PUBLIC SERVICE ENTERPRISE GROUP INC quarterly report, Q2 FY2017

Business context and reporting period

Public Service Enterprise Group Incorporated (PSEG) filed this combined, unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Its principal businesses are regulated electric and gas transmission and distribution through PSE&G, and competitive generation and energy supply through PSEG Power. Unless noted, financial amounts below are in millions of dollars.

Financial performance and position

• PSEG operating cash flow for the first half was $1,756, versus $1,722 a year earlier. Investing cash outflow was $1,989, including $1,981 of property, plant and equipment additions. Financing cash inflow was $240; dividends paid were $435.
• At June 30, PSEG had $430 cash, $40,524 total assets and $12,521 of long-term debt carrying value, including current maturities as presented in the debt note. Stockholders’ equity was $12,918.
• Available credit liquidity was $3,982 under $4,200 of committed facilities. Management said facility capacity exceeded projected maximum liquidity needs over the next 12 months. PSEG had no commercial paper outstanding.
• Common dividends were $0.43 per share in Q2; the board declared the same amount for Q3. Management cited an indicative annual rate of $1.72 per share.

Material changes versus prior comparable periods

• Consolidated revenue increased 12% in Q2 and 5% for the first half, while net income fell 42% and 66%, respectively. PSE&G earnings rose, but Power’s results deteriorated sharply.
• The principal earnings drag was accelerated depreciation following Power’s June 1 retirement of the Hudson and Mercer coal/gas units: $964 of total depreciation in the first half, including $938 of incremental accelerated depreciation. Management attributed $563 of the first-half net-income decline to after-tax expenses primarily related to these retirements.
• Power’s Q2 generation revenue benefited from improved mark-to-market results versus the prior-year loss; these gains did not offset the retirement-related depreciation. PSEG also reported $27 of after-tax first-half charges for Energy Holdings’ leveraged-lease exposures, including REMA-related collectability and asset-value charges.
• PSE&G’s first-half operating revenue rose $118, primarily from higher transmission revenue and regulated program recovery; its net income increased $66.

Outlook, management commentary, risks and contingencies

• No specific consolidated earnings guidance was stated in the provided filing text. Power reported that hedging, capacity-market revenues and ancillary services secured approximately 60% of estimated gross margin for 2017–2019.
• Management expected operating cash flow, cash on hand and financing to fund capital spending and dividends, and expected planned capital requirements to be funded with internal funds and debt without new equity. It reported no material change to previously projected capital expenditures.
• Utility investment priorities include reliability, resiliency and gas-system modernization. PSE&G filed for a proposed five-year GSMP II program in July 2017, seeking up to $2.7 billion of investment beginning in 2019; the request was pending. PSE&G also expected to file a distribution base-rate case by November 1, 2017.
• Power’s key risks include weak wholesale prices and nuclear/coal plant economics, fuel and transmission constraints, construction and permitting risks, and possible early retirement costs. Keys and Sewaren 7 were targeted for commercial operation in 2018; Bridgeport Harbor 5 was targeted for mid-2019.
• Material contingencies include the Passaic River Superfund matter (PSEG accrued approximately $57), broader manufactured-gas-plant remediation (PSE&G recorded a $373 liability and matching regulatory asset, with estimated total costs of $373–$430 through 2021), and an ongoing Hudson River cable-fluid leak response whose costs are expected to be material but are not clearly quantified in the filing.
• FERC’s investigation of Power’s PJM bidding matters remains unresolved. Power accrued $35 for the cost-based bidding matter; estimated disgorgement and interest were described as $35–$135 plus possible penalties. The filing says potential penalties and the separate quantity-of-energy matter cannot be reasonably estimated and could be material.
• GenOn’s Chapter 11 restructuring creates uncertainty for Energy Holdings’ REMA leveraged leases. Lease payments were current, but additional write-downs and accelerated tax liabilities could result. Other risks include nuclear decommissioning, environmental compliance, counterparty credit, regulatory outcomes, market prices, interest rates, and weather.

Most important facts for investors to verify

• How much of Power’s earnings decline is attributable to accelerated depreciation versus ongoing operating economics, and whether further coal or nuclear retirements are likely.
• Whether REMA/GenOn developments require additional lease impairments, cash funding, or tax payments.
• Final outcomes and potential exposure from the FERC/PJM investigations and major environmental matters, particularly the Passaic River and cable leak.
• Regulatory decisions, timing and authorized returns for PSE&G’s rate case, GSMP II and other infrastructure recovery requests.
• Progress, cost and schedule for Keys, Sewaren 7 and Bridgeport Harbor 5, and the sustainability of Power’s hedged gross margin and the $1.72 annualized dividend indication.