Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited Form 10-Q for the quarter ended March 31, 2021. PSEG’s principal businesses are regulated electric and gas utility PSE&G and competitive generation and energy supply company PSEG Power. Figures are in millions of dollars unless otherwise stated; comparisons are with the first quarter of 2020.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Operating revenue | $2,889 | $2,781 |
| Operating income | $741 | $797 |
| Net income | $648 | $448 |
| Diluted earnings per share | $1.28 | $0.88 |
| Operating cash flow | $1,027 | $1,153 |
| Capital expenditures | $633 | $720 |
- Revenue rose 4%, while operating income fell 7%. Operating margin was approximately 25.6%, versus 28.7% a year earlier; net margin was approximately 22.4%, versus 16.1% (calculated from reported figures).
- Net income increased 45%, chiefly reflecting improved Nuclear Decommissioning Trust (NDT) investment results: after-tax NDT income was $32 million, versus a $135 million expense in Q1 2020. Higher PSE&G earnings and other factors also contributed; Power’s mark-to-market results were a partial offset.
- PSE&G revenue was $2,073 million and net income $477 million, versus $1,883 million and $440 million. PSEG Power revenue was $1,167 million and net income $161 million, versus $1,220 million and $13 million.
- Operating cash flow declined 11%. PSE&G cash flow was $518 million, down from $635 million, primarily due to higher receivables and pandemic-related collection pressure. PSEG Power generated $475 million, versus $484 million.
- At March 31, PSEG reported cash and cash equivalents of $803 million and total assets of $50.2 billion. Long-term debt was $15.35 billion, with $1.43 billion due within one year and $665 million of commercial paper and loans. Total available credit facilities were $3.86 billion of $4.2 billion.
- Quarter-end shareholders’ equity was $16.28 billion, up from $15.98 billion at year-end 2020. PSEG paid $258 million in common dividends, or $0.51 per share.
Material changes and business developments
- PSE&G’s revenue increased on higher delivery and commodity revenues; higher transmission investment contributed to delivery growth. Commodity revenue changes were offset by energy costs, and PSE&G does not earn a margin on BGS and BGSS supply.
- PSEG Power revenue declined 4%. Higher realized power prices and volumes in certain regions were offset by mark-to-market losses, lower electricity sales in some markets, and other items. Its net income improvement largely reflects the year-over-year reversal in NDT investment performance, not an equivalent change in recurring operating results.
- PSE&G issued $900 million of secured notes during the quarter, including $450 million of 0.95% notes due 2026 and $450 million of 3.00% notes due 2051, and retired $300 million of notes at maturity.
- The BPU approved PSEG’s 25% investment in the Ocean Wind offshore wind project on March 31; the acquisition closed in April 2021. In May, PSEG Power agreed to sell its Solar Source portfolio for a transaction expected to close in Q2 or Q3 2021, subject to approvals and other conditions.
- PSEG continued exploring strategic alternatives for more than 6,750 MW of fossil generation. No impairment was recorded at quarter-end, but management said a change in sale prospects or held-for-sale classification could cause material impairment charges.
Outlook, risks and contingencies
- PSE&G expects to invest $13–$15 billion over the five years through 2025, implying expected annual rate-base growth of 6.5%–8%. The range includes programs or extensions not fully approved. Planned transmission capital spending for 2021–2023 is $2.5 billion.
- Management said operating cash flow, cash on hand and financing activities are expected to fund planned capital spending and dividends; it expects to meet capital requirements without issuing new equity. The 2021 indicative annual dividend rate is $2.04 per share, subject to board approval.
- PSEG Power’s Salem 1, Salem 2 and Hope Creek nuclear plants received new three-year Zero Emission Certificate awards beginning June 2022, at approximately $10/MWh. The awards remain subject to potential adjustment and legal challenge. Management warned that adverse changes to support, market conditions or regulation could lead to plant closures with material adverse effects.
- COVID-19 continued to pressure PSE&G collections and increase customer receivables and bad-debt expense. A $60 million regulatory asset was recorded for incremental pandemic costs that PSE&G expects are probable of recovery. The residential service-disconnection moratorium was extended through June 30, 2021.
- Material uncertainties include the strategic review and potential disposition of fossil assets, energy-market and regulatory changes, possible additional collateral needs if PSEG Power’s credit rating falls below investment grade, and environmental, regulatory and litigation matters. PSEG had accrued $65 million for the Lower Passaic River matter; additional costs could be material but could not then be estimated. LIPA’s lawsuit concerning Tropical Storm Isaias seeks $70 million and specific performance; termination of the service contract or an adverse outcome could materially affect PSEG.
- PSEG identified FERC transmission incentives and return-on-equity proceedings as potential earnings risks. Management estimated that eliminating the RTO membership adder could reduce annual PSE&G net income and cash inflows by about $30 million; each 25-basis-point reduction in base transmission ROE could reduce them by about $15 million, all else equal.
Important facts for investors to verify
- How much of the earnings increase is sustainable after excluding NDT investment gains and mark-to-market volatility?
- Whether pandemic-related customer arrears, bad debt and cash collection trends improve, and whether deferred costs receive regulatory recovery.
- Whether PSEG completes the Solar Source sale and reaches favorable terms for any fossil-generation divestiture, including potential debt covenant, redemption or impairment consequences.
- Whether PSE&G’s proposed investment plans, rate-base growth and transmission returns are approved and deliver expected recovery.
- Developments in ZEC litigation and nuclear economics, environmental liabilities, and the LIPA/Isaias proceedings.
- Whether available liquidity remains sufficient under commodity-price stress or a PSEG Power credit downgrade, and how upcoming debt maturities are funded.