two additional 500 kV transmission lines in New Jersey. The first line would run from Branchburg to Roseland and the second from Roseland to Hudson. These lines are still in the design phase.
• We obtained incentive rate approval from FERC for our portion of a 500 kV transmission line that may extend to Lower Alloways Creek Township, New Jersey. We will be responsible for constructing and operating a portion of this line, known as the Mid-Atlantic Pathway Project (MAPP). Receipt of incentive rates is contingent upon our portion of the MAPP project being approved by PJM as a Regional Transmission Expansion Plan (RTEP) project.
• We requested approval from the New Jersey Board of Public Utilities (BPU) for a new solar loan program, called "Solar Loan II". Under Solar Loan II, we would help finance the installation of an additional 40 MW of solar-powered generating systems in our electric service territory. Any remaining financing capacity from our current solar loan program would be rolled into the new program.
• The BPU approved our Capital Economic Stimulus Program. Under this program, we anticipate accelerating $694 million of capital infrastructure investments through our utility for electric and gas programs in New Jersey over a 24-month period. The goal of the program is to help improve New Jersey's economy through the creation of new jobs while enhancing our utility's infrastructure. The program provides for a charge for immediate recovery of a return on the program expenditures plus depreciation of the assets which will be adjusted each January.
There is no guarantee that these or future initiatives will be achieved since many issues need to be favorably resolved, such as system reliability concerns, regulatory approvals and funding of construction or development costs.
RESULTS OF OPERATIONS
The results for us and our subsidiaries for the quarters ended March 31, 2009
and 2008 are presented below:
Quarters Ended March 31,
Earnings (Losses) 2009 2008
(Millions)
Power $ 318 $ 275
PSE&G 124 137
Energy Holdings 7 29
Other (5 ) (6 )
PSEG Income from Continuing Operations $ 444 $ 435
Income from Discontinued Operations - 13
PSEG Net Income $ 444 $ 448
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Quarters Ended March 31,
Earnings Per Share (Diluted) 2009 2008
PSEG Income from Continuing Operations $ 0.88 $ 0.85
Income from Discontinued Operations - 0.03
PSEG Net Income $ 0.88 $ 0.88
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Our results include the following after-tax impacts of mark-to-market (MTM) activity:
Quarters Ended March 31,
Non-Trading Mark-to-Market After Tax 2009 2008
(Millions)
Power $ (18 ) $ 3
Energy Holdings 3 2
Total $ (15 ) $ 5
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The quarter-over-quarter increase in our Income from Continuing Operations reflects the following large drivers:
• Improved earnings at Power due to higher prices realized under sales contracts partially offset by lower volumes and losses related to the Nuclear Decommissioning Trust (NDT) Funds, and
• the absence of tax benefits taken in 2008 at PSE&G and Energy Holdings related to an IRS refund claim and other tax items.
PSEG
Our results of operations are primarily comprised of the results of operations of our operating subsidiaries, Power, PSE&G and Energy Holdings, excluding changes related to intercompany transactions, which are eliminated in consolidation. We also include certain financing costs, donations and general and administrative costs at the parent company. For additional information on intercompany transactions, see Note 14. Related-Party Transactions. For an explanation of the variances, see the discussions for Power, PSE&G and Energy Holdings that follow the table below.
Quarters Ended Increase/
March 31, (Decrease)
2009 2008 2009 vs 2008
(Millions) (Millions) %
Operating Revenues $ 3,921 $ 3,792 $ 129 3
Energy Costs 2,068 2,119 (51 ) (2 )
Operation and Maintenance 675 627 48 8
Depreciation and Amortization 207 192 15 8
Income from Equity Method Investments 10 12 (2 ) (17 )
Other Income and Deductions (44 ) (2 ) 42 N/A
Interest Expense (145 ) (153 ) (8 ) (5 )
Income Tax Expense (304 ) (233 ) 71 30
Income from Discontinued Operations, net of tax - 13 (13 ) (100 )
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Power
Quarters Ended Increase/
March 31, (Decrease)
2009 2008 2009 vs 2008
(Millions) (Millions)
Income from Continuing Operations $ 318 $ 275 $ 43
Net Income $ 318 $ 275 $ 43
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For the quarter ended March 31, 2009, the primary reasons for the $43 million increase in Income from Continuing Operations were:
• higher prices and sales volumes on BGS contracts supported by lower generation costs,
• improved margins on a reduced sales volume under the BGSS contract, and
• higher trading gains,
• partially offset by higher maintenance costs and net losses on investments in the NDT Funds.
