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Rating Action:

Moody's changes PSEG and PSEG Power outlooks to negative; affirms all ratings

18 Aug 2021

Approximately $5.7 billion of debt affected

New York, August 18, 2021 -- Moody's Investors Service ("Moody's") changed the outlooks of Public Service Enterprise Group Incorporated (PSEG) and PSEG Power LLC (PSEG Power) to negative from stable. Moody's affirmed the ratings of both entities, including PSEG's Baa1 senior unsecured rating and Prime-2 short-term rating for commercial paper, as well as PSEG Power's Baa1 senior unsecured rating. The outlook change follows PSEG's announcement [1] on 12 August that it had reached an agreement to sell PSEG Power's 6,750 MW of fossil-powered generating assets to a newly formed subsidiary of ArcLight Capital Partners, LLC for approximately $1.92 billion.

RATINGS RATIONALE

"PSEG Power will now have a much smaller generation portfolio with 100% nuclear fuel concentration," stated Jairo Chung, Moody's analyst. "While the Zero Emission Credit (ZEC) program provides some stability in cash flow, PSEG Power will be more vulnerable to volatility in the power markets as a baseload only generator and to changes in the New Jersey regulatory environment" added Chung.

The negative outlook on parent company PSEG reflects the credit pressure on both of its subsidiaries, PSEG Power and regulated utility Public Service Electric and Gas Company (PSE&G, A2 negative). PSE&G's outlook was changed to negative earlier this year as the utility subsidiary continues to pursue a robust rate base growth program, key credit metrics have weakened and debt levels have increased. Also, we expect PSEG's offshore wind investment to be funded by the new debt issued at the parent level.

At the same time, the business risk of PSEG Power is shifting. Although PSEG's overall carbon transition risk will be significantly reduced with the sale of non-nuclear assets, the more limited financial flexibility at the parent and lower than historical credit metrics at PSEG Power more than offset any environmental benefits. As a result, we expect parent company PSEG's credit metrics to also be pressured once the non-nuclear generation asset sale is completed, including its cash flow from operations before changes in working capital (CFO pre-WC) to debt ratio, which is already below its 17% downgrade threshold, compared to historical levels closer to 20%.

With the sale proceeds, PSEG Power is expected to redeem all of its outstanding senior unsecured notes totaling approximately $1.4 billion. In addition, PSEG Power's debt redemption costs will include a make-whole premium ranging from $280 million to $340 million. It is expected that PSEG Power will be recapitalized as the non-nuclear generation asset sale is completed. The sale is expected to close in the late fourth quarter of 2021 or the first quarter of 2022. The negative outlook also reflects our view that the recapitalized PSEG Power will maintain credit metrics at lower levels than historically.

Over the last three years, PSEG Power produced stable financial metrics with the company's CFO pre-WC to debt averaging 40% and retained cash flow (RCF) to debt averaging around 26%. The additional cash flow benefit from the ZEC payments have moderated some of the adverse effects of weak power market since 2019 and we expect PSEG Power to continue to benefit from them, especially with the program extended through May 2025.

Rating Outlook

PSEG's negative outlook reflects the credit pressure on its two subsidiaries, PSE&G and PSEG Power, as well as reduced financial flexibility at the holding company.

PSEG Power's negative outlook reflects the company's much smaller and more concentrated generation portfolio with approximately 3.7 GW of nuclear capacity, including its 50% ownership in Peach Bottom Nuclear Generating Station that it does not operate. It also reflects expected lower financial metrics, increased vulnerability to power market volatility, and higher exposure to the New Jersey regulatory environment.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors That Could Lead to an Upgrade

An upgrade of PSEG's ratings is unlikely given the negative outlook and considering the ongoing utility investment program at PSE&G, the additional leverage it requires and the parent company's weakening financial metrics in recent years. However, a rating upgrade could be considered if there is a material, sustained improvement in PSEG's consolidated credit metrics such that its CFO pre-WC to debt is above 22%.

The negative outlook also limits the possibility of an upgrade of PSEG Power. An upgrade may be considered if there is a material improvement in its financial profile, or through a recapitalization of the company that results in a CFO pre-WC to debt ratio above 50%, or above 40% when accounting for nuclear fuel as a cash expense, on a sustained basis.

Factors That Could Lead to a Downgrade

A rating downgrade could be considered for PSEG if its financial profile continues to deteriorate such that we expect its CFO pre-WC to debt to be below 17% on a sustained basis; if one or both of its main subsidiaries are downgraded; if the regulatory environment becomes less credit supportive or contentious, resulting in longer regulatory lag; or if its business risk increases while its credit metrics do not improve to offset any additional risk.

A rating downgrade could occur if and when PSEG Power completes the sale of its non-nuclear generating assets and shrinks its generation portfolio significantly while increasing fuel concentration. Also, if the sale and planned recapitalization results a materially weaker financial profile, such as CFO pre-WC to debt below 35%, or below the 25% range on a nuclear fuel adjusted basis, a downgrade could be considered.

Affirmations:

..Issuer: PSEG Power LLC

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

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

Affirmations:

..Issuer: Public Service Enterprise Group Incorporated

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

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

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

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

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

Outlook Actions:

..Issuer: Public Service Enterprise Group Incorporated

....Outlook, Changed To Negative From Stable

..Issuer: PSEG Power LLC

....Outlook, Changed To Negative From Stable

Public Service Enterprise Group Incorporated (PSEG) is a utility holding company with a business mix that consists of regulated utility operations in New Jersey through Public Service Electric and Gas Company, and an unregulated merchant power company, PSEG Power LLC. Other subsidiaries include PSEG Long Island, LLC, which operates the Long Island Power Authority's transmission and distribution system under a contractual agreement and PSEG Energy Holdings L.L.C., which owns a portfolio of leveraged leases.

PSEG Power LLC is a merchant power plant operator and a wholly owned subsidiary of PSEG. PSEG Power recently announced the sale of approximately 6.7 GW of non-nuclear generating assets, resulting in the shift of its profile to a nuclear-only power company with approximately 3.7 GW of capacity concentrated in New Jersey.

The principal methodology used in rating PSEG Power LLC was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. The principal methodology used in rating Public Service Enterprise Group Incorporated was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] https://nj.pseg.com/newsroom/newsrelease241 12-Aug-2021

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
VP - Senior Credit Officer
Infra 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
Infra 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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