Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. Its principal businesses are regulated electric and gas transmission and distribution through PSE&G, and wholesale generation and energy supply through PSEG Power. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and condition
| Consolidated PSEG metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $2,450 | $2,688 | $6,971 | $8,137 |
| Operating income | $577 | $814 | $1,751 | $2,430 |
| Net income | $327 | $439 | $985 | $1,370 |
| Diluted EPS | $0.64 | $0.87 | $1.94 | $2.70 |
| Operating margin | 23.6% | 30.3% | 25.1% | 29.9% |
| Operating cash flow | Not reported by quarter in the supplied statements | $2,761 | $3,228 |
- Revenue declined 9% in Q3 and 14% for the nine-month period. Net income fell about 26% and 28%, respectively.
- PSE&G net income increased to $255 million in Q3 from $222 million and to $696 million year to date from $631 million. Power net income declined to $139 million from $206 million in Q3 and to $320 million from $707 million year to date.
- Nine-month capital expenditures were $2,985 million, versus $2,782 million. Net cash used in investing activities was $3,054 million; financing activities provided $349 million.
- At September 30, cash was $450 million, long-term debt was $10,697 million, and stockholders’ equity was $13,476 million. Long-term debt was $8,834 million at December 31, 2015. PSEG had $255 million of commercial paper outstanding.
- Credit facilities totaled $4,153 million, with $3,669 million available. Management said liquidity exceeded projected maximum requirements over its 12-month planning horizon.
- The quarterly dividend was $0.41 per share; the company indicated an annual 2016 rate of $1.64. Dividends paid in the first nine months totaled $622 million.
Material changes and unusual items
- Power decided in October 2016 to cease generation at the Hudson and Mercer coal/gas units on June 1, 2017, subject to PJM reliability review. Q3 included $114 million of pre-tax retirement-related charges: $62 million in energy costs, $48 million in operation and maintenance, and $4 million in depreciation. The after-tax impact to Power was $67 million.
- The filing reports additional depreciation expected from shortened asset lives, but the supplied text renders the amounts as “$568 million” for the remainder of 2016 and “$946 million” into 2017. The values are not clear in the supplied text and should be verified against the filed statements.
- Energy Holdings recorded a $137 million pre-tax write-down of REMA leveraged-lease residual values, associated with weaker economics for coal generation. The related after-tax impairment was $86 million. GenOn, REMA’s parent, reported potential difficulty repaying notes due in June 2017; lease payments were current, but further impairment or cash tax costs were possible.
- Power’s nine-month results were also affected by lower energy volumes and realized prices, lower capacity revenue, adverse mark-to-market comparisons, and the absence of 2015 Superstorm Sandy insurance recoveries. Lower fuel costs and PSE&G transmission investment revenues partly offset these pressures.
- PSE&G’s nine-month revenue decrease included lower securitization-transition-charge collections, which were largely offset by lower related expenses and did not represent a comparable reduction in margin. Transmission revenues increased $152 million due to investment growth.
Outlook, risks and contingencies
- No consolidated earnings guidance was provided. Management expects operating cash flow, cash on hand and financing to fund planned capital spending and dividends without new equity issuance. PSE&G’s projected capital program increased from $8.3 billion to $8.6 billion, primarily for infrastructure needs.
- Management emphasized regulated utility investment, reliability and system resiliency, while noting continued pressure on merchant generation from depressed wholesale prices, low natural-gas prices, reduced capacity factors and capacity-market changes. It is monitoring the viability of other coal units and warns that further early retirements could materially affect results.
- PSE&G must file a distribution base-rate case by November 1, 2017. A 2017 transmission formula-rate filing requested approximately $121 million of increased annual transmission revenue, subject to true-up. Several other rate-recovery petitions were approved provisionally or remained pending.
- A FERC staff investigation into Power’s historical PJM bids remains unresolved. PSEG cannot estimate a loss range; an adverse result could lead to additional losses material to results.
- Environmental exposures include a $57 million accrued Passaic River liability ($46 million PSE&G and $11 million Power), with further costs potentially material and not estimable. PSE&G recorded a $424 million MGP remediation liability with a corresponding regulatory asset; its estimated total remediation range was $424 million to $481 million through 2021.
- An early-October 2016 mineral-oil discharge from subsurface feeder cables near Jersey City was under investigation; costs and responsibility were unclear and could be material. Other risks include nuclear and environmental regulation, construction execution, wholesale-market conditions, counterparty credit, and rate recovery.
- A loss of Power’s investment-grade rating could require additional collateral; the filing estimated approximately $807 million of potential additional collateral as of September 30, 2016. The company also reported a separate $31 million derivative-collateral requirement under a below-investment-grade scenario.
Most important facts for investors to verify
- Verify the rendered incremental Hudson/Mercer depreciation amounts and expected timing against the original filing.
- Track actual retirement costs, PJM approval and any further decisions on the company’s remaining coal units.
- Monitor the FERC bid investigation, Passaic River and MGP remediation exposure, and the Jersey City cable discharge for updated estimates or accruals.
- Assess whether weak Power earnings and cash flow, increased debt, and capital spending affect liquidity, credit ratings or dividend capacity.
- Confirm outcomes of PSE&G rate proceedings and the expected recovery and returns on its planned utility investments.