Business Context and Reporting Period
Public Service Enterprise Group Incorporated (PSEG) filed this combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Its principal businesses are regulated New Jersey utility PSE&G and merchant generation and energy supply subsidiary PSEG Power. PSEG is transitioning toward a predominantly regulated utility and contracted carbon-free energy business.
Financial Performance and Position
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2020 periods.
| Consolidated metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenues | $1,903 | $2,370 | $6,666 | $7,201 |
| Operating income (loss) | $(2,205) | $633 | $(1,758) | $1,837 |
| Net income (loss) | $(1,564) | $575 | $(1,093) | $1,474 |
| Diluted EPS | $(3.10) | $1.14 | $(2.17) | $2.91 |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $1,178 | $2,517 |
- Profit drivers and segments: PSEG Power reported net losses of $1,933 million in Q3 and $2,255 million for nine months; PSE&G earned $389 million and $1,175 million, respectively. PSE&G’s revenue rose 10% in Q3 and 8% for nine months, supported by utility investment and delivery revenues.
- Cash flow and investment: Consolidated operating cash flow fell $1,339 million year over year for nine months. Capital expenditures were $2,046 million; cash dividends paid were $773 million. PSE&G operating cash flow was $1,283 million, while PSEG Power used $166 million.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $1,811 million ($1,860 million including restricted cash). Long-term debt was $14,425 million, with $1,650 million due within one year and $3,705 million of commercial paper and loans. Credit facilities totaled $4,100 million, of which $2,752 million was available. Management said capacity exceeded projected maximum liquidity needs over its 12-month planning horizon.
- Margins: Consolidated operating losses reflect a large impairment charge; the filing does not provide a comparable adjusted margin measure in the supplied text.
Material Changes and Unusual Items
- PSEG Power recorded a $2,162 million pre-tax impairment in Q3 on the planned sale of its fossil fleet, in addition to a $519 million second-quarter impairment. The total expected pre-tax loss on sale was approximately $2,681 million. The Q3 consolidated net loss also reflected substantial non-trading commodity mark-to-market losses: $478 million after tax for the quarter and $718 million for nine months.
- PSEG agreed in August to sell its 6,750 MW fossil generation portfolio for approximately $1,920 million, subject to regulatory approvals and expected to close late in Q4 2021 or in Q1 2022. The June 2021 Solar Source sale generated a reported pre-tax gain of approximately $62 million, alongside approximately $63 million of income tax expense, primarily from investment tax credit recapture.
- Rising energy prices increased PSEG Power’s net cash collateral postings from $343 million at June-end to $999 million at September-end and approximately $1.3 billion by October-end. October borrowings supported collateral needs and debt redemption.
- In October, PSEG Power redeemed its remaining senior notes; the redemption resulted in an approximately $294 million make-whole premium and about $4 million of other non-cash debt extinguishment costs, to be recorded in October.
Outlook, Management Commentary, and Risks
- Management expects PSE&G to invest $14–$16 billion through 2025, with expected rate-base compound annual growth of 6.5%–8%. The upper end depends in part on unapproved programs. PSEG expects to fund planned capital needs through internal cash and debt financing without issuing new equity.
- PSEG announced an indicative annual dividend of $2.16 per share for 2022 and a $500 million share repurchase program subject to completion of the fossil sale. Future dividends remain subject to board discretion.
- An October FERC-approved transmission settlement reduced PSE&G’s base return on equity from 11.18% to 9.9%. Management estimated a $50–$60 million reduction in net income during the first 12 months after implementation and an approximately $150 million decrease in annual transmission revenue effective January 2022.
- PSEG’s Salem and Hope Creek nuclear plants received New Jersey Zero Emission Certificates for a further three-year period beginning June 2022, at approximately $10/MWh. Legal challenges and potential changes to the program remain risks; management warned that materially adverse changes in plant economics or support could lead to cessation of operations.
- COVID-19-related customer collection weakness and higher bad debts continued. PSE&G recorded a $95 million regulatory asset for deferred incremental costs, including gas bad debt, but recovery is not assured. Shutoff restrictions and the winter moratorium were expected to delay a full return to collections through mid-March 2022.
- Material uncertainties include environmental remediation and litigation (including the Passaic River), regulatory outcomes, capacity-market and transmission rules, commodity prices and collateral requirements, fossil-sale approvals, and the LIPA dispute. PSEG had accrued $66 million for the Passaic River matter; additional costs could be material but were not estimable.
Investor Verification Priorities
- Track regulatory approvals, closing timing, final proceeds, and any further purchase-price or working-capital adjustments for the fossil-asset sale.
- Verify the realized cash and earnings effects of the October debt redemption, make-whole premium, and elevated collateral requirements.
- Assess the underlying earnings and cash-flow trend apart from fossil impairment charges and volatile derivative mark-to-market results.
- Monitor the implementation and revenue impact of the lower transmission ROE, and approval and recovery of planned utility investments.
- Review outcomes of nuclear ZEC appeals, environmental matters, and the LIPA term-sheet process, including any resulting financial exposure.