PUBLIC SERVICE ENTERPRISE GROUP INC annual report, FY2016

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Public Service Enterprise Group Incorporated — 2016 Form 10-K

Business context and reporting period. This is a combined annual filing for PSEG and its wholly owned operating subsidiaries, Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (Power), for the year ended December 31, 2016. PSE&G operates a regulated New Jersey electric transmission and electric and gas distribution utility; Power generates and markets electricity and natural gas. The filing also provides fourth-quarter results.

Financial results and condition

  • Revenue and earnings: Consolidated operating revenue was $9.061 billion, down 13% from $10.415 billion in 2015. Net income was $887 million versus $1.679 billion; diluted EPS was $1.75 versus $3.30. Operating income fell to $1.576 billion from $2.962 billion. Net margin was approximately 9.8%, compared with 16.1% in 2015.
  • Segments: PSE&G net income increased to $889 million from $787 million. Power net income fell to $18 million from $856 million. Other recorded a $20 million loss, including after-tax leveraged-lease charges of $92 million.
  • Fourth quarter: Consolidated revenue was $2.090 billion, and net loss was $98 million (diluted loss per share of $0.19). Power recorded a $302 million net loss, primarily reflecting plant retirement costs and higher mark-to-market losses.
  • Cash flow and investment: Operating cash flow was $3.311 billion, down $608 million. Capital expenditures were $4.199 billion, so operating cash flow less capital expenditures was negative $888 million. Cash and cash equivalents ended the year at $423 million.
  • Debt and liquidity: Long-term debt was $10.895 billion, with $500 million due within one year and $388 million of commercial paper and loans. Total assets were $40.070 billion. Available credit-facility liquidity was $3.543 billion against $4.153 billion in total facilities. The filing states that capacity exceeded projected maximum liquidity needs over its 12-month planning horizon.
  • Margins and dividends: PSEG’s operating margin was approximately 17.4%, down from 28.4% in 2015. Dividends declared were $1.64 per share for 2016; the board approved $0.43 per share for first-quarter 2017, implying an indicative annual rate of $1.72.

Material changes versus 2015

  • Lower energy sales volumes and realized prices, reduced capacity and operating-reserve revenues, and lower gas sales contributed to Power’s revenue decline. Lower fuel costs partly offset these pressures.
  • Power’s 2016 results included $686 million of pre-tax charges tied to the planned June 2017 retirement of the Hudson and Mercer units, including $571 million of depreciation and asset-retirement costs. The reported after-tax effect was $396 million.
  • Energy Holdings recorded a $137 million pre-tax write-down of REMA leveraged-lease residual values and a further $10 million pre-tax charge related to REMA’s liquidity. The filing warns that further write-downs may occur.
  • 2015 included $102 million of after-tax Superstorm Sandy insurance recovery, while 2016 had after-tax non-trading mark-to-market losses of $100 million versus gains of $93 million in 2015.
  • PSE&G earnings improved, supported by higher transmission revenues and utility investment recovery. Its operating cash flow nevertheless declined to $1.894 billion from $2.125 billion.

Outlook, risks, and contingencies

  • Investment plans: Projected capital expenditures are $4.660 billion for 2017, $3.320 billion for 2018, and $2.190 billion for 2019. PSE&G’s next distribution base-rate case must be filed by November 1, 2017. Management expects planned capital requirements to be funded with internally generated cash and debt, without new equity issuance.
  • Projects and operations: Major generation projects include Keys Energy Center and Sewaren 7, targeted for 2018, and Bridgeport Harbor 5, targeted for 2019. Management identified continued cost control, reliable operations, project execution, and recovery of utility investment as priorities. No specific consolidated earnings guidance is provided in the filing text.
  • Market and regulatory risks: Management cites sustained low gas and power prices, capacity-market design changes, subsidized generation, customer conservation, fuel and transmission constraints, and possible early retirement of other coal or nuclear units. The 2017 BPU rate case and FERC and environmental proceedings could affect recovery, investment returns, costs, or operations.
  • Contingencies: FERC’s preliminary, non-public investigation into Power’s New Jersey fossil-unit bids remains ongoing. The company cannot estimate the potential loss; adverse resolution could result in material additional losses. The Passaic River cleanup liability was approximately $57 million at year-end, but additional costs may be material and cannot currently be estimated. A 2016 mineral-oil cable discharge near Jersey City is under investigation; costs are described as likely material, but responsibility and amount are unclear.
  • Other notable exposure: GenOn/REMA counterparties had weak credit ratings and near-term debt challenges, although lease payments were current at year-end. Power’s potential additional collateral requirement following a downgrade below investment grade was approximately $783 million. The Salem reactor-bolt issue extended an outage; inspections and replacement work are expected over future refueling cycles.

Most important facts for investors to verify

  • Whether Power’s earnings and cash generation recover after the Hudson and Mercer retirements, and whether other coal assets remain economic.
  • The eventual financial outcome of the FERC bidding investigation and the Passaic River and Jersey City environmental matters.
  • REMAs’s ability to meet lease obligations and whether additional lease impairments or cash-tax consequences arise.
  • Whether projected capital spending, utility rate recovery, and financing needs remain consistent with available liquidity and dividend plans.
  • How low commodity prices, capacity-market changes, nuclear operating issues, and environmental requirements affect generation margins and asset values.

Audit note: Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting for PSEG.