Public Service Enterprise Group Inc. or PSEG’s (PEG) shares attained a 52-week high of $37.41 during intraday trading on Wednesday, Mar 26, finally closing a little lower at $37.20.
What’s Driving Public Service Enterprise?
The New Jersey-based electric and gas utility is focused on its transmission business, which is expected to drive the company’s earnings, boost return on invested capital (ROIC) while generating more shareholder value.
Earlier this month, Public Service Enterprise revealed its capital investment projection for the next five years. Of the total capital expenditure (capex) plan of $12 billion, $10 billion or 68% is earmarked for its transmission business, Public Service Electric and Gas Company (“PSE&G”).
As Public Service Enterprise transforms into a more transmission-focused company, it will come more and more under the purview of the Federal Energy Regulatory Commission rather than the Public Utility Commission. This will benefit the utility due to the fact that federal agency often grants higher rates of return on investments than the state regulators on transmission projects.
Public Service Enterprise Group intends to spend the funds primarily to upgrade transmission facilities authorized by the PJM Interconnection L.L.C. Currently, PSE&G is in the middle of five vital ventures. Post completion, the company will add a 345-kilovolt line by Jun 2018. These initiatives will enable the company to provide uninterrupted services to its customers while managing estimated system overloads.
Public Service Enterprise also operates a merchant power unit, PSEG Power. Last year, approximately 55% of total energy produced was nuclear while the remaining was mainly from coal and natural gas. For the merchant power business, revenues can climb at peaking plants because of its comparative rate advantages when compared to base-load revenues, when operating in the PJM auction structure.
Public Service’s strong balance sheet and cash flows provide substantial financial flexibility and a cushion in the present challenging business environment. The company has successfully reduced its long-term debt to $8.1 billion in 2013 from $10.3 billion in 2006, while enhancing its net asset to $21.3 billion from $13.6 billion over the same time frame. This utility has been able to generate free cash flow in 9 out of the last 10 years registering above-average ROIC.
Moreover, Public Service Enterprise is expected to invest more in its Energy Strong Program to solidify its delivery assets. This program is subject to the New Jersey Board of Public Utilities’ approval.
Public Service Enterprise currently carries a Zacks Rank #1 (Strong Buy). Some other stocks worth considering in the utility industry include Otter Tail Corp. (OTTR), CMS Energy Corp. (CMS) and American Electric Power Company Inc. (AEP). While Otter holds a Zacks Rank #1 (Strong Buy), CMS Energy and American Electric Power carry a Zacks Rank #2 (Buy).