Public Service Enterprise Group Incorporated — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. PSEG is the holding company for regulated utility PSE&G and competitive energy supplier Power. Figures are in millions of dollars unless stated otherwise.
Financial performance
| Consolidated PSEG | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenues | $2,394 | $2,254 | $7,228 | $6,987 |
| Operating income | $554 | $693 | $1,797 | $1,066 |
| Net income | $412 | $395 | $1,239 | $618 |
| Diluted EPS | $0.81 | $0.78 | $2.44 | $1.22 |
| Operating margin | 23.1% | 30.7% | 24.9% | 15.3% |
Q3 revenue rose 6%, while operating income declined 20%; higher energy costs and operating expenses more than offset revenue growth. Net income increased 4%, supported in part by lower income taxes and trust investment gains. Nine-month net income nearly doubled year over year, with the comparison heavily affected by 2017 accelerated depreciation on retired Hudson and Mercer units.
- Segments: PSE&G earned $278 in Q3 and $828 for nine months, versus $246 and $753, respectively. Power earned $125 in Q3 versus $136; nine-month income was $400 versus a $131 loss.
- Cash flow: Nine-month operating cash flow was $2,492 versus $2,733. Capital additions were $3,028; cash dividends paid were $682. Cash, cash equivalents and restricted cash ended at $106, including $88 of cash and cash equivalents.
- Debt and liquidity: At September 30, long-term debt was $12,909, debt due within one year $1,450, and commercial paper and loans $419. Total available credit capacity was $3,638 of $4,300 in facilities; management said capacity exceeded projected maximum liquidity needs over the next 12 months.
- Dividends: $0.45 per share for Q3; the indicated annual rate was $1.80 per share. Nine-month dividends paid were $1.35 per share.
Material changes and unusual items
- The 2017 comparison includes $964 of accelerated depreciation for the June 2017 retirement of Hudson and Mercer generating units. No material related costs were recorded in 2018.
- Power’s non-trading mark-to-market activity reduced after-tax income by $96 in Q3 and $59 for the first nine months of 2018, compared with losses of $27 and zero, respectively, in 2017. These valuation changes are a significant source of earnings volatility.
- The 2018 effective tax rate benefited from the federal statutory rate reduction from 35% to 21%. An IRS audit settlement prompted a $28 remeasurement benefit in Q3; the settlement remained subject to Joint Committee on Taxation review. PSEG said unrecognized tax benefits could decrease by $50–$120 within 12 months.
- New accounting for equity investments moved unrealized gains and losses on trust-fund equity securities into earnings. PSEG reclassified $176 after tax from accumulated other comprehensive income to retained earnings at adoption.
Outlook, investment plans and principal risks
- PSEG expects to invest $12–$16 billion over five years, with expected annual rate-base growth of 8%–10%. PSE&G’s approved GSMP II is a five-year, $1.9 billion gas-system program beginning in 2019. Proposed ES II ($2.5 billion over five years) and Clean Energy Future ($3.6 billion over six years) programs remained subject to regulatory approval.
- In October 2018, the BPU approved a PSE&G distribution rate-case settlement effective November 1: $212 of base-revenue increases, offset by about $225 of tax-benefit returns, for a net annual revenue reduction of approximately $13. It also provided for a $28 customer refund. The approved rate base was $9.5 billion, with a 9.6% distribution ROE and 54% equity capitalization component.
- Management reported no formal earnings guidance in the provided filing text. It said operating cash flow, cash on hand and financing activities were expected to fund capital spending and dividends, and that planned capital needs could be funded without new equity issuance. Power had stopped accepting new retail-energy customers but planned to serve existing customers through contract expiry.
- Power’s Salem and Hope Creek nuclear economics depend partly on energy and capacity-market outcomes and whether the units are selected for New Jersey’s Zero Emissions Certificate program, expected to begin in April 2019. Management warned early retirement could entail material charges and costs. FERC’s capacity-market proceeding could also affect nuclear and fossil generation revenue.
- Environmental exposure includes the Passaic River matter: PSEG accrued $57, while the EPA’s selected remedy for the lower 8.3 miles was estimated at $2.3 billion in total; the company could not estimate its ultimate share or additional exposure. PSE&G recorded $343 for its broader MGP remediation program, with an estimated total range of $343–$388 through 2021.
- Other notable contingencies include the REMA Chapter 11 restructuring of leveraged-lease investments, for which PSEG entities expect $31.5 cash upon completion and face related tax consequences; the Passaic and Newark Bay proceedings; a $93 contractor claim concerning Sewaren 7, which Power said was not probable or estimable; and ongoing proceedings over a customer service disconnection. Outcomes of several matters could be material, and some losses cannot currently be estimated.
- Liquidity could be pressured by commodity-price movements and collateral requirements. A three-level downgrade of Power could trigger approximately $888 of additional collateral requirements as of September 30. Other risks include fuel and power price volatility, regulatory and environmental changes, construction execution, nuclear operations, and counterparty performance.
Most important facts for investors to verify
- How much of the nine-month earnings increase reflects recurring operations versus the 2017 retirement charge, tax effects, trust gains and mark-to-market changes.
- Progress on approval and recovery of costs for ES II and Clean Energy Future, and the expected returns and timing of the broader capital program.
- Eligibility and economics of Salem and Hope Creek under New Jersey’s ZEC program and the outcome of PJM/FERC capacity-market changes.
- Potential ultimate liability and rate recovery for Passaic River and other environmental matters, beyond amounts accrued.
- REMA restructuring completion, cash proceeds, lease exposure and resulting tax payments or reductions in tax losses.
- Cash generation, capital spending, upcoming maturities and collateral needs under commodity-price or credit-downgrade stress scenarios.