Public Service Enterprise Group: Gas Investment Plan Key Growth Driver

We are reaffirming our $65 fair value estimate for Public Service Enterprise Group PEG after New Jersey regulators approved approximately $900 million of investment in the company’s natural gas distribution system during the next two years. We are also maintaining our narrow moat rating.

The program is an extension of PSEG’s Gas System Modernization Program and a key sign of regulatory support for retail gas supply in the state. This contrasts with neighbor New York, which is exploring ways to phase out natural gas use to reduce carbon emissions.

The long-lived nature of gas system infrastructure investments means New Jersey regulators effectively are making a multidecade commitment to retail natural gas. Regulators plan to rule on another round of gas system investments in 2026.

We anticipated the GSMP approval in our $19 billion capital investment forecast for the next five years at PSEG’s rate-regulated New Jersey utility, PSE&G. Our forecast is higher than management’s most recent expectation, which did not include the GSMP. We expect management to raise its five-year capital investment outlook when it reports earnings on Oct. 31.

We continue to believe that the company will hit the high end of management’s 5%-7% annual long-term earnings growth target as capital investment accelerates during the next four years. Reaching this investment level will require additional constructive regulatory outcomes related to New Jersey’s clean energy policies, including energy efficiency, electric vehicle charging, and advanced metering.

PSEG stock trades at a 7% discount to our fair value estimate as of Oct. 25. It has substantially outperformed the utilities sector this year despite a series of large swings. We think its 3.8% dividend yield and growth potential offer an attractive total return opportunity for investors.

Our 2023 operating earnings estimate remains in line with management’s $3.40-$3.50 EPS guidance.