Business context and reporting period
Public Service Enterprise Group Incorporated (PSEG) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. PSEG’s principal businesses are regulated New Jersey utility PSE&G and competitive generation and energy supply business PSEG Power. Figures below are in millions of dollars unless otherwise noted.
Financial performance and position
| Consolidated PSEG | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenue | $2,302 | $2,394 | $7,598 | $7,228 |
| Operating income | $490 | $554 | $1,436 | $1,797 |
| Net income | $403 | $412 | $1,256 | $1,239 |
| Diluted EPS | $0.79 | $0.81 | $2.47 | $2.44 |
| Operating margin | 21.3% | 23.1% | 18.9% | 24.9% |
- Cash flow: Nine-month operating cash flow was $2,709, versus $2,492. Investing cash outflow was $2,359, including $2,383 of property, plant and equipment additions. Financing cash outflow was $393. Cash, cash equivalents and restricted cash ended at $156, compared with $199 at year-end 2018.
- Debt and liquidity: Long-term debt carrying value, including amounts due within one year, was $15,504 at September 30, compared with $14,462 at December 31, 2018. Available credit capacity was $3,649 of $4,200 in facilities; management said capacity exceeded projected maximum needs over its 12-month planning horizon. Cash and cash equivalents were $120. Current assets of $3,059 were below current liabilities of $4,067.
- Dividends: PSEG paid $1.41 per share during the first nine months, up from $1.35 a year earlier, and reported an indicative 2019 annual rate of $1.88 per share.
Material changes versus the prior comparable period
- Q3 revenue declined 4% and net income declined 2%; nine-month revenue rose 5% and net income rose 1%. The nine-month comparison includes a $402 pretax loss on the sale of Keystone and Conemaugh generation interests, completed in September; the disclosed after-tax loss was $286.
- PSE&G nine-month net income increased to $974 from $828, supported by rate-base investment and new distribution rates. Revenue and expense movements also reflected pass-through commodity costs and tax-benefit flowbacks to customers.
- PSEG Power nine-month net income fell to $309 from $400, including the plant-sale loss. Q3 Power earnings were $53 versus $125, reflecting lower generation volumes and prices, lower capacity revenue and weaker NDT investment results, partly offset by ZEC revenue and BH5 operations.
- PSEG adopted lease accounting in 2019, recording operating lease right-of-use assets and liabilities; management reported no material effect on operating results or cash flows.
Outlook, commentary, risks and unusual items
- Utility investment: PSE&G narrowed its five-year capital expenditure range to $12–$14.5 billion and forecast annual rate-base growth of 7.5%–8.5%. Its BPU-approved Energy Strong II program is $842 million; its five-year Gas System Modernization II program is $1.9 billion. A proposed six-year, estimated $3.5 billion Clean Energy Future program remained partly pending regulatory review.
- Generation and clean energy: Salem 1, Salem 2 and Hope Creek received New Jersey Zero Emission Certificates through May 2022, subject to program terms and potential adjustment. PSEG Power completed its 1,800 MW combined-cycle construction program with BH5 entering service in June 2019. PSEG announced a goal to cut fleet carbon emissions 80% by 2046 from 2005 levels and a vision of net-zero CO2 emissions by 2050, conditional on technology and policy advances.
- Market and nuclear risks: Pending FERC changes to PJM capacity-market rules could affect generation economics. ZEC awards were appealed; management warned that adverse capacity-market or environmental outcomes could contribute to nuclear plant retirements after the current ZEC term and materially affect results.
- Environmental and legal contingencies: PSE&G’s estimated MGP remediation costs were $364–$407 through 2023; it accrued $364, with a corresponding regulatory asset. Separately, PSEG accrued $65 for the Lower Passaic River matter; additional costs could be material, but the ultimate exposure was not estimable. Other proceedings include the Jersey City cable-fluid matter, regulatory investigations and contractor litigation.
- Other unusual items: Energy Holdings recorded a $58 pretax write-down in Q2 on the Powerton leveraged-lease investment following a reduced residual-value estimate. PSEG Power’s California solar assets face uncertainty from PG&E’s bankruptcy. In October, PSEG entered exclusive negotiations on a potential 25% interest in New Jersey’s Ocean Wind project; completion remained subject to due diligence, agreement and approvals.
- Management reported effective disclosure controls and no material change in internal control during the quarter. It stated there were no material changes to the previously disclosed risk factors. The filing does not provide a clear numerical earnings forecast for 2019.
Important facts for investors to verify
- How much of reported earnings and cash flow depends on volatile mark-to-market and nuclear trust investment results, and how the $402 plant-sale loss affects comparisons.
- Progress and regulatory recovery for PSE&G’s capital programs, including pending Clean Energy Future elements and the expected rate-base growth.
- Developments in PJM capacity-market rules, ZEC appeals and the economics and operating outlook for the nuclear fleet after May 2022.
- Environmental and litigation exposure, especially the Passaic River and MGP matters, where final remedies, cost allocations or recoveries remain uncertain.
- Liquidity sensitivity to commodity-price movements and credit downgrades: the filing cites potential additional collateral needs of $872 under a specified downgrade scenario.