Public Service Enterprise Group Incorporated (PSEG) — 2020 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed July 31, 2020. The combined filing covers PSEG and its wholly owned subsidiaries PSE&G, a regulated New Jersey electric and gas utility, and PSEG Power, a competitive energy supplier and generator. Unless noted, amounts below are in millions of dollars.
Financial performance
| Consolidated metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $2,050 | $2,316 | $4,831 | $5,296 |
| Operating income | $407 | $160 | $1,204 | $946 |
| Net income | $451 | $153 | $899 | $853 |
| Diluted EPS | $0.89 | $0.30 | $1.77 | $1.68 |
| Operating margin (calculated) | 19.9% | 6.9% | 24.9% | 17.9% |
| Operating cash flow | Not separately presented | Not separately presented | $1,664 | $1,824 |
Q2 revenue fell 11% and first-half revenue fell 9%. Q2 net income rose substantially, while first-half net income increased modestly. Comparisons include significant non-operating and prior-year items: Q2 2020 included $201 million of net gains on trust investments versus $39 million in Q2 2019; the 2019 period also included a $395 million asset-disposition loss related to Keystone and Conemaugh. First-half 2020 trust-investment results were a $20 million loss, versus a $167 million gain in 2019. These effects make headline earnings comparisons less indicative of underlying operating trends.
- Segments: PSE&G net income was $283 million in Q2 and $723 million for the first half, versus $227 million and $630 million in 2019. PSEG Power reported Q2 net income of $170 million versus a $40 million loss, but first-half net income declined to $183 million from $256 million.
- Cash flow and investment: First-half operating cash flow decreased $160 million year over year. Capital spending was $1,414 million; operating cash flow less capital spending was approximately $250 million. Cash dividends paid were $495 million.
- Liquidity: At June 30, cash and cash equivalents were $431 million ($467 million including restricted cash). Available committed credit facilities were $3,639 million of $4,200 million total. PSEG also entered into $800 million of 364-day term loans in March and April; these were excluded from the stated facility totals.
- Debt: Consolidated long-term debt was $13,580 million, with $2,093 million due within one year; commercial paper and loans were $1,165 million. PSEG issued $975 million of PSE&G debt and PSEG Power retired $406 million of notes at maturity during the first half.
- Shareholder returns: The Q2 dividend was $0.49 per share, up from $0.47. The board approved another $0.49 dividend for Q3, indicating an annualized rate of $1.96 per share.
Material changes and management outlook
- PSE&G’s first-half operating income increased to $916 million from $747 million, supported by higher transmission revenue from rate-base investment and lower energy costs; its six-month revenue declined slightly. Higher depreciation, interest expense, and income taxes partly offset the improvement.
- PSEG Power’s first-half revenue declined 24%, reflecting lower wholesale prices and volumes, lower gas supply revenue, and reduced mark-to-market gains. Management cited lower demand during the pandemic and continued pressure from low wholesale power and gas prices.
- Management stated COVID-19 had not materially affected results, financial condition, or cash flows through June 30, but warned a prolonged outbreak could hurt collections, bad debt, cash flow, operations, and project execution. PSE&G reported weaker customer payment patterns, suspended non-safety disconnections, and increased its receivables allowance; the allowance was $121 million at June 30.
- PSE&G expects to invest $11.5–$15 billion through 2024, implying 6.5%–8% annual rate-base growth. These estimates depend partly on regulatory approval of proposed programs. Planned transmission spending for 2020–2022 is $2.8 billion. No specific consolidated earnings guidance is provided in the supplied filing text.
- On July 31, after quarter-end, PSEG announced it was exploring strategic alternatives for PSEG Power’s non-nuclear fleet: more than 6,750 MW of fossil generation and a 467 MW solar portfolio. Potential marketing was expected to begin in Q4 2020, with completion potentially in 2021. No transaction is assured; PSEG intends to retain its nuclear fleet.
- Salem 1, Salem 2, and Hope Creek have ZEC support through May 2022. The next eligibility-period decision was expected by April 2021. PSEG said materially adverse ZEC, market, or operating conditions could lead it to pursue retirement of the plants, with potentially material costs.
Risks, contingencies, and unusual items
- Material uncertainties include COVID-19’s duration and economic effects; wholesale energy prices and demand; changes to PJM capacity-market rules; ZEC eligibility and payments; regulatory approvals and allowed returns; and environmental requirements.
- PSEG accrued approximately $65 million for the Lower Passaic River matter. The EPA’s remedy for the lower 8.3 miles is estimated at $2.3 billion, but PSEG’s ultimate share and additional exposure are not yet estimable and could be material. PSE&G separately recorded $346 million for its manufactured-gas-plant remediation program, with a corresponding regulatory asset.
- PSEG Power’s current exposure under commodity-related guarantees was $113 million; the face value of outstanding guarantees was $1,828 million. A loss of investment-grade status could trigger additional collateral needs; the filing estimates approximately $845 million under the described stress scenario.
- PSE&G’s transmission return-on-equity proceedings remain unresolved. Management estimated each 25-basis-point reduction in base transmission ROE could reduce annual net income and cash inflows by approximately $15 million.
- The filing reports the pandemic’s first-half impact as not material, but acknowledges that future effects cannot be estimated clearly. Estimates for several legal, environmental, regulatory, and market exposures remain uncertain.
Important facts for investors to verify
- How much Q2 earnings growth came from trust-investment gains and other non-operating items versus recurring operations.
- Progress and regulatory approvals for PSE&G’s investment programs, and whether projected rate-base growth and cost recovery are achieved.
- Customer receivables, bad debt expense, and operating cash flow as pandemic-related payment effects develop.
- Any outcome or timing of a potential non-nuclear fleet sale, including transaction terms, approvals, and accounting consequences.
- Future ZEC awards, PJM capacity-market changes, and their implications for nuclear plant economics and possible retirement costs.
- Developments in Passaic River remediation and other environmental proceedings, including any revised estimates of PSEG’s share of costs.