Public Service Enterprise Group Incorporated — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This combined filing covers PSEG and its wholly owned operating subsidiaries, PSE&G and PSEG Power; figures below are consolidated PSEG unless otherwise noted. Amounts are in U.S. dollars.
Business context and reporting period
PSEG combines regulated New Jersey electric transmission and electric and gas distribution (PSE&G) with merchant power generation and energy marketing (PSEG Power). PSE&G serves about 2.3 million electric and 1.9 million gas customers. PSEG Power operates nuclear, gas, oil, coal and solar generation, primarily in the Northeast and Mid-Atlantic. Regulated utility investment has become a larger contributor to PSEG’s earnings mix.
Key financial metrics
| Metric | 2019 | 2018 | Change / note |
|---|---|---|---|
| Operating revenue | $10.076 billion | $9.696 billion | Up 3.9% |
| Operating income | $1.943 billion | $2.298 billion | Down 15.4%; includes a $402 million pretax asset-disposition loss in 2019 |
| Net income | $1.693 billion | $1.438 billion | Up 17.7% |
| Diluted EPS | $3.33 | $2.83 | Up 17.7% |
| Net cash from operations | $3.379 billion | $2.913 billion | Up $466 million |
| Capital expenditures | $3.166 billion | $3.912 billion | Down $746 million |
| Cash and cash equivalents | $147 million | $177 million | At year-end |
| Long-term debt | $13.743 billion | $13.168 billion | Selected financial data; debt due within one year was $1.365 billion in 2019 |
Operating margin was approximately 19.3% versus 23.7% in 2018; net margin was approximately 16.8% versus 14.8%. PSEG’s segments reported net income of $1.250 billion at PSE&G, $468 million at PSEG Power, and a $25 million loss in Other, compared with $1.067 billion, $365 million, and $6 million, respectively, in 2018.
Available liquidity under $4.2 billion of credit facilities was $2.864 billion at year-end. Total facility usage was $1.336 billion. PSEG reported $1.115 billion of commercial paper and loans on its consolidated balance sheet. Operating cash flow exceeded property additions by approximately $213 million in 2019; cash dividends paid were $950 million.
Material changes versus 2018
- Consolidated net income rose mainly on higher PSE&G regulated earnings, favorable mark-to-market results and nuclear decommissioning trust investment gains, ZEC revenue, and pension/OPEB credits. These gains were partly offset by the Keystone and Conemaugh sale loss.
- PSE&G net income increased $183 million. Distribution rate relief and transmission/distribution investment contributed, while customer tax-benefit refunds reduced revenues and tax expense.
- PSEG Power net income increased $103 million despite the asset-sale loss. Its results benefited from improved mark-to-market and trust investment performance and ZEC revenue; operating income declined from $596 million to $448 million.
- PSEG Power completed the sale of its 776 MW interests in Keystone and Conemaugh in September 2019, recording a $402 million pretax loss (approximately $286 million after tax). It also began commercial operation of the 484 MW Bridgeport Harbor Unit 5 gas plant.
- Net gains on trust investments were $260 million, compared with a $143 million loss in 2018. After-tax NDT-related activity was a $152 million gain versus a $90 million loss; non-trading mark-to-market activity was a $205 million gain versus an $84 million loss.
- Capital spending declined year over year, while operating cash flow increased, partly because PSEG Power’s cash collateral requirements fell by $596 million.
Outlook, management commentary, risks and unusual items
- Investment outlook: PSE&G expects to invest $11.5 billion to $15 billion over the five years through 2024, implying expected annual rate-base growth of 6.5% to 8%. These ranges depend partly on programs not yet approved. Planned PSE&G capital spending is $2.675 billion in 2020, $2.515 billion in 2021 and $2.305 billion in 2022; PSEG consolidated projected spending is $2.860 billion, $2.655 billion and $2.485 billion, respectively.
- Regulated programs: Approved programs include the five-year, $1.9 billion Gas System Modernization Program II and the $842 million Energy Strong II program. The proposed six-year Clean Energy Future program is estimated at $3.5 billion and remains subject to regulatory review.
- Power market outlook: Management said low wholesale gas and power prices pressure merchant generation margins. More than 70% of PSEG Power’s expected 2020 gross margin was associated with hedging, capacity revenues, ZECs and certain ancillary services. This is not a consolidated earnings or EPS forecast.
- Climate objectives: PSEG announced an aim to reduce generation-fleet carbon emissions 80% by 2046 from 2005 levels and a net-zero CO2 vision for 2050, contingent on technology, public policy and customer behavior.
- Nuclear support and retirement exposure: Salem 1, Salem 2 and Hope Creek received ZECs through May 2022, but the award was appealed and plants must reapply for later periods. The filing says PSEG Power would take steps to retire the plants after the initial ZEC period if support is not renewed or economics materially deteriorate. FERC’s expanded PJM minimum-offer rule could affect capacity-market participation; impact was unclear.
- Environmental exposure: PSEG accrued approximately $65 million for the Lower Passaic River matter, but the EPA’s estimated $2.3 billion remedy for the lower 8.3 miles is not PSEG’s allocated share. Additional company costs could be material and could not be estimated. PSE&G’s MGP remediation estimate ranges from $357 million to $400 million; it recorded the low end, $357 million, with a corresponding regulatory asset.
- Other notable items: PSEG recorded a $58 million pretax write-down on the Powerton leveraged-lease residual value and a $16 million goodwill impairment at PSEG Power. PG&E’s bankruptcy could affect payment under long-term solar PPAs; potential impairment exposure was up to the facilities’ $55 million net book value.
- Other risks: Commodity and capacity-price volatility, outages and forward-sale obligations, fuel and transmission constraints, regulatory cost recovery and return-on-equity decisions, environmental rules and remediation, pension and decommissioning funding, counterparty credit, collateral calls, cybersecurity and access to financing. A three-level downgrade of PSEG Power could trigger estimated additional collateral of about $974 million at year-end 2019.
PSEG paid dividends of $1.88 per share in 2019 and approved a first-quarter 2020 dividend of $0.49 per share, an indicated annual rate of $1.96. The independent auditor issued an unqualified opinion on the financial statements; its report identified nuclear retirement assumptions, the Passaic River liability and tax-related regulatory accounting as critical audit matters. Management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether PSE&G’s proposed Clean Energy Future investment receives approval and what returns and recovery terms regulators authorize.
- Whether Salem and Hope Creek ZEC support continues beyond May 2022, and how PJM capacity-market rules affect nuclear revenues.
- How much of the Passaic River and other environmental remediation costs will ultimately be allocated to PSEG, and whether PSE&G can recover eligible costs in rates.
- Whether merchant power earnings and cash generation can withstand low wholesale prices, generation outages, hedge variability and collateral requirements.
- Whether planned utility capital spending, rate-base growth and regulatory returns remain achievable while maintaining investment-grade credit ratings and dividend capacity.