PUBLIC SERVICE ENTERPRISE GROUP INC annual report, FY2017

Business context and reporting period

Public Service Enterprise Group Incorporated (PSEG) filed this combined Form 10-K for the fiscal year ended December 31, 2017, covering PSEG and its wholly owned operating subsidiaries, regulated utility PSE&G and merchant generator and marketer PSEG Power. PSE&G principally transmits electricity and distributes electricity and gas in New Jersey; Power operates generation and energy supply businesses primarily in the Northeast and Mid-Atlantic. The filing also reports 2017 fourth-quarter results.

Financial performance and position

Unless otherwise noted, amounts are in millions of dollars.

Net income included a $745 million noncash benefit, primarily from remeasuring deferred taxes after the Tax Act. It also included $577 million of after-tax charges related to early retirement of the Hudson and Mercer generating units. The filing does not provide a single consolidated margin measure.

Segment net income was $973 million for PSE&G, $479 million for Power and $122 million for Other. PSE&G’s earnings rose from $889 million, helped by higher transmission revenue; Power’s rose from $18 million, largely reflecting tax effects and lower outage costs, despite lower realized power prices and retirement charges.

For the fourth quarter, PSEG reported revenue of $2,096 million and net income of $956 million, versus $2,090 million and a $98 million net loss in the prior-year quarter. Management attributed the earnings comparison in part to the Tax Act benefit and higher 2016 costs associated with closing Hudson and Mercer.

Debt, liquidity and capital

At December 31, 2017, PSEG reported $12,068 million of long-term debt and $1,000 million due within one year; commercial paper and loans were $542 million. Available liquidity under credit facilities was $3,478 million, against $4,200 million of total facilities. Management said facility capacity exceeded estimated maximum liquidity needs over its 12-month planning horizon. Operating cash flow was below capital expenditures; the company also paid $870 million in common dividends during 2017.

Planned capital expenditures for 2018–2020 total $8,020 million, including $6,830 million at PSE&G and $1,100 million at Power. PSEG said it expected to fund planned capital needs through internally generated cash and external debt financing, without issuing new equity. The Board approved a first-quarter 2018 dividend of $0.45 per share, an indicative annual rate of $1.80.

Material changes, outlook and risks

• Tax Act: The federal corporate tax rate fell from 35% to 21% effective January 1, 2018. PSE&G recorded approximately $2.9 billion of regulatory liabilities for excess deferred taxes expected to benefit customers; refund timing and amounts remain subject to regulatory decisions. The company described parts of its tax accounting as provisional.
• Utility investment and rates: PSE&G filed a distribution rate case requesting an approximately 1% revenue increase, with new rates anticipated in the fourth quarter of 2018. Its proposed $2.7 billion, five-year GSMP II gas modernization program was pending BPU approval.
• Generation and market exposure: Hudson and Mercer retired in June 2017, after substantial accelerated depreciation. Management warned that continued low wholesale prices and insufficient policy support could prompt early retirement of the Salem and Hope Creek nuclear units, with potentially material costs. Power had contracted to sell 100% of anticipated base-load output for 2018, 95%–100% for 2019 and 50%–55% for 2020.
• Regulatory and legal contingencies: FERC’s preliminary investigation into Power’s PJM bidding practices continued. Power estimated possible disgorgement and interest of $35 million–$135 million for one bidding issue, plus potential penalties; exposure for a separate issue was not estimable and could be material. For Passaic River remediation, PSEG accrued $57 million, while the selected EPA remedy is estimated at $2.3 billion overall; PSEG could not estimate any additional company exposure.
• Other risks: Power’s leveraged lease exposure is affected by financially weak counterparties, including REMA; further write-downs are possible. The filing also highlights commodity-price and fuel-supply volatility, nuclear operating and decommissioning obligations, environmental compliance, severe weather, cybersecurity, regulatory recovery, and access to liquidity. PSE&G disclosed a potential customer-data exposure associated with a third-party payment processor; the impact was still under review.

Important facts for investors to verify

• How much of 2017 net income and EPS growth reflects the one-time $745 million tax benefit, and what recurring earnings imply after excluding it.
• Progress and final rate treatment for PSE&G’s base-rate filing, tax-related customer refunds, transmission rates and proposed GSMP II investment.
• Resolution and potential financial impact of the FERC PJM bidding investigation, including any penalties beyond the recorded accrual.
• Whether low power prices or policy changes lead to nuclear or remaining coal-unit retirements, and the associated impairment, decommissioning and remediation costs.
• Developments in REMA and related leveraged leases, Passaic River remediation, and the third-party payment-system data incident.