Public Service Enterprise Group Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2022

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Kyle, and I am your event operator today. I'd like to welcome everyone to today's conference, Public Service Enterprise Group's Second Quarter 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. And answer session.

Operator

And the number one on your telephone Systems during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded today, August 2, 2022, and will be available for replay as an audio webcast on PSEG's Investor Relations website at investor. Pseg.com. I would now like to turn the conference over to Carlotta Chan. Please go ahead.

Speaker 1

Thank you, Kyle. Good morning, everyone. PSEG's 2nd quarter 2022 earnings release, attachments and slides detailing operating results by company are posted on our IR website located at www.investor. Pseg.com, and our 10 Q will be filed shortly. The earnings release and other matters discussed during today's call contain forward looking statements and estimates that are subject to various risks and uncertainties.

Speaker 1

We will also discuss non GAAP operating earnings, which differs from net income as reported in accordance with Generally Accepted Accounting Principles or GAAP in the United States. We include reconciliations of our non GAAP financial measures and a disclaimer regarding forward looking statements on our IR website and in today's earnings materials. On today's call are Ralph Izzo, Chair, President and Chief Executive Officer of PSEG Dan Craig, Executive Vice President and Chief Financial Officer. And following their prepared remarks, Ralph LaRosa, currently Our Chief Operating Officer and our next CEO will join Ralph and Dan to take your questions. Ralph?

Speaker 2

Thank you, Carlotta. Good morning, everyone, and thanks for joining us for a review of PSEG's Q2 2022 results. For the Q2, PSEG reported net income of $131,000,000 or $0.26 per share compared to a net loss of $177,000,000 or $0.35 per share in the Q2 of 2021. Non GAAP operating earnings for the Q2 of 'twenty two were $320,000,000 or $0.64 per share compared to non GAAP operating earnings of $356,000,000 or $0.70 per share in 20 21 Second Quarter. And just a reminder, and I'll repeat this several times throughout this call, that the Q2 2021 included the results from our divested fossil assets and solar source.

Speaker 2

PSEG is on track to achieve our 2022 Non GAAP Operating Earnings Guidance of $3.35 to $3.55 per share based on results through the 1st 6 months of 2022. This is largely driven by ongoing rate based growth from regulated investments and lower costs due to the already mentioned sale of generation assets on the carbon free infrastructure side of the business. Utility earnings for the first half of twenty twenty two are up 4% over last year. At Carbon Free Infrastructure, the year over year comparisons are skewed by our asset sales. Also, the majority of 20 22's earnings at the Carbon Free Infrastructure and Other side of the business have been realized as of June 30.

Speaker 2

So for the balance of 2022, the utility will continue to be the main driver of PSEG's growth profile, which results squarely within our guidance range. I'm very encouraged by the revised climate compromise contained in the proposed Inflation Reduction Act that includes production tax credit provisions for existing nuclear and new offshore wind resources. We hope to see it move on to the Senate floor this week, but more on that later. I know many of you have been following the potential for an impact to our pension results in 2023 due to the significant declines in equity and fixed income markets since the beginning of the year. Should market conditions remain stressed on our December 31 measurement date, We would anticipate noncash pension headwinds related to these market declines.

Speaker 2

December 31 is the single date that will determine the pension impact for 2023. So instead of continually updating a number as our dynamic market changes on a daily basis, We would rather simply assure you that in the interim, we are actively developing plants to counteract the potential near term headwinds to the extent they remain at year end. I want to emphasize that our pension remains very well funded and does not I repeat, does not require any cash contributions for the foreseeable future. From a funding perspective, our pensions were approximately 95% funded at year end 2021, and the increase in the discount rate year to date has kept the funding ratio in a comparable place to year end. Rest assured that we will work tirelessly to mitigate the potential future headwinds, including pension, supply chain and general inflationary pressures.

Speaker 2

I hope you will see through these near term challenges and recognize what we see, that the underlying fundamental utility growth story of PSE and G remains intact and that our valuation will reflect the improved business mix and overall derisking that continues, all of which gives us The confidence to reiterate our multiyear 5% to 7% EPS CAGR from the midpoint of 2022 non GAAP operating earnings guidance to 2025. We remain focused on improving our system reliability and resiliency, further derisking the business overall and Maximizing Affordability for our Customers. The statewide moratorium on shutoffs for residential electric and gas service was lifted in mid March 2022, and collections and shutoffs have since restarted. However, New Jersey did passed legislation after the moratorium ended that provided protection from shutoffs to customers who applied for payment assistance programs by June 15, 'twenty two. Applicants for assistance are protected from shutoffs while awaiting their application determination.

Speaker 2

As a result, PSE and G continues to experience higher accounts receivable aging, which we expect will take the next several years to reset to historical levels. PSE and G's electric distribution bad debt expense is recoverable through its societal benefits clause mechanism and has deferred its incremental guest distribution bed debt expense as well as other incremental COVID-nineteen costs to Future Recovery, which will likely take place in our next distribution based rate case. Our regulatory framework in New Jersey continues to be constructive. Working with the BPU staff and rate council, we reached the settlement to begin work this quarter on the infrastructure advancement program. The BPU approved the settlement in June.

Speaker 2

And over the next 4 years, we will invest $500,000,000 to extend reliability improvements, inclusive of the last mile of our distribution system, as we prepare the grid for the rapid transition to electric vehicles and Enable a Greater Integration of Renewable Energy Resources. Turning to our efforts on the Environmental, Social and Governance, or ESG front. We are continuing our internal preparations to finalize company wide emission reduction goals, and we will be submitting those targets to the United Nations backed science based targets initiative for validation that they are in fact consistent with the objectives of the Paris Agreement to limit the global temperature increase to 1.5 degrees Celsius or less. We have until September of 2023 to finalize and submit our targets for validation, although we're aiming to present our pathways before them, which will address all three scopes of PSEG's emissions reduction goals. Let me turn now to commodity markets, where we've seen a continued increase in electric and natural gas prices during the Q2.

