Public Service Enterprise Group Inc. (PSEG) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in millions of dollars except per-share data. The filing covers PSEG and its wholly owned subsidiaries PSEG Power LLC (“Power”) and Public Service Electric and Gas Company (“PSE&G”).
Business context
PSEG operates a regulated New Jersey electric and gas transmission and distribution utility through PSE&G, and a wholesale energy supply and generation business through Power. PSEG LI began operating LIPA’s Long Island transmission and distribution system under a 12-year agreement on January 1, 2014.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $2,641 | $2,554 | $8,113 | $7,650 |
| Operating income | $746 | $712 | $1,816 | $1,934 |
| Net income | $444 | $390 | $1,042 | $1,043 |
| Diluted EPS | $0.87 | $0.77 | $2.05 | $2.06 |
| Dividends per share | $0.37 | $0.36 | $1.11 | $1.08 |
- Q3 revenue increased 3% and net income rose 14% year over year; approximate operating margin was 28.2%, versus 27.9%.
- Nine-month revenue rose 6%, but operating income declined 6%; net income was essentially unchanged. Approximate operating margin fell to 22.4% from 25.3%.
- Q3 improvement reflected lower pension/OPEB and maintenance costs, increased transmission investment revenues, and lower tax expense. Lower PJM capacity revenues partly offset those gains.
- Nine-month results were pressured by higher generation and gas costs and larger mark-to-market losses. PSEG reported after-tax non-trading mark-to-market losses of $138, versus $22 in 2013. PSE&G earnings increased to $565 from $468, while Power earnings fell to $440 from $577.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $2,536, up from $2,435. Investing cash outflow was $1,988, including $1,922 of property, plant and equipment additions. Financing cash outflow was $338.
- Cash and cash equivalents were $703 at September 30, 2014, compared with $493 at year-end 2013. PSEG paid $561 in common dividends during the first nine months.
- Total debt reported in the debt fair-value table was $8,963 at September 30, 2014, compared with $8,643 at year-end 2013. Stockholders’ equity was $12,084; total assets were $34,147.
- Credit facilities totaled $4,300, with $4,102 of available liquidity. Management said available credit exceeded anticipated maximum liquidity requirements. PSEG and Power extended $2.1 billion of facilities to 2019; investment-grade ratings were maintained.
- Management expected capital requirements over the next three years to be funded through internally generated funds and external debt. The filing raised PSE&G’s projected capital expenditures through 2016 by $295, excluding the separately approved Energy Strong program.
Outlook, developments and key risks
- No specific consolidated earnings guidance was provided in the supplied filing text. Management emphasized cost control, reliable operations, re-contracting open supply positions, execution of capital investment plans and managing regulatory and market uncertainty.
- The BPU approved PSE&G’s $1.22 billion Energy Strong resiliency program. A 2015 transmission rate update filed with FERC sought approximately $182 million of additional annual transmission revenue, effective January 1, 2015, subject to approval.
- Power’s Salem Unit 2 refueling outage lasted longer than planned; the unit returned to service July 14, 2014. The nuclear fleet averaged a 91% capacity factor for the first nine months.
- Power recorded a $25 million charge in Q1 for errors in PJM market bids. FERC staff opened a preliminary, non-public investigation; further disgorgement, penalties or other losses are possible, but the ultimate impact could not be estimated.
- Environmental and litigation exposures include PSE&G’s $452 million recorded MGP remediation liability, offset by a regulatory asset; uncertain Passaic River cleanup obligations; and unresolved Superstorm Sandy insurance litigation after the damage estimate was revised to $579 million. PSEG said its eventual Passaic River share could not yet be determined.
- Cooling-water permit requirements could require material upgrades at certain generating plants. A Salem cooling-tower estimate cited in the filing was approximately $1 billion total, with Power’s share estimated at $575 million; these potential costs were not included in forecast capital expenditures.
- Power’s guarantees had a face value of $1.719 billion and current exposure of $222 million. A loss of investment-grade status could trigger up to $851 million of additional collateral requirements; available credit facilities were $3.516 billion for this purpose.
- Other risks highlighted include changes to PJM capacity-market rules, wholesale power and fuel prices, environmental regulation, severe weather, project permitting and construction delays, and counterparty credit risk.
Most important facts for investors to verify
- Whether the FERC bid investigation results in additional charges, disgorgement or penalties beyond the $25 million recorded.
- Whether PSE&G obtains the expected rate recovery and approvals for Energy Strong, transmission investments and other regulatory programs.
- How much Power’s mark-to-market losses reverse or persist, and whether fuel costs and capacity-market changes affect generation earnings.
- The eventual cost allocation and recoverability of Passaic River and other environmental obligations, including potential cooling-water compliance costs.
- Whether the Sandy insurance case produces recoveries against the revised $579 million damage estimate, and the implications for liquidity and capital spending.
- That cash flow, debt and segment figures are interpreted on the appropriate consolidated or subsidiary basis; the filing presents separate financial statements for PSEG, Power and PSE&G.