PUBLIC SERVICE ENTERPRISE GROUP INC quarterly report, Q1 FY2018

Full document

Public Service Enterprise Group Inc. (PSEG) — Q1 2018 10-Q

Period: Three months ended March 31, 2018; unaudited. The combined filing covers PSEG and its wholly owned subsidiaries PSE&G, a regulated New Jersey electric and gas utility, and PSEG Power, a competitive energy supplier and generator. Financial amounts below are in millions unless otherwise stated.

Financial results and key metrics

Consolidated PSEGQ1 2018Q1 2017
Operating revenue$2,818$2,591
Operating income$832$178
Net income$558$114
Diluted EPS$1.10$0.22
Operating cash flow$1,140$1,197
Capital additions to property, plant and equipment$1,053$1,062
Common dividend per share$0.45$0.43
  • Revenue increased 9%. Operating margin was approximately 29.5%, compared with 6.9% in Q1 2017; the comparison is materially affected by unusually high prior-year depreciation from plant retirements.
  • PSE&G earned $319, up from $299; revenue was $1,845 versus $1,826. Utility operating income declined to $482 from $523 as operating costs and depreciation increased, while lower tax expense supported net income.
  • Power earned $234 versus a $170 loss; revenue was $1,403 versus $1,269. The change chiefly reflects the absence of the prior-year Hudson and Mercer accelerated depreciation charge, higher mark-to-market gains, and lower federal tax rates.
  • Cash from operations fell $57 year over year. PSE&G operating cash flow rose to $577 from $515, while Power’s fell to $542 from $580.
  • At March 31, cash and cash equivalents were $118; total debt was approximately $13.1 billion, including $1.0 billion due within one year. Total assets were $42.8 billion and stockholders’ equity was $14.1 billion.
  • Available committed credit capacity was $3.417 billion under $4.2 billion of facilities. PSEG had $594 million of commercial paper outstanding; PSE&G had none. Management said capacity exceeded projected maximum liquidity needs over its 12-month planning horizon.
  • Capital spending remained substantial: PSE&G reported $759 million of capital expenditures and Power $283 million, excluding nuclear fuel. PSEG paid $227 million in dividends during the quarter.

Material changes versus the prior period

  • Consolidated net income rose $444 million. Management attributed the increase mainly to the 2017 accelerated depreciation at Hudson and Mercer, 2017 leveraged-lease charges, Power’s higher non-trading mark-to-market gains, the lower federal tax rate, and higher transmission revenue.
  • Q1 2017 included $574 million of Power depreciation for Hudson and Mercer retirements and $55 million of pre-tax Energy Holdings charges relating to REMA lease investments. These items make the year-over-year earnings improvement a poor standalone indicator of recurring growth.
  • Power’s after-tax non-trading mark-to-market gain was $85 million versus $6 million in Q1 2017; NDT fund activity was a $16 million expense versus $8 million of income. PSEG adopted accounting guidance that moved unrealized gains and losses on trust equity investments into earnings.
  • The Tax Act lowered the federal corporate tax rate from 35% to 21%. PSEG said the change reduced income-tax expense and was expected to benefit PSEG and Power, while reducing PSE&G customer rates and affecting its cash flows. The full impact remained under assessment.

Outlook, commentary, risks and unusual items

  • Management stated that operating cash flow, cash on hand and financing activities were expected to fund capital requirements and dividends; it expected to meet planned capital needs without issuing new equity. No specific 2018 earnings-per-share guidance is provided in the supplied filing text.
  • PSEG’s indicative annual dividend rate was $1.80 per share; the board declared a $0.45 second-quarter dividend. Future dividends remain subject to board discretion.
  • PSE&G anticipated a BPU decision on its distribution base-rate case in Q4 2018. Interim tax-related rate reductions effective April 1 lowered annual electric and gas base revenues by $71 million and $43 million, respectively. A five-year, $1.9 billion GSMP II settlement was reached in April, subject to regulatory implementation; PSE&G also expected to seek an Energy Strong program extension.
  • Power continued construction of Keys Energy Center and Sewaren 7, targeted for commercial operation in 2018, and Bridgeport Harbor Unit 5, targeted for mid-2019. Delays, permitting and cost recovery remain execution risks.
  • Nuclear economics are a key uncertainty. Management said continued depressed market prices without adequate New Jersey compensation could lead to early retirement of Salem and Hope Creek, with potentially material accelerated depreciation, impairment, decommissioning, severance and remediation costs. New Jersey lawmakers passed nuclear-support legislation in April, but enactment, eligibility and adequacy were uncertain.
  • In April 2018, PSEG and FERC Staff entered a settlement, approved April 25, requiring approximately $40 million to resolve a market-bidding investigation. Power recorded an additional $5 million pre-tax charge in Q1, bringing the accrued liability to approximately $40 million.
  • Environmental exposure includes a $345 million PSE&G liability and matching regulatory asset for its MGP remediation program; the estimated undiscounted program range was $345 million to $391 million through 2021. PSEG had also accrued $57 million for its estimated Passaic River share, but additional costs may be material and could not be estimated.
  • Energy Holdings’ net investment in leases was $70 million. GenOn’s restructuring and REMA’s credit condition could result in additional write-offs and accelerated deferred taxes; the filing said the outcome was uncertain.
  • Other key risks include commodity-price and counterparty exposure, possible additional collateral needs following a Power credit downgrade, nuclear and fossil plant viability, regulatory and rate-case outcomes, environmental compliance, and construction and operating risks. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Important facts for investors to verify

  • How much of Power’s earnings improvement is repeatable after separating prior-year retirement charges, current-period mark-to-market gains, trust investment losses and tax effects.
  • Final outcomes and timing for PSE&G rate cases, tax-related customer refunds, GSMP II and any Energy Strong extension.
  • Whether New Jersey’s nuclear-support legislation is enacted and provides sufficient compensation to Salem and Hope Creek; assess resulting retirement and decommissioning exposure.
  • Developments in the FERC settlement payment, Passaic River and MGP remediation, and GenOn/REMA lease exposures.
  • Liquidity under stress: the filing estimated approximately $867 million of additional collateral could be required if Power lost investment-grade status, compared with $3.417 billion of available committed capacity at quarter-end.
  • Construction progress, costs and commercial-operation dates for Keys, Sewaren 7 and Bridgeport Harbor Unit 5, alongside the company’s capital-spending and dividend plans.