Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Its principal businesses are PSE&G, a regulated New Jersey electric and gas utility, and PSEG Power, a competitive generation and energy-supply business. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Consolidated PSEG | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenues | $1,874 | $2,050 | $4,763 | $4,831 |
| Operating income (loss) | $(294) | $407 | $447 | $1,204 |
| Operating margin | (15.7)% | 19.9% | 9.4% | 24.9% |
| Net income (loss) | $(177) | $451 | $471 | $899 |
| Diluted EPS | $(0.35) | $0.89 | $0.93 | $1.77 |
Q2 consolidated revenue fell 9%; first-half revenue fell 1%. First-half operating cash flow was $1,049, down from $1,664 in 2020. Capital spending was $1,303 versus $1,414, and cash dividends paid were $516 versus $495. The company reported $107 cash and equivalents at June 30, 2021, versus $543 at year-end 2020; cash, cash equivalents and restricted cash totaled $144.
At June 30, consolidated long-term debt was $15,350, with $345 due within one year; commercial paper and loans were $1,450. Total assets were $49,292 and stockholders’ equity was $15,878. The company reported $3,855 of available credit capacity under $4,200 of facilities and stated that capacity exceeded projected maximum liquidity needs over its 12-month planning horizon.
Material changes and segment results
- PSE&G: Q2 revenue was $1,514, up 4%, and net income was $309, up from $283. First-half revenue was $3,587, up 7%, and net income was $786, up from $723. Growth reflected rate-base investment and sales, among other factors. First-half operating cash flow declined to $680 from $999.
- PSEG Power: Q2 revenue was $380, down 44%, and net loss was $483 versus income of $170. First-half revenue was $1,547, down 19%, and net loss was $322 versus income of $183. Results were affected by mark-to-market losses and a $519 pre-tax impairment of the ISO-New England fossil asset grouping.
- The impairment was partly offset by a $62 pre-tax gain on the June sale of Solar Source. The sale also resulted in approximately $63 of income tax expense, primarily from recapture of investment tax credits.
- Consolidated Q2 and first-half results also reflected lower year-over-year gains on nuclear decommissioning trust investments in Q2 and higher non-trading mark-to-market losses. First-half after-tax non-trading mark-to-market losses were $240, compared with no such net losses reported for the 2020 period.
Outlook, management commentary and key risks
- Management is pursuing a shift toward a primarily regulated utility and contracted carbon-free energy infrastructure business. PSEG completed the Solar Source sale and continued exploring strategic alternatives for more than 6,750 MW of fossil generation; a transaction was anticipated in Q4 2021 or Q1 2022, with no assurance of a sale.
- PSE&G expects to invest $13–$15 billion over 2021–2025, implying expected annual rate-base growth of 6.5%–8%. The range depends partly on regulatory approval and extensions of investment programs. Planned transmission spending for 2021–2023 is $2.5 billion.
- PSEG completed its 25% investment in the Ocean Wind offshore-wind project in April 2021; commercial operation is expected in 2025. In June, management announced a goal of net-zero Scope 1 and 2 emissions by 2030, subject to technology, policy and customer-behavior assumptions.
- PSE&G recorded an $82 COVID-19 regulatory asset, including $42 for incremental gas bad-debt expense, which it expects to recover. The company cited lower customer cash collections and higher receivables amid service-disconnection restrictions; recovery and the ultimate pandemic impacts remain uncertain.
- A July 2021 transmission settlement, pending FERC approval, would reduce PSE&G’s base transmission ROE from 11.18% to 9.9%; management estimated an annual net-income reduction of $50–$60 and a total cash-flow reduction of about $100.
- New Jersey awarded Salem 1, Salem 2 and Hope Creek nuclear plants ZECs for June 2022–May 2025 at approximately $10/MWh. Appeals and possible changes to payments remain risks; PSEG stated that adverse changes in plant economics or support could lead it to cease operating the plants.
- Other material risks include fossil-asset sale impairments and debt redemption costs, wholesale power and gas prices, capacity-market and regulatory changes, environmental remediation, nuclear regulation, and the LIPA dispute following Tropical Storm Isaias. PSEG had accrued $66 for the Passaic River matter and estimated PSE&G MGP remediation costs of $271–$309, with $271 accrued and recorded as a regulatory asset.
- The LIPA/PSEG LI non-binding term sheet contemplated OSA amendments, including more incentive-based compensation, and resolution of LIPA’s $70 claim; approvals and a final settlement were not assured. PSE&G’s BPU affiliate and management audit was in its data-collection phase.
- No full-year earnings guidance was provided in the supplied filing text. Management said operating cash flows, cash on hand and financing activities were expected to fund planned capital expenditures and dividends; it did not expect to issue new equity to fund planned capital requirements. The board approved a Q3 dividend of $0.51 per share, an indicated annual rate of $2.04.
Most important facts for investors to verify
- Whether the $519 ISO-NE impairment, Solar Source sale proceeds and related tax effects are fully reflected in the reported period, and how any fossil-fleet transaction would affect additional impairments, costs and debt.
- Progress and approvals for PSE&G’s investment programs and the proposed transmission ROE settlement, including the estimated earnings and cash-flow effects.
- Whether COVID-related costs and bad debts are ultimately recoverable, and whether customer collections and operating cash flow improve after disconnection restrictions ease.
- Outcomes of ZEC appeals, capacity-market proceedings, environmental liabilities and the LIPA matter, including any material changes to accrued amounts or operating arrangements.
- Liquidity and collateral sensitivity to commodity-price movements or a PSEG Power credit downgrade; the filing estimated additional collateral needs of approximately $862 under a below-investment-grade downgrade scenario.