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Rating Action:

Moody's downgrades PSEG to Baa2 and PSE&G to A3; assigns Baa2 Issuer Rating to PSEG Power; outlooks stable

08 Oct 2021

Approximately $16.5 billion of debt securities affected

New York, October 08, 2021 -- Moody's Investors Service ("Moody's") downgraded the long-term ratings of Public Service Enterprise Group Incorporated (PSEG) and the ratings of Public Service Electric and Gas Company (PSE&G). Ratings downgraded include PSEG's senior unsecured rating to Baa2 from Baa1; and PSE&G's first mortgage bond rating to A1 from Aa3, Issuer Rating to A3 from A2, and short-term commercial paper rating to Prime-2 from Prime-1. At the same time, Moody's affirmed PSEG's Prime-2 short-term commercial paper rating. The outlooks of PSEG and PSE&G were changed to stable from negative.

Moody's also assigned a new Baa2 Issuer Rating to PSEG Power LLC (PSEG Power) and changed its outlook to stable from negative. See below for a complete list of rating actions.

RATINGS RATIONALE

"Over the last few years, PSEG's credit metrics have deteriorated to the mid-teens from above 20% as more of its earnings and cash flows have been generated from its regulated utility operations," stated Jairo Chung, Moody's analyst. "Increased debt levels at the parent company to fund offshore wind expansion and a high level of utility capital investment will keep its metrics at these lower levels over the next few years," added Chung.

PSEG's Baa2 rating reflects its position as a regulated utility and unregulated power holding company with a CFO pre-WC to debt ratio that we expect will be in the 14%-15% range. It also considers the material amount of debt at the parent level, which has increased over the last couple of years. The percentage of parent debt to consolidated debt averaged around 17% between 2016 and 2019 but it has since increased to around 23% at the end of 2020. In addition, the pending sale of PSEG Power's nonnuclear generation assets will not lead to a reduction in the level of parent debt with some of the proceeds instead will be utilized for share buybacks and a dividend increase.

Furthermore, we expect PSEG to fund its new offshore wind investments with new debt issued at the parent level. We see an expansion of PSEG's offshore wind plans as bringing more construction risk and operating complexity to the organization. We view risks associated with offshore wind investments to be higher than those of onshore wind projects, which have a long history of successful execution in the US. Offshore wind risks include a greater sensitivity to weather and environmental conditions and higher supply chain and permitting uncertainties. These risks can be partly mitigated by a strategic ownership structure and robust contractual provisions as well as support from federal and state levels through their environmental goals and incentives.

PSEG's credit rating also incorporates the earnings and cash flow generated from its low risk wires-only regulated utility PSE&G. The company expects to generate approximately 90% of its earnings from PSE&G. We expect more than 75% of cash flow will be generated from the utility.

PSE&G's A3 Issuer Rating reflects our expectation that the utility's CFO pre-WC to debt ratio will be maintained at around 18% going forward as it continues to pursue a robust capital investment program. At its recent investor day, the company increased its capital investment plan by $1 billion to a range of $14 billion - $16 billion through 2025. The utility's investments are expected to be funded by its internally generated cash flow, additional debt issued at the utility, as well as the proceeds from new debt expected to be issued at PSEG Power. Approximately 90% of PSE&G's annual investment will continue to earn returns contemporaneously. PSE&G has aligned its investment opportunities with New Jersey's energy policy goals and has several rate mechanisms and riders to assure recovery of its investments.

The Baa2 Issuer Rating assigned to PSEG Power considers the company's smaller scale, lack of fuel diversity, as well as the concentrated geographic location of its nuclear power plants. It also reflects the company's improved overall carbon transition risk as a result of the recent sale of its non-nuclear generation assets, and relatively stable cash flow generation, which benefits from New Jersey's Zero Emission Certificate (ZEC) payments through 2025. Also, we expect the company to continue operating its nuclear power plants safely and reliably.

We continue to view the merchant power market to be volatile. Lower than historical power prices, primarily driven by low natural gas prices and an increasing supply of renewable generation resources, are expected to continue although they have shown some improvement in recent months. Despite the recent improvements, we expect these weakened power market conditions to continue. As a smaller baseload-only power company, PSEG Power will be more exposed to these volatilities and uncertainties. The company is expected to recapitalize its balance sheet once the sale of its non-nuclear assets is finalized and PSEG Power has stated that it will target a cash flow to debt metric of around 40% after the recapitalization.

