Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Its principal businesses are PSE&G, a regulated New Jersey electric and gas utility, and PSEG Power, a competitive generation and energy-supply business. Amounts below are in millions of dollars, except per-share data.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenues | $2,370 | $2,302 | $7,201 | $7,598 |
| Operating income | $633 | $490 | $1,837 | $1,436 |
| Net income | $575 | $403 | $1,474 | $1,256 |
| Diluted EPS | $1.14 | $0.79 | $2.91 | $2.47 |
| Operating cash flow | Not separately provided | $2,517 | $2,709 |
- Q3 revenues rose 3% and net income rose 43% year over year; nine-month revenues fell 5% while net income increased 17%.
- At September 30, cash and cash equivalents were $966; total assets were $49,576. Long-term debt was $14,792 and debt due within one year was $2,093.
- PSEG had $4.2 billion of credit facilities, with $3.995 billion available. Management said capacity exceeded anticipated maximum liquidity needs over its 12-month planning horizon.
- Nine-month capital expenditures were $2,092, including $1,777 at PSE&G. Cash dividends paid were $743; the Q3 dividend was $0.49 per share, and the company indicated an annual rate of $1.96.
Material changes and drivers
- Q3 earnings benefited from a $122 pretax ($86 after-tax) gain on the sale of PSEG Power’s Yards Creek interest, higher PSE&G transmission and distribution earnings, and NDT investment gains. PSEG Power’s Q3 net income was $254 versus $53 a year earlier.
- Nine-month earnings also benefited from the Yards Creek gain and comparison with a 2019 pretax loss of about $400 on the Keystone and Conemaugh plant sales. Offsetting factors included lower realized power prices and volumes, lower capacity revenue, and mark-to-market losses at PSEG Power.
- PSE&G’s nine-month net income increased to $1,036 from $974, supported by investment-related earnings and pension/OPEB credits. PSEG Power’s increased to $437 from $309, with asset-sale comparisons and other items contributing.
- Operating cash flow declined $192 year over year. PSEG cited lower cash flow at both PSE&G and PSEG Power, including customer collection impacts and counterparty collateral movements.
Outlook, risks and contingencies
- PSE&G expects to invest $12.5–$14.7 billion over 2020–2024, implying 7%–8% compound annual rate-base growth; the outlook depends partly on approvals for proposed programs. The BPU approved a $1 billion, three-year energy-efficiency program in September 2020.
- PSEG is exploring strategic alternatives for PSEG Power’s non-nuclear fleet, including more than 6,750 MW of fossil generation and a 467 MW solar portfolio. Marketing was expected to begin in Q4 2020, with a potential transaction in 2021; no sale is assured. PSEG intends to retain its nuclear fleet.
- Salem 1, Salem 2 and Hope Creek had ZEC awards through May 2022; applications for the next eligibility period were filed in October 2020. The BPU decision, ZEC terms, PJM capacity-market rules, commodity economics and environmental requirements could affect continued operations. The filing says adverse outcomes could lead to plant closures and material charges.
- The pandemic had not materially affected results, financial condition or cash flows through September 30, but management warned prolonged effects could weaken collections, increase bad debt and reduce operating cash. PSE&G recorded a $35 COVID-related regulatory asset; eventual recovery is not assured. New Jersey’s non-safety disconnection moratorium was extended through March 15, 2021.
- Material uncertainties include the Passaic River cleanup and related litigation, with approximately $65 accrued and possible additional costs not estimable; a comprehensive BPU audit of PSE&G; and investigations into PSEG LI’s response to Tropical Storm Isaias. PSEG Power’s current exposure under guarantees was $86, with $844 of potential additional collateral if its credit rating fell below investment grade.
- S&P lowered PSEG Power’s senior-note rating to BBB from BBB+ in August 2020; the reported outlooks for PSEG, PSE&G and PSEG Power were stable.
Facts investors should verify
- Whether PSEG completes a non-nuclear fleet transaction, on what terms, and with what regulatory approvals or accounting effects.
- The BPU’s next-period ZEC decision and developments in PJM capacity-market rules that could affect nuclear economics.
- Whether PSE&G recovers COVID-related costs and bad debt, and how customer arrears affect cash flow.
- Updated estimates, cost allocation and regulatory recovery prospects for Passaic River and other environmental liabilities.
- Actual capital spending, rate-base growth and approvals for proposed PSE&G investment programs, alongside liquidity and credit-rating developments.