Public Service Enterprise Group Incorporated (NYSE:PEG) Q3 2023 Earnings Call Transcript

Public Service Enterprise Group Incorporated (NYSE:PEG) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Rob, and I am your operator today. I would like to welcome everyone to today’s conference, Public Service Enterprise Group’s Third Quarter 2023 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 the members of the financial community. [Operator Instructions] As a reminder, this conference is being recorded today October 31, 2023, and will be available for replay as an audio webcast on PSEG’s Investor Relations website at https://investor.pseg.com. I would now like to turn the conference over to Carlotta Chan. Please go ahead.

Carlotta Chan: Good morning, and welcome to PSEG’s third quarter 2023 earnings presentation. On today’s call are Ralph LaRossa, Chair, President and CEO; and Dan Cregg, Executive Vice President and CFO. The press release, attachments and slides for today’s discussion are posted on our IR website at investor.pseg.com, and our 10-Q will be filed shortly. PSEG’s earnings release and other matters discussed during today’s call contain 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 principle, 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 materials.

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Following Ralph and Dan’s prepared remarks, we will conduct a 30-minute question-and-answer session. I will now turn the call over to Ralph LaRossa.

Ralph LaRossa: Thank you, Carlotta. Good morning to everyone, and thanks for joining us to review PSEG’s third quarter results. Earlier today, PSEG reported third quarter 2020 net income of $0.27 per share compared to net income of $0.22 per share for the third quarter of 2022. Non-GAAP operating earnings for the third quarter were $0.85 per share compared to $0.86 per share in the third quarter of 2022. Our non-GAAP results exclude items shown in Attachments 8 and 9, which we provided with the earnings release. We are very pleased with the results of both PSE&G and PSEG Power & Other which are continuing to fully meet our planning expectations. Through the first nine months, PSEG is on track to achieve our full year 2023 non-GAAP operating earnings guidance of $3.40 to $3.50 per share.

This morning, we also reaffirmed both PSEG’s full year 2023 earnings guidance and our long-term 5% to 7% earnings growth outlook with the announcement of our third quarter results, which Dan will discuss in greater detail following my remarks. We had a very constructive quarter on several fronts. Our utility, PSE&G invested approximately $1 billion in energy infrastructure during the third quarter, bringing the year-to-date spend to $2.7 billion. For the full year 2023, capital spend is now expected to total $3.7 billion, slightly higher than our original plan of $3.5 billion, ahead of scheduled execution on our clean energy future energy efficiency and our infrastructure advancement programs. On the advanced metering front, PSE&G has completed the installation and placed into service just over half of 1.3 million of the 2.3 million planned smart meter replacements.

Overall, we remain on schedule and within our cost parameters. We have seen strong demand for PSE&G’s energy efficiency solutions, which is helping our customers save energy and lower their bills. To give you some perspective on how strong the demand for energy efficiency is. Consider that PSE&G now sells more energy efficiency solutions in a single month than we did in the entire year just a few years ago. In addition, we continue to support the energy transition and decarbonization of the New Jersey economy by upgrading the last mile of our distribution system as well as adding new electric infrastructure due in part to an increase in electric vehicle penetration. These critical New Jersey energy investments also support our rate base growth trajectory of 6% to 7.5% through 2027.

The low end of PSEG’s rate base CAGR assumes an extension of our investment programs at their current annual levels. Within the upper end of the rate base range is a potentially higher amount of infrastructure investment and upcoming filings for energy efficiency above their current run rates. Last week, the BPU reset the start date for the second three-year energy efficiency period to begin January 1, 2025, and run through June 30, 2027, for a total term of 2.5 years while adding a six-month extension to the current three-year period. The BPU requested updated utility filings to be aligned with this new period. The BPU’s updated framework outlines a robust continuation of EE in the state and includes utility-specific net annual energy reduction targets for the upcoming filings.

