Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited combined Form 10-Q for the quarter ended March 31, 2017. Its principal businesses are regulated electric and gas transmission and distribution through PSE&G, and competitive generation and energy marketing through PSEG Power. Amounts below are in millions of dollars except per-share data.
Financial results and position
- Consolidated results: Revenue was $2,592, down 1% from $2,616. Operating income was $178 versus $827, and net income was $114 versus $471. Diluted EPS was $0.22 versus $0.93. The sharp earnings decline primarily reflects accelerated depreciation from the planned Hudson and Mercer plant retirements.
- Segments: PSE&G revenue increased to $1,812 from $1,712 and net income rose to $299 from $262. Power revenue declined to $1,284 from $1,313; it recorded a $170 net loss versus $192 net income a year earlier, largely due to retirement-related depreciation.
- Cash flow and investment: Operating cash flow was $1,196 versus $1,214. Capital expenditures were $1,062, leaving approximately $134 of operating cash flow after those expenditures. Cash dividends paid were $218. Cash and cash equivalents fell to $193 from $423 at year-end.
- Debt and liquidity: Long-term debt was $10,898, with $500 due within one year and $315 of commercial paper and loans outstanding. PSEG reported $4,200 of credit facilities, of which $3,619 was available. Current assets of $2,716 were below current liabilities of $3,111.
- Shareholder returns: The quarterly dividend was $0.43 per share, up from $0.41 a year earlier; the board approved the same dividend for Q2. Management indicated an annualized 2017 dividend rate of $1.72 per share.
Material changes versus the prior comparable period
- Power recorded $574 of depreciation and amortization in Q1, including $558 of incremental accelerated depreciation associated with Hudson and Mercer. Power expects another $389 of total depreciation for those units in 2017. The units were scheduled to cease generation on June 1, 2017.
- Energy Holdings recorded an additional $55 pre-tax charge on leveraged lease investments tied to NRG REMA amid continuing liquidity and coal-market concerns.
- PSE&G earnings improved, supported by higher transmission and gas distribution revenues, including recovery through approved programs. PSE&G’s operating cash flow nevertheless declined year over year, primarily due to lower tax refunds.
- Consolidated operating cash flow was nearly flat year over year, while net income fell substantially. Management attributed the earnings decline principally to plant-retirement depreciation, lower realized energy sales prices, and the leveraged-lease charge.
Outlook, risks and contingencies
- Investment and outlook: Management expects operating cash flow, cash on hand and financing to fund capital spending and dividends, and expects planned capital requirements to be met without issuing new equity. It continued construction of Keys Energy Center and Sewaren 7, targeted for 2018 operation, and Bridgeport Harbor 5, targeted for mid-2019. No specific earnings guidance was provided in the supplied filing text.
- Regulatory recovery: PSE&G filed for recovery of Energy Strong costs, requesting annual revenue-requirement increases of approximately $22 for electric and $3 for gas, with rates sought from September 2017. It also expected to file a distribution base-rate case by November 1, 2017. Outcomes remain uncertain.
- Environmental exposure: PSE&G recorded a $386 liability for remediation of former manufactured gas plant sites, including its Passaic River share, and an equal regulatory asset. The filing describes a possible broader Passaic River cleanup cost of $2.3 billion and says additional PSEG costs beyond accrued amounts could be material, but cannot currently be estimated. A separate Jersey City cable-fluid discharge response was ongoing; costs were expected likely to be material, with allocation and ultimate amount unclear.
- Regulatory and legal matters: Power’s FERC PJM bidding investigation could result in estimated disgorgement and interest of $35–$135, plus penalties; the company accrued the $35 low end, while other potential losses could not be estimated and may be material. PSEG also reported a new FERC inquiry into financial transmission-rights auction activity.
- Market and operating risks: Continued low wholesale power and gas prices, environmental compliance costs, fuel and pipeline constraints, and changing capacity-market rules could affect generation economics. Further early retirement or impairment of coal or nuclear assets could materially harm results. Management also noted possible additional leveraged-lease write-downs if GenOn/REMA’s financial condition worsens.
- Other notable developments: Westinghouse, a nuclear-fuel fabrication provider for Salem Units 1 and 2, filed for Chapter 11; failure to provide services could disrupt fuel supply. A Salem 2 refueling outage and baffle-bolt work was expected to run longer than usual in Q2, reducing production. The EPA was reconsidering and expected to stay certain steam-electric effluent-rule compliance dates; the ultimate requirements and financial impact were uncertain.
Most important facts for investors to verify
- Whether the anticipated Hudson and Mercer shutdowns and remaining 2017 depreciation estimates match subsequent reporting, and whether any additional retirement or remediation costs arise.
- Developments in the FERC PJM bidding investigation, including penalties or exposure above the $35 accrued amount, and the separate FTR inquiry.
- Changes in GenOn/REMA credit condition, lease collections, and any additional leveraged-lease impairment or cash-tax consequences.
- Final PSE&G rate-case and program-recovery decisions, and the pace and returns of planned utility and generation investments.
- Updated estimates and responsibility allocations for Passaic River, manufactured-gas-plant and Jersey City cable remediation exposures.
- Liquidity and funding needs, including credit-facility availability, potential collateral calls after a downgrade, and coverage of capital spending and dividends.