Speaker 2

And although some PJM prices have moderated recently, prices remain at high levels. With gas and electricity supply costs, which are a pass through at PSE and G, comprising approximately 40% to 45% of a typical residential gas and electric bill. We are keenly focused on controlling costs to minimize the impact of rising commodity costs on these customer bills and Maximizing Affordability. On the electric side, PSE and G contracts for its default BGS, basic generation service, as we often refer to it, requirements on a 3 year rolling basis. And each year, onethree of the load is procured for a 3 year period.

Speaker 2

New BGS rates went into effect June 1. And despite what I just said a moment ago, but due to a decline in actual versus assumed capacity costs, electricity bills actually declined. On the gas side, PSE and G is permitted is permitted to recover the cost of hedging up to 80% or roughly 115 Bcf of its annual residential requirements through the BGSS tariff. We recently filed for our anticipated BGSS costs to go into effect in rates before the upcoming winter season that will reflect current market prices at the time and be trued up for actual costs over subsequent time periods. On the nuclear side of the business, we remain fully hedged in 20222023 and a little more than half hedged in 2024.

Speaker 2

With our ratable baseload hedging program in effect, we should begin to see higher prices layer in as we continue to incrementally sell power forward Into 2024 2025, assuming that prices remain at today's higher levels. The uncertainty of power prices highlights the critical need for Longer Revenue Visibility to safeguard the economic viability of existing nuclear plants, which are increasingly recognized as an irreplaceable source of carbon free domestic energy supply. I might add this is also taking place at the international level in terms of the recognition as an irreplaceable source of carbon free energy supply. We continue to observe a positive shift in public sentiment and support of preserving these nuclear plants, most recently as part of what I mentioned before, the proposed Inflation Reduction Act of 2022, as our country invests in energy security and climate change solutions, which can help to stabilize Rising Electricity Prices. This proposed legislation agreed to last Thursday by Senators Manchin and Schumer includes the nuclear production tax credit we have advocated for over the last 2 years and would be in effect from January 24 through 2,032.

Speaker 2

This pricing floor for nuclear generation squarely addresses our need for a longer term framework within which we can continue to own and operate our fleet with extended revenue visibility beyond the current 3 years 0 emission certificate cycle. The bill also includes transitioning to a technology neutral ITC PTC beginning in 2025 for new Carbon Free Resources. And there is a 15% corporate minimum tax on net book income that would impact us and our customers. We are analyzing all aspects of the bill, including the many provisions that will help address climate change. We are hopeful that these provisions will pass Congress.

Speaker 2

Senate Majority Leader Schumer indicated his intention to bring the bill to the Senate floor this week, but there is a review process involving the Senate parliamentarian that could take a week by itself to complete. If the Senate is able to approve the measure, The House would likely return from the August recess to vote on it. In the meantime, we continue to have policy level discussions with New Jersey State Legislators, who are currently in summer recess, to discuss a longer duration alternative to the current Zero Emission Certificate Framework for nuclear should the price war contained in the reconciliation bill prove elusive. Now let me turn to an update of our offshore wind opportunities, which we continue to advance on a number of fronts. On the transmission partnership Coastal Wind Link, The timing of New Jersey's decision on its state agreement approach to transmission offshore is still expected this October.

Speaker 2

On Ocean Wind 1, development efforts are ongoing as we approach the upcoming FID date in the coming months, while the Bureau of Ocean Energy Management will continue public hearings on the draft environmental impact statement later this summer. As related to the opportunity to co invest with We continue to have conversations on a variety of fronts. And in fact, due diligence continues in earnest in this regard. As I stepped down from my CEO duties on September 1, PSEG is well positioned to enter its 120th year of serving New Jersey with essential energy services that help to power the economic engine of the state and advance its energy policy leadership. In my role as Executive Chair of the Board through the end of 'twenty two, I will continue to advocate on behalf of PSEG in key policy arenas.

Speaker 2

Now later you'll hear from Ralph LaRosa. And I must say, he is the most well prepared, ready CEO elect in the history of our company. And with Ralph at the helm, PSEG will further advance its Powering Progress vision of a future where people use less energy, and it's cleaner, safer and delivered more reliably than ever. PSEG's dedicated workforce will continue the public service heritage that recently earned us The 2022 Edison Award from the Edison Electric Institute, the electric utility's highest industry honor in recognition of PSEG's infrastructure modernization programs focused on protecting our customers and communities from extreme weather conditions. I think that's our 2nd Edison award in the last 10 or 12 years or so.

Speaker 2

I will now turn the call over to Dan for more details on our operating results, and Dan, Ralph and I will be available for your questions.

Speaker 3

Thank you, Ralph. Good morning, everybody. As Ralph mentioned, for the Q2 of 2022, KCG reported net income of $0.26 per share and non GAAP operating earnings of $0.64 per share. We've provided you with information on Slides 911 regarding the contribution to non GAAP operating earnings by business for the Q2 year to date periods ended June 30. Slides 1012 contain waterfall charts that take you through the net changes quarter over quarter and first half twenty twenty two over first half twenty twenty one and Non GAAP Operating Earnings by Major Business.

Speaker 3

We'll start with PSE and G, whose 2nd quarter net income was relatively flat compared to the Q2 of 2021, reflecting rate base additions from our investment programs and our gas system monetization, Energy Strong programs and the implementation of the SIP, which is largely offset by IRON in the quarter, much of which was timing related. Compared to the Q2 of 2021, transmission margin was flat as growth in rate base and other positive trip adjustments were offset by the August 2021 implementation of a new transmission formula rate, including our base return on equity moving to 9.9% plus the 50 basis point for distribution. Gas margin improved $0.02 per share over the Q2 of 2021, reflecting the scheduled recovery of investments made under GSMP and a true up from the SIP. Electric margin rose $0.02 per share compared to the Q2 of 2021, driven by the scheduled recovery of Energy Strong II investments and the SIP. Other margin primarily related to appliance service also added a $0.01 per share compared to the Q2 of 2021.

