Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited Form 10-Q for the three months ended March 31, 2013. PSEG is a holding company with wholesale generation and energy supply through PSEG Power, regulated New Jersey electric and gas transmission and distribution through PSE&G, and energy-related investments through Energy Holdings. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $2,786 | $2,875; down 3% |
| Operating income | $610 | $783 |
| Operating margin | 21.9% | 27.2% |
| Net income | $320 | $493; down 35% |
| Diluted EPS | $0.63 | $0.97 |
| Operating cash flow | $877 | $1,088 |
| Capital expenditures | $724 | $687 |
| Cash and cash equivalents | $420 at March 31 | $379 at December 31, 2012 |
| Total long-term debt, including securitization and project debt | $7,009 | $6,687 at December 31, 2012 |
| Available credit-facility liquidity | $3,958 | $4,300 total facility capacity; $342 in use |
Net income attributable to Power was $137, down from $253; PSE&G earned $179, down from $197. Energy Holdings reported no earnings versus $40 in Q1 2012. PSEG paid $0.36 per common share in dividends, compared with $0.355.
Material changes and management commentary
- PSEG attributed the $173 decline in net income mainly to non-trading mark-to-market losses after forward prices rose, higher operating and maintenance costs including Superstorm Sandy repairs, and the absence of the prior-year IRS tax-settlement benefit. After-tax non-trading mark-to-market losses were $105, versus gains of $52 a year earlier.
- Power’s revenue fell 7%, and its earnings declined $116. Mark-to-market losses on forward positions and higher maintenance costs, including $28 of Sandy-related generation repairs, outweighed higher capacity and operating-reserve revenues.
- PSE&G revenue rose 3%, supported by transmission investment and higher gas sales volumes in colder weather. Earnings nevertheless declined, principally because of higher operating costs and the lack of the 2012 tax benefit. Increased customer migration reduced BGS sales.
- Operating cash flow fell $211 year over year. Management said cash from operations, cash on hand and financing were expected to fund capital spending and dividends; it described liquidity and investment-grade credit ratings as strong. S&P upgraded PSEG, Power and PSE&G to BBB+ in April 2013 and changed outlooks to stable.
Outlook, risks and contingencies
- Management’s 2013–2015 base capital-investment estimate was approximately $6.1 billion: $2.535 billion in 2013, $2.085 billion in 2014 and $1.515 billion in 2015. The proposed Energy Strong program would add $3.9 billion of distribution-system resilience investments over ten years, plus an anticipated $1.5 billion for transmission; the proposal was pending BPU review. Management expected to fund capital needs with internally generated funds and external debt.
- Key business uncertainties include wholesale power and capacity-market prices, low natural-gas prices, regulation and market design, environmental requirements, project approvals and construction costs, customer demand, and reliable service after severe weather. PSEG noted that future dividends remain subject to board discretion.
- Superstorm Sandy caused damage to utility and generation assets. Further repair and replacement costs could be material; insurance recovery beyond a $25 million advance received in 2012 was not estimable at quarter-end.
- Energy Holdings’ leveraged leases carry significant counterparty risk. Midwest Generation and its parent filed for Chapter 11; a $48 million scheduled rent payment on the Powerton and Joliet leases was not made, and the lease-debt forbearance expired April 5, 2013. The filing describes possible acceleration and foreclosure remedies and potential write-offs and cash-tax consequences. GenOn REMA lease payments were current, but future payments were not assured.
- Environmental and regulatory exposures include Passaic River matters for which PSEG could not estimate its share of possible losses; PSE&G recorded a $513 million MGP remediation liability, with a disclosed estimated range of $513–$649 million and a matching regulatory asset. Pending cooling-water intake rules could require material upgrades; the filing cites an older estimate of approximately $575 million for PSEG’s share of Salem cooling towers.
- PSEG’s 2013 planned pension and postretirement contributions were fully funded during the quarter: $145 million to pension plans and $14 million to postretirement healthcare plans.
Important facts for investors to verify
- Whether PSEG’s earnings recover from the Q1 mark-to-market losses and whether those losses reverse or persist as forward prices and positions change.
- Actual costs, timing, regulatory approval and rate impacts of Energy Strong and the planned transmission and utility investment programs.
- Developments in the Midwest Generation bankruptcy and expected lease recoveries, including any impact on Energy Holdings’ investment and tax exposure.
- Insurance recoveries and total costs for Sandy-related damage, alongside storm-cost regulatory treatment.
- Potential outcomes and cost exposure from environmental proceedings, cooling-water requirements, and capacity-market and transmission-policy challenges.
- Cash generation, debt maturities, credit-facility availability and dividend decisions as capital spending proceeds.