Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this combined Form 10-K for the fiscal year ended December 31, 2014. PSEG operates regulated electric and gas transmission and distribution utility PSE&G, wholesale generation and energy-supply business PSEG Power, and other businesses including its Long Island Power Authority (LIPA) management contract. Unless stated otherwise, amounts below are consolidated and in millions of dollars.
Financial results and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $10,886 | $9,968 | +9% |
| Operating income | $2,623 | $2,299 | +14% |
| Net income | $1,518 | $1,243 | +22% |
| Diluted earnings per share | $2.99 | $2.45 | +22% |
| Cash provided by operating activities | $3,160 | $3,158 | Approximately unchanged |
| Capital expenditures (property, plant and equipment) | $2,820 | $2,811 | +$9 |
- Operating margin was approximately 24.1%, versus 23.1% in 2013; net margin was approximately 13.9%, versus 12.5%.
- Segment net income: PSE&G $725 (up from $612); Power $760 (up from $644); Other $33, compared with a $13 loss.
- Cash and cash equivalents were $402 at year-end, down from $493. Total assets were $35.3 billion and total stockholders’ equity was $12.2 billion.
- Debt carrying value was approximately $9.1 billion, including current maturities and securitization debt, compared with approximately $8.6 billion in 2013. PSEG reported $4.081 billion of available liquidity under $4.3 billion of credit facilities and said it was in compliance with debt covenants.
- Annual common dividends declared were $1.48 per share, up from $1.44. The board approved a first-quarter 2015 dividend of $0.39 per share, an indicated annual rate of $1.56.
- 2014 consolidated operating revenue includes $389 million of LIPA Servco pass-through costs, fully reimbursed and reflected in operating expenses; these amounts do not represent equivalent margin growth.
Material changes versus the prior comparable period
- Net income rose $275 million. Management attributed the increase primarily to higher PSE&G transmission revenue, Power’s mark-to-market gains versus losses in 2013, greater gas sales volumes, and lower pension and postretirement benefit costs.
- These benefits were partly offset by fewer electricity volumes under Power’s Basic Generation Service contracts and higher generation fuel costs. Lower wholesale gas prices also remained a headwind to Power’s longer-term generation margins.
- PSE&G’s operating cash flow increased to $1.833 billion from $1.645 billion, while Power’s increased to $1.425 billion from $1.347 billion. Consolidated operating cash flow was essentially flat; changes in taxes, regulatory deferrals, and working capital affected the comparison.
- Power’s Salem Unit 2 refueling outage extended from April to July 2014 for reactor coolant pump repairs. The company also reported approximately 54,000 GWh of generation for the year.
- For the fourth quarter, consolidated net income was $476 million versus $200 million in the fourth quarter of 2013; diluted EPS was $0.94 versus $0.39.
Outlook, commentary, risks and unusual items
- No specific 2015 earnings or EPS guidance is provided in the supplied filing text. Management expects to fund investment through internally generated cash and external debt financing, and forecasts capital expenditures of $3.22 billion in 2015, $2.90 billion in 2016 and $2.58 billion in 2017.
- Major planned investment includes PSE&G transmission and distribution reliability work and the BPU-approved $1.22 billion Energy Strong program. PSE&G’s 2015 transmission formula-rate update took effect January 1, 2015; the filed annual revenue increase was approximately $182 million, subject to a stated estimated $21 million reduction from bonus-depreciation effects.
- Management highlighted uncertainty around wholesale energy and capacity market rules, environmental regulation, persistently low gas and electricity prices, customer conservation and technology changes, construction permitting and project execution, and successful operation of the LIPA system.
- Power recorded a $25 million charge in 2014 related to errors in certain PJM fossil-unit bids. A nonpublic FERC staff investigation remains ongoing and could lead to repayment of over-collections, penalties or other remedies; the ultimate exposure is not estimable from the filing.
- PSE&G recorded a $434 million MGP remediation liability, with estimated total remediation costs of $434 million to $505 million, and an offsetting regulatory asset. Passaic River cleanup liability remains uncertain; the EPA’s preferred remedy estimate for the lower eight miles was $1.7 billion, but PSEG could not determine its ultimate share.
- Superstorm Sandy property-damage recovery remains contested. PSEG notified insurers of an estimated $564 million in facility damage costs; the insurance litigation outcome and timing of any recovery are uncertain.
- Cooling-water permit decisions could require costly upgrades at generation facilities. The filing cites a historical estimate of approximately $575 million for Power’s share of cooling towers at Salem, but states that the estimate has not been updated and no final requirement or cost is established.
- Other notable items: the DOE’s suspension of the nuclear waste fee was expected to provide an annualized pretax benefit of about $30 million; a 2014 restructuring of nuclear decommissioning trust investments contributed to realized gains; and a $14 million impairment was recorded on two commercial real estate properties.
- Deloitte issued unqualified opinions on the consolidated financial statements and PSEG’s internal control over financial reporting. Management reported effective controls and no material weaknesses.
Most important facts for investors to verify
- How much of the 2014 earnings increase reflects recurring utility investment returns and sustainable Power performance versus mark-to-market gains, trust-fund gains, weather-driven gas sales and benefit-cost changes.
- Whether actual 2015 capital spending, transmission cost recovery and Energy Strong recovery align with the stated plans, and how the investment program is financed.
- The outcome and financial consequences of the FERC investigation into Power’s market bids, including any additional liability beyond the $25 million charge.
- Developments in Passaic River and MGP remediation, Sandy insurance recovery, and cooling-water permitting that could alter liabilities, costs or generating-asset economics.
- Power’s exposure to lower wholesale energy prices, market-design changes, generation outages and possible collateral calls; the filing estimates $945 million of additional collateral could be required if Power lost investment-grade ratings.
- The sustainability of cash flow, debt levels and dividend growth given substantial planned investment, pension and postretirement obligations, and the company’s dependence on continued access to credit markets.