BofA Downgrades Public Service Enterprise Group To Underperform

Although Public Service Enterprise Group Inc. PEG have underperformed their integrated peer group since the PJM’s capacity market auction prices were announced, Brian Chin of Bank of America Merrill Lynch believes there could be further downside risk from the current levels.

Chin downgraded the rating on the company from Neutral to Underperform, while lowering the price target from $46 to $41.

Lower Than Expected Auction Results

The analyst believes the weak capacity auction results are “a tangible sign that the long-expected debottlenecking of New Jersey’s longstanding power pricing premium is finally here. This should lead to weaker margins at PSEG’s deregulated generation segment.”

PJM’s weak capacity auction prices were below expectations, while New Jersey EMAAC region and the northern New Jersey PS and PS-North regions within the EMAAC declined to $120/MW-day.

Impact Of Results

“This is the first time in four years where capacity prices in none of those regions reflected capacity scarcity constraints,” Chin stated, while pointing out that excluding the May 2012 auction, this was the first time in five years that the company’s core New Jersey regions were unable to price above $167/MW-day.

Following the announcement of the auction results, forward PJM energy prices declined in response.

“By our calculations, a structural flattening of capacity prices and energy prices in New Jersey to the rest of PJM equates to a reduction in PEG’s EPS of $0.32 and EBITDA of $255 million,” Chin pointed out.