Speaker 3

O and M expense was $0.04 per share unfavorable compared with the Q2 2021, reflecting higher costs from the resumption of customer settlement proceedings as courts reopened and higher electric operation expense and gas tariff work. Interest expense was a $0.01 per share unfavorable, reflecting higher investment. In addition, the impact of PSEG's $500,000,000 share repurchase program had a $0.01 per share benefit on Q2 2022 results. Flow through taxes and other items had a net unfavorable impact of $0.01 per share compared to the Q2 of 2021, driven by the use of an annual effective tax rate that will reverse over the remainder of the year. Summer weather during the Q2 of 2022, measured by the temperature humidity index, was warmer than normal, but cooler than temperatures during the Q2 of 2021.

Speaker 3

With the Sipin effect, variations in weather, positive or negative, have a limited impact on electric and gas margins, while enabling the widespread adoption of PSE and G's Energy Efficiency Program. For the trailing 12 months ended June 30, weather normalized electric and gas sales reflected lower residential sales, both electric and gas lower by approximately 3% and higher commercial and industrial sales, higher by 2% and 3%, respectively, as more people return to work outside the home. Growth in the number of electric and gas customers remained positive by approximately 1% over the trailing 12 month period. PSE and G invested approximately $741,000,000 during the 2nd quarter at approximately $1,400,000,000 year to date through June 30, and we are on track to execute our planned 2022 capital investment program of $2,900,000,000 The 2022 capital spending program includes infrastructure upgrades to transmission and distribution facilities as well as the continued rollout of the Clean Energy Future Investments in Energy Efficiency, Energy Cloud and Smart Meters, Electric Vehicle Charging Infrastructure and the new IAP investments that will begin this quarter. PSE and G's forecast of net income for 2022 is unchanged at $1,510,000,000 to $1,560,000,000 Moving on to Carbon Free Infrastructure and Other, where we reported a net loss of $174,000,000 or $0.35 per share for the Q2 of 2022, driven by our Nuclear Decommissioning Trust and mark to market impacts and non GAAP operating earnings of $15,000,000 or $0.03 per share.

Speaker 3

This compares to a Q2 2021 net loss of $486,000,000 and non GAAP operating earnings of $47,000,000 which included the results of the divested fossil and solar assets. For the Q2 of 2022, electric gross margin declined by $0.25 per share, primarily due to the sale of the 6750 Megawatt Fossil Portfolio this past February and the sale of the Solar Source Portfolio in June of 2021. This reduction in gross margin includes recontracting approximately 8 terawatt hours of nuclear generation at a $3 per megawatt hour lower average price. In addition, ZEC's added a $0.01 per share due to the absence of the Hope Creek refueling outage in the year earlier quarter. Separately lowered margins at gas operations resulted in a penny decline in gross margin versus the Q2 of 2021.

Speaker 3

And earnings call. Year over year second quarter cost comparisons were better by $0.22 per share due to the divestitures, driven by lower O and M depreciation and interest expense that will mainly benefit first half twenty twenty two results. You recall the 3rd and 4th quarters of 2021 reflected the solar source sale in June, the cessation of fossil depreciation from August onward and the retirement of PSEG Power's outstanding debt in October. Our activity was $0.01 per share unfavorable compared with the Q2 of 2021 as a result of higher interest expense and taxes and other were $0.01 unfavorable compared to the Q2 of last year. Nuclear generating output increased by over 3.7% to 7.5 terawatt hours in the Q2 of 2022, reflecting the absence of a refueling outage at Hope Creek in the year earlier quarter.

Speaker 3

The capacity factor for the nuclear fleet for the year to date period through June 30 was 95.1%. TCG is forecasting generation output of 14 terawatt hours to 16 terawatt hours for the remaining 2 quarters of 2022 and is hedged approximately 95% to 100% of this production at an average price $28 per Megawatt hour. For 2023, we're forecasting nuclear baseload output of 30 terawatt hours to 32 terawatt hours with 95% to 100% hedged at an average price of $31 per megawatt hour. And for 2024, we're forecasting nuclear baseload output of 29 to 31 terawatt hours, which is 55% to 60% hedged at an average price of $32 per megawatt. The forecast of non GAAP operating earnings for carbon free infrastructure and other is unchanged at $170,000,000 to 220,000,000 and this guidance for 2022 excludes results related to the fossil sale fossil assets that were sold in February of this year.

Speaker 3

With respect to recent financing activity and collateral postings, PSEG remains on solid financial footing. As of June 30, The PSEG Money Pool, including PSEG and Power, had available liquidity, including cash on hand of $3,700,000,000 In April May of 2022, we entered into a 3 64 day variable rate term loan agreement totaling 2,000,000,000 also in the quarter, Power entered into $21,000,000 letter of credit facilities expiring in April 24 and April 25, respectively. And in July of 'twenty two, PSEG repaid a $1,250,000,000 short term loan that was due later this month. Our net cash collateral postings of $2,500,000,000 at June 30 related to out of the money hedge positions as energy prices rose during the Q2 of 2022. Collateral postings have increased subsequent to June 30.

Speaker 3

And at the end of July, Towerhead net collateral postings of approximately $2,500,000,000 Most of this collateral is associated with hedges in place through the end of 2023 and is expected to be returned to PSEG Power once it satisfies its obligation under those contracts or sooner if market prices decline in the interim. As Ralph mentioned, we are reaffirming PSEG's 2022 non GAAP operating earnings guidance of $3.35 to $3.55 per share, with regulated operations contributing approximately 90% of the total. For the full year of 2022, PSE and G's net income is forecast at $1,510,000,000 to $3,070,000,000 to $1,560,000,000 The non GAAP operating earnings for CFIO is forecasted at $170,000,000 to $220,000,000 PSEG's 2022 earnings guidance excludes financial results from the divested fossil assets and includes an additional interest expense related to recent financings. Looking beyond 2022, regarding the pension item Ralph referenced earlier, Slide 19 in the webcast deck highlights some pension disclosure contained and our current 10 ks annual report. We outlined several items that will influence the pension impact in 2023, including updating the discount rate and interest cost, setting the expected return on planned assets for 2023, calculating the actual gain or loss on the funds and determining the fair value of the funds at year end.

