Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this combined, unaudited Form 10-Q for the quarter ended June 30, 2018. PSEG is a holding company whose principal businesses are regulated New Jersey electric and gas utility PSE&G and competitive generation and energy supply company PSEG Power (Power). Results below are consolidated PSEG figures unless a subsidiary is identified; dollar amounts are in millions except per-share data.
Financial performance
| Metric | Three months ended June 30, 2018 | 2017 comparable | Six months ended June 30, 2018 | 2017 comparable |
|---|---|---|---|---|
| Operating revenue | $2,016 | $2,142 | $4,834 | $4,733 |
| Operating income | $411 | $195 | $1,243 | $373 |
| Net income | $269 | $109 | $827 | $223 |
| Diluted EPS | $0.53 | $0.22 | $1.63 | $0.44 |
| Operating margin (calculated) | 20.4% | 9.1% | 25.7% | 7.9% |
| Net margin (calculated) | 13.3% | 5.1% | 17.1% | 4.7% |
Quarter revenue fell 6%, while six-month revenue rose 2%. Net income increased by $160 million for the quarter and $604 million for the half year. Comparisons are substantially affected by 2017 accelerated depreciation following retirement of the Hudson and Mercer generating units: Power recorded $390 million in the 2017 second quarter and $964 million in the first half. Other contributors included the lower federal tax rate and PSE&G infrastructure-related earnings; Power’s lower wholesale energy sales and unfavorable second-quarter mark-to-market results partly offset these gains.
By segment, PSE&G reported net income of $231 million for the quarter and $550 million for the half year, compared with $208 million and $507 million. Power reported $41 million and $275 million, versus a $97 million loss and a $267 million loss. Power’s 2017 results included the large retirement-related depreciation charges.
Cash flow, balance sheet and liquidity
- Operating cash flow was $1.633 billion in the first half, down from $1.755 billion in 2017. Capital expenditures were $2.005 billion, yielding calculated operating cash flow less capital expenditures of negative $372 million. Investing cash flow was negative $2.027 billion; financing cash flow was positive $190 million.
- Cash and cash equivalents were $95 million at June 30, 2018, compared with $313 million at year-end 2017. PSEG paid $455 million in common dividends during the half year.
- At June 30, PSEG reported $12.510 billion of long-term debt, $1.550 billion of long-term debt due within one year and $270 million of commercial paper and loans. Total available credit capacity was $3.699 billion of $4.200 billion in facilities; management said capacity exceeded anticipated maximum liquidity needs over its 12-month planning horizon.
- Total assets were $43.707 billion and stockholders’ equity was $14.158 billion at June 30, compared with $42.716 billion and $13.847 billion, respectively, at December 31, 2017.
Material changes, outlook and management commentary
- Management expects $12 billion to $15.5 billion of investment over five years and annual rate-base growth of 8%–10%. PSE&G expects to complete ESP I and GSMP I in 2018; the approved GSMP II is a five-year, $1.9 billion program beginning in 2019. PSE&G filed a proposed five-year, $2.5 billion ESP II and expects to file a six-year, estimated $2.9 billion Clean Energy Future program. These proposals are subject to regulatory approval.
- PSE&G’s updated distribution rate case requests an approximately 3% revenue increase, with new base rates anticipated in the fourth quarter of 2018. Tax-related interim rate reductions effective April 1 lowered annual electric and gas revenues by $71 million and $43 million, respectively. A June gas-supply filing requested a $26 million annual revenue decrease.
- Management said it expects to fund planned capital requirements without issuing equity and indicated an annual 2018 dividend rate of $1.80 per share. The board declared a $0.45 per-share third-quarter dividend. The filing does not provide a specific full-year earnings or EPS forecast.
- Power’s New Jersey Salem and Hope Creek nuclear economics remain exposed to market prices, capacity-market changes and whether the plants qualify for sufficient support under the state’s new zero-emissions certificate (ZEC) program. Potential early retirement could result in material accelerated depreciation, asset-retirement, severance, remediation and trust-funding costs. Salem and Hope Creek had net assets of $667 million and $773 million, respectively, at June 30.
- Energy Holdings recorded a $20 million pretax second-quarter charge for leveraged lease exposure to REMA. Its net investment in leases was $52 million at June 30, and management said further write-downs or accelerated tax payments could occur depending on REMA/GenOn developments.
- Environmental exposure includes a $57 million accrual for the Passaic River matter; further costs may be material but could not be estimated. PSE&G also recorded $332 million for its MGP remediation program, within an estimated undiscounted range of $332 million to $378 million through 2021, with a corresponding regulatory asset.
- A contractor sued over the Sewaren 7 project seeking $93 million; Power said loss was not considered probable and could not be estimated. PSE&G also faces regulatory and law-enforcement investigations concerning a customer service disconnection in July 2018; the outcome is not predictable.
- Accounting changes effective in 2018 moved unrealized gains and losses on trust-fund equity securities into net income. The related transition adjustment reclassified $176 million, net of tax, from accumulated other comprehensive income to retained earnings; it was not a current-period operating gain. Adoption of new lease accounting in 2019 is expected to materially affect PSEG and PSE&G balance sheets, but the impact had not been quantified.
Most important facts for investors to verify
- Whether PSE&G receives timely approval and recovery for its rate cases and major infrastructure and clean-energy programs.
- Whether New Jersey’s ZEC program and PJM/FERC capacity-market decisions support continued economic operation of Salem and Hope Creek.
- Developments in REMA/GenOn and the potential effect on lease recoveries, impairments and tax obligations.
- Progress and ultimate cost allocation for Passaic River and other environmental matters, including whether recoveries through rates are allowed.
- Execution of the planned capital program, debt maturities, liquidity needs and ability to sustain the indicated dividend.
- The amount and balance-sheet effects of lease-accounting adoption, and the effects of tax-law changes on utility rates and non-utility earnings.