PSEG Q1 2016 Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. PSEG is the parent of PSE&G, a regulated New Jersey electric and gas utility, and PSEG Power, a wholesale energy supplier and generator. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $2,616 | $3,135 | Down 17% |
| Operating income | $827 | $1,048 | Down 21% |
| Net income | $471 | $586 | Down 20% |
| Diluted EPS | $0.93 | $1.15 | Down $0.22 |
| Operating margin | 31.6% | 33.4% | Down 1.8 percentage points |
| Net margin | 18.0% | 18.7% | Down 0.7 percentage points |
| Cash from operations | $1,214 | $1,679 | Down $465 |
| Capital expenditures | $1,065 | $747 | Up $318 |
| Cash and cash equivalents at quarter-end | $592 | $394 at Dec. 31, 2015 | Up $198 |
Cash from operations less property, plant and equipment additions was approximately $149 million. PSEG paid $207 million of common dividends, or $0.41 per share, during the quarter.
Business results and year-over-year drivers
- PSE&G: Net income rose to $262 million from $242 million. Operating income increased to $462 million from $451 million despite revenue declining 14% to $1,712 million. Higher transmission revenue from increased investment and lower operating costs helped; much of the revenue decline reflected lower commodity and clause-related collections that are substantially offset by lower costs or regulatory amortization.
- Power: Net income fell to $192 million from $335 million, and operating income declined to $343 million from $584 million. Revenue decreased 24% to $1,313 million. Management cited warmer weather, lower gas and electricity sales volumes and prices, and lower PJM operating-reserve and capacity revenues. Lower fuel costs partly offset these effects.
- PSEG’s total net income declined $115 million. The prior-year comparison included a $75 million after-tax Superstorm Sandy insurance recovery at Power; Power also recorded $128 million of Sandy-related insurance recoveries in 2015 operating results. Lower 2016 operating reserve and capacity revenue and reduced gas sales were additional headwinds. Higher transmission investment revenue and lower natural gas costs provided partial offsets.
- Non-trading mark-to-market results improved to a $13 million after-tax gain from a $20 million loss. NDT fund income was a $5 million after-tax expense versus $2 million of income. PSEG recognized $10 million of other-than-temporary impairments in Q1 2016, compared with $5 million in Q1 2015.
Debt, liquidity and investment
- At March 31, PSEG reported $9,676 million of long-term debt in capitalization, plus $562 million due within one year and $12 million of commercial paper and loans. Long-term debt in capitalization was $8,834 million at December 31, 2015. PSE&G issued $850 million of secured medium-term notes and retired $171 million of bonds during the quarter.
- Available liquidity under credit facilities was $4,006 million, against total facilities of $4,253 million. Cash was $592 million. Management said available credit exceeded anticipated maximum liquidity requirements.
- PSE&G capital expenditures were $724 million, primarily for transmission and distribution reliability. Power reported $283 million of capital expenditures, excluding $50 million for nuclear fuel. The filing said projected capital expenditures were not materially changed from the 2015 Form 10-K.
- Management expected operating cash flow, cash on hand and financing activities to fund planned capital spending and dividends, and expected to fund requirements without new equity. The company cited solid investment-grade ratings and an indicative 2016 annual dividend rate of $1.64 per share; future dividends remain at the board’s discretion.
Outlook, risks and notable developments
- Management’s priorities include regulated utility infrastructure investment, operational reliability, cost control, and disciplined development of generation projects. Construction continued on Keys Energy Center and Sewaren 7, targeted for 2018 operation; the company also announced Bridgeport Harbor Station 5, targeted for mid-2019. Three solar projects totaling 100 MW-direct current were acquired and expected to enter service during 2016.
- In April 2016, PSE&G accepted responsibility for three Artificial Island transmission project components, with a base estimate of $273 million and total project cost of up to $340 million including risk and contingency.
- Passaic River: Following the EPA’s March 2016 remedy decision, estimated at $2.3 billion for the lower 8.3 miles, PSEG’s recorded combined liability was approximately $57 million ($46 million PSE&G; $11 million Power). The company said additional costs could be material but could not estimate a range. PSE&G’s broader MGP remediation liability was $434 million, matched by a regulatory asset.
- FERC investigation: An ongoing, non-public investigation concerns errors in Power’s PJM fossil-unit bids and capacity-related quantities. The filing says potential remedies span a wide range and additional losses could be material; the company could not reasonably estimate a loss range. A $25 million charge was recorded in 2014, with no subsequent charge through this filing.
- Salem Unit 1: An April 2016 inspection found degradation in reactor-vessel bolts during a scheduled refueling outage. Further testing was underway and expected to extend the outage; effects on output, margin and costs depended on inspection results and repairs.
- Environmental and regulatory risks include cooling-water permit requirements that could require material upgrades or affect plant operations, evolving emissions and wastewater rules, and uncertainty regarding environmental remediation. Salem’s draft permit allowed continued use of its existing cooling system subject to modifications; the final permit was expected in the first half of 2016.
- Other risks highlighted include weak wholesale prices and demand, regulatory and market-design changes, construction delays and cost escalation, counterparty credit deterioration, severe weather, and cybersecurity. If Power fell below investment grade, the filing estimated up to $851 million of additional collateral could be required; available credit facilities for collateral were $3,391 million.
- The company reported a 99.7% nuclear fleet capacity factor in Q1 and nuclear output 7.5% above the prior-year quarter. The filing provides no numerical full-year earnings guidance.
Most important facts for investors to verify
- Whether Power’s lower wholesale revenues and earnings persist, and how weather, market prices, capacity and reserve revenues affect results.
- The outcome and potential financial exposure from the FERC PJM bidding investigation, for which no loss range was estimable.
- Whether the EPA’s Passaic River remedy, other remediation obligations and regulatory cost recovery produce costs beyond the recorded accruals.
- The duration and financial effect of Salem Unit 1’s extended outage, and the status of required permits and environmental upgrades at generation facilities.
- Execution, cost and timing of major utility and generation projects, alongside the company’s ability to fund capital needs, debt maturities and dividends while maintaining liquidity and credit ratings.