Public Service Enterprise Group

Public Service Enterprise Group announced earnings per share of $0.86 on an adjusted basis for the second quarter, up from $0.77 in the second quarter of 2025. Results are on track to meet our full-year estimate.

Why it matters: Growth capital investments at PSEG's distribution utility and higher margins at PSEG Power accounted for most of the year-over-year earnings growth in the quarter. Management reaffirmed its $4.28-$4.40 EPS guidance for 2026, implying 7% growth from 2025 and in line with our forecast. PSEG plans to invest $24 billion-$28 billion in 2026-30, primarily at the utility. Management suggested there could be additional growth investment at PSEG Power.

The bottom line: We are reaffirming our $75 fair value estimate and Narrow Morningstar Economic Moat Rating for Public Service Enterprise Group. PSEG's stock trades in line with our fair value estimate and in line with our sector valuation as of Aug. 4. Management reaffirmed its 6%-8% annual five-year earnings growth target, in line with our forecast.

Big picture: New Jersey Gov. Mikie Sherrill's Executive Order No. 1 could result in utility ratemaking changes such as multiyear rate plans, decoupling, and performance-based incentives, which could be positives for PSEG shareholders. Management said it is open to exploring new generation development at PSEG Power outside of New Jersey for the first time since selling its non-nuclear generation fleet in 2022. We expect any projects would have long-term contracts with utility-like returns and risk. Expanding the Salem nuclear plant seems to have implicit political support in the recent Power NJ Act; however, bringing a new unit online could take more than a decade.

Coming up: PSEG plans to file a base rate review by year-end, with new customer rates likely effective in late 2027. This will be its first review since a settlement in October 2024.

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Our fair value estimate is $75 per share after incorporating recent financial and operational updates.

Constructive regulatory decisions give us confidence that Public Service Enterprise Group will be able to reach the high end of management's $26 billion-$28 billion five-year capital investment plan. We incorporate extensions of the Energy Strong, gas system modernization, and Clean Energy Future investment plans.

This growth investment plan supports our 6% average annual earnings growth forecast in 2026-29 on a consolidated basis. We expect slightly faster growth at PSE&G and slower growth at PSEG Power.

PSE&G's electric and gas rate settlement terms reached in October 2024 were in line with our expectations, including a $505 million annualized rate increase based on maintaining a 9.6% allowed return on equity and 55% allowed equity capital structure.

We assume stable margins and minimal growth at PSEG Power. Historically high capacity prices for 2026-29 should result in peak earnings for the nuclear fleet. Beyond 2027, we assume federal nuclear production tax credits support stable margins for the nuclear fleet.

We assume a 7% cost of equity and 6.0% cost of capital in our discounted cash flow valuation. Our cost of equity assumption is lower than the 9% rate of return we expect investors to demand of a diversified equity portfolio.

We think Public Service Enterprise Group's regulated electricity and natural gas distribution utility, which serves about 75% of New Jersey and contributes 90% of consolidated earnings on a normalized basis, is the foundation for its efficient-scale Morningstar Economic Moat Rating of narrow.

State and federal regulators grant PSE&G exclusive rights to charge customers rates that allow it to earn a fair return on and return of the capital it invests to build, operate, and maintain its distribution networks. In exchange for PSE&G's service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

Regulation in New Jersey is constructive. State regulators have approved favorable terms for most of PSE&G's planned distribution investments during the next five years. After regulators cut Public Service Enterprise Group's base allowed return on equity to 9.6% from 10.3% as part of a 2018 rate settlement, PSEG has been able to reach rate settlements in its most recent rate requests that support its capital investments.

Wide-moat interstate transmission has grown to about 40% of PSE&G's regulated asset base. Despite a cut in its transmission business' allowed return on equity in 2021, Public Service Enterprise Group is still positioned to earn at least a 10% return on equity on those assets, well above its cost of equity.

The company owns a large stake in three nuclear plants in New Jersey and Pennsylvania. These plants generate the lowest-cost source of reliable electricity in the region and face virtually no substitution threat because no other power generation source can match their low cost or scale.

Land constraints and not-in-my-backyard opposition are key barriers to entry where Public Service Enterprise Group’s nuclear plants operate. The federal nuclear production tax credit helps ensure returns on capital stay above the plants' cost of capital. The New Jersey plants are a critical component of the state's goal of zero-carbon emissions.

PSEG has paid a dividend every year since 1907 and accelerated dividend growth in 2022. We expect 6% annual dividend growth for at least the next four years.

PSEG has established strong regulatory relationships that support what we think could be at least $26 billion of capital investment during the next five years.

New Jersey's aggressive clean energy goals should result in many infrastructure growth opportunities for PSEG.

PSEG's large investment plan makes regulatory and financial market support critical to maintaining earnings growth.

Higher interest rates and persistent inflation could raise costs to fund its large investment program and make its dividend less attractive to income investors.

Customer utility bill affordability concerns in New Jersey could lead to regulatory changes that impact both of PSEG's businesses.