Fitch Affirms Public Service Enterprise Group & Subsidiaries' Ratings

CHICAGO--()--Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of Public Service Enterprise Group Incorporated (PSEG) and its competitive generation subsidiary PSEG Power LLC (Power) at 'BBB+'. Fitch 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 Rating Outlook for PSEG, Power, and PSE&G is Stable. A detailed list of ratings is provided at the end of this release.

The ratings are anchored by the predictable operating earnings from the regulated business, the resilient cash flow generation from the merchant operations, and the conservative financial strategy. The Stable Outlook reflects Fitch's expectations that credit metrics will remain commensurate with the current ratings, despite a modest weakening as PSEG's subsidiaries work through significant capital spending programs in 2015-2017.

KEY RATING DRIVERS

KEY RATING DRIVERS FOR PUBLIC SERVICE ENTERPRISE GROUP INC.

Conservative Financial Policies: The ratings on PSEG are supported by its solid financial metrics reflecting conservatively capitalized subsidiaries and the absence of parent-level debt. Fitch's financial forecast incorporates a modest increase in consolidated leverage, including possible use of parent-level debt, to fund the capex plan with adjusted debt/EBITDAR and FFO-adjusted leverage approaching 3.4x and 3.6x, respectively, by 2017 compared with 2.3x and 2.4x, respectively, at June 30, 2015. Although PSEG has the capacity to increase leverage within the current rating level, it is a moderate concern, and Fitch will monitor the amount, nature and purpose of debt issuance to ensure PSEG's financial profile remains consistent with Fitch's expectations.

Improving Business Profile: Fitch expects regulated earnings, currently representing slightly more than half of consolidated earnings, to grow modestly in the coming years. The growth primarily reflects increasing regulated earnings, through investments to expand its rate base, and stable merchant earnings. Merchant power has proven its ability to deliver consistent free cash flows in volatile environment with its conservative capitalization, favourable location, and hedging strategy.

Large Capex Program: PSEG's capex program is expected to exceed $3.2 billion in 2015 and be maintained at elevated levels through 2017, with the majority of investments expanding PSE&G's regulated rate base. Contemporaneous recovery on more than half the investments and attractive allowed returns on Federal Energy Regulatory Commission (FERC)-regulated investments partly offset the financial pressure.

Stable Merchant Power Business: The credit profile of the merchant business has been maintained through a stabilization of its cash flow generation, modest capex investments, favourable generation profile, and hedging strategies. Significant free cash flows generation from the merchant operations have funded most dividend payments in recent years, therefore enabling PSE&G to retain earnings to fund its capex program.

KEY RATING DRIVERS FOR PUBLIC SERVICE ELECTRIC & GAS CO.

Solid Financial Profile: PSE&G's ratings reflect a financial profile that compares favourably with Fitch's target ratios for the current rating level and its peer group. Fitch expects credit metrics to weaken moderately over the next few years due to the elevated capex program, base rate case avoidance, and the absence of bonus depreciation. Fitch forecasts adjusted debt/EBITDAR to average 3.5x and adjusted FFO-adjusted leverage to average 4.2x through 2017, which remain supportive of the existing ratings.

Large Capex Cycle: PSE&G is in the midst of a large capex program centred on FERC-regulated transmission projects, and electric and natural gas infrastructure improvements. FERC-related investments account for approximately 62% of the $10.8 billion five-year capex plan. An additional $1.2 billion is being invested in the Energy Strong (ES) program while a request to invest $1.6 billion for a gas system modernisation program (GSMP) is pending with the New Jersey Board of Public Utilities.

Constructive Regulatory Environment: The capex plan will increase the FERC jurisdictional share of PSE&G's rate base to slightly above 50% in 2019 from about 40% currently. The regulatory diversity and cash flow predictability of FERC formula rates lowers the business risk. PSE&G has rider recovery mechanism for its ES program and is seeking the same for GSMP. A fuel and purchase power adjustment mechanism and weather-normalization clause in the gas business also contribute to earnings and cash flow predictability and reduced business risk. The use of riders reduces the need to file for general rate cases.

Financial Flexibility: During the current period of high capex, financial flexibility has been aided by the decision of PSEG to not extract dividends in any of the prior three years. Fitch expects management to maintain an equity ratio in the 51%-52% range and only seek modest dividends, if any, over the rating horizon.

KEY RATING DRIVERS FOR PSEG POWER LLC

Operating Environment: The operating environment for Power's competitive generation business is expected to remain challenging as sluggish demand and abundant natural gas supply constrain power prices. Fitch views capacity market reforms, to be effective in the next PJM capacity auction, to be as constructive and supportive of Power's credit quality.

Competitive Position: The generation profile is well placed along the dispatch curve with the nuclear fleet, representing approximately 55% of generation, likely to be dispatched under any price scenario. The generation fleet is located in the constrained mid-Atlantic and New England markets and it is close to load pockets resulting in realised power prices slightly above that of closest liquid hubs. With modest exposure to coal and carbon regulation, Power is also well positioned to benefit from any uplift in power prices from higher environmental costs or reduced supply from coal retirements.

