Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. PSEG operates through PSEG Power, a wholesale energy business, and Public Service Electric and Gas Company (PSE&G), a regulated New Jersey utility; the combined filing also reports separately for these subsidiaries. Amounts below are consolidated PSEG figures unless otherwise noted.
Financial results and position
Dollar amounts are in millions, except per-share data. Comparisons are with the same 2013 period.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $2,249 | $2,310 | $5,472 | $5,096 |
| Operating income | $365 | $612 | $1,070 | $1,222 |
| Net income | $212 | $333 | $598 | $653 |
| Diluted EPS | $0.42 | $0.66 | $1.18 | $1.29 |
| Operating margin | 16.2% | 26.5% | 19.6% | 24.0% |
| Net margin | 9.4% | 14.4% | 10.9% | 12.8% |
- First-half operating cash flow was $1.448 billion, up from $1.343 billion. Capital expenditures were $1.229 billion; investing cash outflow was $1.282 billion. Cash ended the period at $570 million, versus $493 million at year-end 2013.
- At June 30, total debt carrying amount was approximately $9.027 billion, including current maturities and securitization debt. Total capitalization was $19.776 billion, including $11.844 billion of equity.
- Available liquidity under $4.3 billion of credit facilities was $4.065 billion. Commercial paper and loans were zero at quarter-end. PSEG reported investment-grade ratings; S&P outlooks for PSEG, Power and PSE&G had been revised to positive.
- Dividends paid were $0.37 per share in Q2 and $0.74 per share for the first half. The board approved a $0.37 third-quarter dividend, implying an indicated annual rate of $1.48 per share.
Changes versus the prior comparable period
- Q2 revenue fell 3%, while first-half revenue rose 7%; first-half growth primarily reflected PSE&G transmission investment and higher gas supply volumes.
- Q2 net income declined $121 million and first-half net income declined $55 million. Power was the main source of the earnings decrease: its Q2 earnings fell to $54 million from $210 million, and first-half earnings to $218 million from $351 million. PSE&G earnings rose to $151 million from $121 million in Q2 and $365 million from $300 million in the first half.
- Management attributed Power’s weaker results to unfavorable non-trading mark-to-market effects, lower generation volumes and realized prices in PJM, higher fuel costs, and planned fossil-plant outages and maintenance. PSE&G benefited from increased transmission revenues associated with capital investment.
- Operating and maintenance expense rose 24% in Q2 and 22% for the first half, while energy costs increased 5% and 12%, respectively. Power’s first-half operating cash flow declined $52 million, partly due to increased margin deposits; PSE&G’s rose $316 million.
Outlook, risks and unusual items
- No specific full-year earnings guidance is stated in the supplied filing text. Management expects capital needs over the next three years to be funded with internally generated cash and external debt financing, and expects operating cash flow, cash on hand and financing activities to support planned investment and dividends.
- PSE&G’s BPU-approved Energy Strong resilience program calls for $1.22 billion of investment, primarily over three years. The first $1.0 billion receives accelerated recovery with a 9.75% return on equity; recovery of the remaining $220 million is expected through a later rate case. PSE&G also increased projected capital expenditures through 2016 by $295 million.
- Power recorded a $25 million charge in Q1 related to errors in cost-based PJM bids. The investigation identified additional pricing and quantity issues; the ultimate impact and any penalties cannot yet be estimated, and additional losses could be material.
- Superstorm Sandy property-damage estimates were revised to $579 million ($484 million Power and $95 million PSE&G); insurance recovery is being pursued, but timing and amount are uncertain. PSE&G recorded a $410 million liability for manufactured-gas-plant remediation, with estimated total costs ranging from $410 million to $486 million through 2021 and an offsetting regulatory asset.
- Potential material exposures include future requirements for cooling-water intake systems, environmental rules and permits, and wholesale market and regulatory changes. For Salem, the filing cites an older estimate of approximately $1 billion for cooling towers, of which Power’s share would be about $575 million; such costs are not included in forecast capital expenditures.
- Other notable items include a $174 million after-tax first-half non-trading MTM loss, compared with a $25 million loss in 2013; the extended Salem Unit 2 refueling outage, which returned to service July 14; and the expected annualized $30 million pre-tax benefit from suspension of the federal Nuclear Waste Fee.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during Q2. Management states there were no additional risk factors beyond those in the 2013 Form 10-K.
Important facts for investors to verify
- Whether subsequent FERC/PJM findings on bid errors lead to additional charges, penalties or other remedies beyond the $25 million recorded.
- Whether Power’s mark-to-market losses, generation economics and outage-related costs persist, and how these affect earnings and cash flow.
- Actual Energy Strong and other transmission/distribution spending, regulatory recovery timing, and financing needs relative to the announced plans.
- Developments in the Sandy insurance litigation and the range, timing and recoverability of environmental remediation obligations.
- Final permitting requirements and potential compliance costs for cooling-water intake, emissions and other environmental rules, particularly for Salem and other once-through-cooled plants.