Fitch Affirms Ratings of Public Service Enterprise Group and Subs; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB+' long-term Issuer Default Rating (IDR) on Public Service Enterprise Group Incorporated (PEG) and its competitive generation subsidiary PSEG Power LLC (Power). Fitch has also affirmed the 'A-' long-term IDR of Public Service Electric & Gas Company (PSE&G), its regulated electric and gas distribution utility in New Jersey.

The 'F2' short-term IDR and commercial paper rating on PEG and PSE&G were also affirmed. A detailed list of rating actions follows at the end of this release.

The Rating Outlook for PSEG, Power, and PSE&G is Stable.

These rating actions affect approximately $8.8 billion of long term debt.

Key Rating Drivers

--Low consolidated leverage and conservative capitalization at PSE&G and Power;

--Strong earnings from PSE&G;

--Large capital investment program at PSE&G;

--Fuel diversification, regionally advantaged, and multi-year hedging program at Power;

--Extended period of weak power prices to pressure Power's earnings and cash flows

Conservative Leverage

The ratings on PEG, Power, and PSE&G are supported by strong financial metrics, in part, reflecting management's conservative use of leverage. There is no long-term debt at PEG while Power and PSE&G are conservatively capitalized with debt to capital measures of 30% and 49%, respectively.

Fitch financial forecasts incorporate modestly higher consolidated leverage as PSE&G's large capex program matures, and moderately higher leverage at Power which paid over 100% of its net income in dividends to PEG in 2013.

Fitch's key leverage measures reflect modest deterioration over the forecast period. Debt to EBITDAR and FFO Adjusted Leverage, 2.55x and 2.76x at Dec. 31, 2013, are projected by Fitch to average 3.18x and 3.28x over the 2014 to 2016 forecast period. The higher consolidated leverage reflects the large capex program at the utility and the utility's larger percentage in the consolidated balance sheet.

Robust Utility Financial Metrics

PSE&G's recent infrastructure investments and expected strong EBITDA growth from transmission projects in progress will propel earnings and cash flow measures throughout Fitch's 2014-2016 forecast. The New Jersey Board of Public Utilities (BPU) approved an authorized Return on Equity (ROE) of 10.3% in 2010 for both the electric and gas distribution segments and new PJM transmission investments that earn a Federal Energy Regulatory Commission (FERC) formula rate return add diversity to the utility's cash flows and are a key driver of future earnings growth. These transmission projects provide increased cash flow predictability at a strong return on equity, with timely recovery of capital deployed.

PSE&G is in the midst of a large capital spending program that is largely centered on transmission projects and the $1.2 billion recently approved Energy Strong, infrastructure hardening program. PSE&G receives timely recovery of costs and invested capital on these transmission infrastructure investments and in some cases receives an authorized ROE of up to 12.93% on FERC regulated projects. Similarly, PSE&G will receive timely recovery on the Energy Strong investments.

PSE&G's capex budget peaked in 2013 and is estimated by management to exceed $2 billion annually in 2014 and 2015.

Fitch expects PSE&G to maintain its capital structure during this period of elevated capex. PSE&G did not pay any dividends to its parent in 2012 or 2013. Retained earnings, down-streamed equity from PEG, and incremental debt issuances are expected to fund the capex budget and preserve the authorized equity base at 51.2% of total capital.

As part of the Energy Strong approval, the BPU required PSE&G to file a new rate case before Nov. 1, 2017. Fitch does not expect PSE&G to file a new rate case earlier. Earnings remain strong throughout the forecast period. Over this time period, Fitch expect EBITDAR to Interest to average over 7.0x compared with 6.86x in 2013 and Debt to EBITDAR to average 3.1x compared with 3.06x in 2013. Both measures compare favorably to rating category peers and Fitch rating guidelines.

Power

Power continues to be plagued by weak power prices in its core mid-Atlantic and New England markets. While the credit profile has been maintained through debt reductions, the longer-term outlook for merchant generators such as Power continues to weaken as power sales are constrained by energy efficiency, conservation and distributed generation. Weak demand combined with low natural gas prices will continue to dampen power prices.

Power's ratings benefit from the predictability of earnings and cash flows. The market structure locks in prices three years in advance through participation in the Basic Generation Services (BGS) auction in New Jersey and in capacity auctions held by the PJM Regional Transmission Organization (PJM) and the Independent System Operator New England (ISO-NE). The generation fleet is located in close proximity to load pockets in mostly urban constrained areas.