Rating Outlook

The stable outlooks reflect our expectation that PSEG and PSE&G will maintain their current credit profiles while PSE&G continues its robust investment program over the next several years. Also, PSEG's stable outlook incorporates our view that its offshore wind investments will remain small relative to its other businesses and allow the company to maintain a similar level of business risk.

The stable outlook for PSEG Power incorporates our view that the company will generate relatively stable cash flow through its energy hedging practices and the continuation of ZEC payments and continue to operate its nuclear power plants consistently.

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

Factors That Could Lead to an Upgrade

A rating upgrade could be considered if PSEG improves its credit profile such that its financial metrics increase materially, including a CFO pre-WC to debt ratio above 17% on a sustained basis. For PSE&G, if its CFO pre-WC to debt is maintained above 20%, a rating upgrade could be possible. In addition, if the regulatory environment improves, resulting in a meaningful improvement in the utility's business risk and greater certainty and visibility for the utility's cash flow generation, the ratings of PSE&G could be upgraded.

A rating upgrade could be considered for PSEG Power if there is a material strengthening of its financial profile that results in a cash flow from operations before changes in working capital (CFO pre-WC) to debt ratio above 35%, or 28% after adjusting for nuclear fuel expense, on a sustained basis. If there are market developments that improve cash flow visibility and certainty and the company's merchant power market volatility exposure is significantly mitigated, a rating upgrade could be possible.

Factors That Could Lead to a Downgrade

A downgrade could be considered for PSEG or PSE&G if the regulatory environment deteriorates such that regulatory lag increases significantly. For PSEG, a rating downgrade could be possible if its CFO pre-WC to debt falls below 14% or its percentage of parent debt increases above 25% on a sustained basis. For PSE&G, if its CFO pre-WC to debt ratio falls below 17% on a sustained basis, its ratings could be pressured.

A rating downgrade could be considered if PSEG Power's credit metrics deteriorate including its CFO pre-WC to debt falling below 31%, or 24% after adjusting for nuclear fuel expense, on a sustained basis. If the power markets deteriorate such that PSEG Power's market exposure increases or cash flow visibility diminishes, such as due an unexpected termination of the ZEC payments, a rating downgrade could occur.

Assignments:

..Issuer: PSEG Power LLC

.... Issuer Rating, Assigned Baa2

Affirmations:

..Issuer: Public Service Enterprise Group Incorporated

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

Downgrades:

..Issuer: Public Service Electric and Gas Company

.... Commercial Paper, Downgraded to P-2 from P-1

.... Issuer Rating, Downgraded to A3 from A2

....Pref. Stock Preferred Stock, Downgraded to Baa2 from Baa1

....Senior Secured First Mortgage Bonds, Downgraded to A1 from Aa3

....Senior Secured Medium-Term Note Program, Downgraded to (P)A1 from (P)Aa3

....Senior Secured Regular Bond/Debenture, Downgraded to A1 from Aa3

..Issuer: NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

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

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

....Underlying Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

..Issuer: Public Service Enterprise Group Incorporated

....Pref. Shelf, Downgraded to (P)Ba1 from (P)Baa3

....Subordinate Shelf, Downgraded to (P)Baa3 from (P)Baa2

....Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

Outlook Actions:

..Issuer: PSEG Power LLC

....Outlook, Changed To Stable From Negative

..Issuer: Public Service Electric and Gas Company

....Outlook, Changed To Stable From Negative

..Issuer: Public Service Enterprise Group Incorporated

....Outlook, Changed To Stable From Negative

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 its utility subsidiary, Public Service Electric and Gas Company (PSE&G), and an unregulated merchant power company, PSEG Power LLC (PSEG Power), which will have approximately 3.8 G of nuclear generating capacity after it completes the sale of non-nuclear generating assets. 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. Also, a separate subsidiary called PSEG Renewable Generation holds a 25% interest in the 1,100 MW Ocean Wind project, an offshore wind investment 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 Electric and Gas Company and 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.

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
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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