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The New Jersey Board of Public Utilities (BPU), playing spoilsport to Public Service Enterprise Group Inc. (PEG - Analyst Report) or PSEG, issued two diametrically opposite regulatory directives.
The first is an approval which authorized the company to raise its customer electricity rates. This was the company's first rate request in nearly four years. However, the beneficial effects of PSEG’s regulatory approval for rate hike would be partially offset by the second contradictory regulatory directive, which stipulates refund to customers regarding Market Transition Charge. BPU also deferred action on the company's request to increase gas distribution revenues by $26.5 million until a future agenda meeting.
PSEG estimates that through the electricity rate hike it will receive additional revenue of $73.5 million. However, this was a far cry from the original rate increase request filed in May 2009 by the company, asking for $230.6 million hike in its electric and gas distribution revenue. Later the request had been modified to $204 million.
The final settlement agreement included an increase of $100 million in additional electric and gas revenues with a return on equity of 10.3%. The rate hike would increase the electricity bill of average residential customers, consuming 7,360 kilowatt-hours annually, by about $12 per year, or 0.9%. This customer's monthly summer electric bill for 780 kilowatt-hours would increase by about $3, or 2.4%.
PSEG agreed to refund $122 million to customers during the next two years to resolve a long-standing issue regarding the Market Transition Charge (MTC), which was part of the state's deregulation law implemented in 1999. When the refund is factored in, the above mentioned average residential customer's electric bill will only increase by about $1 per year for the next two years.
PSEG based in Newark, New Jersey, is a diversified utility holding company. Its operations are mostly located in the Northeastern and Mid-Atlantic parts of the U.S. The company’s robust portfolio of regulated as well as non-regulated utility assets provides the company with a steady earnings base and significant growth prospect in the long run.
The company has been striving to optimize generation margins by improving cost-structure, performance and reliability of its nuclear as well as fossil units. Management has taken several measures to improve financial stability and reduce the overall risk profile of the company.
PSEG has been pursuing growth opportunities in the core U.S. market and increasing its capital allocation in projects that provide good risk-adjusted returns. Going forward, a low-cost nuclear fleet, assumed rate relief and added generating capacities will drive the company’s earnings growth.
However, the present unfavorable macro backdrop, rising cost of coal, higher pension and financial costs, and power-price volatility might overshadow the positives. Thus we maintain our market Neutral recommendation on the Zacks #3 Rank ('hold') stock. In the near term we believe its peers like Huaneng Power International Inc. (HNP - Snapshot Report), ALLETE Inc. (ALE - Snapshot Report) and China Hydroelectric Corporation are more promising.