PUBLIC SERVICE ENTERPRISE GROUP INC annual report, FY2013

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Public Service Enterprise Group Inc. (PSEG) — 2013 Form 10-K

Business context and reporting period. This combined annual filing covers PSEG, PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G) for the fiscal year ended December 31, 2013. PSEG combines a competitive wholesale generation and energy-supply business with a regulated New Jersey electric transmission and gas/electric distribution utility. The filing also includes unaudited quarterly data, including fourth-quarter results.

Financial performance and position

  • Revenue and earnings: Consolidated operating revenue was $9.968 billion, up 1.9% from $9.781 billion in 2012. Net income was $1.243 billion, down 2.5% from $1.275 billion; diluted EPS fell to $2.45 from $2.51. Operating income was $2.299 billion versus $2.278 billion.
  • Margins: Operating margin was approximately 23.1% versus 23.3% in 2012; net margin was approximately 12.5% versus 13.0%. PSE&G’s commodity supply revenues and costs largely pass through to customers without margin, so reported revenue movements do not necessarily indicate changes in underlying utility profitability.
  • Segments: Power net income declined to $644 million from $666 million. PSE&G net income rose to $612 million from $528 million. Other businesses recorded a $13 million loss versus $81 million of income in 2012.
  • Cash flow and investment: Cash from operations was $3.158 billion, up from $2.787 billion. Property, plant and equipment additions were $2.811 billion, versus $2.574 billion; operating cash flow less these additions was $347 million. Cash dividends paid were $728 million.
  • Liquidity: Year-end cash was $493 million, up from $379 million. Available credit-facility liquidity was $4.049 billion of $4.3 billion total commitments. Current assets were $3.614 billion and current liabilities $3.063 billion.
  • Debt: At year-end, consolidated long-term debt was $7.862 billion, with $544 million of long-term debt due within one year. Securitization debt totaled $496 million, including current maturities; commercial paper and loans were $60 million. The company reported compliance with debt covenants.
  • Other metrics: Total assets were $32.522 billion, compared with $31.725 billion. The annual common dividend was $1.44 per share; the board approved a first-quarter 2014 dividend of $0.37 per share, implying $1.48 annually.

Material changes versus 2012

  • Net income declined by $32 million. Management cited higher planned outage and maintenance costs, increased mark-to-market losses at Power, and the absence of 2012 tax-audit settlement benefits and lease-related recoveries.
  • Power’s earnings were also affected by lower BGS contract volumes and prices, lower wholesale load-contract volumes, and higher generation costs. Higher capacity revenues, increased generation in PJM, and improved gas sales partly offset these factors.
  • PSE&G earnings improved, supported by increased transmission investment and revenues. PSE&G operating cash flow increased by $389 million, while Power operating cash flow declined by $106 million.
  • Consolidated operating cash flow increased by $371 million. PSEG issued $2.0 billion of long-term debt and redeemed $1.025 billion during 2013.
  • Fourth-quarter consolidated net income was $200 million, compared with $224 million in fourth-quarter 2012.

Outlook, commentary, risks and contingencies

  • Outlook and investment: Management emphasized cost control, reliable operations, re-contracting open supply positions, executing utility and transmission projects, and operating the Long Island Power Authority system under a 12-year services agreement that began January 1, 2014. Planned capital construction and investment expenditures, excluding nuclear fuel, were $2.680 billion for 2014, $2.440 billion for 2015 and $1.975 billion for 2016. These forecasts exclude the proposed Energy Strong program.
  • Energy Strong: PSE&G sought approval for a proposed $3.9 billion, ten-year resiliency program, including $2.6 billion of investments during an initial five-year period. The BPU proceeding was pending; recovery and returns on the proposed investment were not assured.
  • Market and operating risks: Management identified continued low gas and electricity prices, wholesale capacity and energy market rule changes, customer conservation and migration, fuel and commodity volatility, counterparty credit, generation outages, and collateral needs as key uncertainties. A below-investment-grade Power rating could have required approximately $691 million of additional collateral at year-end market conditions.
  • Storm and insurance matters: PSE&G had deferred $245 million of storm costs as a regulatory asset at year-end, subject to regulatory review of prudence and recovery. PSEG reported approximately $50 million of Sandy-related insurance proceeds received or recorded, while pursuing additional recovery in litigation; further proceeds were not estimable.
  • Environmental and nuclear exposure: Proposed cooling-water intake rules and potential permit requirements could materially affect some generating facilities; the filing states that potential cooling-system costs were not included in Power’s capital forecast. Nuclear safety requirements, emissions rules, remediation obligations, and coal-ash regulation could also increase costs. The Passaic River and Newark Bay matters include significant potential remediation claims whose ultimate company-specific exposure was not estimable.
  • Lease and regulatory matters: Energy Holdings had $825 million of gross leveraged-lease investments, with 70% of the portfolio rated below investment grade. Lessee distress or defaults could lead to impairment and tax consequences. PSE&G terminated LCAPP capacity agreements after a federal court invalidated the New Jersey subsidy law; appeals remained pending.
  • Unusual items and controls: Non-trading mark-to-market activity was a $74 million after-tax loss in 2013 versus a $10 million loss in 2012. The company reported unqualified financial-statement audit opinions and effective internal control over financial reporting.

Important facts for investors to verify

  • Review the sustainability of Power earnings under lower wholesale prices, the forward hedge position, and the dependence of capacity revenues on evolving market rules.
  • Track BPU decisions on Energy Strong, storm-cost recovery, and PSE&G’s ability to earn returns on planned capital investment.
  • Reconcile the debt maturity schedule, refinancing needs, credit-facility availability, and potential collateral requirements against cash flow and capital spending.
  • Assess the amount and timing of any further Superstorm Sandy insurance recovery and the outcome of the related litigation and BPU review.
  • Monitor environmental and nuclear regulatory proceedings, including cooling-water requirements, permit renewals, emissions compliance, and the Passaic River claims.
  • Evaluate leveraged-lease counterparty credit quality, particularly the exposures involving entities in bankruptcy or financially stressed generation businesses.