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Public Service (PEG) to Spend $15B in 5 Years, Keeps View

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Public Service Enterprise Group (PEG - Free Report) or PSEG recently laid out its near term as well as long-term capital investment strategy at the utility’s Annual Investor Conference in New York.  While offering a snapshot of the company’s future capital spending plans, its CEO Ralph Izzo pointed out the company’s achievements last year.

In particular, Izzo praised the double-digit rate base and earnings growth that PSEG’s gas and utility subsidiary, Public Service Electric and Gas Company (“PSE&G”), delivered in 2016. More recent accomplishments include the 4.9% dividend hike announced last month, marking the 13th increase in PSEG's dividend over the last 14 years.

Growth Prospects

For 2017, PSEG continues to expect earnings in the range of $2.80­–$3.00 per share. Also, management projects that the utility will represent approximately two-thirds of its adjusted operating earnings in 2017. Further, net income for PSE&G is projected to increase from $889 million in 2016 to the band of $945–$985 million in 2017.

Investment Plans

In the 2017–2021 period, PSEG plans to spend approximately $15 billion for upgrading its energy infrastructure. Of this, management expects to spend $12.3 billion for PSE&G’s baseline infrastructure program, which in turn reflects 7% CAGR growth in rate base.

Expansion of the baseline investment program in turn might increase PSE&G's five-year capital program to $13.8 billion, reflecting 9% CAGR growth in the utility’s base rate. Thus, these investment programs have the potential to expand PSE&G’s existing forecast of a baseline CAGR growth of 7% to up to 9% over the next decade.

Within PSE&G, the company plans to spend $6 billion on transmission over the next five years, with the primary focus being on reliability and replacement of old infrastructure. For electric distribution, an investment of $3 billion has been allotted, with main emphasis on up gradation of technology to improve grid performance. For gas distribution as well, $3 billion has been allotted while a capital investment plan of $250 million has been assigned for solar and energy efficiency.

Coming to its Power subsidiary, Izzo underlined that recent growth in the utility has offset the challenges that PSEG’s business has been facing due to low electricity prices. Going forward, with consistent evolution in energy markets in response to the low-priced gas environment, PSEG Power is expected to excel by increasing the efficiency and performance of its plants while lowering costs.

Moreover, PSEG Power's investments are likely to decline with the completionof three clean, highly efficient combined-cycle gas plants in the PJMand New England markets. This will allow the company to invest more cash in PSE&G going ahead.

Finally, management believes that such strategic investment programs will offer PSEG long-term opportunities to offer more reliable, resilient, cleaner and affordable energy to customers along with providing significant gains to shareholders in terms of increased dividend.

Our View

Undoubtedly, the latest capital investment plan will help the company maintain strong operating earnings growth apart from strengthening the state’s economy and providing environmental benefits. Consistent focus on financial strength, systematic capital investments, strong location advantages and operational excellence will likely boost the company’s performance, going forward.

Moreover, last year, the company planned to spend $11.9 billion on PSE&G in the 2016–2020 period, lower than this year’s plan of $12.3 billion or the extended option of $13.8 billion. However, the prior five-year investment plan of $16 billion, announced last March, is higher than this year’s $15 billion.

Further, PSEG underperformed the Zacks categorized Utility-Electric Power industry year-to-date, with the company’s gain of 2.8% being lower than the industry’s addition of 5%. This might have been triggered by intense competition from peers like Entergy Corporation (ETR - Free Report) , Ameren Corporation (AEE - Free Report) and CMS Energy Corporation (CMS - Free Report) . Also, the current year EPS estimates for the company have declined by 3 cents over the past 60 days, which reflects investors’ reluctance to consider the stock as a suitable investment option.

Zacks Rank

PSEG currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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