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Rating Action:

Moody's upgrades rating of PSEG Inc. to Baa1; outlook stable; subsidiary ratings affirmed

24 Jul 2017

Approximately $700 million of debt securities upgraded

New York, July 24, 2017 -- Moody's Investors Service, ("Moody's") today upgraded the senior unsecured rating at Public Service Enterprise Group Incorporated (PEG) to Baa1 from Baa2, the subordinate shelf rating to (P)Baa2 from (P)Baa3, and the preferred shelf rating to (P)Baa3 from (P)Ba1. The P-2 short-term rating for commercial paper was affirmed and the outlook was changed to stable from positive. All ratings at PEG's subsidiaries PSEG Power LLC (PSEG Power, Baa1 stable) and Public Service Electric & Gas Company (PSE&G, A2 stable) were affirmed.

Upgrades:

..Issuer: Public Service Enterprise Group Incorporated

....Preferred Shelf, Upgraded to (P)Baa3 from (P)Ba1

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

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

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

Outlook Actions:

..Issuer: Public Service Electric and Gas Company

....Outlook, Remains Stable

..Issuer: Public Service Enterprise Group Incorporated

....Outlook, Changed To Stable From Positive

..Issuer: PSEG Power LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: New Jersey Economic Development Authority

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

..Issuer: Public Service Electric and Gas Company

.... Commercial Paper, Affirmed P-1

.... Issuer Rating, Affirmed A2

....Senior Unsecured Shelf, Affirmed (P)A2

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

....Preferred Shelf, Affirmed (P)Baa1

....Pref. Stock Preferred Stock, Affirmed Baa1

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

....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

..Issuer: Public Service Enterprise Group Incorporated

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

..Issuer: PSEG Power LLC

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

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

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

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

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

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

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

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

RATINGS RATIONALE

"The upgrade of PEG's ratings reflect the increasing contribution of the regulated utility subsidiary relative to the unregulated business in terms of consolidated cash flow and especially the expected substantial increase in distributions to the parent from the utility", said Swami Venkataraman, Senior Vice President at Moody's. "As a result, the regulated utility will become more of a driver of the parent company's credit quality", added Venkataraman.

PEG's ratings have historically been constrained at Baa2 given that PSEG Power has been the sole source of dividends to the parent for the past several years. Going forward, we expect that PSE&G will start to be a material contributor of dividends to PEG starting in 2018 and the amount is expected to grow from 2019 onwards. In addition, PSE&G's share of PEG's operating income has grown over the past few years from about 45% to nearly 2/3rd in 2017, strengthening PEG's credit profile. With this changing profile, we will also evaluate PEG under our regulated utilities methodology going forward rather than under the unregulated utilities methodology used historically.

PEG historically had no debt at the parent level, but issued $1.2 billion in 2015-16 and will issue additional debt in 2017. Debt issuance at the parent largely reflects a drop in dividends from PSEG Power owing to that subsidiary's own capex program as well as equity investments by the parent into PSE&G. Notwithstanding the additional debt, financial metrics are expected to remain adequate to support the Baa1 rating at PEG. Going forward, we expect PEG's consolidated CFO-pre WC coverage of interest and debt to be in the 6-7x and 20-25% ranges, respectively, over the 2017-19 period. Over the next few years, our expectation is that parent level debt will remain under 20%, which is more than adequately incorporated into the two notch rating differential between PEG and its primary utility subsidiary PSE&G.

The affirmation of PSE&G's rating reflects the utility's stable operating and financial performance and continued strong growth in rate base opportunities, which the utility has financed over the last several years by retaining 100% of its earnings. PSE&G continues to operate under a favorable regulatory environment both with respect to New Jersey and with the FERC for its transmission business. PSE&G earns forward looking rates (at FERC) or contemporaneously (based on trackers in NJ) on 70% of its upcoming capex over the next five years, supporting cash flow and reducing regulatory lag. Transmission currently accounts for 44% of PSE&G's rate base and is set to grow further as it accounts for 50% of the utility's capex over the next five years.

Our affirmation of PSEG Power's ratings reflect the company's low leverage, efficient operations, ratable hedging strategy and the strong competitive position and locational advantages of its generating assets. Although financial ratios are expected to weaken going forward, with CFO pre-WC to debt in the 35-40% range compared with 40-50% historically, these ratios remain adequate for the rating. PSEG Power has prudently financed $1.5 billion in capex during 2015-18 to construct three new combined cycle gas plants totaling 1780 MW in PJM and ISO-NE. Construction was financed largely from retained cash flows and we expect absolute debt levels to decline back to 2014 levels by 2020.

Rating Outlook

The stable outlooks incorporate our expectation for continued stable financial performance at all three companies. Over the next few years, we expect CFO-pre WC coverage of debt to range from 20-25% at PEG, low-twenties percent at PSE&G and 35-40% at PSEG Power.

Factors that Could Lead to an Upgrade

PEG's ratings could be upgraded if the company experiences a stronger financial performance, such that CFO pre-WC/Debt is in the high 20% range on a sustained basis. An upgrade at PSEG Power may be considered if there is a material increase in the average life of its hedges resulting in an improved financial profile, supported largely by hedges, with CFO Pre-W/C coverage of debt above 50%. An upgrade at PSE&G could be considered if there is a sustained improvement in credit metrics, with CFO pre-WC) coverage of debt in the high-twenties percent range.

Factors that Could Lead to a Downgrade

PEG's ratings could be downgrade with CFO pre-WC/Debt falling to the high teens percent on a sustained basis. In addition, the incurrence of material holding company debt in excess of our assumptions, or in conjunction with a shareholder oriented financial strategy (other than capex), could also place downward pressure on the rating. PSEG Power's rating maybe downgraded if there is a material decline in the competitive position of its fleet due to a change in market dynamics or a materially weaker financial profile, with CFO Pre-W/C coverage of debt below 30%. PSE&G's rating could be downgraded if its regulatory relationships became contentious or if CFO pre-WC coverage of debt fell below 19% on a sustained basis.

Public Service Enterprise Group Incorporated (PEG, Baa1 stable) is the parent holding company of PSEG Power LLC (PSEG Power, Baa1 stable), a wholesale merchant generator with approximately 10.5 GW of capacity and Public Service Electric and Gas Company, New Jersey's largest regulated electric and gas transmission and distribution (T&D) utility. Other subsidiaries include PSEG Energy Holdings L.L.C. (Holdings), which owns a portfolio of leveraged leases, and PSEG Long Island LLC, which effective January 1, 2014, operates the Long Island Power Authority's T&D system under a contractual agreement.

The principal methodology used in rating Public Service Enterprise Group Incorporated and Public Service Electric and Gas Company was Regulated Electric and Gas Utilities published in June 2017. The principal methodology used in rating PSEG Power LLC was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

Swami Venkataraman, CFA
Senior Vice President
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

Jim Hempstead
MD - Utilities
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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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