Morningstar | PSEG's Utility Investment Plans Offer Valuation Upside Pending Regulatory Support
We are reaffirming our $43 per share fair value estimate for narrow-moat Public Service Enterprise Group after the company reported earning $0.64 per share on an operating basis in the second quarter, up from $0.62 per share in the second quarter of 2017. The company remains on track to meet our full-year forecast. Management reaffirmed its full-year $3.00-$3.20 EPS guidance, in line with our estimate.We still believe that most of our projected 4% annual consolidated earnings growth in the next few years will come from the distribution utility, PSE&G, which reported $1.09 per share of operating earnings through the first half of the year, up from $1.00 per share during the first half of 2017. We expect PSE&G can increase earnings at a 7% average annualized rate for several years.
We expect PSEG Power will remain a drag on consolidated growth as generation margins flatline. First-half earnings were flat as lower realized power prices negated upside from higher capacity prices. A lower corporate tax rate and New Jersey nuclear subsidies should help offset lower forward power prices to keep earnings mostly flat in 2019 and 2020.
Management also reaffirmed its plan to invest $12 billion-$15.5 billion at PSE&G in 2018-22, producing 8%-10% annual rate-base growth, both above our forecast. Key regulatory activity in the second half of the year includes an electric base-rate case and negotiations related to PSEG's $2.5 billion five-year Energy Strong II investment proposal. Successful regulatory outcomes could move the utility's growth to the high end of management's guidance range and lead us to increase our growth outlook and fair value estimate.
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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