Power's nuclear and baseload coal generation, which accounts for approximately 60% of the company's total generation was fully hedged for the balance of 2014 and 2015. Power will realize approximately $50 megawatt hour (MWh) on these hedges. Power's intermediate load and peaking facilities generally have a lower percentage of their expected volumes hedged in the current year and are unhedged in the outer years. This open position provides exposure to possible higher sustained or seasonal power prices but also carries sensitivity to short-term swings in power prices.

Power has a relatively diverse source of fuel for its generating plants, which limits the impact associated with any negative shock to a particular fuel source. In 2013, almost 60% of Power's generation was from its interest in five nuclear plants. Power has relatively modest exposure to coal.

The company's diverse fuel sources result in Power's assets being placed all along the dispatch curve, enabling the company to benefit from different electric generation market conditions. Power's baseload units have had a solid operating record, with its nuclear plants having achieved an average aggregate capacity utilization factor of greater than 90% over the past five years. The strong performance of these baseload units gives Power a favorable competitive position in its wholesale markets.

The primary credit concern for Power is the company's exposure to price volatility in the merchant power market. Due to Power's merchant exposure, it is important that management continues to keep leverage at a modest level to enable the company to absorb periods of weak cash flows without too much strain on the balance sheet.

Fitch expects Power's earnings and cash flows to weaken over the forecast period from continued weak power prices and leverage to increase from cash dividends paid to PEG. Under Fitch financial models, EBITDAR to Interest declines from 9.66x at year-end 2013 to an average of 7.7x over the 2014 to 2016 time period. Over this same time period leverage increases with Debt to EBITDAR, 1.89x at year-end 2013 increasing to an average of 2.4x over the next three years. With power prices expected to remain weak, Power's ratings will be dependent on maintain a conservative capital structure.

Adequate Liquidity:

PEG, Power, and PSE&G all have good liquidity. PEG and PSE&G each has its own commercial paper program to meet short-term liquidity requirements, with PEG using its program to also meet the short-term liquidity needs of Power.

The companies have an aggregate $4.3 billion in bank credit facilities. PEG's share of the revolving credit facilities totals $1 billion, with Power's totaling $2.7 billion and PSE&G's totaling $600 million.

Rating Sensitivities

Factors that individually or collectively result in a rating downgrade or Negative Outlook revision include:

PEG

--A change in financial management policies that incorporates a more aggressive use of leverage including acquisition related debt could lead to a rating downgrade.

Power

--The conservative capital structure and low leverage are key to Power's ratings. Debt to EBITDAR sustained above 2.75x (currently 1.9X) could lead to a downgrade.

--A higher risk profile for the merchant generation business including substantial capital investments for required environmental and safety upgrades that are not recoverable through higher prices could lead to a rating downgrade.

--A downgrade of PEG would likely trigger a downgrade of Power.

PSE&G

--A change in regulatory policies that inhibit PSE&G's ability to earn a timely and adequate return on invested capital.

--Debt to EBITDAR maintained above 3.5x (3.1x at year-end 2013)

could result in a downgrade.

Factors that individually or collectively lead to a rating upgrade:

PEG

--A change in the business mix resulting in a higher contribution of earnings and cash flows from regulated investments could lead to a higher rating.

PSE&G

--An upgrade of PSE&G's ratings over the near term is unlikely during its large capex program that will require substantial external financing and equity infusions from its parent. As the capex program matures, maintaining FFO Adjusted Leverage below 3.5x and Debt to EBITDAR below 3.25x could lead to a rating upgrade.

Power

--A positive rating action on Power is remote, due to the company's presence in the merchant power sector.

Fitch has affirmed the following ratings with a Stable Outlook:

PSE&G

--Long-term IDR at 'A-';

--Senior secured debt at 'A+';

--Pollution control revenue bonds at 'A+'.

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

PEG

--Long-term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Power

--Long-term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);

--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)' (March 11, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=859954

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Glen Grabelsky, +1-212-908-0577
Managing Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Robert Hornick, +1-212-908-0523
Senior Director
or
Committee Chairperson
Shalini Mhaajan, +1-212-908-0351
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Glen Grabelsky, +1-212-908-0577
Managing Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Robert Hornick, +1-212-908-0523
Senior Director
or
Committee Chairperson
Shalini Mhaajan, +1-212-908-0351
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com