Public Service Enterprise Group's 10-K: Steady Revenue; Potential Issues With Nuclear Generation On The Horizon
- PEG's gross revenue was steady.
- They took a big depreciation hit thanks to two early power plant closings.
- Due to competition from natural gas, their nuclear operations may become unprofitable in the future.
I originally profiled Public Services Enterprise Group (PEG) here. For a general background on the utilities industry's market background, please see this link.
Let's begin with the relevant financial data for income and dividend investors (data from Morningstar.com; author's calculations).
Revenue was more or less flat. While the company's gross margin rose 2.4%, the operating margin dropped 1.6% due to plant closures. The EBIT/Gross revenue is at a very healthy 47%. The company is growing EBIT at a solid clip which is helping to keep their interest/EBIT ratio contained. The company's debt to asset ratio is very conservative. Dividend investors will be pleased with the low dividend payout ratio.
The company filed for a rate increase in January; they are seeking a 1% rate hike. Like other utilities, they included the impact of the new tax law in their submission. They also have a gas modernization request pending.
They retired two plants: their Hudson and Mercer coal facilities. They recorded $964 billion in accelerated depreciation as a result of the closures, which is why their operating margin dropped.
Then we have the potential nuclear issue. As a refresher, the company has the following power generation sources:
Nuclear is key to the company's generation capabilities. Thanks to fracking, natural gas is now plentiful and cheap as shown in the following chart:
Natural gas has declined consistently since the end of the recession. That has started to squeeze power companies that use nuclear generation. This graph from the Department of Energy's Monthly Energy Report highlights the change:
The following two paragraphs from the company's 10-K outlines the situation [emphasis added]:
..... These closures and retirements are generally due to the decline in market prices of energy, resulting from low natural gas prices driven by the growth of shale gas production since 2007, the continuing cost of regulatory compliance and enhanced security for nuclear facilities, both federal and state-level policies that provide financial incentives to construct renewable energy such as wind and solar and the failure to adequately compensate nuclear generating stations for the attributes they bring similar to renewable energy production. These trends have significantly reduced the revenues of nuclear generating stations while limiting their ability to reduce the unit cost of production.
If market prices continue to be depressed and legislation is not enacted that adequately compensates nuclear generating stations for their attributes, Power [PEG's power generation subsidiary] anticipates it will no longer be covering its costs nor be adequately compensated for its market and operational risks at the Salem and Hope Creek nuclear units and would anticipate retiring these units early. The costs associated with any such retirement, which may include, among other things, accelerated depreciation and amortization or impairment charges, accelerated asset retirement costs, severance costs, environmental remediation costs and additional funding of the Nuclear Decommissioning Trust Fund (NDT) would be material to both PSEG and Power.
What does this mean? As of now, nothing. The company is simply telegraphing this to shareholders. They are also putting the New Jersey legislature on notice about the company's situation. In the long run, however, this will have to be dealt with.
As of now, the company is fine and their dividend is safe.
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