Public Service Enterprise Group Inc. — 2015 Form 10-K
Business context and reporting period. This combined annual filing covers the fiscal year ended December 31, 2015, and includes PSEG, its regulated New Jersey utility PSE&G, and merchant-generation subsidiary PSEG Power. PSE&G operates electric transmission and electric and gas distribution; Power sells wholesale energy, capacity and related services. Figures below are in millions of dollars unless otherwise noted.
Key financial results
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $10,415 | $10,886 | (4.3%) |
| Operating income | $2,962 | $2,623 | +$339 |
| Net income | $1,679 | $1,518 | +$161 |
| Diluted earnings per share | $3.30 | $2.99 | +$0.31 |
| Operating cash flow | $3,919 | $3,160 | +$759 |
| Capital expenditures/additions to property, plant and equipment | $3,863 | $2,820 | +$1,043 |
| Total assets at year-end | $37,535 | $35,287 | +$2,248 |
| Long-term debt at year-end | $8,834 | $8,215 | +$619 |
- Calculated operating margin was approximately 28.4%, up from 24.1%; net margin was approximately 16.1%, up from 13.9%.
- Segment net income: PSE&G $787, up from $725; Power $856, up from $760; Other $36, up from $33.
- Cash and cash equivalents were $394 at year-end, versus $402 a year earlier. Total credit facilities were $4.2 billion, with $3.648 billion available.
- Balance-sheet current liabilities included $734 of long-term debt due within one year and $364 of commercial paper and loans. PSEG reported total capitalization of $21.901 billion, including $13.067 billion of equity.
- Common dividends were $1.56 per share for 2015, versus $1.48 in 2014; cash dividends paid totaled $789.
Material changes and drivers
- Net income rose about 11%, despite lower revenue. Management cited higher PSE&G transmission revenue from infrastructure investment, lower Power fuel costs, higher mark-to-market gains, and Superstorm Sandy insurance recoveries.
- Power revenue fell $506, or 9%, largely from lower gas-supply prices and capacity revenue. Energy costs fell $597, reflecting cheaper gas and coal. Lower capacity prices, retired peaking units, lower ancillary and operating-reserve revenue, and weaker NDT-related results partly offset the benefit.
- PSE&G revenue declined $130, or 2%, while net income rose $62. Transmission revenue increased $164; commodity revenue decreased with lower gas prices, with related commodity costs passed through to customers.
- Operating cash flow increased by $759. Cash investment in property, plant and equipment rose to $3.863 billion, leaving approximately $56 million of operating cash flow above that investment measure before other investing and financing items.
- Reported results included a $214 million pretax insurance recovery recognized in 2015 for Superstorm Sandy; management reported a $102 million after-tax benefit. The insurance claim was described as fully resolved.
Outlook, investment plans and risks
- The filing gives no specific 2016 earnings or EPS guidance. Management expects to fund planned requirements through internally generated cash and external debt financing, without issuing new equity.
- Projected capital expenditures for 2016–2018 total $11.480 billion: $4.435 billion in 2016, $4.085 billion in 2017 and $2.960 billion in 2018. Major programs include PSE&G transmission, Energy Strong and gas-system modernization, plus Power’s Keys Energy Center, Sewaren 7 and Bridgeport Harbor Station 5 projects.
- PSE&G’s approved Gas System Modernization Program provides for $905 million of investment over three years; Energy Strong allows up to $1.2 billion of investment. Recovery is subject to regulatory terms and review.
- The board approved a first-quarter 2016 dividend of $0.41 per share, an indicative annual rate of $1.64. Future dividends remain subject to board discretion.
- Management highlighted sustained low natural-gas and wholesale electricity prices, regulatory and capacity-market uncertainty, customer conservation and migration, construction and permitting risks, and environmental requirements as ongoing challenges.
- Power’s FERC Staff investigation into New Jersey fossil-unit market bids remains unresolved. The company recorded a $25 million charge in 2014; it said potential additional disgorgement or penalties could be material, but it could not reasonably estimate the loss range.
- Environmental contingencies include Passaic River remediation, for which the ultimate remedy, allocation and exposure remain uncertain. PSE&G recorded $10 million and Power $3 million for the matter; additional costs could be material. PSE&G also reported a $431 million MGP remediation liability, matched by a regulatory asset.
- Power’s domestic leveraged-lease portfolio was $784 million gross; 73% of total leveraged lease investments were rated below investment grade by S&P. Lessee defaults could cause impairment and tax consequences.
- Management changed its pension and postretirement service- and interest-cost calculation prospectively; it estimated 2016 expense reductions of $34 million for pension and $13 million for OPEB, net of amounts capitalized.
Important facts for investors to verify
- Whether the FERC investigation results in additional penalties or losses beyond the $25 million previously recorded.
- Power’s sensitivity to wholesale energy and capacity pricing, and the timing and economics of its generation projects.
- Whether planned utility capital spending receives timely regulatory approval and cost recovery, including the Energy Strong and gas-modernization programs.
- The eventual remedy, allocation and recoverability of Passaic River and other environmental costs, and any cooling-water permit requirements affecting generation assets.
- Power’s ability to maintain investment-grade credit ratings and liquidity under commodity-price stress; a below-investment-grade rating could require approximately $864 million of additional collateral at disclosed year-end conditions.
- The sustainability of cash generation and dividends alongside the elevated 2016–2018 capital program and near-term debt maturities.