Public Service Enterprise Group Incorporated — Q1 2019 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the three months ended March 31, 2019, and includes PSEG, its regulated New Jersey utility PSE&G, and merchant energy subsidiary PSEG Power. PSE&G transmits and distributes electricity and gas; Power generates and markets energy, including nuclear and fossil generation.
Key financial results
- Revenue: $2.980 billion, up 6% from $2.818 billion. Energy costs rose 18% to $1.124 billion.
- Profit: Operating income was $786 million, down from $832 million. Net income rose to $700 million from $558 million; diluted EPS increased to $1.38 from $1.10. PSE&G net income was $403 million (prior year $319 million); Power net income was $296 million (prior year $234 million).
- Margins: Operating margin was approximately 26.4%, versus 29.5% a year earlier. Net margin was approximately 23.5%, versus 19.8%; the increase was significantly influenced by trust investment gains.
- Cash flow and investment: Operating cash flow was $1.218 billion, versus $1.140 billion. Property, plant and equipment additions were $795 million, versus $1.053 billion. Cash dividends paid were $238 million, or $0.47 per share.
- Debt and liquidity: At March 31, consolidated long-term debt was $13.216 billion, with $900 million due within one year; commercial paper and loans were $1.151 billion. Cash and cash equivalents were $65 million. Credit facilities totaled $4.2 billion, with $2.875 billion available.
- Balance sheet: Total assets were $45.756 billion and stockholders’ equity was $14.814 billion at March 31, compared with $45.326 billion and $14.377 billion, respectively, at December 31, 2018.
Material changes versus prior year
- Net income increased $142 million. Management attributed the rise largely to a swing from losses to gains on Power’s nuclear decommissioning trust (NDT) investments and higher PSE&G earnings following new rates and transmission and distribution investment.
- Net gains on trust investments were $128 million, compared with losses of $22 million; the NDT fund’s after-tax contribution to net income was $76 million, versus an after-tax loss of $16 million.
- PSE&G revenue increased 10%, while Power revenue rose 1%. PSE&G’s operating income declined to $465 million from $482 million; Power’s declined to $301 million from $329 million.
- Interest expense rose to $133 million from $103 million. Depreciation and amortization increased to $314 million from $280 million.
Outlook, commentary, and notable risks
- Management expects to invest $11–$16 billion over five years and projects annual rate-base growth of 7%–9%. PSE&G’s major plans include the $1.9 billion GSMP II gas program, the proposed $2.5 billion Energy Strong II program, and the proposed $3.5 billion Clean Energy Future program; regulatory approval or review remains relevant to these plans. Planned 2019–2021 transmission spending is $3.4 billion.
- Management reported a 98.0% nuclear fleet capacity factor and approximately 14 terawatt-hours of generation in the quarter. It said more than half of Power’s expected 2019 gross margin relates to hedging, capacity revenues, and ancillary-service payments.
- In April 2019, Salem 1, Salem 2, and Hope Creek were awarded New Jersey ZECs expected to support operations through May 2022. This is a subsequent-quarter development. Salem 1’s April refueling outage is expected to last longer than planned because more reactor-vessel bolts require replacement, potentially reducing production and ZEC revenue.
- Key exposures include changing wholesale power and gas prices, PJM capacity-market and FERC decisions, regulatory approval and cost recovery for utility investment, environmental compliance, nuclear operating risks, and possible early retirement of generation assets. Management warns that retirement of the New Jersey nuclear plants after the initial ZEC term could materially affect results.
- Environmental and legal contingencies include Passaic River remediation, for which PSEG had accrued approximately $57 million but could not estimate additional exposure; PSE&G’s broader MGP remediation liability was $353 million, with estimated costs ranging from $353 million to $404 million through 2021. Other matters, including the Newark customer incident investigation and litigation, have uncertain outcomes.
- Power’s credit agreements could require additional collateral following a downgrade below investment grade; estimated potential additional collateral was approximately $850 million at quarter-end. PG&E’s bankruptcy also creates uncertainty about collections under Power’s California solar PPAs.
- The board approved a $0.47-per-share second-quarter dividend, implying an indicative annual rate of $1.88 per share. Management said it expects internally generated funds and external debt financing to fund capital needs, and does not expect to need new equity.
Important facts for investors to verify
- How much of the earnings increase reflects recurring utility and generation performance versus volatile NDT investment gains and mark-to-market activity.
- Regulatory outcomes, timing, and recoverability for Energy Strong II, Clean Energy Future, GSMP II, and transmission investment.
- The economics of the nuclear fleet after the initial ZEC period, including capacity-market changes and the effect of Salem 1’s extended outage.
- Whether environmental and legal exposures, including Passaic River and MGP remediation, exceed recorded accruals or affect customer rate recovery.
- Debt refinancing, cash generation, capital spending, dividends, and collateral needs under adverse commodity-price or credit-rating scenarios.