• The increase also included the recognition of non-trading MTM losses of $18 million, after-tax, in 2009 as compared to $3 million of after-tax MTM gains in 2008.
The quarter-over-quarter details for these variances are discussed below:
Quarters Ended
March 31, Increase/ (Decrease)
2009 2008 2009 vs 2008
(Millions) (Millions) %
Operating Revenues $ 2,374 $ 2,375 $ (1 ) -
Energy Costs 1,462 1,589 (127 ) (8 )
Operation and Maintenance 258 239 19 8
Depreciation and Amortization 47 38 9 24
Other Income and Deductions (40 ) (5 ) 35 N/A
Interest Expense (43 ) (42 ) 1 2
Income Tax Expense (206 ) (187 ) 19 10
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For the quarter ended March 31, 2009 as compared to 2008
Operating Revenues decreased $1 million due to:
• Generation revenues increased $59 million due to
¡ a net increase of $88 million from higher prices on a higher volume of BGS contracts modestly offset by the expiration of several contracts in May 2008, and
¡ higher revenues of $19 million due to several new wholesale contracts that were entered into in late 2008 and early 2009,
¡ partially offset by lower revenues of $41 million resulting from lower volumes of generation being sold at lower prices.
• Gas Supply revenues decreased $76 million
¡ including a net decrease of $8 million resulting from sales under the BGSS contract, comprised of $46 million from lower average gas prices in 2009 net of gains on financial hedging transactions, partly offset by higher sales volumes of $38 million due to colder winter temperatures in 2009, and
¡ a net decrease of $68 million due to lower prices on a reduced sales volume to third party customers.
• Trading revenues increased $16 million principally due to premiums received on the termination of certain trades and gains on electric-related contracts.
Operating Expenses
• Energy Costs represent the cost of generation, which includes fuel purchases for generation as well as purchased energy in the market, and gas purchases to meet Power's obligation under its BGSS contract with PSE&G. Energy Costs decreased by $127 million due to:
¡ Generation costs decreased by $39 million due to $98 million of lower fuel costs, primarily reflecting lower volumes of natural gas and coal purchases and lower average natural gas prices, partly offset by net losses of $51 million from financial hedging transactions.
¡ Gas costs decreased $88 million, reflecting net decreases of $9 million and $75 million related to Power's obligations under the BGSS contract and sales to third party customers, respectively, reflecting lower inventory costs partially offset by higher volumes.
• Operation and Maintenance increased $19 million primarily due to
¡ a net increase of $8 million due to higher planned maintenance costs at our fossil stations, primarily Keystone, Bergen and Linden, and
¡ an increase of $9 million primarily related to a planned outage at Hope Creek.
• Depreciation and Amortization increased $9 million due to
¡ an increase of $4 million resulting from a larger depreciable nuclear asset base in 2009, principally due to depreciation of the Salem 2 steam generator replacement being placed into service in May 2008, and a higher depreciable fossil asset base in 2009, and
¡ an increase of $4 million due to pollution control equipment being placed into service in December 2008 at our Mercer 1 and 2 generating facilities.
Other Income and Deductions decreased $35 million due to
• higher charges of $22 million ($60 million in 2009 versus $38 million in 2008) for other-than-temporary impairments related to the NDT Fund securities,
• net realized losses of $17 million on the NDT Fund securities, and
• a $4 million write-off of obsolete pollution-control equipment,
• partially offset by an increase of $7 million in net unrealized gains on NDT Fund derivative instruments.
Interest Expense experienced no material change.
Income Tax Expense increased $19 million in 2009 primarily due to
• an increase of $25 million due to higher pre-tax income,
• partially offset by a reduction of $3 million due to lower earnings from the NDT Funds, and
• a reduction of $2 million due to increased benefits from a manufacturing deduction under the American Jobs Creation Act of 2004.
