Public Service Enterprise Group Incorporated — Q3 2015 Form 10-Q
Business context and period. This combined, unaudited filing covers the three and nine months ended September 30, 2015, with comparisons to 2014. PSEG is a holding company whose main 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. Amounts below are in millions of dollars unless noted.
Financial results and position
- Consolidated earnings: Q3 revenue was $2,688, up 1.8%; operating income was $814, up 9.1%; net income was $439, down 1.1%; diluted EPS was $0.87 versus $0.87. For nine months, revenue was $8,137, essentially flat; operating income was $2,430 versus $1,816; net income was $1,370 versus $1,042; diluted EPS was $2.70 versus $2.05. Nine-month operating margin increased to approximately 29.9% from 22.4%.
- Segment results, nine months: PSE&G earnings rose to $631 from $565. Power earnings rose to $707 from $440, including a $102 after-tax Superstorm Sandy insurance recovery. Other earnings were $32 versus $37. Q3 earnings were $222 for PSE&G and $206 for Power, compared with $200 and $222, respectively, in Q3 2014.
- Key earnings drivers: Management attributed the year-to-date improvement primarily to favorable non-trading mark-to-market results (after-tax gain of $58 versus a loss of $138), lower fuel costs, increased wholesale electricity volumes, transmission investment revenues, and Sandy insurance proceeds. Offsets included weaker NDT fund results and higher planned nuclear outage, pension and OPEB costs. The quarter’s net income decline reflected lower NDT results and higher outage and benefit costs, partly offset by higher transmission revenue and mark-to-market gains.
- Cash flow and investment: Nine-month operating cash flow was $3,228, up from $2,536. Capital expenditures were $2,782 versus $1,922, leaving operating cash flow less capital expenditures of $446, compared with $614. Cash dividends paid were $592. Cash and cash equivalents were $271 at September 30, down from $402 at year-end 2014.
- Balance sheet and liquidity: Total assets were $36,424; total capitalization was $21,066, including $12,934 of equity. Reported long-term debt was $8,132, with $1,038 due within one year; the balance sheet also showed $68 of securitization debt due within one year and $20 of commercial paper and loans. PSEG reported $4,200 of credit facilities, $259 in use and $3,941 available. Management said liquidity exceeded anticipated maximum requirements.
- Dividends: Q3 dividend was $0.39 per share; the indicated annual rate was $1.56 per share. Nine-month dividends were $1.17 per share, up from $1.11.
Material changes, outlook and management commentary
- PSE&G’s 2015 transmission formula rate increased annual transmission revenues by approximately $182. The 2016 update filed with FERC is expected to provide $146 in increased annual transmission revenue beginning January 1, 2016; it remained subject to the regulatory process.
- Management described continued investment in utility infrastructure and generation. The approved Energy Strong program provides for $1.2 billion of investment. A settlement in principle for the Gas System Modernization Program proposed $905 of investment over three years, subject to approval. Planned generation projects include Sewaren 7, estimated at $625–$675, and Keys Energy Center, estimated at $825–$875, both targeted for 2018 service.
- Management reported a 92% nuclear fleet capacity factor for the first nine months and said low natural-gas prices benefit gas customers and reduce fuel costs, but also depress electricity prices. Existing hedges helped mitigate lower prices; as hedges expire and are replaced at lower levels, margins may be affected, particularly for nuclear and coal generation.
- For the 2018–2019 PJM capacity delivery year, Power cleared 8,634 MW at an average $214.72 per MW-day. Management said the result may support improved capacity revenues but cautioned that future pricing is uncertain and stricter performance requirements may entail additional investment and performance risk.
- Material contingencies include the lower Passaic River Superfund matter. PSEG accrued $10 for PSE&G and $3 for Power based on current estimates, but said further costs could be material and could not be estimated. PSE&G recorded a $450 environmental liability for its broader manufactured-gas-plant remediation program through 2021, with a corresponding regulatory asset; estimated total costs were $450–$518.
- Power’s FERC investigation into errors in certain PJM market bids and capacity-related offers remained ongoing. The company had recorded a $25 charge in 2014; possible additional losses, disgorgement or penalties could be material, but the amount could not be reasonably estimated.
- Other risks include potential costs or operational effects from environmental regulation, including cooling-water intake, steam-electric effluent and greenhouse-gas rules; a draft Salem permit did not require cooling towers, but the final permit was pending. Power also disclosed potential Bridgeport Harbor wastewater-permit noncompliance and related possible fines, with the impact not yet predictable.
- Power’s current exposure under guarantees was $184, against $1,733 of guarantee face value. A downgrade below investment grade could require up to $796 of additional collateral; available credit facilities for collateral posting were reported at $3,375.
Most important facts for investors to verify
- How much of the year-to-date earnings increase is recurring, given the $102 after-tax Sandy recovery and the significant year-over-year swing in mark-to-market results.
- Regulatory outcomes and realized recovery for transmission, Energy Strong and the proposed gas modernization investment, as well as the accuracy and economics of major generation project budgets.
- The ultimate allocation and cost of Passaic River remediation and other environmental obligations, including the extent to which regulated costs remain recoverable from customers.
- The outcome and potential financial consequences of the FERC market-bidding investigation and other pending regulatory proceedings.
- Exposure to sustained low wholesale power prices, expiring hedges, capacity-market changes and environmental compliance costs, alongside debt maturities and potential collateral needs.