Public Service Enterprise Group Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2023

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Shamali, and I am your event operator today. I would like to welcome everyone to today's conference, Public Service Enterprise Group's 4th Quarter and Full Year 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session for members of the financial community.

Operator

As a reminder, this conference is being recorded today, February 21, 2023, 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, Shamali. Welcome to PSEG's 4th quarter and full year 2022 earnings presentation. Joining us on the call today are Ralph LaRosa, Chair, President and CEO of PSEG And Dan Craig, Executive Vice President and CFO. The press release, attachments and slides for today's discussion are posted on our IR website at investor. Sir.

Speaker 1

Pseg.com and our 10 ks will be filed shortly. The earnings release and other matters discussed during today's Call contains forward looking statements and estimates that are subject to various risks and uncertainties. We will also discuss non GAAP operating earnings, which differs from net income or net loss as reported in accordance with generally accepted accounting principles 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 material. Following Ralph and Dan's prepared remarks, we will conduct a question and answer session.

Speaker 1

I will now turn the call over to Ralph LaRosa.

Speaker 2

Thank you, Carlotta, and thank you to everyone joining us on our call this morning. Since the Q3 2022 earnings report, We've had several important updates. Dan will provide you with a full financial review later in our prepared remarks as I will focus on some strategic highlights. We are pleased to report strong operating and financial results for both the Q4 and full year of 2022. We successfully navigated last year's challenges, including inflation, supply chain disruptions, energy price spikes and the steep rise in interest rates to deliver GAAP earnings of $2.06 per share and non GAAP operating earnings of $3.47 per share, placing our results for the full year above the midpoint of our 2022 non GAAP earnings guidance.

Speaker 2

In fact, 2022 was the 18th year in a row that PSEG has delivered non GAAP results at or above management's original operating earnings guidance. TSE and J, which contributes the vast majority of our results, posted an 8.2% annual increase in net income from the continued investment in its structure, clean energy programs and the 1st full year of decoupling. PSE and G invested over $3,000,000,000 of capital during 2022 In transmission upgrades, gas system modernization, energy efficiency, electric vehicle infrastructure and launch our efforts to address the reliability of the last mile of our distribution system. At year end 2022, PSE and G's rate base topped $26,400,000,000 a 7.7% increase over the year end 2021. We know the important shareholders place on the predictability and visibility of our financial results.

Speaker 2

And during the past 12 months, we have taken many steps to deliver just that. First, we completed the strategic alternatives process, which included the sale of PSEG Fossil last February. This increased the regulated contribution to about 90% of our consolidated non GAAP earnings. We completed a $500,000,000 share repurchase program in May of 2022 and increased the cash return to shareholders by raising the annual dividend by $0.12 We're 5.9 percent for 2022. 2nd, the passage of the Inflation Reduction Act of 2022 We'll offer our nuclear generation a level of much needed stability when it goes into effect in 2024.

Speaker 2

While the industry waits For clarifications, we believe the Inflation Reduction Act is a game changer that should provide the stability required for long term financial As a result of the nuclear production tax credits extending through at least 2,032, We are now able to consider small but important value added investments, including the potential for capacity upgrades at Salem, A fuel cycle extension at Hope Creek and the license extension of our New Jersey units. Critical to these decisions will be our determination of how predictable and visible nuclear revenues could be beyond our current 3 year ZEC window. The IRA also created valuable incentives for PSE and G's customers to accelerate their transition to electric vehicles, which will Advance New Jersey's decarbonization goals and expand our opportunities to invest in last mile reliability and make ready infrastructure. This aligns with the recent state objectives to increase electrification. Just last week, Governor Murphy issued 3 executive orders That establish or accelerate the state's existing 2,050 targets for clean sourced energy, building electrification The Board of Public Utilities and other state agencies were directed to collaborate with stakeholders to develop plans to reach these goals.

Speaker 2

These include an updated Energy Master Plan in 2024 and a new proceeding to develop a future of natural gas utility plant to consider new revenue streams such as conversion of existing facilities to District Geothermal and new technologies to meet 2019 Energy Master Plan goal 50% reduced emissions below 2,006 levels by 2,030. 3rd, we announced our Strategic decision to exit our investment in offshore wind generation by selling our 25% equity stake in Ocean Wind 1 Back to our joint venture partner, Verstedt. This decision to exit offshore generation was consistent with our goal to increase the predictability of our business. PSEG will continue to provide Ocean Wind with onshore construction management services to ensure the onshore substations And associated onshore cabling are ready to receive the project's output when it goes in service. We also intend to continue And enabling the New Jersey Wind Port in Salem County.

Speaker 2

And finally, last week, the BPU approved the settlement of our pension accounting filing retroactive to January 1, 2023, an important step we have pursued to limit pension expense volatility. This improved business platform created by the strategic actions we have taken over the past 2 years, combined with our efforts to increase the predictability of our results, It positions us to narrow our 2023 non GAAP operating earnings to a range of $3.40 to $3.50 per share From our original guidance of $3.35 to $3.55 a share provided last November. This new $0.10 range compares to the $0.20 range we have provided in previous years. These strategic moves also drive our outlook for long term compound annual earnings growth rate of 5% to 7% through 2027 and enable us to pursue this growth path without the need to issue new equity during this 5 year period. Moving to 2023, we extended our 2022 dividend increase of $0.12 per share to set the 2023 indicative annual rate at at $2.28 per share, marking our 116th year of paying a dividend to shareholders.

Speaker 2

PSE and G has begun executing its capital investment plan of over $3,400,000,000 for 2023, which is expected to be the largest single year spend in the utility's 120 year history. This will be directed primarily towards infrastructure replacement, Energy Efficiency and Last Mile Reliability. The good news is that additional headroom was created in our gas And combined customer bill as the recent decline in natural gas prices has enabled PSEG to reduce its residential default gas supply rate by 0 point The $0.15 per therm for the balance of the winter 2022, 2023 heating season. This decrease in the pass through commodity charge will reduce the typical residential winter gas bill by $13 per month annualized or 11.5%. Speaking of our customers, they rated PSE and G number 1 in the 2022 J.