Speaker 3

As many of you know, we do not smooth, we apply the fair value of the fund balances to next year's expected return. As such asset values and discount rate on December 31 will determine the impacts for next year. Lastly, we've completed our $500,000,000 share repurchase through open market purchases and an accelerated share repurchase program in May of 2022. That concludes our prepared remarks. And with this being Ralph Izzo's last earnings call as CEO, I'll give him an opportunity to make some closing remarks before taking your questions.

Speaker 2

No, actually, Dan, I think I'll wait till later to make those comments. Sorry about that. Okay. Why don't we go right to the questions, Kyle?

Operator

Yes, thank you. Ladies and gentlemen, we will now begin the question and answer session for members of the financial community. You may do so by pressing the star and the number 2. If you are on a speakerphone, please pick up your handset before entering your request. One moment please for the first question.

Operator

The first question is from Shar Pourreza with Guggenheim Partners. Please proceed with your question.

Speaker 4

Hey, guys. Good morning.

Speaker 2

Hey, Shar. Hi, Shar.

Speaker 4

So Ralph, let me just, if it's okay, start on the pension side. Can Can we maybe just get a little bit more details on the potential offsets that you're sort of thinking about implementing? I mean, everyone has estimated estimates out there on what the drag could be. So whether it's $0.20 $0.30 $0.40 or whatever it ends up being, do you Feel like you could offset that kind of a drag and how does that potentially factor into a rate case filing in 2023?

Speaker 2

Yes. So, Sean, of course, we like to think of the fact that we're always mindful of our O and M expense. But you can always do more, There's a cost versus quality consideration that we'll have to take into account. So there's no doubt we can offset some of the headwinds. We're just not going to get into a conversation today about how easy it is to offset $0.05 versus $0.30 versus $0.20 And believe me, we've seen numbers dance around that whole range over the past 6 years.

Speaker 2

But we're not going to do anything that compromises the long term service quality of the customers. We're going to look at every part of our cost structure to see what is a good short term decision, what's a good long term decision. And then of course, as you correctly pointed out, the utility does have a rate case that starts January 1, 2024. So we view this as a short term headwind that's not quantifiable on August 2

Speaker 3

and

Speaker 2

can only be quantified on December 31, We're looking at a whole litany of potential cost reductions, and each one of them comes with some risk. And we'll draw the line where we feel Comfortable that the short term risks are manageable, but we do nothing to jeopardize the long term health of the company.

Speaker 3

I

Speaker 2

know that's not a quantitative answer to your question, but I think it's just going to drive people crazy to every day look at what markets are doing and what congressional leader is visiting, What Island Nation and what's that doing to equity markets and things that are simply not within our control over the next few months.

Speaker 4

Got it. Got it. Okay. That's helpful. And then just Ralph, on the strategy side with Generation sort of with the Inflation Reduction Act gaining traction has obviously improved visibility on nuclear, which is one of the things you mentioned would be a trigger point potentially to assess whether you want the assets within the portfolio or not.

Speaker 4

So any updates there? And then just around offshore wind, there's obviously some very healthy valuation marks on the land lease values with your neighbor looking to provide another maybe data point soon. Any thoughts there and whether you would reassess value here as well. So I guess, how are you thinking about potential trigger points to exit the remaining generation business you have?

Speaker 2

Yes. I think you hit the nail on the head in terms of important data points, Shar, coming in. Look, if the Inflation Reduction Act passes as is proposed. There are some technical amendments that we're working with those sponsors to make sure are considered because of some language that is inconsistent with what people told us they're trying to achieve. I mean, you basically have a nuclear energy price of $44 a megawatt hour, give or take a few pennies, as long as power prices in the market don't drop below $25 and as long as power prices in the market don't go above $14 So the nuclear assets begin to me at least to look a lot like a rate base rate of return in piece of infrastructure, right, with a steady and attractive cash flow that makes them economically viable.

Speaker 2

Now there's a whole lot of wood that needs to be chopped between now and making that something that President Biden puts his pen to. And then there's the need to see what investor reaction will be if it's interpreted the same way that we interpret it, which is, as I said, essentially a very predictable earnings stream with a very solid cash flow generation that I think serves the state of New Jersey very well, serves the company very well, serves the planet very well. On offshore wind, we do have an important data point coming up, and you alluded to it. There is another company that is and a strategic review process, and we'll carefully monitor the outcome of that while pursuing with all the due diligence efforts I spoke about before from Coastal Wind Link to Ocean Wind 1 and some other possible opportunities with Orsted. Look, it should be obvious to everyone.

Speaker 2

New Jersey is going to build 7.5 gigawatts of offshore wind. I think half a dozen states are going to build 30 gigawatts of offshore wind. That's going to have a significant impact on the tile markets, build headroom and opportunities to grow earnings per share for companies. So it's something that we want to make sure we are taking the long view in terms of the role we should or shouldn't play in that. So

Speaker 3

more to follow.

Speaker 2

Some of it we'll be following in the next few months. Got it. Got it. Sorry, what was test year for

Speaker 4

the rate case that you guys are going to file. Is it 'twenty three?

Speaker 5

Test

Speaker 2

year is from July of 'twenty three to June of 'twenty four, so it does include 'twenty three. It gets filed on January 1, 'twenty

Speaker 4

four. Fantastic. I appreciate it, guys. And Ralph and Ralph, congrats.

Speaker 2

See you guys. Thanks.

Operator

Our next question is from Nick Campanella with Credit Suisse. Please proceed with your question.

Speaker 6

Hey, good morning. Thanks for taking my question. Just acknowledging that you kind of You reiterated the long term 5% to 7% EPS CAGR. When we kind of take into account the mitigation strategies you're targeting and this 5% to 7% CAGR. Is this a long term CAGR?

