Public Service Enterprise Group (PEG) reported 23Q1 operating revenues of $3.76 billion, up 62.3% from $2.31 billion in 22Q1. The increase was due to a $1.64 billion surge in net mark-to-market gains on derivatives at PSEG Power, which more than offset modest declines in Power’s wholesale electricity sales volumes and capacity revenue. PSE&G’s operating revenues rose 0.4% to $2.29 billion, as an 8.4% rise in transmission revenues was substantially offset by lower electric and gas distribution revenues.
23Q1 GAAP EPS was $2.59 vs. $0.00 in the prior year period. Non-GAAP operating earnings were $1.39 vs. $1.33. The swing of $2.42 per share in exceptional items (excluded in the calculation of non-GAAP EPS) was due almost entirely to the after-tax impact of those mark-to-market gains.
Management was pleased with the solid operating and financial performance. PEG remains on track to achieve its full-year non-GAAP operating earnings guidance of $3.40-$3.50 and its 5%-7% annualized (non-GAAP) EPS growth target to 2025. The earnings guidance implies that 2023 non-GAAP operating earnings will be essentially flat with 2022. However, the company’s five-year capital spending plan, which totals $15.5-$18.0 billion, is intended to grow its utility rate base by 6.0%-7.5% annually, which is the basis for its longer-term earnings growth guidance and its assertion that its financial results will be more predictable as well. Although non-GAAP earnings will be flat in 2023, the guidance implies that earnings will accelerate over the next few years to achieve its 5%-7% annualized EPS growth target.
A substantial portion of the growth is expected to come from PSE&G through investments to modernize the electric and gas distribution infrastructure to improve reliability and to decarbonize the New Jersey economy. During the quarter, for example, PSE&G filed a request with the NJBPU for Phase 3 of its Gas System Modernization Program, seeking to spend $2.5 billion over the next three years. The utility’s Deans 500kV substation was named by the NJBPU as the preferred interconnection point to bring onshore the output from 3,500 MW of planned offshore wind production.
PSEG Power is also pursuing initiatives to grow revenues and earnings, such as extending the refueling cycles at its nuclear power plants and upgrading their power production capacity. It will also continue to pursue investments in renewable energy, such as offshore wind and solar.
Based upon 23Q1 results and management’s guidance, my projections anticipate 2023 GAAP EPS of $4.25 and non-GAAP EPS of $3.44. For 2024, I now project GAAP EPS of $2.99 and non-GAAP EPS of $3.58. Applying a valuation multiple of 18.2 times projected 2024 non-GAAP EPS of $3.58, my new price target is $65.00, up from $61.00 previously. My price target represents a potential 12-month total return of 9.3%, including the stock’s 3.7% dividend yield. That merits a performance rating of “3” or Neutral, according to my formula. Since my last report in early November, PEG’s share price has fluctuated between $56 and $64, in a slightly positive uptrend. While utility valuations are not especially cheap, greater predictability of earnings and attractive dividend yields make PEG a worthwhile investment.
This is a summary of my recent update report on Public Service Enterprise Group (PEG). To obtain a copy of the full report, please reach out to me using the contact information provided below.
May 23, 2023
Stephen P. Percoco
Lark Research
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