Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this combined Form 10-Q for the three months ended March 31, 2020. PSEG’s principal businesses are regulated utility PSE&G and merchant energy supplier PSEG Power. Unless noted, amounts below are consolidated and in millions of dollars.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenue | $2,781 | $2,980; down 7% |
| Operating income | $797 | $786 |
| Net income | $448 | $700; down 36% |
| Diluted EPS | $0.88 | $1.38 |
| Operating cash flow | $1,153 | $1,218 |
| Capital additions to property, plant and equipment | $720 | $795 |
| Cash and cash equivalents at March 31 | $799 | $147 at December 31, 2019 |
| Long-term debt, including current maturities | $15,705 | $15,108 at December 31, 2019 |
| Available credit facility liquidity | $3,223 | At March 31, 2020; $4,200 total facilities |
Operating margin was approximately 28.7%, compared with 26.4% a year earlier; net margin was approximately 16.1%, compared with 23.5%. PSEG paid $248 million in common dividends, or $0.49 per share, versus $238 million and $0.47 per share a year earlier.
Results diverged by business: PSE&G net income rose to $440 million from $403 million, while PSEG Power net income fell to $13 million from $296 million. PSE&G operating cash flow was $635 million, up from $520 million; PSEG Power’s was $484 million, down from $726 million.
Material changes and notable items
- Consolidated net income fell primarily because the nuclear decommissioning trust (NDT) recorded $221 million in net investment losses, compared with $128 million in gains a year earlier. Management reported the after-tax NDT impact as a $135 million expense in 2020 versus $76 million of income in 2019.
- PSEG Power also faced lower wholesale prices and volumes, reduced capacity revenue, and a $20 million lower-of-cost-or-market adjustment to fuel oil inventory. These were partly offset by new ZEC revenue and higher mark-to-market gains.
- PSE&G benefited from higher transmission revenue and utility investment returns. Lower commodity revenue and associated energy costs largely offset each other.
- PSE&G issued $600 million of secured medium-term notes during the quarter. PSEG had $762 million of commercial paper outstanding. Credit facilities had $3.223 billion available; the filing states facility capacity exceeded projected maximum liquidity needs over its 12-month planning horizon.
Outlook, risks and contingencies
- The filing gives no specific consolidated earnings or EPS guidance. Management expects operating cash flow, cash on hand and financing to fund capital spending and dividends; it expects capital requirements over the next three years to be funded through internal funds and external debt.
- PSE&G expects to invest $11.5 billion to $15 billion over 2020–2024, implying annual rate-base growth of 6.5%–8%. These plans include programs still requiring regulatory approval. Planned transmission spending for 2020–2022 is $2.8 billion.
- Management said COVID-19 had not materially affected first-quarter results, financial condition or cash flows, but could not estimate the potential future impact. Risks include weaker demand, customer payment delays and bad debt, project or regulatory delays, workforce and supply interruptions, and market-access or liquidity pressures. Non-safety-related service disconnections for nonpayment were temporarily suspended.
- PSEG declared a second-quarter dividend of $0.49 per share, consistent with an indicated annual rate of $1.96. Future dividends remain at board discretion.
- Salem 1, Salem 2 and Hope Creek currently receive ZEC support through May 2022. If the program is materially changed or the plants do not receive future awards, PSEG Power says it may take steps to retire them; related costs and charges could be material. FERC capacity-market rules, including the expanded MOPR, and pending state and federal actions create uncertainty.
- PSEG accrued approximately $65 million for the Passaic River matter; the EPA’s remedy for the lower river is estimated at $2.3 billion, but PSEG’s ultimate share is unresolved and additional costs could be material. PSE&G also recorded a $352 million liability and regulatory asset for its MGP remediation program, within an estimated total cost range of $352 million–$395 million through 2023.
- Other items to monitor include the pending sale of Yards Creek, expected to close in the second half of 2020 subject to approvals; FERC’s investigation concerning a PSE&G transmission project; and the Sewaren 7 contractor litigation, in which the contractor seeks $93 million.
Important facts for investors to verify
- Whether the sharp year-over-year NDT investment swing is temporary and how market performance affects future earnings and decommissioning funding.
- Progress and regulatory approval of PSE&G’s planned investment programs, and whether anticipated rate-base growth and cost recovery are achieved.
- COVID-19 effects on utility customer collections, bad-debt expense, energy demand, project execution and liquidity beyond the first quarter.
- Future ZEC eligibility and payment levels, and the effect of PJM capacity-market decisions on PSEG Power’s nuclear and generation economics.
- Potential additional environmental liabilities, including the Passaic River allocation and remediation scope, beyond amounts accrued.