PSE&G
Quarters Ended Increase/
March 31, (Decrease)
2009 2008 2009 vs 2008
(Millions)
Income from Continuing Operations $ 124 $ 137 $ (13 )
Net Income $ 124 $ 137 $ (13 )
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For the quarter ended March 31, 2009, the primary reasons for the $13 million decrease in Income from Continuing Operations were:
• higher taxes as a result of tax benefits recorded in 2008 related to an IRS refund claim and other tax items, and
• increased Operation and Maintenance expense and depreciation, offset by
• higher margin revenues due to favorable weather and a Transmission formula rate increase.
The quarter-over-quarter details for these variances are discussed below.
Quarters Ended
March 31, Increase/ (Decrease)
2009 2008 2009 vs 2008
(Millions) (Millions) %
Operating Revenues $ 2,735 $ 2,618 $ 117 4
Energy Costs 1,859 1,793 66 4
Operation and Maintenance 395 360 35 10
Depreciation and Amortization 149 143 6 4
Other Income and Deductions - 4 (4 ) (100 )
Interest Expense (79 ) (81 ) (2 ) (2 )
Income Tax Expense (85 ) (65 ) 20 31
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For the quarter ended March 31, 2009 as compared to 2008
Operating Revenues increased $117 million primarily due to
• Commodity related revenues increased $65 million due to
¡ increased electric revenues of $75 million primarily due to $97 million in higher BGS and Non-Utility Generation (NGC) revenues (higher prices of $129 million offset by decreased sales of $32 million), offset by $22 million in lower non-utility generation (NUG) revenues, primarily due to lower prices, and
¡ decreased gas revenues of $10 million due to $48 million in decreased BGSS prices offset by $38 million in higher sales due to weather.
• Delivery revenues increased $52 million due to
¡ increased gas revenues of $30 million due to $15 million of higher sales due to favorable weather and $15 million due to higher SBC revenues, and
¡ increased electric revenues of $22 million due to $14 million for SBC revenues, $7 million for net transmission rate increases, $4 million for a securitization transition charge rate increase, offset by $3 million in decreased distribution sales and demands due to economic conditions. PSE&G retains no margins from SBC or STC collections as the revenues are offset in operating expenses below.
• Energy Costs increased $66 million due to
¡ increased electric costs of $75 million due to $120 million or 16% in higher prices for BGS and NUG purchases offset by $45 million or 6% in lower BGS and NUG volumes due to economic conditions, offset by
¡ decreased gas costs of $10 million due to $48 million or 5% lower prices offset by $38 million or 4% in higher sales volumes due to favorable weather.
• Operation and Maintenance increased $35 million primarily due to
¡ increases in SBC expenses of $30 million, and
¡ $11 million of higher labor and benefits, primarily increased pension expense,
¡ partially offset by lower materials usage of $4 million, and
¡ lower injuries and damages of $2 million.
• Depreciation and Amortization increased $6 million due to
¡ increases of $4 million due to additional plant in service, and
¡ increases of $3 million for amortization of regulatory assets,
¡ partially offset by $1 million in capitalized depreciation and software amortization.
Other Income and Deductions decreased $4 million due to
• $3 million in lower investment income due to current market conditions, and
• $1 million reduction in income tax gross-ups on contributions in aid of construction (CIAC). CIAC is taxable and PSE&G recognizes the gross-up as income when collected.
Interest Expense experienced no material change.
Income Tax Expense increased $20 million primarily due to
• $3 million on higher pre-tax income, and
• $18 million in tax benefits taken in 2008 related to an IRS refund claim.
Energy Holdings
Quarters Ended Increase/
March 31, (Decrease)
2009 2008 2009 vs 2008
(Millions) (Millions)
Income from Continuing Operations $ 7 $ 29 $ (22 )
Income from Discontinued Operations, net of tax - 13 (13 )
Net Income $ 7 $ 42 $ (35 )
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For the quarter ended March 31, 2009, the primary reasons for the $22 million decrease in Income from Continuing Operations were:
• lower tax benefits as a result of the absence of benefits recorded in 2008 related to an IRS refund claim,
• lower generation revenues, and
• lower leveraged lease revenues primarily due to the tax reserve taken in mid-2008 and the sale of leveraged lease assets,
• partially offset by gains on sales and terminations of leveraged lease assets, and
• lower interest expense due to debt retirement.
The quarter-over-quarter details for these variances are discussed below:
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