Neil Kalton, CFA
Wells Fargo Securities
314-955-5239
Public Service Enterprise Group (PEG) reported Q3 operating EPS of $0.83 and guided to the upper end of the $2.50-$2.75 range for 2011. We reiterate our Outperform rating and 12-18 month range of $36-$37 per share.
Our revised EPS outlook reflects strong year-to-date results in 2011, PEG's updated hedge and volume disclosures for 2011E-2013E and recent forward power and fuel prices. Lower assumed power prices (both hedged and open) in our model post-2011 were partially mitigated by higher-than-expected output for PEG's intermediate coal, combined cycle and peaking units and lower assumed coal costs. We remain positive on PEG for the following reasons: (1) a diverse unregulated generation fleet, which is attractively located in a constrained power market, (2) strong regulated growth opportunities driven largely by investment with contemporaneous returns, and (3) a comparatively strong balance sheet that provides financial flexibility.
On the [recent analysts'] call, Exelon Corporation (EXC) addressed measures being implemented and/or considered in the wake of the poor power market outlook. These included (1) layering in more put options in the hedging program to mitigate exposure to natural gas but maintain exposure to a potential enviro-driven heat rate recovery and (2) evaluating the capital intensive nuclear uprate program.
In addition, management affirmed a commitment to the dividend. While we viewed the strategic discussion favorably, we are cognizant that the maneuvers and need to restate a commitment to the dividend are indicative of a prudent but increasingly defensive posture.
Paul Fremont
