Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this combined Form 10-K for the fiscal year ended December 31, 2018. PSEG operates primarily through PSE&G, its regulated New Jersey electric and gas transmission and distribution utility, and PSEG Power, its competitive generation and energy-marketing business. The filing includes separate reporting for PSEG, PSE&G and Power; figures below are consolidated PSEG unless specified. This is an annual filing, not a standalone fourth-quarter report.
Financial results and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Operating revenue | $9.696 billion | $9.094 billion |
| Operating income | $2.298 billion | $1.429 billion |
| Net income | $1.438 billion | $1.574 billion |
| Diluted EPS | $2.83 | $3.10 |
| Operating cash flow | $2.913 billion | $3.260 billion |
| Capital expenditures | $3.912 billion | $4.190 billion |
| Cash and cash equivalents at year-end | $177 million | $313 million |
| Total assets at year-end | $45.326 billion | $42.716 billion |
Revenue grew about 6.6%. Operating margin was approximately 23.7%, versus 15.7% in 2017; net margin was approximately 14.8%, versus 17.3%. These ratios are calculated from reported results and should be read alongside the unusual items discussed below. The filing reports $13.168 billion of long-term obligations at year-end; total debt carrying value, including current maturities, was $14.462 billion. Credit facilities totaled $4.2 billion, with $2.999 billion available. PSEG reported stable investment-grade ratings: Baa1/BBB for PSEG senior notes, Aa3/A for PSE&G mortgage bonds and Baa1/BBB+ for Power senior notes.
By segment, PSE&G net income rose to $1.067 billion from $973 million, while Power net income declined to $365 million from $479 million. The company declared $1.80 per share in 2018 dividends, up from $1.72; in February 2019, the board approved a first-quarter dividend of $0.47 per share.
Material changes versus the prior comparable period
- Consolidated net income fell 8.6%, despite higher revenue and operating income. The 2017 result included a $745 million non-cash tax-reform benefit; 2018 included about $125 million of after-tax unrealized losses on NDT equity securities following an accounting change.
- Operating income increased substantially in part because 2017 included accelerated depreciation associated with the Hudson and Mercer plant retirements. In 2018, Power sold those retired sites and recorded a $54 million pre-tax gain.
- PSE&G earnings improved with T&D investment growth and new distribution rates effective November 1, 2018. The rate settlement provided a $9.5 billion distribution rate base and a 9.6% authorized ROE, but reduced annual revenues by about $13 million net, largely reflecting tax-benefit returns to customers.
- Power’s results reflected the mid-2018 commercial start of the Keys and Sewaren 7 gas plants, increased generation and gas-sales revenues, and higher fuel costs. Nuclear decommissioning trust investment results also weakened year over year.
- Operating cash flow decreased $347 million. Power’s operating cash flow fell $242 million, including higher margin-deposit requirements; PSE&G’s increased $15 million.
- Long-term obligations increased from $12.071 billion to $13.168 billion. PSEG invested $3.912 billion in property, plant and equipment during the year.
Outlook, risks, contingencies and unusual items
- Investment outlook: Management expects $11 billion to $16 billion of investment over five years and annual PSE&G rate-base growth of 7%–9%. Forecast capital expenditures for 2019–2021 are $3.015 billion, $2.695 billion and $2.360 billion, respectively. These forecasts exclude proposed Energy Strong II and Clean Energy Future programs, which require regulatory approval.
- Nuclear plants: Power applied for New Jersey Zero Emission Certificates (ZECs) for Salem 1, Salem 2 and Hope Creek. Management stated that, absent a material financial change, it would take steps to retire all three if any failed to receive ZEC support, or if adverse capacity-market changes undermined their economics. Potential retirement charges and costs could be material. The ZEC decision was expected in April 2019.
- Markets and regulation: Power’s earnings remain exposed to wholesale electricity and natural-gas prices, capacity-market rules, generation availability, fuel costs, hedging outcomes and customer migration. Pending PJM/FERC capacity-market changes could affect capacity revenues, particularly for nuclear generation receiving state support.
- Environmental and legal exposure: PSEG accrued $57 million for its estimated share of the lower Passaic River remedy; the EPA’s selected remedy was estimated at $2.3 billion overall. PSE&G also recorded a $321 million MGP remediation liability, with a corresponding regulatory asset. The ultimate costs and recovery remain uncertain. Other matters include a PSE&G cable-fluid release, a $93 million contractor claim concerning Sewaren 7, and investigations and litigation relating to a customer service disconnection; outcomes are not established in the filing.
- Other credit and asset risks: Power’s potential additional collateral requirement following a below-investment-grade downgrade was approximately $857 million at year-end. Power’s California solar facilities had a $57 million net book value and faced uncertainty after power-purchaser PG&E filed for bankruptcy in January 2019. Energy Holdings’ lease portfolio also includes below-investment-grade counterparties.
- Other unusual items: A December 2018 OPEB plan amendment reduced PSEG’s obligation by $559 million; Medicare-eligible subsidized plans are to move to a private exchange in 2021. PSEG expected to pay approximately $120 million in 2019 in taxes related to the REMA restructuring.
- Management reported sufficient liquidity for its 12-month planning horizon, investment-grade ratings and an expectation that planned capital requirements and Tax Act effects could be funded without issuing new equity. The filing does not provide a specific earnings-per-share guidance range.
Important facts for investors to verify
- Whether the New Jersey nuclear units received ZEC awards, and the resulting operating, capacity-market and retirement implications.
- Regulatory decisions, cost recovery and returns for proposed ES II and Clean Energy Future investments, alongside execution of the approved GSMP II program.
- Power’s forward generation margins, hedging and collateral needs, and sensitivity to wholesale energy and capacity-market changes.
- Cash flow and financing capacity relative to planned capital spending, debt maturities and dividend commitments.
- Updated estimates, recoverability and timing for Passaic River and MGP remediation, plus outcomes of the disclosed legal and regulatory matters.
- The effect of PG&E’s bankruptcy on Power’s solar PPAs and the treatment of related assets and revenues.
- How much of the 2018 earnings comparison reflects recurring operations versus prior-year tax benefits, NDT accounting changes, plant-retirement charges and asset-sale gains.