Morningstar | PSEG has plenty of growth opportunities with support from New Jersey regulators.
Public Service Enterprise Group is one of the few truly diversified utilities left in the U.S., giving investors exposure to a growing regulated infrastructure utility and upside to merchant power markets in what we consider favorable energy markets. Although earnings have flatlined because of weakness at its merchant power generation unit, its New Jersey regulated distribution utility supports a healthy and growing dividend.With PSE&G's utility earnings growing near 7% annually, we think PSEG can keep consolidated earnings and the dividend growing modestly through 2020 as PSEG Power's earnings bottom. PSEG has a strong balance sheet that can fund some $16 billion of investment the next five years.A big test in 2018 will be PSE&G's ability to win approval for higher base rates for the first time since 2010. Its $1.9 billion gas distribution investment plan and New Jersey's Clean Energy Bill investment opportunities could push that investment target higher. These and other large investments earn near-contemporaneous returns, supporting consistent earnings and dividend growth.PSEG Power's wholesale generation fleet benefits from the tight supply/demand balances in the New Jersey and Northeast markets. This makes its plants' energy and capacity more valuable than many other utilities' fleets. PSEG Power also benefits from one of the most balanced generation fleets of any U.S. utility. This has helped it maintain profitability even while coal plants close and nuclear margins shrink. Its three nuclear plants produce about half of PSEG's total generation, but its gas plants are gaining share.PSEG's gas generation benefits from its proximity to low-cost Marcellus Shale gas. PSEG has expanded its competitive advantage with a $2 billion investment in state-of-the-art generation to take advantage of low gas prices in the region. Short-term power demand and price volatility could swing profits, but as long as PSEG remains an efficient operator, the generation business should continue to provide value in any commodity market environment.Public Service Enterprise Group, through its subsidiaries, is engaged in the energy industry. The company conducts its business through two subsidiaries, Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (PSEG Power). PSE&G is a public utility, which is engaged in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey; and PSEG Power is a multi-regional energy supply company that integrates the operations of its merchant nuclear and fossil generating assets with its power marketing businesses and fuel supply functions through energy sales in energy markets primarily in the Northeast and Mid-Atlantic United States.
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