Speaker 2

D. Power customer satisfaction studies for both residential electric and natural gas service in the East among large utilities. This is the first time we have achieved both number one rankings in the same year. This honor culminated a year that saw PSEG recognized by the Edison Electric Institute with the Edison Award, the industry's highest honor for leadership and innovation. And speaking of leadership, PSEG's environmental, social and governance credentials continue to be recognized.

Speaker 2

In addition to our MSCI upgrade to AAA, It's highest ESG rating. PSEG was also named to the Dow Jones Sustainability North America Index for the 15th year in a row, as well as to the Just 100 list of America's Most Just Companies for 2023, recognizing our commitment to serving our customers, Workforce, Communities and the Environment and Shareholders. None of this could be accomplished without our employees, We remain PSEG's most important resource. Together, we continue to be guided by PSEG's long standing commitment to operational excellence, Disciplined investment and financial strength. As I recognize our employees, I must take a moment to honor one that lost his Life in a tragic act of violence.

Speaker 2

Some of you may have heard about the horrible loss when a member of the PSEG team was killed by a former employee. It was one of the saddest days in our company's history. Our condolences and prayers go out to all of those that have been impacted by this event. I also want to thank our employees who supported each other during this difficult time. We will continue to provide resources to protect the health, Safety and well-being of all PSEG employees, including brief counseling for any employees seeking it.

Speaker 2

In closing, and as I mentioned earlier, we know the importance stakeholders place on predictability and visibility of our financial results and goals. I have made increasing both factors a key focus of PSEG's strategic plan. We intend to share the details of this plan at our upcoming investor conference on March 10, as we continue to build a practical path for decarbonizing the New Jersey economy. I'll now turn the call over to Dan and return after his remarks for Q and A.

Speaker 3

Thank you, Ralph. Good morning, everybody. For the full year 2022, GAAP earnings were $2.06 per share Compared to a GAAP loss of $1.29 per share for the full year of 2021, which included fossil sale related impairments. Non GAAP results were $3.47 per share for 2022 compared to 20 21's non GAAP results of $3.65 per share, which you may recall excluded depreciation related to the fossil assets held for sale in the Q4 of 2021 and retirement of power debt. For the Q4 of 2022, GAAP earnings improved to $1.58 per share compared with $0.88 per share for the Q4 of 2021.

Speaker 3

Non GAAP operating earnings were $0.64 per share Compared with $0.69 per share for the Q4 of 2021, which contain the fossil sale related items I just mentioned. We provided you with information on Slides 9 and 11 regarding the contribution to non GAAP operating earnings by business The Q4 and full year periods ended December 31. Slides 10 and 12 contain waterfall charts that take you through the net Changes quarter over quarter year over year in non GAAP operating earnings by major business, which I will review now starting with PSE and G. Full year 2022 net income rose by $119,000,000 or over 8% to $1,565,000,000 Compared to 2021 net income of $1,446,000,000 reflecting higher earnings from continued investment in T and D programs And the favorable impact of a full year of decoupling in 2022. For the Q4 of 2022, the utilities net income rose by $81,000,000 to $352,000,000 or $0.70 per share compared to $0.53 per share in the Q4 of 2021.

Speaker 3

As you can see on Slide 10, transmission margin added a penny per share compared to the year earlier quarter, reflecting growth in rate base, partly offset by the timing of O and M recovery. Gas, electric and other margin contributed to combined to add $0.07 per share Compared with last year's Q4, reflecting GSMP II roll ins, the Conservation Incentive Program or SIP decoupling for both electric and gas, Appliance Service and Other Margin. On the expense side, O and M was flat versus the prior year quarter. Higher distribution, depreciation and interest expense each reduced results by $0.01 per share reflecting higher plant in service and investment. Lower pension expense added a $0.01 per share versus the year ago quarter and flow through taxes, the impact of lower outstanding shares and other items added $0.10 per share Compared to the Q4 of 'twenty one with $0.07 of that amount reversing the timing impact of taxes from prior quarters in 2022.

Speaker 3

During 'twenty two, PSE and G invested over $3,000,000,000 in planned capital spending to upgrade transmission and distribution facilities, Enhance reliability and increased resiliency. In 2022, we also launched the IAP, our 511 Structure Advancement Program, which the BPU authorized last June to improve the reliability of the last mile of our electric distribution system and address aging substations and gas M and R stations. And as Ralph mentioned, at year end 2022, TSE and G's rate base stood at approximately $26,400,000,000 a 7.7% increase over year end 2021. Last Friday, the Board of Public Utilities approved an order authorizing PSE and G to modify its method of pension accounting for rate making purposes, which will mitigate variability in the calculation of PSE and G's pension expense for calendar year 2023 beyond. The backdrop of economic conditions continue to improve in New Jersey during 2022.

Speaker 3

New Jersey's unemployment rate returned to pre pandemic levels 3.3% in September and remained below the national average at year end. System peak load reached 10,147 Megawatts on August 9, exceeding the 10,000 Megawatt level for the 2nd year in a row. Weather normalized electric sales increased by 2% for the year with residential sales flat and C and I sales increasing by 3%. Weather normalized gas sales were flat for the year, with residential gas sales down 1%, while C and I sales increased by 2%. The SIP mechanism decouples the impact of most customer usage from margin, subject to earnings and rate cap limitations, leaving the change in the number of customers as the major driver of margin growth going forward.

