Public Service Enterprise Group Incorporated (PSEG) — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The combined filing covers PSEG and its wholly owned subsidiaries Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (Power). Amounts are in millions of dollars, except per-share data.
Business context
PSE&G is a regulated New Jersey electric transmission and distribution and natural-gas distribution utility. Power is a wholesale energy supplier and generator. PSEG also has smaller businesses, including its LIPA system operations contract and lease investments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $2,314 | $2,249 | $5,449 | $5,472 |
| Operating income | $568 | $365 | $1,616 | $1,070 |
| Net income | $345 | $212 | $931 | $598 |
| Diluted EPS | $0.68 | $0.42 | $1.83 | $1.18 |
| Dividends per share | $0.39 | $0.37 | $0.78 | $0.74 |
Operating margin, calculated as operating income divided by revenue, was approximately 24.5% in Q2 2015 versus 16.2% in Q2 2014, and 29.7% versus 19.6% for the first half. PSEG attributed higher earnings principally to favorable non-trading mark-to-market results versus losses in 2014, lower fuel costs, increased transmission investment and Sandy insurance recoveries.
- Segments: Q2 earnings were $167 at PSE&G and $166 at Power; first-half earnings were $409 and $501, respectively. Power’s results included after-tax Sandy insurance recoveries of $27 in Q2 and $102 in the first half.
- Cash flow: First-half operating cash flow was $2,234, up from $1,448. Capital spending was $1,743 versus $1,229; investing cash flow was negative $1,773. Financing cash flow was negative $266, including $394 of common dividends paid.
- Liquidity: Cash was $597 at June 30, 2015, compared with $402 at year-end 2014. PSEG reported $4,080 of available liquidity under $4,300 of credit facilities; facilities were described as exceeding anticipated maximum liquidity needs.
- Debt and capital: Long-term debt was $8,689, with $491 due within one year and $134 of VIE securitization debt due within one year. Total capitalization was $21,397. PSE&G issued $600 of secured notes and redeemed $300 of notes during the first half; PSEG reported investment-grade ratings.
Material changes and management commentary
- First-half net income rose $333 year over year while revenue was nearly flat. Power earnings more than doubled, from $218 to $501; PSE&G earnings increased from $365 to $409.
- First-half Power operating results benefited from lower fuel and gas costs and more favorable mark-to-market results. Results also included substantial Sandy insurance recoveries, making reported earnings less indicative of recurring performance.
- PSE&G’s transmission revenue increased with rate-base investment; its annual transmission revenue formula rate rose approximately $182 effective January 1, 2015, with a 2015 true-up expected to reduce the increase by about $21.
- Management reported a 91% average nuclear fleet capacity factor for the first half and said transmission construction was on schedule and within budget. It expects to fund planned projects and dividends through operating cash and financing, without issuing new equity.
- The board approved a Q3 dividend of $0.39 per share, implying an indicated annual rate of $1.56. Future dividends remain subject to board discretion.
Outlook, investment plans and risks
- No specific full-year earnings guidance is provided in the supplied filing text. Management emphasized cost control, reliable operations, execution of its investment program, and management of open energy supply positions.
- PSE&G’s approved Energy Strong program provides for $1.22 billion of investment. Its proposed Gas System Modernization Program would invest approximately $1.6 billion over five years and was pending BPU approval. Power acquired the Keys Energy Center development project, a 755 MW gas-fired plant expected to cost $825–$875 million and be completed in 2018.
- Regulatory and market uncertainty includes PJM capacity-market changes, demand-response litigation, transmission competition under FERC Order 1000, and environmental rules. The Salem draft water permit did not require cooling towers, but final permitting remained pending; cooling-system requirements at other facilities could entail material costs.
- Environmental and legal exposures: PSE&G recorded a $445 million liability and matching regulatory asset for MGP remediation, with estimated total costs of $445–$517 million through 2021. Passaic River cleanup costs remain uncertain; additional costs beyond recorded accruals could be material, but the company could not estimate them. Other matters include the FERC investigation of Power’s bidding practices, the Keystone air-permit proceeding, and potential wastewater-permit compliance issues at Bridgeport Harbor.
- Market and credit risks: Commodity-price changes can affect earnings, collateral and liquidity. Power’s current exposure under guarantees was $196 million; additional collateral that could be required if Power lost investment-grade status was $907 million, compared with $3,494 million of liquidity available under PSEG and Power credit facilities. Counterparty failure, reduced power prices, lower demand, construction delays and adverse regulatory outcomes are also risks.
- Superstorm Sandy insurance claims were fully resolved after $214 million of additional proceeds were recognized in the first half of 2015. The recovery is a notable nonrecurring item.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operating improvement versus mark-to-market movements and Sandy insurance recoveries.
- Whether PSE&G receives timely recovery of Energy Strong, gas modernization and other infrastructure spending, including the pending rate and regulatory filings.
- The eventual allocation and cost of Passaic River remediation, MGP cleanup and other environmental obligations, and the extent of rate recovery or insurance coverage.
- Potential outcomes and financial impacts of the FERC bidding investigation, cooling-water permit decisions and other pending legal or regulatory matters.
- Power’s exposure to commodity-price swings and collateral calls, particularly under a credit-rating downgrade, and the funding needs of planned capital projects and upcoming debt maturities.