Public Service Enterprise Group Inc. and the investment community see the sale of the utility's fossil fleet providing more stable and predictable growth as it transitions to a cleaner company.

"Today, PSEG took another significant step in our evolution as a clean energy infrastructure-focused company," PSEG Chairman, President and CEO Ralph Izzo posted on his LinkedIn account. "For investors and our many stakeholders, the sale of the fossil assets will improve our business mix, help realize a more predictable earnings profile and enhance an already compelling environmental, social and governance (ESG) profile."

PSEG on Aug. 12 announced the sale of PSEG Power LLC's non-nuclear generation fleet to Arclight Energy Partners Fund VII LP, a fund controlled by ArcLight Capital Partners LLC, for about $1.92 billion. The fleet consists of about 6,750 MW of unregulated fossil fuel generation, primarily natural gas plants.

The Newark, New Jersey-headquartered gas and electric utility said the sale includes 13 generation units in New Jersey, Connecticut, Maryland and New York.

PSEG expects to book a pretax impairment charge of $2.15 billion to nearly $2.23 billion on the sale with debt redemption costs including a make-whole premium of $280 million to $340 million. Coupled with the sale of the PSEG Solar Source LLC portfolio in June, PSEG anticipates the fossil fleet sale will result in about $2.15 billion in after-tax net proceeds.

Guggenheim Securities LLC analyst Shahriar Pourreza said the asset sale helps set a "constructive path forward" for PSEG "with a significantly de-risked business mix" including 6.5% to 8% annual rate base growth for Public Service Electric and Gas Co., along with offshore wind and infrastructure opportunities.

Guggenheim and CreditSights signaled the transaction value is roughly in line with their expectations.

The assets expected to be sold include the 755-MW PSEG Keys Energy Center in Prince George's County, Md., the 576-MW Bridgeport Harbor Station combined-cycle natural gas plant in Fairfield County, Conn., and the 931-MW Bethlehem Energy Center in Albany County, N.Y. The 1,229-MW Bergen combined-cycle natural gas plant in Bergen County, N.J.; the 1,230-MW Linden combined-cycle natural gas plant in Union County, N.J.; and the 525-MW Sewaren Gas Power Plant in Middlesex County, N.J., also are believed to be part of the transaction.

CreditSights analyst Andrew DeVries noted the impairment change is "mostly related to three of the plants only recently coming online."

PSEG, in July 2020, announced it was exploring stategic alternatives for its unregulated fossil fuel generation and the 467-MW solar portfolio. In November 2020, Izzo told analysts and investors the company is offloading the fossil fleet to reduce "overall earnings volatility" and enhance its ESG position.

"This is part of the path that they have been on," Glenrock Associates LLC analyst Paul Patterson said in an Aug. 12 interview. "It's not exactly an invisible trend."

While a significant portion of the proceeds is expected to be used for debt reduction, Patterson agreed that the transaction "improves the carbon profile" for PSEG.

"It also frees up the company financially and operationally to be more concentrated in the clean energy and infrastructure business," Patterson said. "There could be some recapitalization."

On an Aug. 3 earnings call, Izzo said the company sees a "sizable opportunity in offshore wind" and related infrastructure. The company is planning to submit bids as New Jersey solicits proposals through the PJM Interconnection for electric transmission infrastructure to support the state's goal to develop 3,500 MW of offshore wind resources by 2030 and 7,500 MW by 2035.

Wall Street also expects PSEG to provide long-term earnings guidance and potentially outline a 5% to 7% EPS growth plan during the company's analyst day in September.

"With the decreased volatility from merchant power and a consistent set of [long-term] fundamentals ... we believe [PSEG] can now offer investors strong earnings visibility, which could likely point to a [5% to 7%, three-to-five-year] EPS" compound annual growth rate, Guggenheim's Pourreza wrote.

PSEG on Aug. 12 updated its full-year 2021 operating earnings guidance to $3.50 per share to $3.65 per share, from $3.40 per share to $3.55 per share.

'A forced ESG seller'

As another part of its clean energy transition, PSEG in June announced plans to target net-zero emissions by 2030 and direct half of its $14 billion to $16 billion capital spending program for 2021 through 2025 toward decarbonization, and emission and methane reduction.

PSEG and analysts, however, pointed out that while the fossil plants will no longer be part of PSEG's portfolio, they will still be in operation.

"I understand that the emissions from the fossil-fueled power plants we're selling aren't going anywhere anytime soon, even though the assets are leaving PSEG's books," Izzo wrote. "However, our transition to a carbon-free generation portfolio will allow us to be full-throated advocates for policies that support the clean energy transition and compensate carbon-free generators for their environmental and climate benefits — such as an economy-wide price on carbon."

On the flip side, CreditSights said it expects ArcLight "will make significant money on the purchase as [PSEG] was essentially a forced ESG seller."

"[T]here are very few buyers of fossil assets and all the offshore wind farms that will eventually displace most of the [megawatt-hours] from these plants will no doubt be severely delayed until later in the decade," DeVries wrote in an Aug. 12 research report.

Denmark's Ørsted A/S, the world's largest offshore wind developer, on an Aug. 12 earnings call said that wind speeds in the second quarter were among the worst in 20 years. PSEG in April completed its acquisition of a 25% stake in the planned 1,100-MW Ocean Offshore Wind Farm in New Jersey from Ørsted's North American subsidiary.

"We suspect these plants [PSEG] is selling will do quite well when the wind isn't blowing," DeVries wrote.

PSEG said it expects the ArcLight transaction to close in the fourth quarter of this year or early 2022.

Glenrock's Patterson said he's unsure of what ArcLight's long-term plans for the merchant assets will be in a decarbonizing economy.

"In many cases, I think [private equity firms] are trying to extract as much value out of them as they can," Patterson said.