Speaker 3

The number of electric and gas customer rose by approximately 1% each in 2022. Wrapping up the utility update, we've narrowed our forecast of PSE and G's net income for 2023 to $1,500,000,000 to $1,525,000,000 which reflects pension and OPEB updates compared to 2022, Offset by the benefit of contemporaneously recovered investments, predictability of utility margin from the SIF decoupling as well as the implementation of the pension accounting filing effect for calendar year 'twenty three. Now turning to Carbon Free Infrastructure and Other. For full year 'twenty two, CFO's net loss of 5 $34,000,000 or $1.06 per share reflected higher losses on both mark to market transactions and nuclear decommissioning trust fund related activity. The full year 2021 net loss included impairments and debt extinguishment costs related to the Fossil sale.

Speaker 3

Non GAAP operating earnings $174,000,000 or $0.35 per share from $407,000,000 for full year 'twenty one reflecting the absence of the fossil assets. For the Q4 of 'twenty two, CFO's net income improved to $436,000,000 or $0.88 per share from $174,000,000 in the year ago quarter, reflecting higher gains on both mark to market transactions and NDT fund related activities. Net income for the Q4 of 'twenty one included debt For the Q4 2022, the non GAAP operating earnings loss of $34,000,000 or $0.06 per share, Reflecting the absence of the fossil assets compared to the Q4 2021 non GAAP earnings of $81,000,000 or $0.16 per share, which reflected the cessation of depreciation and lower interest costs related to the fossil sale. Returning again to Slide 10, Non GAAP operating earnings were $0.22 per share lower in the Q4 than the Q4 of 2021, driven by lower capacity prices for the remaining nuclear fleet, Lower generation volume, recontracting at lower prices and lower ZEC revenue compared to the year ago quarter. Combined, these items drove electric gross margin Declined $0.34 per share.

Speaker 3

Gas operations improved by $0.04 per share, reflecting higher off system sales, higher commodity pricing and higher storage margin. Power related cost comparisons for the Q4 2022 improved as overall O and M expense was $0.07 per share favorable Compared to the year ago quarter, again reflecting the Fossil Asset Sale, partly offset by the planned refueling at the 100% owned Hope Creek Nuclear Plant in this year's Q4. Appreciation and interest were higher by $0.01 per share and reflected the March 2022 debt issuance at Power versus the year earlier debt retirements related To the Fossil Sume. Our activity was a $0.01 per share favorable compared to Q4 2021, primarily reflecting Since of 20 20 one's donation to the PCG Foundation, partly offset by higher parent interest of $0.04 Taxes and other Our earnings call will be recorded and includes the accelerated receipt of an expected tax carryback claim in 2022 instead of 2023, which is partially offset by the reversing of a timing impact from tax benefits in prior quarters in 2022. During the ops, the nuclear fleet operated at an average capacity factor of 85.8% during the Q4, which included the Hook Creek regionally And for you 7.3 terawatt hours of carbon free generation.

Speaker 3

An unplanned outage at Salem Unit 2 in late December of 2022 occurred During a PJM region wide generation emergency action and resulted in capacity performance penalties, the net financial impact of the outage, including replacement power, capacity penalties, as well as bonuses earned by the other operating PSEG units, did not expect it to be material. For For the full year, the nuclear fleet operated at an average capacity factor of 92.2%, producing 31.3 terawatt hours of generation. PCG is forecasting total baseline, baseload nuclear generation of approximately 31 terawatt hours for the full year of 'twenty three, hedged 95% to 100% at an average price $31 per megawatt hour, an increase of about $4 per megawatt hour compared to $22 For 20 24, total nuclear generation is forecasted Also to be approximately 31 terawatt hours and it's 55% to 60% hedged at an average price of $32 per megawatt hour. In addition, in December, we exited certain legacy BGS or Basic Generation Service contracts in order to rebalance our hedge portfolio and realign it to our base load nuclear fleet And reduce volatility in 2023. Wrapping up CFIO, we've narrowed our forecast of non GAAP operating earnings To $200,000,000 to $225,000,000 from $185,000,000 to $235,000,000 A quick update on financing activity and collateral postings.

Speaker 3

As of December 31, 2022, total available credit capacity was 3,700,000,000 including $1,000,000,000 at PSE and G. In addition, we have total cash and cash equivalents on hand of approximately 465,000,000 PSEG Power had net cash collateral postings of $1,500,000,000 at December 31, primarily related to out of the money hedge positions resulting from higher energy prices, which declined to $700,000,000 through last Friday. Given the recent improvement in our collateral position, in January of this year, We prepaid $750,000,000 of a $1,500,000,000 short term loan that was due in April. Following the repayment of this term loan, PSEG had outstanding a total of $1,250,000,000 of 365 day term loans expiring this spring to support Power's collateral needs. Empower added outstanding a $1,250,000,000 term loan expiring in March of 2025.

Speaker 3

Combined, these Term loans comprised $2,500,000,000 of variable rate debt. As we mentioned during our Q3 call, we entered into interest rate swaps during September October of last year, which converted $1,050,000,000 of our outstanding term loans from floating to fixed rate reducing our variable rate debt exposure. Following the measurement of the pension at year end 2022, we've incorporated the impact of the actual 2022 investment returns, discount rate and interest rates into the 2023 pension Our expected return on planned assets increased to 8.1% for 2023. As the decline in value of the fixed income securities due to higher interest rates during 2022 enables a higher yield on them going forward. While 2022 investment returns had a negative impact on 2023 pension calculations, the increase in interest rates served to reduce the pension liability with the funded status of our pension plan Ending the year at a solid 87%.

Speaker 3

In addition, accounting settlement approved by the DPU will create a regulatory asset or liability to overlay our current accounting, which will probably mitigate the impact of certain expense related pension calculations going forward. As Ralph mentioned earlier, we've narrowed our 2023 non GAAP operating earnings guidance to $3.40 to $3.50 per share, around the same $3.45 per share midpoint With regulated operations continuing to contribute approximately 90% of that total. As a reminder, PSEG does not forecast GAAP earnings related and related long term growth rates. KISS E and G's forecast of 2023 net income is narrowed to $1,500,000,000 to $1,525,000,000 reflecting the predictability provided by the SIP, expected transmission distribution investment recovery and focus on O and M cost control. Non GAAP operating earnings guidance for CFIO is now forecasted at $200,000,000 to 225,000,000 CFIO's narrowed guidance also removes the previously expected benefit for the tax carryback claim from PSEG's 2023 operating guidance.

