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Morningstar | Public Service Enterprise Group Has Plenty of Growth Opportunities in New Jersey

Public Service Enterprise Group is one of the few truly diversified utilities left in the United States, 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 recently because of weakness at its merchant power generation unit, power markets appear to have stabilized and earnings growth should return. We believe PSEG's New Jersey regulated distribution utility, which now contributes about three fourths of PSEG's total earnings, will provide the bulk of our 7% earnings growth outlook during the next four years. PSEG's plan to invest what could be more than $16 billion at its utility during the next five years is the primary growth driver.The utility will have to continue getting political and regulatory support for infrastructure replacement, clean energy, energy efficiency, and other network upgrades to realize that earnings growth. New Jersey's 2018 Clean Energy Bill is a sign that public policy will continue to support growth opportunities. PSE&G passed a big regulatory test by reaching a settlement to raise base electric and gas rates in 2019 for the first time since 2010.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. Recent New Jersey legislation approving nuclear subsidies should boost margins.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.