Speaker 6

Or do you still have kind of visibility on 5% to 7% growth in 2023?

Speaker 2

So Nick, as you know, in a regulated world with test years and rate cases, one does not. And even though, I guess, it's almost 90% of our CapEx has some form of trackers, some of that is delayed 6 months, some of that is delayed 1 year. We've never told people that the 5% to 7% CAGR is every year to be applied, that it was you take the midpoint of the 'twenty two guidance and you look at where we are in 'twenty five and the CAGR over that time frame is 5% to 7%. And we never gave what 23 would be or what 24 would be.

Speaker 6

Okay. Thank you. And then just other aspects of the DIRA, just like the minimum 15% tax. Just How does that kind of play in to affecting your business, if at all? And what are the offsets there?

Speaker 2

So Dan will talk. Yes. I think what's laid

Speaker 3

out right now, Nick, is pretty simple to what's in the Build Back Better. And so I think Your first screen you're going to go through is the size of the earnings from the company to determine whether or not you're subject to it and then you're going to work your way through. Essentially will deemphasize things like depreciation and give you a lower rate in exchange. And so that trade off, I think as an industry, we're going to go through and take a look and see what that means from a cash flow basis. To the extent that, that does kick in, you'll have a higher cash flow upfront coming out the door for taxes.

Speaker 3

But whatever excess you do have, that's going to be carried forward indefinitely. And so we will work our way through. And Ultimately, to the extent that that happens, you have a deferred tax asset or probably more appropriately stated, a smaller deferred tax liability, which comes into play in the balance of your rate making as well. So I think we're all exploring where this is going to go to the extent it does get across the finish line as is. I know that there are some in Washington who had challenges against this type of an increase in the first go around.

Speaker 3

But right now as it's laid out, it looks pretty similar to what was in Build Back Better.

Speaker 6

Okay, great. And if I could just squeeze one more in, I think folks are wondering, so I'll ask you just any thoughts on, an Analyst Day this year?

Speaker 2

Yes. So Ralph, go ahead. You want to?

Speaker 7

Yes, yes. Nick, This is Ralph LaRosa. Nick, right now, we're planning to do an Analyst Day in the Q1 of 'twenty three. I think Ralph just laid out a bunch of mileposts that would lead us to say that we there's enough moving parts that it makes sense for us To have that conversation in the Q1 of 2023.

Speaker 6

All right, fantastic. Congrats everyone. Thanks again.

Operator

Our next question is from Steve Fleishman with Wolfe Research. Please proceed with your question.

Speaker 8

Yes. Hi. Good morning. Ralph Izzo, just want to wish you the best in case this is your last earnings call. So Thank you.

Speaker 8

It's been fun. So first of all, just on the pension, how should we think about How the pension is maybe roughly split between regulated and non regulated parts of PEG?

Speaker 3

You probably have 75%, 80% of it that's going towards the regulated piece, Steve.

Speaker 2

Okay. And then when you Obviously, you don't know

Speaker 8

what returns are going to be the next 3 years. But when you think about your confidence in the 5% to 7% to 25 Is most of that just because this just gets all trued up in the rate case, no matter what happens with the pension performance And you just go to normal return or is it that you're expecting the market to bounce back and the offsets? Is it more that this is just part of the rate case ups and downs?

Speaker 3

Think about it more the latter, Steve. Obviously, you're going to have effective markets, both your equity and debt markets for your asset return for the assets within the trust as well as what the discount rate is going to look like. But ultimately with a bigger part of the pension being on the utility side of the house that you're going to have a regulatory aspect of it that's going to be important as well.

Speaker 8

Okay. So that's it's not like you're counting on the markets to come back or anything like that?

Speaker 3

Correct, right.

Speaker 2

Okay. Okay. And then,

Speaker 8

Ralph, it's an unfair question To end things up, you've been very involved in working on this IRA law. Just curious, your best judgment on

Speaker 2

I was a little bit worried about Senator Sinema, but the tax provisions, the carried interest provisions don't seem to be a big number. So I find it hard to believe that, that would really result in you're having to worry about one more, renegade Senator vetoing the bill. And as we head into the midterms, there's a really good chance, It looks like the Senate could retain a Democratic majority. And a lot of feel like if they could get this over the finish line that would cement that prospect. So I give it a high probability of success.

Speaker 2

My bigger worry was whether or not we reduced a $2,000,000,000,000 piece of legislation to $500,000,000,000 if you lose the folks that were part of it on the House side. But some of the more visible and outspoken members of the left wing of the Democratic Party have said this is a critically important Climate Change Initiative and the most important thing we've done in this regard. So I've gained a little bit of conference there as well. So I put it to odds at pretty strong. I mean, with the Senate majority leader saying he's going to bring it to the floor on Thursday, even before the parliamentarian is likely to rule.

Speaker 2

I'd say that the odds are looking quite good at this point.

Speaker 8

I had one last question I forgot about. Offshore Wind Transmission, the bidding for that, is there any update on the process there?

Speaker 2

The RFP, I think, is going to come out Q1 of next year for the next round. Is that the question?

Speaker 3

October date, Steve, for when we're supposed to be hearing back. There's been a little bit of There's no work that's been ongoing on it. I know PJM put out a piece related to some of the risks and the constructability and different elements. So I know folks have had some comments back on that. But ultimately, it sits within the BPU's jurisdiction with PJM providing Some technical support.

Speaker 3

October is still when we're supposed to hear back what the answer is on that.

Speaker 8

Great. Thank you very much.

Operator

The next question is from Durgesh Chopra with Evercore ISI. Please proceed with your question.

Speaker 9

Hey, guys. Good morning. Just on the pension topic, one of the discussions that we've had with investors relates to your earned ROEs versus authorized. Obviously, pension has been sort of a tailwind in the past few years and it looks like it's going to be a headwind going forward. Can you comment on then just your earned versus authorized returns at the utility currently?

