Public Service Enterprise Group Inc.'s (PEG) fourth-quarter profit fell 19% after sliding margins cut into earnings at the company's main electricity utility.

The company projected a downbeat outlook for the current year amid tough power-market conditions.

"We will continue to focus on maintaining high levels of operating efficiency" across its utility and competitive-power business, Chairman and Chief Executive Ralph Izzo said during a conference call. "We will not, however, be able to offset the impact on operating earnings in 2011 from a decline in the market price for energy, and the increased expenses" related to the company's operating coal plants.

Earnings will be pressured by lower-priced hedges replacing higher priced hedges seen last year and customer loss amid tough power market conditions, executives said.

For instance, the company has hedged 95% of its coal and nuclear generation in 2011 at $68 a megawatt hour compared to 91% of that portfolio hedged in 2010 at $72 a megawatt hour.

The Newark-based company generates about 70% of its profits from its competitive power business with the bulk of the rest coming from its regulated utility operations.

New Jersey's largest utility has suffered continued revenue pressure amid stagnant demand. Many power companies are struggling following back-to-back years of declining purchases and slumping prices for wholesale generation that's sold at market-driven rather than regulated rates.

The company will face more pressure in the coming years now that New Jersey has enacted a series of long-term incentives to build natural gas power plants in the state. PSEG and other utilities vocally opposed the measures, which were intended to lower electricity rates in the state.

Meanwhile, the company is considering building new gas-fired generation at its existing sites as part of a law passed by new Jersey government last month providing long-term subsidies for new plants, even as the company opposes the program, Izzo said. PSEG and other existing power plants say that the government program skews the East Coast electricity market. They have filed a complaint with federal regulators and challenging it in a U.S. district court.

PSEG will earn about $2.50-$2.75 a share in 2011, behind analysts' recent expectation of $2.80 a share. The company earned $3.12 in 2010.

PSEG posted a fourth-quarter profit of $282 million, or 56 cents a share, down from $349 million, or 69 cents a share, a year earlier. Excluding effects from hedging, the sales of two Texas power plants and other items, per-share operating earnings were 60 cents, down from 66 cents. Analysts polled by Thomson Reuters most recently forecast earnings of 62 cents a share.

PSEG Power, the company's largest unit by earnings, posted a 19% lower profit after margins continued to erode on certain wholesale contracts and a 26-day refueling outage at its Hope Creek nuclear reactor cut output.

The company's electric and gas businesses posted 22% higher earnings thanks to an electric and gas rate settlement, but profit in its energy holdings unit fell 58% after lower project earnings and write-downs more than offset the benefit of lower interest expenses.

PSEG pegged capitals pending at $6.7 billion in 2011-2013.

The bonus depreciation tax benefit will improve cash by about $900 million in 2011-2012, of which half will be at the utility and the rest at the company's wholesale operations, Chief Financial Officer Caroline Dorsa said. The tax benefit passed in December lets companies take a 100% writedown on investments projects completed this year and a 50% writedown next year, instead of spreading them over 15-20 years.

Shares were recently down 5 cents at $31.69. The stock is up 2.9% over the past 12 months

-By Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

--Drew FitzGerald contributed to this report.
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