Speaker 3

That concludes our prepared remarks. So Shamali, please open the line and we'll take some questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session for members of the financial community. And the first question is from Shahriar Pourreza with Guggenheim Partners. Please proceed with your question.

Speaker 4

Good morning, Ralph and team. It's actually Constantine here for Shar. Congrats on the quarter.

Speaker 3

Hey, Constantine.

Operator

I just

Speaker 4

wanted to start off with the 2023 guidance updates and specifically on the utility. Do you have any updates on the O and M cost initiative targets And interest costs that are embedded in guidance versus what was presented in November, especially as you're winding down some of the collateral needs. And just Maybe to clarify, was the pension outcome the main driver for the $15,000,000 decrease at the top end of the guidance?

Speaker 3

I think the way to think about the pension honestly is it's just reducing volatility overall. As we think about at EEI, it was in November, We were providing guidance and as you know we snapped the tape at twelvethirty one. And so I think the elimination of the ups and downs that Could have come from year end, which was not known at the time, was part of the reason that we had a wider Range at that point and are more narrow now, I would say that that number came in right about where we thought it was going to. And so I would say we are Consistent with that, but with the absence of the movement that we could have had, we had presumed at that time, Constantine, that we would Obtain what we did subsequently obtain from the BPU, so that was presumed already. And I would say from an O and M perspective, I'd say it's fair to think about the assumptions as being consistent as what we said at EEI.

Speaker 3

We may see some Benefits coming through by virtue of collateral coming off a little quicker, but the year is not over. We'll continue to see some movements and we'll continue to manage that going forward.

Speaker 5

Hey, Constantine, the only thing I

Speaker 2

would add from an O and M standpoint, we've been a culture of continuous improvement and we'll continue to Look for opportunities when they arise, but we don't normally publicize any specific numbers in that area.

Speaker 4

Okay. Thanks for that clarification. This one might be more for Dan again. With the announced exit from offshore wind and the first Part being that put option on the JV and the potential incremental acreage sales. Kind of more directly, how are you thinking about the use of proceeds?

Speaker 4

And As we think about the old investment capacity slide and with the sale proceeds be online on the short term financing, is there a target FFO to debt metrics that we need to Think about in your longer term planning assumptions?

Speaker 3

Yes, I think the We saw on that that exit from Ocean Wind 1 would be at our cost to date and we've characterized it as being right around 200,000,000 Just in excess of $200,000,000 So that certainly is nice to have back, but it's not a major item to move the needle with respect to the broader numbers. I think we've talked about having an overall FFO to debt threshold 13% to 14%, and we've talked in the past about living somewhere North of that, into the 2015, 2016 area, and I think that's a fair way to continue to think about where we are.

Speaker 4

Great. And maybe for just one second shifting to nuclear. What's the threshold for including operational or CapEx or an upside into the plan And the needs associated with it, just thinking of the co owner and some of the assets just being announced and the announcements around some of the upgrades Elsewhere, just curious on any thoughts or conversations that you've had?

Speaker 3

Yes. If, so we'll have our normal run rate operating Capital to the extent that there is an opportunity to deploy capital to enhance results overall. Obviously, that analysis is going to go through Just like any other analysis we would do and be up against the hurdle rate that's going to show that's going to make sense for us to do that. I think we have Some promise on some things going forward and maybe we'll give you a little bit more color about that as we get a little further down the road on that.

Speaker 4

And any specific conversations that you've had or still too early?

Speaker 5

About the CapEx?

Speaker 4

With the co owners.

Speaker 2

We talk to our co owners all the time. I mean that's just the normal operating, but Nothing specific. Yes, Constantine, no.

Speaker 4

Okay. Thank you. Appreciate it. Thanks for taking the questions.

Operator

Our next question comes from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Speaker 6

Hi, good morning. It's actually Rich Sunderland on for Jeremy. Can you hear me?

Speaker 2

Sure, Rich. Yes.

Speaker 6

Hey, thanks. Certainly, back to the offshore wind update, just on the GSOE acreage, any options you're evaluating beyond an outright Sale here. Also curious when we could expect the next update on this front?

Speaker 2

Yes. No, so Rich, just unequivocally, we are not going to be in the offshore Generation Business, I mean that and the timing of what we do, we'll just be keeping an eye on the market and seeing what makes sense.

Speaker 6

Very clear. Got it. And then just Governor Murphy's executive orders within that, I guess, the 100 And clean energy plan. How do you see this impacting the Energy Master Plan overall? And curious at a high level what you're focused on either from that front or from an EMP front?

Speaker 2

So I would kind of say there's a lot of good news in that announcement last week for a company like ours And especially one that's been focused, we kicked off this effort on the last mile last year and I think this just Kind of reinforces the need for it, from a customer standpoint and from a reliability standpoint. So lots of opportunities. We'll certainly be engaged in that. I personally am tripling down on electric vehicles as much as we can in this area and that's driving the de carbonization in the state. And then from a gas system standpoint, certainly some push on whether or not there's a lot of Expansion of the gas system, we have about a high 80% saturation rate for our customers.

Speaker 2

So we never had our business plan set up for Growth on the gas side, that's not in our numbers. We just kind of hook up customers as they called us. But Our replacement plans are completely aligned. If you look at the wording that's in the executive order by reducing methane emissions. So We think there's just a lot of positives in that announcement and we'll work with the state and policymakers on whatever we can to help drive that in the Energy Master Plan.

Speaker 6

Got it. Very helpful. And sorry, I just wanted to circle back one last time to offshore wind. The GSOE acreage, is that all uncommitted? And can you just run the numbers on what's in there and what's net to peg?

