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Rating Action:

Moody's affirms the ratings of PSE&G and PSEG; outlooks stable

01 May 2019

Approximately $11.0 billion of debt securities affected

New York, May 01, 2019 -- Moody's Investors Service ("Moody's") affirmed the ratings of Public Service Electric and Gas Company (PSE&G), including its A2 long-term (LT) Issuer Rating and P-1 short-term rating, and maintained stable outlook. Also, Moody's affirmed the ratings of Public Service Enterprise Group Incorporated (PSEG), including its Baa1 senior unsecured rating and P-2 short-term rating, and maintained stable outlook.

RATINGS RATIONALE

"Although we generally view the regulatory environment in New Jersey to be average, it has become more supportive of utility investments over the last few years, especially for PSE&G. PSE&G has been actively participating in the developments of the new regulatory framework and has improved its ability to recover investment cost and to earn appropriate and timely returns. PSE&G is pursuing a significant amount of investment ranging between $11 billion and $16 billion over the next five years and it will earn contemporaneous returns on most of its investments," stated Jairo Chung, Moody's analyst. "However, its investment will require the company's leverage to increase at a faster rate than its cash flow increase, putting pressure on its key credit metrics, notably its cash flow from operation before changes in working capital (CFO pre-WC) to debt being sustained around 19%," added Chung.

PSE&G's A2 LT Issuer Rating reflects PSE&G's interaction with its key regulator, the Board of Public Utilities (BPU), leading to a track record of largely predictable and consistent regulatory outcomes. Also, it incorporates the improvement in the cost recovery and PSE&G's ability to receive contemporaneous or near contemporaneous returns on over 90% of its investment in transmission and distribution. Furthermore, PSE&G benefits from having approximately 45% of its rate base that are transmission assets that are under the purview of the Federal Energy Regulatory Commission (FERC). Moody's estimates the overall weighted average allowed return on equity (ROE) to be approximately 10.5%. Moody's expects PSE&G to achieve an earned ROE close to it based on the FERC formulaic rate adjustments and the minimal lag under the New Jersey's regulatory framework.

On the other hand, Moody's views that PSE&G has limited financial flexibility within the rating category with key credit metric, CFO pre-WC to debt around 19% on a sustained basis, weak for its A2 rating. Moody's expects the magnitude of the company's investment program will continue to pressure on the company's financial profile. PSE&G's parent PSEG has stated that it does not plan to issue any equity to fund the utility's investment. Thus, Moody's expects PSE&G to be an active debt issuer while the company is pursuing its robust capital investment program.

PSEG's Baa1 senior unsecured rating incorporates its improved business risk. As PSE&G continues to invest in its rate base, the earnings contribution from the low risk utility operations is expected to increase over time. In addition, PSEG Power LLC (Baa1 stable), PSEG's merchant power generation subsidiary, recently received an approval for the zero emission certificate (ZEC) program, further improving certainty and visibility of its cash flow over the next three years. Based on its improved business risk profile, Moody's expects PSEG to maintain its financial profile that is appropriate for its rating, including CFO pre-WC to debt above 17%.

Outlook

PSE&G's stable outlook reflects the meaningful improvement in the regulatory environment which resulted in minimal regulatory lag for its robust investments. It also incorporates Moody's view that PSE&G will maintain its financial profile that is consistent with the current profile with its CFO pre-WC to debt around 19%.

PSEG's stable outlook incorporates Moody's expectation that the company's business risk will continue to improve with the increase in the utility's earnings. Also, Moody's expects PSEG's financial profile to maintain a stable financial profile.

Factors that could lead to an upgrade

Given PSE&G's strong credit rating and its ongoing capital investment program, an upward movement in the ratings is unlikely at this time. However, a sustained improvement in its credit metrics, such as its CFO pre-WC to debt above 24%, could lead to a rating upgrade.

For PSEG, a rating upgrade is unlikely with the ongoing utility investment that requires additional leverage. However, a rating upgrade could be considered if there is a sustained improvement in PSEG's consolidated credit metrics such that its CFO pre-WC to debt is above 22%.

Factors that could lead to a downgrade

PSE&G's rating could be downgraded if the regulatory relationship becomes contentious and regulatory lag increases. If PSE&G's risk profile increases as a result of higher operational risk, or poor execution of its investment program, a downgrade could be considered. Also, if the financial profile further weakens and its CFO pre-WC to debt falls below 19% on a sustained basis, a downgrade could be possible.

A rating downgrade could be possible for PSEG if its business risk increases while its credit metrics do not improve to absorb the additional business risk. Also, if the regulatory environment in New Jersey becomes contentious, resulting in longer regulatory lag; or if its financial profile deteriorates such that its CFO pre-WC to debt falls to 17%, a rating downgrade could be considered.

Outlook Actions:

..Issuer: Public Service Electric and Gas Company

....Outlook, Remains Stable

..Issuer: Public Service Enterprise Group Incorporated

....Outlook, Remains Stable

Affirmations:

..Issuer: New Jersey Economic Development Authority

....Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: Public Service Electric and Gas Company

.... Commercial Paper, Affirmed P-1

.... Issuer Rating, Affirmed A2

....Pref. Stock, Affirmed Baa1

....Senior Secured First Mortgage Bonds, Affirmed Aa3

....Underlying Senior Secured First Mortgage Bonds, Affirmed Aa3

....Senior Secured Medium-Term Note Program, Affirmed (P)Aa3

....Senior Secured Regular Bond/Debenture, Affirmed Aa3

....Senior Secured Shelf, Affirmed (P)Aa3

..Issuer: Public Service Enterprise Group Incorporated

....Preferred Shelf, Affirmed (P)Baa3

....Subordinate Shelf, Affirmed (P)Baa2

....Senior Unseured Shelf, Affirmed (P)Baa1

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Salem (County of) NJ, Pollution Ctrl Fin Auth

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: York County Industrial Development Auth., PA

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

Public Service Electric and Gas Company (PSE&G) is the largest regulated transmission and distribution utility in New Jersey with its rate base estimated around $19 billion. PSE&G serves approximately 2.3 million electric and 1.8 million gas customers, accounting for approximately 70% of the state's population. PSE&G is a wholly-owned subsidiary of Public Service Enterprise Group Incorporated (PSEG).

Public Service Enterprise Group (PSEG), headquartered in New Jersey, is a utility holding company with a business mix that consists of a low risk utility operations in New Jersey and an unregulated merchant power generation company with the Northeast and Mid-Atlantic regions of the U.S.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jairo Chung
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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