Public Service Enterprise Group Incorporated (PSEG) — Q3 2022 Form 10-Q
Business context and period. This unaudited combined filing covers the quarter and nine months ended September 30, 2022, and reports both PSEG and its wholly owned regulated utility, Public Service Electric and Gas Company (PSE&G). PSEG’s principal businesses are regulated electric and gas transmission and distribution through PSE&G and merchant nuclear generation and energy supply through PSEG Power. PSEG completed the sale of its 6,750 MW fossil generation portfolio in February 2022.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| PSEG operating revenue | $2.272 billion | $1.903 billion | $6.661 billion | $6.666 billion |
| PSEG operating income (loss) | $173 million | ($2.205 billion) | $417 million | ($1.758 billion) |
| PSEG net income (loss) | $114 million | ($1.564 billion) | $243 million | ($1.093 billion) |
| PSEG diluted EPS | $0.22 | ($3.10) | $0.48 | ($2.17) |
| PSE&G net income | $399 million | $389 million | $1.213 billion | $1.175 billion |
| PSEG operating cash flow | — | $701 million | $1.178 billion |
- Revenue and earnings drivers: PSEG Q3 revenue rose 19%, while nine-month revenue was essentially flat. Q3 earnings recovered primarily because 2021 included large fossil-asset impairment charges and greater mark-to-market losses. For the first nine months of 2022, PSEG Power reported a $922 million loss, including significant commodity mark-to-market and nuclear trust investment losses; PSE&G earnings increased to $1.213 billion.
- Cash flow and investment: Nine-month operating cash flow declined $477 million year over year, mainly reflecting collateral requirements, tax-payment differences, and other cash-flow changes. Capital additions were $2.088 billion; investing cash flow was a $299 million outflow. Dividends paid were $810 million and share repurchases totaled $500 million.
- Debt and liquidity: At September 30, PSEG reported $16.150 billion of long-term debt and $1.525 billion due within one year, plus $2.235 billion of commercial paper and loans. Available committed credit capacity was $3.406 billion. Cash and cash equivalents were $377 million ($418 million including restricted cash). Management said liquidity, including financing access, was expected to cover stressed needs over the next 12 months.
- Collateral exposure: PSEG Power’s net cash collateral postings reached $2.2 billion at quarter-end, then were $1.7 billion on October 28, 2022. Management said most related to hedges through 2023 and was expected to be returned as contracts are fulfilled. A downgrade-related collateral requirement was estimated at $917 million at September 30.
Material changes and unusual items
- The 2021 comparison includes a $2.691 billion pre-tax impairment loss associated with the fossil generation portfolio sale. PSEG recorded a further $43 million pre-tax impairment adjustment in 2022 related to that sale.
- In September 2022, Energy Holdings recorded a $53 million pre-tax impairment ($38 million after tax) on a domestic generating facility.
- Nine-month after-tax losses included $896 million from non-trading commodity mark-to-market activity and $224 million from nuclear decommissioning trust activity. Trust investment values declined amid market losses; the NDT fund fair value was approximately $2.124 billion, versus $2.635 billion at December 2021.
- The Inflation Reduction Act established a nuclear generation production tax credit for 2024–2032, subject to eligibility and further Treasury guidance. PSEG reduced nuclear asset retirement cost and liability assumptions by $145 million following reassessment.
Outlook, management commentary, and risks
- PSE&G estimated 2021–2025 capital investment of $14–$16 billion and expected 6%–7.5% annual rate-base growth from year-end 2021 through year-end 2025. PSE&G’s nine-month capital expenditures were $1.871 billion, primarily for transmission and distribution reliability.
- PSEG reported an indicative 2022 annual dividend rate of $2.16 per share. Management expected capital needs to be funded through internally generated cash and debt financing, without new equity issuance.
- Management cited inflation, higher interest rates, volatile commodity prices, supply-chain constraints, customer payment and collection trends, regulatory uncertainty, and market-design changes as challenges. PSE&G had recorded a $122 million COVID-19-related regulatory asset, which it believed was recoverable, subject to regulatory processes.
- Key regulatory matters include PSE&G rate and program filings, an ongoing BPU management and affiliate audit, and a FERC investigation concerning a transmission project. The company said potential penalties in the FERC matter could be material but could not estimate a loss range.
- Environmental contingencies include the Passaic River matter, for which PSEG had accrued $66 million, and a newly designated Hackensack River Superfund site whose potential impact was unknown and could be material. PSE&G’s estimated MGP remediation liability was $213 million, with a corresponding regulatory asset.
- PSEG’s Ocean Wind 1 investment had a carrying value of $190 million, with approximately $35 million of planned additional development funding to final investment decision. PSEG was reviewing its options; the project was expected to enter commercial operation in 2025.
- The filing also notes potential nuclear operating and regulatory risks, including the pending environmental review for Peach Bottom license renewals and possible Salem cooling-water compliance costs. Nuclear plants’ continued economic viability depends partly on market conditions and government support.
Important facts for investors to verify
- Whether commodity mark-to-market losses, collateral postings, and trust investment declines persist or reverse, and how they affect cash flow and earnings.
- Whether PSE&G’s proposed investment programs and recovery filings receive regulatory approval on expected terms and timelines.
- The final economic and tax effects of the Inflation Reduction Act’s nuclear credits, including their interaction with New Jersey ZEC payments.
- Developments in environmental and regulatory matters, particularly Passaic and Hackensack River liabilities, the FERC investigation, and the BPU audit.
- Whether Ocean Wind 1 proceeds to final investment decision and whether PSEG’s projected capital spending, rate-base growth, liquidity, and dividend plans remain achievable.