Speaker 2

It's like 35,000 acres. And so it's about 35,000 acres that are still available. To some degree, we've committed some of that to Orsted if they go ahead with Skipjack. I don't have the exact numbers in front of us, but it's a de minimis amount of that 35,000.

Speaker 3

Yes, there is a as that project was going forward, there was a need for some incremental acreage and so some of those were made available for that purpose.

Speaker 7

Great. Thank you for the time today.

Speaker 2

Thanks, Rich.

Operator

Our next question comes from the line of Durgesh Chopra with Evercore ISI. Please proceed with your question.

Speaker 8

Hey, good morning, team. Thanks for taking my questions. Good morning, guys. Good morning, guys. Just On the pension front, just I just want to reconcile and make sure we have this accurately captured.

Speaker 8

The accounting order From the BPO last week, that roughly mitigates about 20% to 30% of the pension expense volatility. So if you can confirm that, Dan, if that's still the right number. And then maybe you can update us on the sort of the lift out approach that you had highlighted you were considering, Just any updates that you can share there as well.

Speaker 3

Yes. Dagesh, on the first question, I think that's a reasonable way to think about it. Although, you will see as you step through time, Some of the components of pension will change. So it's not a I think it's a fair way to think about where we sit today, but as we step through time, Some of that could move as some of the component elements end up changing. I think with respect to the lift out, we've talked about it a little bit in the past.

Speaker 3

We are Continuing to explore that as a potential, again as a reminder, really what that does is just shrink the overall size And I think that potential still exists for us. We're still doing diligence on it and are working our way through the process. And we'll have some more information for you as we go through the year, but I wouldn't expect anything to be imminent, but I would hope to see something happen this year. It would be to Durgesh.

Operator

Durgesh, are you on mute? Not sure if you're still connected, but

Speaker 1

Okay. Shamali, we can move to the next question and if Durgesh comes back, we'll continue with him.

Operator

Sure. No problem. Our next question comes from the line of David O'Cao with Morgan Stanley. Please proceed with your question.

Speaker 9

Hey, Ralph and Dan.

Speaker 10

Good morning. Thanks for taking my question.

Speaker 5

Hey, Dave.

Speaker 10

Let's see. I was curious on nuclear. So one of your peers recently announced higher levels of nuclear O and M Heading into 2023, curious if you would expect a similar dynamic in terms of upward O and M pressure on your nuclear units. And then separate but somewhat related on nuclear fuel, they also were taking a more conservative approach in In terms of building inventory and lowering risk of any kind of Russian supply interruptions that could occur in the future, wondering if You have considered a similar strategic approach in terms of sourcing nuclear fuel.

Speaker 2

Yes. So a couple of things on that front. On the Just from an O and M standpoint, as you recall, the Inflation Reduction Act required anyone Who wanted to participate in the PTC or not participate, but fully participate in the PTC to pay prevailing wages At the sites and we have been doing that for years here at PSEG. So, no off board O and M impact for us. I don't know if there's anything beyond that, that the others are talking about, but specifically for us, I don't see anything that would be driving additional O and M expenses at those plants.

Speaker 2

And then on the fuel supply, we were not as dependent on Russian fuel supply as at all For our fuel supply, so it's not an issue for us that we needed to get in front of and I think We'll talk a little bit more about that at our investor meeting. But I just it's Again, that's something that was forefront for us or something that we had to proactively address because we're not we're just not in that marketplace. I I think there's an impact on the entire market. It will be an impact for everyone, but that's not something we are trying to jump in front of right now.

Speaker 3

Yes, I think we got pretty good line of sight in the near term on nuclear fuel, David. Just given the from the standpoint of the fuel and the reactor and then you've got your upcoming Fuel reloads and those that as you kind of go through the years, the near term is pretty well hedged And that's on top of the fuel that's in the reactor. So I think we're in pretty good shape for the pursuit for The foreseeable future.

Speaker 10

Got it. Got it. Thanks. That's helpful. And then I just wanted to clarify on the collateral Postings, it's great to see that they've come down maybe sooner than expected.

Speaker 10

I was wondering if you could just remind us of how the Collateral kind of falls off through the year. And is that earlier than you had previously anticipated, the, I think $800,000,000 that you're able to Paydown earlier, is that helpful for EPS in terms of taking some of the short term debt off the balance sheet for this year?

Speaker 3

Yes, David, we've said before, if you think about most of the price differential and most of the period that we do have hedged, A lot of what we would expect to see is that those positions would roll off through 2023 and Into the winter of 'twenty four was where the bigger element of the totals were. And so that timing is fairly consistent. I think to the extent that you saw prices come down, you're going to see a lower overall balance to the extent that they go back up that will continue to move. So It will continue to be dynamic, but to the extent that that stays a little bit lower as we run through these next 12 months, we would have less Overall, collateral posted and that would be the best.

Speaker 10

Okay, great. Thanks so much.

Speaker 2

Yes.

Operator

Our next question comes from the line of Durgesh Chopra with Evercore ISI. Please proceed with your question.

Speaker 4

Hey, guys.

Speaker 11

Can you

Speaker 8

hear me now?

Speaker 4

We can. We can.

Speaker 8

Okay. Sorry about that. It was actually my headset. So Dan, thank you. I heard all of that.

Speaker 8

I appreciate it. Just the uplift that was roughly another 20% to 30% That would reduce the pension volatility by and so if you were able to get that successfully the uplift successfully executed, That would essentially basically kind of the 50% of the pension expense volatility would have been taken care of inclusive of this BP order last week. Am I thinking about that correctly?

Speaker 3

Yes. You said uplift, but I think you mean the lift out, Right. And so

Speaker 8

I think Yes, that's right.

