Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this combined, unaudited Form 10-Q for the quarter ended March 31, 2014. Its principal businesses are PSEG Power, a wholesale energy supplier and generator, and PSE&G, a regulated electric and gas transmission and distribution utility in New Jersey. PSEG also began operating Long Island’s transmission and distribution system under contract on January 1, 2014.
Financial performance and position
Unless noted otherwise, amounts are in millions of dollars. Consolidated results for Q1 2014 compared with Q1 2013:
- Revenue increased 16% to $3,223; operating income rose 16% to $705. Operating margin was approximately 21.9%, little changed from the prior-year quarter.
- Net income rose 21% to $386; diluted EPS increased to $0.76 from $0.63. Net margin was approximately 12.0%, versus 11.5%.
- Segment earnings: Power $164, up from $141; PSE&G $214, up from $179; other businesses contributed $8, versus zero.
- Operating cash flow was $1,116, up from $877. Investing cash outflow was $629, including $609 of property, plant and equipment additions. Financing cash outflow was $325. Cash ended the quarter at $655, up from $493 at year-end.
- At March 31, total assets were $33,326 and total capitalization was $19,602. Long-term debt in capitalization was $7,802, excluding $786 of current maturities of long-term and securitization debt. Current assets of $3,853 exceeded current liabilities of $3,357. Commercial paper and loans were zero at quarter-end.
- Available credit liquidity was $4,112 under $4,300 of facilities. The company paid a $0.37 per-share dividend in the quarter and indicated an annual dividend rate of $1.48.
Changes versus the prior-year quarter
- Higher Power generation and capacity revenues, colder-weather gas sales, and growth in utility transmission investment supported earnings. PSE&G revenue rose 8% to $2,145 and earnings increased 20% to $214.
- Power revenue increased 17% to $1,700, while energy costs rose 21% to $1,044, reflecting higher fuel and gas costs. Higher fuel and purchased-energy costs were partly offset by lower PJM congestion costs.
- Consolidated operating cash flow increased $239. Management attributed the improvement to higher earnings and working-capital and regulatory-account movements, among other factors.
- Capital additions declined to $609 from $724. PSE&G invested $481 in plant, primarily for transmission and distribution reliability.
Outlook, risks and unusual items
- Management emphasized cost control, reliability, re-contracting open supply positions, executing capital plans, and continued investment in utility infrastructure. It did not provide a specific earnings or revenue forecast in the supplied filing text.
- On May 1, 2014, after quarter-end, PSEG reached a proposed $1.22 billion Energy Strong settlement with BPU staff and other parties. It provides an accelerated recovery mechanism, including a 9.75% return on equity on the first $1.0 billion; BPU approval remained pending. The remaining $220 million would be sought in a future base-rate case.
- Management cited wholesale power and capacity-market changes, lower commodity prices, customer demand and conservation, environmental rules, construction and permitting delays, and severe weather as significant challenges. A proposed federal cooling-water intake rule could have material operational or capital consequences; the final rule was pending.
- Power’s after-tax non-trading mark-to-market losses were $132, compared with $105 in Q1 2013. Management identified this as a factor in the earnings comparison; changes in forward prices can make reported results volatile.
- Power reported incorrect calculations in certain PJM cost-based bids that resulted in fossil-fleet revenue over-collection. The matter was under review, and the company could not estimate potential repayments, penalties, or other costs.
- The EPA’s revised Passaic River cleanup study described alternatives costing $365 million to $3.25 billion, with a $1.7 billion preferred alternative. PSEG said its ultimate share was uncertain and believed its respective cleanup shares would be immaterial, but could not predict the outcome. Separately, PSE&G recorded a $432 million liability and matching regulatory asset for manufactured-gas-plant remediation, with estimated total costs of $432 million to $509 million through 2021.
- Superstorm Sandy facility-damage costs were revised to an estimated $579 million in April 2014; insurance recovery was disputed and uncertain. The filing also describes potential collateral needs if Power lost investment-grade ratings, including up to $802 million of additional collateral under specified circumstances.
Investor facts to verify
- Whether the Energy Strong settlement received BPU approval and how its investment and recovery schedule developed.
- Resolution and financial impact of the PJM bid-calculation review and the Sandy insurance litigation.
- Updated cost estimates, regulatory recovery, and PSEG’s share of Passaic River and other environmental obligations.
- Power’s exposure to mark-to-market earnings swings, fuel and capacity-market changes, and collateral calls under adverse credit or commodity conditions.
- Progress on planned capital spending, financing needs, and the expected returns and regulatory recovery for major transmission and resiliency projects.