Public Service Enterprise Group Incorporated (PSEG) — Q3 2023 Form 10-Q
Business context and reporting period. The combined filing covers PSEG and its wholly owned utility subsidiary, Public Service Electric and Gas Company (PSE&G), for the quarter and nine months ended September 30, 2023. PSEG operates a regulated New Jersey electric and gas utility and a nuclear generation business. Amounts below are in millions of dollars, except per-share data.
Financial performance and position
- PSEG revenue and earnings: Q3 revenue was $2,456, up 8% from $2,272; net income was $139 versus $114, and diluted EPS was $0.27 versus $0.22. For the first nine months, revenue was $8,632, up 30%; net income was $2,017 versus $243, and diluted EPS was $4.03 versus $0.48.
- Operating results: Q3 operating income was $551 versus $173; nine-month operating income was $2,993 versus $417. Calculated operating margins were approximately 22.4% and 7.6% for Q3 2023 and 2022, respectively, and 34.7% and 6.3% for the nine-month periods. These comparisons are substantially affected by volatile derivative mark-to-market results.
- Segment results: PSE&G net income was $401 in Q3 versus $399, and $1,224 for nine months versus $1,213. PSEG Power & Other recorded a Q3 loss of $262 versus a loss of $285, but nine-month income of $793 versus a loss of $970.
- Cash flow and investment: Nine-month operating cash flow was $3,096 versus $701; investing cash outflow was $2,030 versus $299, including $2,360 of property, plant and equipment additions. Financing cash outflow was $1,477. Management attributed the operating cash-flow increase principally to a $1,175 cash-collateral inflow in 2023 compared with a $1,317 outflow in 2022, and lower tax payments. Cash, cash equivalents and restricted cash totaled $100 at period-end; balance-sheet cash and cash equivalents were $57.
- Debt and liquidity: PSEG had $19,039 of long-term debt including amounts due within one year, plus $695 of commercial paper and loans. Available committed credit capacity was $3,749 under $4,150 of facilities. Management said liquidity, including access to external financing, was expected to cover stressed needs over the next 12 months. PSE&G separately reported $13,660 of long-term debt including current maturities and $100 of commercial paper and loans.
- PSE&G cash flow and investment: Nine-month operating cash flow was $952 versus $1,586, while capital additions were $2,149. PSE&G reported total assets of $41,867 and stockholder equity of $16,831 at September 30.
- Dividends: PSEG paid $0.57 per share in Q3 and $1.71 per share for the first nine months, versus $0.54 and $1.62 in the respective 2022 periods.
Material changes versus the prior comparable period
- Nine-month PSEG earnings improved sharply, driven primarily by after-tax non-trading commodity mark-to-market results of $750 versus a loss of $896 in 2022, and NDT fund results of $33 versus a loss of $224. Management cautions that mark-to-market results include future-delivery positions and can be volatile.
- Q3 results included a one-time $332 pretax ($239 after-tax) pension settlement charge following transfer of approximately $1 billion of pension obligations and associated assets for about 2,000 retirees to an insurer.
- PSE&G’s nine-month operating cash flow fell by $634, reflecting lower cash collateral received from BGS suppliers, higher materials and supplies, vendor and energy payments, and increased regulatory deferrals; improved customer collections partly offset the decline.
- Interest expense increased to $550 from $450 for PSEG and to $364 from $319 for PSE&G for the nine-month periods, mainly reflecting debt issuance, refinancing and higher rates.
Outlook, management commentary, risks and contingencies
- Investment outlook: PSE&G estimates $15.5 billion to $18 billion of capital investment for 2023–2027, with expected rate-base compound annual growth of 6% to 7.5% from year-end 2022 through year-end 2027. PSEG’s total planned investment range is $16.3 billion to $18.9 billion. Management reported no material change to projected capital expenditures versus its 2022 Form 10-K.
- Utility programs and rates: The BPU approved a two-year GSMP extension in October 2023, representing approximately $900 million of investment. PSE&G expects to file a distribution base rate case by December 31, 2023 and expects to conclude it in the second half of 2024. Several cost-recovery and rate filings remain pending. A planned 2024 filing for medium- and heavy-duty EV infrastructure is also described.
- Nuclear business: Nuclear units generated 24.3 TWh at a 95.8% capacity factor in the first nine months. Management said more than 90% of expected 2023 PSEG Power gross margin relates to hedged energy margin, known capacity and ZEC revenues, and certain gas and ancillary-service revenues. A federal nuclear production tax credit is scheduled for 2024–2032, but its effects and interaction with ZEC payments remain under review. Changes in market conditions, regulatory support or environmental requirements could affect plant economics; early retirement could trigger material charges and costs.
- Environmental exposures: PSEG accrued approximately $66 for the Passaic River matter; additional costs could be material but cannot currently be estimated. PSE&G’s MGP remediation estimate is $205–$224 undiscounted, with a $205 liability and corresponding regulatory asset recorded. Remediation at legacy fossil sites is not estimable and is expected to be potentially material. The potential Hackensack River impact is also unknown.
- Other regulatory and legal risks: PSE&G’s FERC investigation concerning the Roseland-Pleasant Valley transmission project has an unestimable potential loss; penalties could be material. The BPU management and affiliate audit is pending. Other identified exposures include the Sewaren 7 contractor litigation, the Jersey City cable matter, and potential costs associated with cooling-water rules. The filing states outcomes are uncertain.
- Market, policy and operating risks: Management identifies inflation, higher interest rates, pension asset performance, affordability and collections, cybersecurity and physical security, severe weather, changing energy demand, environmental and decarbonization policy, and regulatory approval of planned investments as key challenges. A two-level downgrade of PSEG Power could require additional collateral; the estimated potential requirement was approximately $750 at September 30, 2023.
- Other developments: PSEG sold its Ocean Wind JV interest in May and PSEG Power sold its Kalaeloa interest in July, with no material gain or loss. In October, PSEG issued $1 billion of senior notes; Moody’s revised PSEG Power’s outlook from stable to positive, with its issuer rating unchanged.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus commodity mark-to-market and trust investment results.
- The pension settlement’s ongoing effects, and the extent to which pension costs and funding requirements change after the lift-out.
- Regulatory approval and recovery timing for PSE&G’s investment programs, pending filings and expected distribution rate case.
- Actual costs and recoverability of environmental remediation, especially the Passaic River and former generating-site obligations.
- Debt refinancing costs, liquidity needs and possible collateral calls under commodity contracts or a credit-rating downgrade.
- Whether nuclear tax-credit guidance and market or regulatory developments support the economics of continued plant operations.