Speaker 3

Yes. So I think that's a good way to think about it. If you think about building blocks, you'll have An element related to the utility with respect to the unrecognized losses and then you would have another element which would be of Comparable size. I think the way you're thinking about the math is right. Just the only caveat is again, as you do go through time, you'll see the different cost components And return components change a little bit, so you could see some movement.

Speaker 3

I think that's a fair way to think about it, Durgesh.

Speaker 8

Okay, perfect. Then just one last one again on pension. In terms of timing, You might have said that expect an update sometime this year. So by your Analyst Day here or Investor Day in March, We shouldn't be expecting that you get a pension lift out, right? That's coming later in the year?

Speaker 3

That's the right way to think about it, yes.

Speaker 8

Thank you so much. I appreciate it again, Thank you for bringing me back in to ask my questions.

Operator

And our next question comes from the line of Michael Sullivan with Wolfe Research. Please proceed with your question.

Speaker 2

Hey, Michael.

Speaker 3

Hey, Ralph. How are

Speaker 12

you? Great. Yes, I didn't want to like front run the Analyst Day too much here, but just Can you maybe give us a little preview of what else to expect just in terms of new disclosures? I mean, I'd imagine The growth rate and all that is kind of set, but in terms of like some of the nuclear things you alluded to, will we get some more flavor there? And then I guess on the offshore wind side, it sounds like that timing is not really tied to the Analyst Day.

Speaker 2

Yes. No, that's not. Look, I would say this to you, Michael, If you walk out of that meeting with even more confidence in our ability to execute on the things that we've been talking about, that would be my goal for that investor meeting. We've done that over the last year in some crazy turbulent times and I think that you'll see more of that and I want you to walk out of that meeting with more confidence. So We're doubling down on some of the things that we've got planned in the utility and that should be the real highlight in the conversation, a little more about our thoughts about how To respond to the Governor's call for action.

Speaker 12

Okay, great. And then I think this kind of got asked a little bit, but just on the offshore wind Proceeds, so it sounds like the $200,000,000 you already got back is not a big needle mover, but when you stack that on top of what you Could potentially get for GSOE, I'd imagine that's a little more material. So kind of how do we think about where those proceeds could go?

Speaker 2

Yes. And just so Mike, just so we're 100% clear, we have not received the $200,000,000 back yet, right? That's in the process with our partner and we're going through Dotting the I's and crossing the T's in that whole conversation, so more to come on that front. But I think the materiality The GSOE is a TBD and we'll see what the market gives us on that front. And then Dan and the team will Do what Dan and the team have done for many years and put it to the best use.

Speaker 12

So Sorry. So are you suggesting that It could end up being immaterial, like is there a reason that that wouldn't be worth anything?

Speaker 2

No, I just don't want to we're not building Plan that's built that's based on getting some New York BITE multiples on it. So I don't want people to walk away with some Inflated opinion on what those acres are going to be worth. We'll see what the market comes back with.

Speaker 12

Okay, fair enough. Okay, thanks very much.

Speaker 2

Yes.

Operator

Our next question comes from the line of Julien Dumoulin Smith with Bank of America. Please proceed with your question.

Speaker 7

Hey, good morning, team. Thanks for the time. Appreciate it. Good to chat with you guys.

Speaker 2

Good morning, Julian. It's been a while.

Speaker 7

It's been a second here. Absolutely. So just with respect to hedges here, I just want to come back to this real quickly. A couple of different moving pieces. First off, If I heard right in the comments BGSS here, you guys are moving away from that.

Speaker 7

Seems like A slightly more important strategic decision after years of benefiting there. Can you talk about that a little bit here? Again, obviously not a big contribution, But then also related here and probably more critical and looking forward here, what's your latest interpretation of the PTC and how that interplays with your 24 hedges? And ultimately, how you think about hedging right now considering what IRS may or may not do?

Speaker 2

Yes. Let me I want to give that Dan, to give you details on it, but that is not a recent move on our part. We have been moving away over time on the BGSS and I think we've BGS and we've talked about that for a while, not BGSS, but BGS. And we've been doing that. It's a different product, right?

Speaker 2

It's more of a shaped product than a baseball product that our nuclear plants would support, but Dan will give you a lot more details on that in the hedging piece.

Speaker 3

Yes. Just to be super clear, Julien, if you think about it, the BGS product is a default product in New Jersey on the electric side of the business. And so PSEG Power has used that as a hedge for a long time and PSEG Power had nuclear and fossil units and had a very shaped I'll put seasonality by virtue of having both nuclear and fossil generation and as We sold the fossil units and we still had some BGS obligations. You think about those are 3 years at a time. That was not an ideal fit for nuclear, which is more shaped and more of a block power.

Speaker 3

And so really don't take too much from The sale of the BGS, it just those remaining legacy tranches were not a good fit for a nuclear output that looks more like Blockchain Power. What it is not is related to the BGSS, which is basic gas supply service that we provide to PSE and G and actually can leverage some of that excess capacity in In a way that we've done for many years and we'll continue to do that. So the move away is for just the small remaining legacy tranches that we had on BGS on the electric side that were taken on 3 years at a time and unrelated to BGSS. With respect to The interpretations, I would love to have more of an interpretation than I do right now, but we don't have guidance from Treasury related To how they will define gross receipts in determining what the PTC will be based upon. And so We are still a little bit at the mercy of what treasury will do.

Speaker 3

I think the outcome of the PTCs is going to be positive and supportive, But the exact dynamics of exactly what numbers you would use to figure out what that's going to be is undetermined. By that I mean to the other part of your question, How they will account for hedges in their calculation. And so that's the guidance we're still waiting upon. I think that The outcome will influence how we will end up hedging the nuclear units. We will try to align with how they will define gross receipts, So that ultimately the PTCs that we get will kind of fit the overall mechanism as it's supposed to work and we can end up with that steady ultimate result At the PTC threshold or above if the markets are higher.

