PUBLIC SERVICE ENTERPRISE GROUP INC quarterly report, Q2 FY2016

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Business context and reporting period

Public Service Enterprise Group Incorporated (PSEG) filed this unaudited combined Form 10-Q for the quarter and six months ended June 30, 2016. Its principal businesses are PSE&G, a regulated New Jersey electric and gas transmission and distribution utility, and PSEG Power, a wholesale generation and energy-supply business. Figures below are in millions of dollars except per-share data and percentages.

Financial performance and liquidity

  • Consolidated Q2: Revenue was $1,905, down 18% year over year; operating income was $347 versus $568; net income was $187 versus $345; diluted EPS was $0.37 versus $0.68. Calculated operating margin was 18.2% versus 24.5%, and net margin was 9.8% versus 14.9%.
  • First half: Revenue was $4,521, down 17%; operating income was $1,174 versus $1,616; net income was $658 versus $931; diluted EPS was $1.30 versus $1.83. Calculated operating margin was 26.0% versus 29.7%, and net margin was 14.6% versus 17.1%.
  • Segments: PSE&G Q2 net income rose to $179 from $167; first-half net income rose to $441 from $409. Power reported a Q2 net loss of $11 versus income of $166 and first-half income of $181 versus $501.
  • Cash flow and investment: First-half operating cash flow was $1,722, down from $2,234. Capital additions were $1,971, compared with $1,743; cash dividends paid were $415, compared with $394. Cash and cash equivalents were $648 at June 30, up from $394 at year-end 2015.
  • Debt and liquidity: Balance-sheet long-term debt was $10,273 and debt due within one year was $662; commercial paper and loans were zero at June 30. Combined debt on those balance-sheet lines was therefore $10,935. Available credit facilities totaled $3,927 of $4,153. PSEG reported that facilities exceeded projected maximum liquidity needs over its 12-month planning horizon.
  • Dividend: PSEG paid $0.41 per share in Q2 and declared $0.41 for Q3, indicating an annual rate of $1.64 per share.

Material changes versus the prior comparable period

  • PSEG’s Q2 net income decreased $158 and first-half net income decreased $273. Management attributed the declines principally to unfavorable non-trading mark-to-market results, lower energy sales volumes and realized prices, and the absence of 2015 Superstorm Sandy insurance recoveries. Lower fuel costs and higher transmission investment revenues partly offset these factors.
  • Power’s Q2 revenue fell $311, primarily reflecting mark-to-market losses, lower energy sales and capacity revenue. For the first half, lower generation and gas-supply revenue reflected warmer winter weather, lower sales prices and volumes, reduced reserve and capacity revenues, and adverse mark-to-market comparisons.
  • PSE&G earnings improved despite lower reported revenue, which management linked largely to reduced securitization and other clause-related collections that are offset by lower associated costs. Transmission revenue increased with investment in the network.
  • First-half operating cash flow fell $512, including declines of $101 at PSE&G and $375 at Power. Power’s decrease reflected lower earnings, changes in fuel/materials/supplies and increased margin deposit requirements.
  • Long-term debt increased during the half: PSE&G issued $850 of secured notes and Power issued $700 of senior notes; PSE&G also retired $171 of bonds.

Outlook, commentary, risks and unusual items

  • Management emphasized regulated utility investment, system reliability and resiliency, cost control, and disciplined investment. It expects planned capital requirements to be funded through internal cash generation and external debt, without new equity issuance. No specific full-year earnings or EPS guidance is provided in the supplied filing text.
  • PSE&G raised its estimated capital program from $8.3 billion to $8.6 billion, primarily for customer requests and replacement of aging infrastructure. Management described ongoing Energy Strong and Gas System Modernization investments. Power continued construction of Keys and Sewaren 7 and planned Bridgeport Harbor 5, with targeted operations in 2018 and mid-2019, respectively.
  • Power’s first-half nuclear fleet capacity factor was 91.2%. Salem Unit 1’s refueling outage was extended after degraded reactor-vessel bolts were found; bolt replacement was completed, but the unit was returning to service. The filing says Salem outages would affect third-quarter performance.
  • Regulatory and market exposure: Pending rate filings and changes to PJM capacity-market rules, subsidized generation, transmission cost allocation, environmental regulation and cooling-water permits may affect revenues, costs or investment returns. Power’s potential additional collateral requirement if downgraded below investment grade was approximately $748.
  • Material contingencies: PSEG accrued $57 for its Passaic River matter, but states that ultimate liability cannot yet be predicted and additional costs could be material. PSE&G’s broader manufactured-gas-plant remediation liability was $426, with an estimated range of $426–$491 through 2021 and a corresponding regulatory asset. A continuing FERC staff investigation into Power’s PJM bids has no estimable loss range; additional losses could be material if the company’s legal arguments fail.
  • Energy Holdings’ leveraged-lease receivables included exposure to counterparties rated BB- and CCC. Management said payments were current, but a lessee default or bankruptcy could delay recovery and potentially cause write-offs or significant tax payments.
  • Other notable items include $20 of first-half other-than-temporary impairments, principally associated with NDT securities, and materially weaker mark-to-market results. The filing also identifies risks from low wholesale prices, commodity and weather volatility, nuclear operations, environmental compliance, construction execution, cybersecurity and counterparty credit.

Most important facts for investors to verify

  1. Whether Power’s weak Q2 and first-half results and mark-to-market losses persist, and how much reflects timing versus underlying operating economics.
  2. Updates on the FERC PJM-bid investigation, including any proposed remedies, penalties or changes to the recorded provision.
  3. Revisions to Passaic River and other environmental estimates, including the recoverability and regulatory treatment of PSE&G’s recorded regulatory assets.
  4. Power’s generation availability and costs following Salem outages and any further reactor-vessel bolt work, alongside relevant permit developments.
  5. Actual capital spending, project timing, rate recovery and financing needs, as well as the effect of market conditions or credit changes on liquidity and collateral requirements.