PSEG’s Huge Investment Plan Could Determine the Fate of Natural Gas in New Jersey

We are reaffirming our $65 fair value estimate for Public Service Enterprise Group PEG after the company announced it filed for regulatory approval a new three-year $2.54 billion capital investment plan for its natural gas distribution system. We are maintaining our narrow moat and stable moat trend ratings for PSEG.

PSEG’s plan, if approved, would push management’s five-year capital investment plan to the high end of its $15.5 billion-$18 billion range. We already assumed capital investment at the high end of management’s range, so this announcement doesn’t have a material impact on our fair value estimate.

PSEG’s stock trades at a 10% discount to our fair value estimate as of March 1, making it one of the 10 cheapest U.S. utilities. We continue to forecast 7% long-term annual earnings growth, faster than our 6% median long-term annual growth forecast for the sector. Our growth estimate for PSEG is at the high end of management’s 5%-7% target primarily because we assume incremental growth investment opportunities. The stock’s 3.9% dividend yield is above the 3.7% sector median.

We expect PSEG’s gas system modernization plan, or GSMP, to face stiffer regulatory pushback than its last two GSMPs. New Jersey Gov. Phil Murphy in February issued executive orders accelerating the state’s clean energy targets, which include reducing gas use. However, New Jersey utility regulators recently have supported large, long-term gas utility investments. We think that PSEG’s plan might be the first caught in a tug of war between state regulators and policymakers over the future of natural gas in the state.

We continue to believe gas is the most economical heating energy source in cold climates. If regulators approve all or part of PSEG’s plan, it could signal that the state will support investments to reduce methane emissions and integrate hydrogen or so-called renewable natural gas even if it means higher gas utility bills amid falling demand.