Public Service Enterprise Group Inc. — Q1 2015 10-Q
Business and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. PSEG operates regulated New Jersey electric and gas transmission/distribution utility PSE&G and wholesale energy supplier PSEG Power, alongside smaller businesses.
Financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating revenue | $3.135 billion | $3.223 billion |
| Operating income | $1.048 billion | $705 million |
| Net income | $586 million | $386 million |
| Diluted EPS | $1.15 | $0.76 |
| Operating cash flow | $1.679 billion | $1.116 billion |
| Capital additions to property, plant and equipment | $747 million | $609 million |
| Common dividends paid | $197 million ($0.39/share) | $187 million ($0.37/share) |
Consolidated operating margin was approximately 33.4%, up from 21.9%; net margin was approximately 18.7%, versus 12.0%. These calculated margins reflect unusually favorable comparisons, including lower mark-to-market losses and a Superstorm Sandy insurance recovery, and should not be read as purely recurring improvement.
- Segment earnings: PSE&G earned $242 million, up from $214 million. Power earned $335 million, up from $164 million; its Q1 2015 result included an after-tax $75 million Sandy insurance recovery.
- Balance sheet and liquidity: At March 31, cash was $1.008 billion and current assets were $4.159 billion against current liabilities of $3.622 billion (current ratio approximately 1.15). Long-term debt was $8.090 billion, with $793 million due within one year and $201 million of securitization debt due within one year. Total capitalization was $20.648 billion.
- PSEG reported $4.1 billion of available liquidity under $4.3 billion of credit facilities, with $200 million in use. The filing says facilities were extended in April 2015, after quarter-end, to 2020 for approximately $2.0 billion of facilities.
Changes versus Q1 2014
- Revenue declined 3%, while net income rose 52% and diluted EPS increased from $0.76 to $1.15.
- Lower energy costs and O&M expense more than offset lower revenue. Consolidated energy costs fell $262 million and O&M fell $193 million; O&M included the Sandy insurance recovery, principally at Power.
- Management cited lower fuel costs, increased transmission investment and lower non-trading mark-to-market losses as earnings drivers. Power also benefited from firm natural-gas pipeline capacity during cold weather. Lower capacity prices and weaker ancillary and operating-reserve revenues partly offset these gains.
- Operating cash flow increased $563 million. Management attributed the change largely to tax-payment timing and improved cash flows at PSE&G and Power, including lower margin-deposit requirements at Power.
Outlook, risks and unusual items
- Outlook: The filing provides no explicit full-year earnings or EPS guidance. Management expects capital requirements to be funded with internally generated funds and external debt financing, and expects operating cash flow, cash on hand and financing activities to support planned investment and dividends. The indicated 2015 annual dividend was raised to $1.56 per share.
- Investment plans: The BPU-approved Energy Strong program provides for $1.22 billion of infrastructure investment. A separate proposed Gas System Modernization Program would invest approximately $1.6 billion over five years and remained pending. PSE&G sought additional Energy Strong cost recovery, including estimated annual electric and gas revenue increases of $6 million and $17 million, respectively.
- Environmental and legal contingencies: PSE&G recorded a $452 million liability and matching regulatory asset for remediation of former manufactured-gas-plant sites; its estimated total remediation range was $452–$523 million through 2021. For the Passaic River, PSE&G accrued a $10 million regulatory asset and Power recorded $3 million of expense. The ultimate remedy, allocation and potential additional costs remain uncertain and could be material. Other matters include the FERC investigation into Power’s PJM bidding practices, cooling-water permit requirements, and potential Bridgeport Harbor wastewater-permit noncompliance; outcomes or costs were not determinable for several matters.
- Other notable items: The company received $159 million of Sandy insurance proceeds in March, recognized by PSE&G and Power; a further $54 million settlement reached in April was expected to be recognized in Q2. Power also disclosed $1.811 billion in face value of outstanding guarantees, with $244 million of current exposure. A downgrade below investment grade could require up to $881 million of additional collateral, compared with $3.514 billion of available liquidity for collateral posting.
- Principal risks: Wholesale energy and capacity prices, regulatory rate recovery and approvals, environmental rules and compliance costs, nuclear and plant reliability, construction delays and cost escalation, commodity supply and price changes, counterparty credit, collateral requirements, and pension/decommissioning trust investment performance.
Investor verification priorities
- Assess how much of Power’s earnings improvement is repeatable after excluding the Sandy recovery and changes in mark-to-market results.
- Track the EPA’s Passaic River remedy and cost allocation, and compare evolving remediation estimates with recorded accruals and regulatory recovery assumptions.
- Monitor the FERC bidding investigation, cooling-water permit decisions and Bridgeport Harbor compliance review for potential penalties, capital needs or operating constraints.
- Verify BPU decisions and timing for Energy Strong and the proposed gas modernization program, including how planned investment translates into rate recovery and financing needs.
- Reconcile reported cash generation with capital spending, near-term debt maturities and collateral needs under adverse commodity-price or credit-rating scenarios.