Morningstar | Utility Investment Still Public Service Enterprise Group's Earnings Growth Driver
We are reaffirming our $47 per share fair value estimate after Public Service Enterprise Group reported third-quarter operating earnings totaling $0.95 per share, up from $0.82 per share in the third quarter of 2017. Management tightened its 2018 EPS guidance range to $3.05-$3.15, in line with our estimate.PSEG’s distribution utility, PSE&G, continues to lead the way and we expect that to continue. PSE&G earnings were up 10% in the quarter, but weather contributed about half of that growth. We expect weather benefits to normalize but core growth to pick up in the fourth quarter when new customer rates go into effect. PSEG Power EBITDA was mostly flat, but earnings received a one-time bump from a lower tax rate, as we expected.
The key recent developments for shareholders have been regulatory proceedings at PSE&G. New Jersey regulators approved the terms of PSE&G’s base rate settlement, resolving near-term regulatory risk while supporting PSEG’s core growth plan. PSE&G also recently asked regulators to rule on its $3.6 billion, six-year investment plan as part of the state’s Clean Energy Future, or CEF, legislation. We expect rulings next year. We include $1 billion of CEF investments in our 2019-22 forecast. If regulators approve more investment, it could have a slight positive impact on our fair value estimate.
We continue to assume PSEG invests an average $3 billion annually during the next three years. This should produce 9% average annual earnings growth at PSE&G. But PSEG Power will remain a drag on consolidated earnings growth based on the company’s current hedge profile and energy market prices. We expect 5% consolidated earnings growth. PSEG Power earnings should drop to less than one third of consolidated earnings in the next few years if PSE&G continues to receive regulatory support for its investments.
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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