Capacity Market Reforms: The introduction of the capacity performance (CP) product in PJM, where the majority of Power's generating capacity is located, should be supportive of its credit profile. Per management estimates, about 90% of Power's fleet meets the new CP standards with minimal to moderate investments. PJM's capacity performance (CP) product is expected to stabilize, and possibly improve, capacity revenue.

Conservative Financial Policies: Power's credit profile has been maintained in recent years with a stabilization of its cash flow generation and debt outstanding. However, the construction of the Keys Energy Center will likely require incremental debt issuance. Based on Fitch's forecast for commodity markets, Power has the capacity to modestly increase its debt burden at the current rating level, and Fitch models adjusted debt/ EBITDAR increasing to around 2.7x over the 2016-2017 time horizon. Nonetheless, a higher debt burden will constrain Power's ability to face unexpected challenges in its operating environment and could restrict dividend payments to its parent PSEG.

Hedging Strategy: Power's fleet is located in organized market structures, including participation in the Basic Generation Services auction in New Jersey and capacity markets in PJM and ISO-NE, which provides stability to cash flows. Power's hedging strategy targets 75-80% hedges in the current year, 50-55% in year two and 25-30% in year three.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

--Flat sales (in KWh) over the next several years;

--PSE&G rate filing in November 2017 with new rates effective late 2018;

--Slight deterioration of Power's energy margins and stable capacity revenues;

--Execution of the planned capex program at PSE&G and Power, including partial approval of the gas system modernization program and development of the Keys Energy Center;

--Debt financing and dividend payments at PSE&G and Power, such that credit metrics remain commensurate with their current ratings;

--Modest parent debt balances and conservative consolidated leverage.

RATING SENSITIVITIES FOR PEG

Positive Rating Sensitivities:

A positive rating action is unlikely given the high proportion of earnings coming from the merchant power sector. However, a change in the business mix resulting in regulated and/or long-term contracted investments contributing to more than 80% of operating earnings could lead to a higher rating if accompanied with a conservative capital structure.

Negative Rating Sensitivities:

A change in financial management policies that incorporates a more aggressive use of leverage including acquisition related debt could lead to a rating downgrade. Ratings would be under pressure if adjusted Debt/EBITDAR and adjusted-FFO leverage were to exceed 3.5x and 4.5x, respectively, for a sustained period.

RATING SENSITIVITIES FOR PSE&G

Positive Rating Sensitivities:

Fitch does not currently expect a rating upgrade given PSE&G's large capex program. However, factors that could individually or collectively lead to a positive rating action include a decline of adjusted debt/EBITDAR to 3.25x or lower and/or adjusted-FFO leverage at 3.5x or lower on a sustainable basis.

Negative Rating Sensitivities:

Factors that could individually or collectively lead to a negative rating action include a rise in adjusted debt/EBITDAR above 3.6x and/or adjusted-FFO leverage above 4.5x on a sustainable basis. A change in regulatory policies that inhibits PSE&G's ability to earn a timely and adequate return on invested capital could also result in a rating downgrade.

RATING SENSITIVITIES FOR POWER

Positive Rating Sensitivities:

--A positive rating action on Power is remote; Fitch typically caps the IDR of merchant generation companies at 'BBB+'.

Negative Rating Sensitivities:

--The conservative capital structure and low leverage are key to Power's ratings. As such, adjusted Debt/EBITDAR sustained above 2.75x would 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. As well, a downgrade of PSEG would likely trigger a downgrade of Power.

LIQUIDITY AND DEBT STRUCTURE

Ample Liquidity: PSEG, PSE&G and Power had ample liquidity and manageable debt maturity schedules at June 30, 2015. Consolidated liquidity was strong, at second-quarter end, with about $600 million in cash and equivalent and minimal borrowings under syndicated credit facilities (maturing in March 2020) totalling $4.3 billion. PSEG, Power and other unregulated subsidiaries participate in a money pool while PSE&G does not engage in any inter-company borrowing or lending. PSE&G's credit facility of $600 million serves as a back-stop for its commercial program while Power's $2.6 billion credit facility is primarily used to provide collateral for its forward energy sale and forward fuel purchase contracts.

Manageable Debt Maturity Schedule: PSE&G issued $600 million of first-mortgage bonds in May 2015, which were partly used to refinance maturities. Sustained incremental debt issuance is expected over the rating horizon to finance both the planned capex program at PSE&G and the construction of the new plant project by Power.

Minimal Debt Outstanding at PSEG: There were no borrowings under PEG's $1 billion revolving credit facility and minimal external debt outstanding at the end of second-quarter 2015. PSEG's credit facility includes cross default provisions with PSE&G and Power. However, PSE&G and Power fulfil their respective financing needs without cross guarantees or cross default provisions to each other or PSEG.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Stable Outlook:

PSEG

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

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

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'.

Power

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

--Senior unsecured debt at 'BBB+'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

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

Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989194

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989194

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Maude Tremblay
Director
+1-312-368-3203
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL, 60602
or
Secondary Analyst
Robert Hornick
Senior Director
+1-212-908-0523
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
Date of Relevant Rating Committee: Aug. 6, 2015
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Maude Tremblay
Director
+1-312-368-3203
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL, 60602
or
Secondary Analyst
Robert Hornick
Senior Director
+1-212-908-0523
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
Date of Relevant Rating Committee: Aug. 6, 2015
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com