Speaker 9

And then How are you modeling that going forward in your 5% to 7% target? I'm interested in your returns versus the authorized levels. Thank you.

Speaker 3

Yes. I mean, I think, I guess, if you want to think about what we would anticipate on a go forward basis, it would be earning our allowed return. And so yes, you're going to have some tailwinds and headwinds from various items. Pension certainly is one, and you're right. If I think about it in the immediate term, you've got some more the potential for more headwinds.

Speaker 3

And if you look backwards, there's been some tailwinds, but there's other items that have offsets and also come into play. But I think if you want to think about what we're anticipating as we look at 'twenty five, I think it's we're anticipating earning our allowed return.

Speaker 2

And Dan, I mean, 40% of rate base is transmission, which is basically trued up exactly

Speaker 10

every year.

Speaker 2

If I'm not mistaken, doesn't the conservation incentive program Have a range where if we fall outside that range, we're either not eligible. And so we stick to that allowed return basically on both the D and the T

Speaker 3

Yes, exactly. The way that that SIP mechanism works, it has kind of balance related to your earned return. So we are Pretty close to that level throughout.

Speaker 9

Got it. Thanks. I mean, I guess the forward looking plan has you earning close to the authorized is the key takeaway here. Just Ralph, wanted to go back to sort of the strategic review on offshore. How critical and this is how critical is being involved with the offshore generation side to winning some of these offshore transmission opportunities.

Speaker 9

Obviously, you had previously indicated like roughly I think over $1,000,000,000 in opportunity We'll hear about it in October, but how critical it is from a strategic standpoint to be in the generation to get some of these transmission awards? Or you think those are 2 independent things? I think those are 2 independent and Things.

Speaker 2

I think those are 2 independent things. I don't think it's critical at all. Dan, did you want to answer that?

Speaker 7

No, I'll just reinforce that.

Speaker 9

Great. Thanks guys. Appreciate the update.

Speaker 2

Yes.

Operator

The next question is from David O'Cara with Morgan Stanley.

Speaker 5

As to the hedging environment for 2024 right now for power, is there any update on your ability to take advantage of the current commodity backdrop to accelerate some hedging from here? And what's the liquidity looking like?

Speaker 3

Yes. There's more liquidity out there, David. We couldn't close out the entire position in a very short term, but there's liquidity to be able to continue to do what We anticipate doing, which is staying on our ratable path. I mean, I think we've got a market environment, which has higher pricing than what we have seen historically. But by the same token, we've got a fairly backwardated curve.

Speaker 3

And So those two items, I think, are a little bit at odds with respect to where things may be going. So we're moving along related to our rentable hedging program, kind of within the balance that we set, anticipate that general construct to remain.

Speaker 5

Got it. Thanks. That makes sense. And it's early, but just wondering, as you think about some of the strategic considerations over the next year or so. Any early thoughts on how you'd redeploy capital and kind of use of proceeds as some of these strategic endeavors might Unlock Cash Flow.

Speaker 3

Yes. I mean, I think one of

Speaker 2

the things that is really important about the Infrastructure Advancement Program as the recognition to the credit of the Board of Public Utilities of the underinvestment or let's just say the lack of investment that has followed the last mile because there was so much to do with the higher voltage part of the system. And all the good work we did in transmission and inside plant that actually resulted in our 2nd Edison award and just an outstanding outcome in what was a devastating flood event in Hurricane Ida. All of that work that went so well at the high voltage now needs to go towards the lower voltage part of the system. And IEP was a recognition of that and getting $500,000,000 plus of the $800,000,000 ask approved, I think shows that we're entering a new era. People working from home, Losing power at the home is not just annoying blinking lights on the microwave oven.

Speaker 2

It's you can't charge your car, you can't do your work, You can't call your neighbor, you can't find out where the kids are and that level of resiliency and reliability is something that customers are demanding. So I think that there's a lot of opportunity in that last mile that we're just beginning to explore and touch upon. So as we've often said in the past, David, there's a long runway of utility investment needs, right? I mean, we still have a lot of aging infrastructure we have in place. I forget what I've lost track of what the runway is on the GSMP program at the current spend rate.

Speaker 2

You see the 20 some odd years, I think. So the number one gating function has been, is and will be just making sure that we have customer affordability. And we're always mindful of that. But in terms of opportunities to redeploy, that's on the 10 things that used to keep me awake at night, that was somewhere around number 20.

Speaker 5

Got it, got it. Thanks so much. Really appreciate it.

Operator

Our next question is from Julien Dumoulin Smith with Bank of America. Please proceed with your question.

Speaker 10

Hey, congratulations against Ralph and Ralph here. I'm We're going to keep going here on this theme here on the 5% to 7%, and I want to come back to it. I know we asked you, I think, even last time here, but The expectation of this persisting beyond 23 on the 5% to 7%, does that include the latest net pension headwinds and power mark to market? Where do you stand on selecting that. Again, just again, I get that this is moving around, I get this rate case, etcetera.

Speaker 10

What is your expectation? And then related to that, If you can, what is the current asset performance year to date? You kind of implied a comment in your prepared remarks, But if you can quantify that, it would be

Speaker 3

great. Yes, Joanne, I think it's consistent with what we've been saying. I think we're not going to know exactly what that number is going to be until What that number is going to be until twelvethirty one. That is the nature of how we do our accounting, and that's where we're going to stand. And so I think we're going to have that part of the puzzle determined at that time.

Speaker 3

And given the variability we've seen in markets, you could see some movement there. I would argue that if you take a look at how we are invested with kind of in the mid-50s on the equity side and then some real assets and the balance being on the debt side. You Kind of make a determination that we're if you use just the benchmarks, I think you're going to be in the right ballpark. Against that backdrop, we're going to do exactly what Ralph talked about. We're going to go through, we're going to drive through all the initiatives started to lay out, made determinations on some.

