2023-03-16 21:54:39 ET
Summary
- PEG has a new 10-year $34-40 billion capex plan that aligns with New Jersey's energy policy goals and includes investments in electric and gas distribution, clean energy, and transmission.
- PEG's decision to keep its nuclear assets is positive, as they provide low-risk and stable earnings with potential for growth.
- PEG has a strong balance sheet and anticipates an increase in debt capacity, with potential additional cash flow from offshore wind sales.
Description
After last week's 2023 investor day, which featured multiple highlights and catalysts to look forward to, I have become more enthusiastic about Public Service Enterprise Group ( PEG ) stock. The new $34-40 billion 10-year capex plan provides a more in-depth look at the company's investment needs over the long term, and shows good odds for distribution opportunities in light of New Jersey's environmental policy. PEG has maintained its EPS CAGR of 5-7% from 2023 to 2027 and its 2023 guidance, and, importantly, has reaffirmed no need for external equity to finance this plan. Regarding the nuclear asset, I am sort of relieved that management decided to keep the asset (more details below). With regards to the sale of Ocean Wind 1 , management has also reaffirmed the 25% equity sale. Management also has plans to monetize the GSOE acreage. Finally, the management presented their most recent ideas on RNG and hydrogen opportunities, building on their prior work with landfill RNG to add a fresh facet to the most recent GSMP III filing .
As a whole, PEG highlighted the current capital plan's foundational alignment with NJ policy objectives, which is encouraging because it means the plan faces few regulatory headwinds. To sum up, I find the investor day update useful as it provided details into management capex plans, tailwinds across the nuclear fleet and emerging RNG/hydrogen potential. That said, PEG's narrative will be further de-risked if, going forward, progress is made across items like nuclear PTC treatment, pension changes, and the upcoming rate case. As such, I would advise holding off on investments until these short-term uncertainties have passed.
10-year CAPEX plan
The plan entails expenditures in the areas of electric distribution, gas distribution, clean energy, and transmission. All cast-iron and bare-steel gas mains will be replaced by 2032 as part of the plan's emphasis on modernizing the system across transmission and distribution infrastructure. Since the plan is consistent with state energy goals, such as New Jersey's recently signed executive order mandating 100% clean energy by 2035 and increased electrification of the building sector, I anticipate few, if any, regulatory roadblocks. The potential for natural gas to facilitate the dependable rollout of new technologies like RNG and hydrogen is something that PEG is still optimistic about. I think that PEG's plan to replace all the cast iron in their gas system will be well received in the state, considering that PEG has the most miles of cast iron compared to any other utility. This initiative is likely to contribute to the expansion of a high gas rate base. The capex strategy also accounts for an additional $3-7 billion in potential upside to speed up gas main replacements, electrification, and clean energy. To provide context, the capital expenditure plan over a 10-year period would lead to a rate base of $45-$55 billion by 2032, indicating a CAGR of 5.5-7.5%. This growth rate should offer investors a reasonable level of insight into expected earnings in the future.
Nuclear assets
I support the company's decision to keep its nuclear facilities. Why? Because in my opinion, it is the asset that can generate cash with low risk and volatility, which can be used to finance PEG's other utility investments. While I do not fully support the decision to sell the asset, I do not strongly oppose it, either, because I think the asset's value will increase if it is evaluated independently of a regulated utility business.
I'll get back to my original point about the low risk and volatility of the nuclear PTC: I am of the opinion that it can serve as a robust protection against losses while also generating consistent and low-risk profits in the future. Moreover, if commodity prices continue to rise, there is a potential for exceeding projected earnings. Additionally, management sees a number of growth opportunities, the pursuit of which could boost earnings. The PEG earnings growth guidance of 5-7% includes nuclear earnings with just the PTC, as such, any successful execution of identified growth opportunities could lead to a strong beat (effectively a call option to PEG shareholders).
Strong balance sheet
With regards to balance sheet, the target set by management is to have a debt-to-FFO ratio in the low to high teens percentage. Furthermore, management anticipates an increase in debt capacity at current credit ratings of $4 billion with cash flow contributions from PSEG Power over time. For me, this argues in favor of a very lengthy period of time during which equity is not required, possibly even beyond the initial five year forecast. Offshore wind sales are also expected to bring in even more money in the near future. Concerning this matter, management restated its intention to sell its 25% equity stake in Ocean Wind 1, anticipating a return of its entire investment of approximately $225 million upon the completion of the transaction.
Summary
To summarize, the recent investor day update provided useful insights into PEG's 10-year CAPEX plan, which aligns with state energy goals and has potential for earnings growth. PEG's strong balance sheet and potential for additional cash flow from offshore wind sales suggest a lengthy period of time during which equity is not required. Overall, PEG's foundational alignment with NJ policy objectives and emphasis on modernizing infrastructure are encouraging, and investors should keep an eye on progress in areas like pension changes, nuclear PTC treatment, and upcoming rate case to further de-risk the narrative.
For further details see:
Public Service Enterprise Group: All We Need Now Is To Get Past Near-Term Uncertainties