Speaker 3

And so we're still a little bit of a waiting game and I don't even have a date to tell you when treasury is going to come out with it. The PTC has come into play for the first time in Cal 24. Obviously, companies like ours hedge in Advance of that, so I'd love to have information sooner rather than later, but other elements of the IRA do kick in, in 2023. So we have not heard back from Treasury Any guidance with respect to how they're thinking about that exact definition?

Speaker 7

Got it. And related here with respect to New Jersey stakeholders, Any update on how you're thinking about treating it there? Any changes in that construct? Did you think about like a belt and suspenders of the federal program here? I know we heard some Comments from your peers here?

Speaker 3

No, I mean, look, I think the upshot is that to the extent that PTCs is a payment for the attribute and the ZEC is a payment for the We will net back that amount to the state and that was in the original ZEC legislation that was put together. And so I think that's net net over the long run this is going to be a very good thing for New Jersey because the payment for the attribute that's going to help nuclear ensure that it does have Financial backing is going to be borne by the federal government rather than just New Jersey and that will be a positive thing on the bills over the long Yes.

Speaker 2

And I would just support that by just saying from a belt and suspenders standpoint, I think anything we do here, we being us and policymakers in New Jersey would be For next generations, it's not something that would be belt and suspenders for anything near term.

Speaker 7

Got it. Understood what you mean by that. I appreciate that. All right, excellent. Thank you guys very much.

Speaker 7

Appreciate it. Actually one last quick one on power, If you don't mind, with respect to all the commentary from the Governor's office, etcetera, are you thinking about updating investments around power and the To maximize value of those assets here, we've seen some commentary again from some of your peers there, but again given what's going on with the governor etcetera, I'm just curious if that is Even more of an opportunity.

Speaker 3

Yes, I think that flows

Speaker 2

to PTC and that's in my opening remarks a little bit there Julien was all about, hey, we potentially do some upgrades at Salem, Some change in the fuel cycle at Hope Creek and then long term extension of the licenses themselves. Not to mention everybody's Talk about hydrogen, but we'll talk a little bit more about that all on March 7.

Speaker 4

Got it. All right. That's what I thought.

Speaker 7

Thank you, guys. Appreciate it. Good luck.

Operator

Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Speaker 11

Hey, good morning. Thanks, Paul. Just really quickly, just the extension of the licenses, Is that already reflected in the depreciation schedule of the assets? And How much might that lower the level of depreciation?

Speaker 3

Yes. So the depreciation runs through 2,030 six, 2040, 2046 for the New Jersey units and 2,053, 2,054 for the Pennsylvania units. So those are Presumptive of the extensions that get you to those dates. What we've talked about so there's 2 things going on. What we've talked about is the potential for another extension in New Jersey That is not what is in place right now.

Speaker 3

And also you may recall, Peach Bottom and Turkey Point had some questions raised by the NRC about their existing license extension, which has not changed what we have done. We believe that that will be restored without any change. And so with respect to the incremental 20 years, I don't have a number off the top of my head as to what that would do to us. But we can that's easy math. I think that's all available and we could get that to you, Paul.

Speaker 11

Okay. Just over the years, we've seen different companies Recognize these depreciation changes because of license extensions At different times, some do it even before they file with the NRC, some do it only when they get The NRC's official ruling on it, any thoughts about When we might see the depreciation benefit show up?

Speaker 3

Yes, I think it's most likely what we have in hand, the extension.

Speaker 2

And Paul, let me just reiterate what Dan said about the timing, right? You got 36, 40, and 46 on these units and Normally, you would apply in about 10 years in advance. So, just to kind of set the timeframe for you as to when the application going, we're just talking about it It would be within the 5 years of our business plan.

Speaker 11

Okay, got you. Thanks so much.

Speaker 3

For the work done, Probably not for the receipt of correct the extension.

Speaker 11

Okay. Thank you. Sure.

Operator

Our next question comes from the line of Travis Miller with Morningstar Inc. Please proceed with your question.

Speaker 5

Hi, everyone. Thanks for taking my question. On the transmission of the onshore transmission, any update on solicitations or Development there or anything along those lines?

Speaker 2

No, we're waiting on that as well. I don't Back to anything in the very near term on that. I think the BPU is committed to seeing through the work that they've had approved so far, but we have not There's no indication at this point on the timing of any new solicitations.

Speaker 5

Okay. Is the gating factor in the development In future offshore wind or would there be additional transmission for current?

Speaker 2

I think a bunch of it has

Speaker 4

to do with

Speaker 2

the IRA and understanding how the tax Treatment would be for a wire, whether it's a wired, it's deemed a generator lead or a wired, it's deemed offshore transmission. So once they get through that process, I think there'll be some better idea about timing.

Speaker 5

Okay. Makes sense. And then I said I mentioned about the rate case at the end of the year. Any Anything unusual about that, that would come out or just typical operating cost, capital cost updates?

Speaker 11

No, just typical. Okay.

Speaker 5

That's all I had. Appreciate it. Thanks, Travis.

Operator

Our next question comes from the line of Anthony Crudell with Mizuho. Please proceed with your question.

Speaker 7

Hey, good morning, Ralph. Good morning, again.

Speaker 2

How are you? Good.

Speaker 13

Just two quick ones. One is a follow-up from Dirk Asher's 2 parter. You talked about maybe 2 of the 3 parts you were going to use to mitigate pension volatility. I think the 3rd part you didn't talk about was a pension Tracker that you're going to ask for in a rate case you filed at the end of the year. Any feedback or discussions you've had with policymakers on support or Anything around that?

Speaker 2

I'll start and Dan can add anything he wants to put there. But look at the end of the day, Whether it's a tractor or any other kind of mechanism, we absolutely plan to have a conversation with the BPU about that. I'm just Very happy with the near term what we were able to accomplish. And I think the combined with the American Water Adjustment or mechanism they put in for them, I think the BPU is recognizing there may be some value here for not just for the companies, but for the customers as well as they look at this. So we'll continue to have a conversation.