Speaker 3

We'll continue to make determinations on other and try to make sure we strike the right balance between running the business right and managing our way through some near term headwinds. And the magnitude of those and what we see by virtue of doing the things that we've identified is going to be what's going to determine where we end up in 2023. So it's a little bit dynamic right now, but that's going to drive ultimately where we land within 2023 and that guidance will be forthcoming.

Speaker 10

Right. And maybe implicitly within this, you expect the utility to grow 5% to 7% Specifically, right?

Speaker 2

Say again. So only

Speaker 10

You expect the utility to grow 5% to 7% specifically as well, right?

Speaker 2

So we give you a rate based CAGR on the utility, right? We don't break each business separately in terms of the CAGR. But As you know, Julien, given 90% of our CapEx, get some type of contemporaneous return. The utility earnings should equal rate base minus O and M, minus regulatory lag, plus any new customer growth, which is not part of the SIP. So and those last three pieces are pretty small, but they can change things faster than 1st decimal point.

Speaker 2

But we don't break out each company separately in terms of the CAGR.

Speaker 10

Actually, just going back to the last question, very briefly here. Wyoming hedge 5 percentage points of 24 at this point. Is it just about the prospects on federal support here that hold you back, just to make sure?

Speaker 3

Say your question again, Julian?

Speaker 10

Just on the only adding about 5 percentage points on 'twenty four hedging. I would have thought intuitively maybe you would layer in more. Again, question is more is the federal support and uncertainty from a legislative perspective Hold You Back.

Speaker 3

I mean, I think, frankly, it's just more consistent with respect to how we're thinking about the ratable program. We are a little bit higher than what a ratable 3 year would have you have the math turn out to be. And then so we have some of those ranges, but we want to stay within a bit of a radical band, identifying as well the backwardation that exists within the curve. And so I think that we'll continue to move forward, continuing to hedge at the prices that we're seeing as we go forward. But I think you'll I wouldn't anticipate us to be outside of that ratable range in the near future.

Speaker 10

Got it. All right. Well, congrats again to both. And Izzo, I'm sure I'll catch you soon. Cheers.

Speaker 2

Thanks.

Operator

The next question is from Ross Fowler with UBS. Please proceed with your question.

Speaker 11

Good morning. How are you?

Speaker 2

So I just wanted

Speaker 11

to go to Slide 22 and make sure I understand the dynamic here between the potential,

Speaker 2

let's call it potential because it's

Speaker 11

what it is, nuclear PTC at the federal level and the Zacks in New Jersey. So if I think about The 55% to 60% that you've got hedged at $32 a megawatt hour out in 20.24. Right now, status quo, I would add the $10 to that and get a price on that hedge piece of about $42 a megawatt hour. But if I were to get the nuclear PTC, that would be somewhere between $42 $42 a megawatt hour and that would actually be upside to that pricing, right? Because the ZEC would go away New Jersey, if I understand it correctly, it'd be replaced essentially by the nuclear PTC at the federal level.

Speaker 11

Have I got that right? Is that the right understanding of how that is right? Come in and out. Okay. And then the non hedge piece would come back to the nuclear PTC price.

Speaker 11

Yes. Well, it would basically be either the current price if it were over the $44 or would be the 42 to 42 at the Nuclear PTC, if that's what we get, or it would be whatever you hedge at plus the ZEC, if that's where we stay. So am I thinking about that correctly?

Speaker 3

Yes, I think that's right. Russell, you think about what they're doing in Washington essentially is a floor. And to the extent that realized exceeds that, then the PTC basically just drifts away as your realized goes up and New

Speaker 11

Jersey will

Speaker 3

end with plus 10, right?

Speaker 11

Right. So as you look to hedge Further piece of that is following on to Julian's question here, where you go through your ratable hedging. If hedging were to move up above that $32 it would be above the nuclear PTC. But if you lose the $10, Zach, you'd have to come back to the nuclear PTC level. Is that how I should think about that.

Speaker 11

I guess I'm trying to say if you're hedged at $35 right, you'd get a credit for the PTC up to that 44 level in the federal PTC case or if you're hedged at $34 you would have or $35 It would actually be $45 in the ZEC case. Am I thinking about that correctly?

Speaker 2

The ZEC does not have to the state does not have to give you $10

Speaker 3

Right. Okay. Through 25. And the crisp definition with respect to the realized that you apply in What the PTC is to get you to that 44 as yet is going to be finalized within the details, but that's our expectation.

Speaker 11

Okay. Okay. That makes sense to me.

Speaker 2

Thank you. I just wanted to

Speaker 11

make sure I was getting the ins and outs correctly as we potentially change what applies to the power side in New Jersey for the nuclear plants. Thank you

Speaker 2

very much.

Operator

The next question is from Michael Lapides with Goldman Sachs. Please proceed with your question.

Speaker 12

Hey, guys. Thank you for taking my question and congratulations to both Ralph Fizzo and Ralph LaRosa. My question is probably more for Dan. Dan, you talked a little bit about collateral postings and being a little over right around $2,500,000,000 at the end of July. That cash, if I understand correctly, comes back over the next 18 months between now year end 2023.

Speaker 12

So how should we think of what does that mean? Does that mean that it's simply a reduction in maybe your draws on your credit facility that shows up? So short term debt on the balance sheet will actually go down by that amount by the time we get to 2023, end of 2023 if we leave all else constant.

Speaker 3

You're thinking about it exactly right, Michael. So there's think about it as incremental draws to fund that. And as that comes back, we would just take out the source that was used fund in the 1st place.

Speaker 12

And the source that's being used to fund it is simply short term debt or credit facility up top at the holding company level?

Speaker 3

Yes, that's exactly right.

Speaker 12

Got it. Okay. And if I were to apply my follow on question relates to the Inflation Reduction Act. If I were to apply that to the minimum tax requirement to 2022, How big of a cash flow impact would that be on this year using your guidance for this year? How material?

