Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited combined Form 10-Q for the quarter and nine months ended September 30, 2017. PSEG’s principal businesses are regulated electric and gas utility PSE&G and competitive generation and energy supply company PSEG Power. Unless noted otherwise, figures below are consolidated PSEG amounts in millions of dollars.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $2,263 | $2,450 | $6,988 | $6,971 |
| Operating income | $693 | $577 | $1,067 | $1,751 |
| Net income | $395 | $327 | $618 | $985 |
| Diluted EPS | $0.78 | $0.64 | $1.22 | $1.94 |
| Operating cash flow | Not separately presented for the quarter | $2,734 | $2,761 |
- For the nine months, consolidated operating cash flow was $2,734; capital expenditures were $3,046. Cash and cash equivalents declined $145 to $278.
- At September 30, total assets were $41,157 and stockholders’ equity was $13,124. Long-term debt was $11,274, with $1,250 due within one year; commercial paper and loans were $202.
- Available credit capacity was $3,788 of $4,200 in facilities. Management said facilities exceeded projected maximum liquidity needs over the next 12 months. A downgrade of Power below investment grade could require about $899 of additional collateral.
- Common dividends paid were $0.43 per share in Q3 and $1.29 per share year to date. The company indicated an annual dividend rate of $1.72 per share for 2017.
Material changes versus prior comparable periods
- Q3 net income rose $68 (21%) year over year, while revenue fell $187 (8%). Management cited lower 2016 charges for the Hudson and Mercer retirements and leveraged-lease impairment, lower generation costs, and higher transmission revenues; these were partly offset by lower electricity sales and unfavorable mark-to-market results.
- Nine-month net income fell $367 (37%). Power reported a $131 net loss versus $320 net income a year earlier, primarily reflecting accelerated depreciation following the Hudson and Mercer units’ June 1, 2017 retirement. Power recorded $1,191 of depreciation and amortization for the nine months, including $964 for those units. PSE&G net income increased to $753 from $696.
- PSE&G’s nine-month operating revenue decreased $57, while transmission revenue increased $116, principally reflecting recovery of investment. Lower electric sales volumes weighed on distribution revenue.
- Nine-month operating cash flow was $27 lower than in 2016. PSEG’s balance sheet showed long-term debt of $11,274 versus $10,895 at year-end 2016, and debt due within one year of $1,250 versus $500.
Outlook, management commentary, risks and unusual items
- No consolidated earnings or EPS guidance was stated in the supplied filing text. Management expects operating cash flow, cash on hand and financing to fund capital spending and dividends, and expects planned capital requirements to be funded with internal funds and external debt without new equity.
- PSEG said Power had secured approximately 60% of estimated gross margin for 2017–2019 through hedges, expected capacity revenues and certain ancillary-service payments. It reported a 95% average nuclear fleet capacity factor for the first nine months.
- PSE&G planned a distribution base-rate case seeking a proposed mid-single-digit percentage increase in distribution revenues, a 10.3% return on equity and new rates expected from October 1, 2018; outcomes remain uncertain. A proposed five-year gas modernization extension would invest up to $540 annually starting in 2019 and was not included in projected capital expenditures.
- Construction continued on the Keys and Sewaren 7 generation projects, targeted for 2018 operation, and Bridgeport Harbor 5, targeted for mid-2019 operation. PSE&G reported $2,118 of capital expenditures in the first nine months; Power reported $779, excluding nuclear fuel.
- Energy Holdings recorded $77 of pretax charges in 2017 related to leveraged-lease receivables and leased-asset residual values. GenOn, parent of REMA, filed for Chapter 11; further lease write-offs and accelerated tax payments are possible if lease rejections or foreclosures occur.
- PSE&G recorded a $390 environmental liability for its manufactured-gas-plant remediation program, within an estimated $390–$440 cost range, with a corresponding regulatory asset. Separately, the filing says additional Passaic River costs could be material but cannot currently be estimated; the EPA’s selected remedy was estimated at $2.3 billion overall.
- Power’s FERC investigation into PJM bidding matters remains unresolved. Power accrued $35 for estimated disgorgement and interest on one matter; possible amounts beyond the accrual, including penalties and the separate quantity-of-energy matter, are not reasonably estimable and could be material. A separate FTR investigation closed with no impact to operations or future earnings.
- Management highlighted continued low wholesale power and gas prices, environmental and regulatory uncertainty, and potential early retirement of remaining coal or New Jersey nuclear units as risks to future results. The filing also identifies cybersecurity exposure; reported prior attacks had not materially affected operations or financial condition.
Important facts for investors to verify
- Whether PSE&G receives timely rate relief and recovers planned utility investments, including the pending base-rate case and gas modernization program.
- Power’s ongoing profitability after the Hudson and Mercer retirement charges, and the economics of remaining coal and nuclear assets.
- Potential additional losses or tax consequences tied to GenOn/REMA lease exposure and the unresolved FERC PJM bidding investigation.
- Environmental remediation exposure, especially the Passaic River remedy, and whether liabilities beyond recorded amounts become probable and estimable.
- Liquidity and collateral sensitivity to a Power credit downgrade, commodity-market movements, and execution of major construction projects.