Speaker 2

I won't get tied into a tracker or a mechanism, but we'll have a conversation about it. Yes, it

Speaker 3

will be part of the whole rate case.

Speaker 13

Great. And then just one last housekeeping. If I look at the long term EPS growth rate 5% to 7%, Capital spending drives rate base here 6% to 7.5%, a slight difference there. It's just a difference on the bookends there, the Growth at the CFIO?

Speaker 3

Yes, because The finest 7 is for Enterprise and the rate base growth is solely at the utility. So anything and everything at CFO is going to be in there. And then You'll have a little bit of noise as you go through O and M and different other components, but I think they're largely consistent. You should think about them that way.

Speaker 13

Great. Thanks for taking my questions.

Speaker 2

Thanks, Anthony. Thanks, Anthony.

Operator

Our next question comes from the line of Paul Fremont with Ladenburg Thalmann. Please proceed with your question.

Speaker 2

Hey, Paul.

Speaker 9

Hey, good morning.

Speaker 8

Good morning.

Speaker 2

Good morning.

Speaker 9

Sort of a quick question on rate base growth. You guys, I think, had a range, but I think most of the stretch CapEx look to be in the out year. So I was wondering how you got such a strong level of rate base growth in 2022.

Speaker 3

The only thing I could think of and I'm trying to interpret your question a little bit, Paul, is whether any CWIP that kind of worked its way through the numbers that could change Your ultimate rate base as you go year to year. Okay. Yes. Also,

Speaker 9

Can you give a sense per share in terms of what change in pension cost you're assuming in 2023?

Speaker 3

Yes, versus 'twenty two.

Speaker 9

Yes.

Speaker 3

At EEI, we had given a range of 0.25 $0.30 for pension and OPEB, and we're right within that range, kind of around the midpoint of that range. So that's a consistent number. Obviously, at EEI, we were estimating where we would come out and we didn't see too much movement either in markets or interest rates that moved us away from that. So you think about Middle of that range, I mean, in pretty good shape.

Speaker 9

Okay. But you still got the accounting order, right? And that didn't change the range

Speaker 10

is what you're saying?

Speaker 3

It was assumed we had filed it at that point and we had commented that we were optimistic that that would come through. It Came through as expected, so it was part of what we were thinking at the time when we provided the range.

Speaker 9

Great. And in terms of hedge guidance, I mean, is there a reason Why we haven't seen sort of 25 hedge guidance for PEG Power?

Speaker 3

We kind of updated through 2023 and 2024. I mean, Part of the answer could well be, if you want to think about it this way, Paul, is that we still are awaiting what treasuries are going to do, from the standpoint of guidance. And so that's going to be an important element as we go forward.

Speaker 9

Okay. And then last question for me. You guys gave a gross margin per megawatt hour. Is there any guidance that you can provide on a gross margin per megawatt hour Basis for PEG Power in 2023?

Speaker 3

No, I mean, I think we've given you the overall The hedge price across 23 and characterizes 95% to 100% fair. So, I think you'll see that as we go through the quarters.

Speaker 9

Okay. Thank you very much.

Speaker 2

Thanks, Paul. Thanks, Paul.

Operator

Our next question comes from the line of Sophie Karp with KeyBanc Capital Markets. Please proceed with your question.

Speaker 14

Hi. Good morning. Thank you for squeezing me in here. Hi. Most of my questions have been answered actually, but maybe I can just ask you about the gas utility Future in New Jersey.

Speaker 14

I had given the comments that are coming out from the governor And just overall focus on the electrification. How do you think about kind of the setup that you have going into this, what Could be a multi decade trend. Like specifically, are your electric and gas territories fully overlapped in terms of customers? Like where whatever you might lose as a gas business, you will gain as an electric business? Or are they kind of cannibalized by other utilities?

Speaker 14

How should we think about that?

Speaker 2

Yes. So it's a mixed bag for us. We have some gas only territory, some electric only territory, but all of our customers, the bulk are Combined. So, I don't want to say it's a win win, but it is a win win for us to a great extent. And Because we're focused on all of our gas investments being replacement activities, not new activities, but replacement activities That are going to help reduce methane.

Speaker 2

We're thinking those investments will make a ton of sense and will continue. So, I actually Think about this more from the standpoint of the speed in which we electrify and the cost to consumers How we think about that. So we'll continue to drive that point. We'll be able to offset a bunch of it with the energy efficiency work that we've started and we'll continue. We don't talk about our energy efficiency programs half as much as we did in the past, but that's because it's just become such a core part of our business like any other Anything else we do.

Speaker 2

So, I'm thinking that the energy efficiency will help create more headroom on the bill. As we do that for customers, The electrification can move faster in those areas, but for some of our urban centers, the challenges will remain and we'll have to really work close with policymakers Not to have sticker shock for everyone in the state.

Speaker 14

Terrific. Thanks so much. That's all from me.

Speaker 3

Thanks, Sophie. Thank you.

Speaker 8

And that is all the

Operator

time we have for questions. I would like to turn the floor back over to Mr. LaRosa for closing comments.

Speaker 2

Well, thank you. And I just three things I want to hit on. 1, again, our thoughts and prayers to all those who were impacted By the tragic events that we had here earlier this month, we just the organization We're still dealing with that and will continue for probably years to come. But during that time, We've talked a lot about the transition in leadership here. And I've thanked Ralph Izzo and a number of other people in the past, but No time.

Speaker 2

What I want to do more than now is thank the entire team and my direct reports that have been standing here with me and been able to not only Deal with the tragic events, but also to execute on a plan that you heard earlier today. We've accomplished a lot in a short period of time. We'll continue to do that, and we'll We'll continue to build your confidence and look forward to having that conversation with you on March 10th, when we meet with you at the Stock Exchange in New York. Thanks for calling in.

Operator

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

Speaker 1

Thanks, Damali.

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Earnings Conference Call
Public Service Enterprise Group Q4 2022
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