Speaker 3

I wouldn't give you like a single year look because you can have one time items that would come through. So if you think about this year, we closed the Fossil sales. So you're going to have some kind of disruptions on what it normally looks like. I I think if I would try to do the math and it's going to depend year over year over the longer term, but you're going to basically take a look at what your delta is within your accelerated depreciation, what the delta is within the rates. There's going to be other pieces that are going to move, but I think those are the 2 biggest moving pieces that you have.

Speaker 3

And how much does that 6% buy you going from 21% to 15% compared to the magnitude of what you're getting through the What you're getting through the tax benefits that will be taken away that aren't in your book income. So that's the trade off and it's going to vary a little bit by year depending upon What capital you're deploying and where you are within the accelerated depreciation scheme.

Speaker 12

I hate to sound really big picture here, but I'm going to try and do it Big deal, medium deal, small deal.

Speaker 3

I think it's probably somewhere between. I think To the extent that you're going to see an incremental payment, you're going to end up having an indefinite carry forward on your credit and basically that's going to reduce your deferred taxes. So to the extent that deferred taxes end up reducing your rate base when you have a deferred tax liability, it seems like you'd have the potential that From a regulatory perspective, you'd have an incremental rate based component on the regulatory side of the business, and that's where most of the capital is. So I You still got to play out and see where we end up in the final determination, but somewhere in between.

Speaker 12

Got it. Thanks, Dan. Much appreciated, guys.

Speaker 2

You're right, Michael. That was a question for Dan. Thanks. I think we're coming up upon on the hour call. We are.

Speaker 2

We have time for one more question. One more question. Yes.

Operator

Sure. The next question is from Jeremy Tonet with JPMorgan. Please proceed with your question.

Speaker 13

Hi, good morning.

Speaker 2

Hey, Jeremy.

Speaker 13

And best of luck to Ralph and Ralph. Thank you. And just want to kind of pick up on the last point a little bit there, if I could, as it relates to the Aira. And if passed as it is, How would this impact your financing strategy and agency thresholds if passed?

Speaker 3

Well, I think ultimately there's the potential for a lot of pieces, Jeremy. So it's kind of tough to give a really crisp answer. You've got If I think about just a couple of pieces that are going on, you're going to have a PTC on nuclear that's either going to kick in, in a certain magnitude or not kick in a certain magnitude Because you're above or below that floor, so you've got some cash variability there. Like you've got offshore wind, you've got some PTC potential versus ITC, You're going to make your trade off there, which has a different impacts for cash and for book. And then you've got this minimum tax item, which could be an incremental draw on cash.

Speaker 3

And so I think having the balance sheet strength that we have, we have the ability obviously to work through these issues. But I think the incremental financings around the edges would be changing based upon the timing of some of these things when we see any potential minimum tax incremental payments reversing and the timing of any of these credits that come through. So those are the things you would look to, but I think you've got a lot of time between now and final passage to actually figure out what the actual impacts are going to be.

Speaker 13

Got it. And just one little point there, is it fair to say PTC visibility for nukes would change agency view there versus 3 years' act?

Speaker 3

Certainly, a favorable item, magnitude of that change to be determined. I think you've it's like we talked about, it could be incremental dollars. It could be a Florida, which provides stability, which reduces risk, which the agencies would like. So either way, if I think about both the flexibility on the offshore wind as well as the PTC for Nuclear. I think both of them are value additive from the standpoint of both of these options that we have on the generation side.

Speaker 13

Got it. Thanks. Just the last one, if I could. As it relates to the IAP process, are there takeaways from this process this time, particularly as it relates to how you might view future extensions of CEF and GSMP Programs.

Speaker 3

I think less on CEF and GSMP and more on last mile. So I think This was the first proposal that we put in front of the BPU to start the long runway of work that we have on the last mile, And we were very pleased with the acknowledgment of that need and the work that we have ahead of us. So I think more than anything else, I would look to the IAP, if it's a signal for anything, it's the acknowledgment of the work that does need to be done on the last mile of the system on a more proactive basis rather than just run to failure.

Speaker 13

Got it. That's helpful. I'll leave it there. Thanks.

Speaker 3

Thanks, Gerard.

Speaker 2

Great. So, look, it's been mentioned a couple of times. This is my last Quarterly Earnings Call. And it's something of a cliche, but I have to tell you, it's been just a genuine honor and privilege to be This company for 15 years. And for those of you who are still on the call or listening to the webcast, I just I want to extend to you and hope you'll accept my sincere thanks for all the conversations, all the probing questions you've offered over those years.

Speaker 2

And I'm not kidding. I mean, it served to make us a better company, and hopefully, it served to make me a better CEO. I'll genuinely miss those interactions. But I cannot overemphasize the company is in great hands with the new Ralphs, with Dan and the entire senior team. We've worked side by side for a long time, and I have just 100% confidence that they will do a far better job that I was able to do on my own, certainly in the early stages.

Speaker 2

Now I know that you're all eager to learn more about pensions and Nuclear Economics and Ownership and Offshore Wind Prospects, and you will, and you will. But I'm encouraging our leadership team to continue our proud tradition of taking a long term view and gathering important information before rushing into decisions that might have short term appeal, but long term consequences. So and I think we're literally talking about weeks and maybe months before we get some really important data points that come our way. So with that, it's now my pleasure to turn the call over to Ralph.

Speaker 7

Thank you, Ralph. I just have a few items I wanted to touch on. First, I want everyone to know how excited I am for our future. We are very well positioned by our Power in Progress vision, and I look forward to continuing the work that we have started. 2nd, I wanted to thank all of you on the call for the kind and reporting words I've received from so many of you since the announcement in April.

Speaker 7

And I look forward to meeting with you throughout the remainder of 2022. But finally, I wanted to thank you, Ralph. Thank you for all you've done for this great company, our customers and our employees. Thank you for the industry leadership and specifically your leadership on addressing climate change issues. And last but not least, I thank you for all the time and effort you've given to me personally.

Speaker 7

And with that, Kyle, I think we're ready to close the call.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Public Service Enterprise Group Q2 2022
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