It also directs utilities to propose quantitative performance indicators aligned with the updated net annual energy reduction targets and the compressed 2.5-year time frame. The prior EE annual reduction goals of 0.75% for gas and 2% for electric during the program years of 2026 and 2027 remain unchanged. Earlier this month, the BPU approved a settlement to extend our current GSMP II program through December 2025 and provided for $900 million of investment to replace a minimum of 400 miles of cast iron and unprotected steel main at a modestly higher run rate than our previous programs. For the $900 million investment provided in the settlement, $750 million will be recovered through three periodic rate update clauses with the balance addressed in the future rate case.

Through GSMP II, we reduced methane lease by approximately 22% system-wide from 2018 levels. This extension enables us to remain on track to achieve our long-term reduction target in methane emissions of at least 60% over the 2011 through 2030 period. PSEG’s broader GSMP II filing is being held in advance. We expect that this filing, which also includes pilot projects to introduce renewable natural gas and hydrogen blending into our existing distribution system. We’ll restart after the future of natural gas utility stakeholder proceedings conclude. The GSMP II extension approval provides for restarting the GSMP III filing by January 2025 with the intent of beginning the next phase of this work in January of 2026. While we make these investments, we remain focused on customer affordability and continue to diligently manage our O&M expense.

We recently completed new four-year labor agreements with all of our New Jersey unions. I want to underscore the importance of this in relation to our costs labor is one of our largest expenditures. Having four years of labor cost certainty helps us keep customer bills affordable and provides our represented employees with wage predictability. PSE&G continues to compare very well to peers on a share wallet basis both in the region as well as nationally. Monthly bills for typical residential natural gas customers remained among the lowest in the region. Beyond that, for the upcoming 2024 heating season, the BPU approved PSE&G’s request to lower the gas commodity charge to approximately $0.40 per therm effective October 1. This gas commodity charge, which is simply a pass-through for the utility has declined by a total of 38% since January 1, 2023.

Now turning to our nuclear operations. The PSEG nuclear fleet operated at 95.8% capacity factor during the year-to-date period ended September 30, producing 24.3 terawatt hours of carbon-free baseload energy. Our 57% owned Salem Unit 1 just completed another breaker to breaker run and entered its scheduled fall refueling outage after operating for 508 continuous days between refuelings. Our efforts to transition our boiling water reactor at Hope Creek from an 18-month to 24-month refueling cycle through lower capital cost projects is ongoing. Related to our competitive transmission proposal submitted to PJM as part of its 2022 Window 3 solicitation — their transmission expansion advisory committee staff recently recommended that a PSEG project being included as part of a comprehensive solution.

PSEG’s project outlines a $447 million investment with an expected in-service date of 2027. The PJM Board will announce their final decision in December. This is another example of regulated opportunities that we are pursuing, and we intend to leverage our considerable transmission skills and similar opportunities that arise. Switching topics for a moment to sustainability, you will recall that we committed to the United Nations back race to zero campaign in September of 2021 with the intention of submitting proposed targets encompassing scopes 1, 2 and 3 emissions to the science-based targets initiative. We made our submission in September and is now under review as part of SBTi’s validation process. I’d like to conclude by recapping some of the progress we’ve made towards our goal of streamlining and improving the predictability of our business.

We now have a lower business risk profile following the sale of the fossil business and our exit from offshore wind generation. February and August, we successfully reduced a significant amount of pension variability on future results with the regulatory accounting order and the lift-out and we’ll consider pursuing additional mitigation on our upcoming rate case. And we have helped them secure the financial viability of critical important New Jersey energy assets with the decision to retain our carbon-free baseload nuclear fleet, enhanced by the revenue stability of a production tax credit that begins January of 2024. These actions helped to extend our track record of executing on PSEG’s improved business strategy. Having a decade-long visibility of cash flows from the nuclear PTC will help us to maintain a solid financial profile that does not require us to issue any new equity or sell any assets to fund our five-year capital investment program.

It supports our ability to pay a competitive and growing dividend. In closing, I want to share our plans for providing 2024 earnings guidance and other important financial updates. As you know, we will file our electric and gas distribution base rate case this December, and we’ll update you with the parameters once that is public. We expect to complete our normal business planning in mid-December, so you can expect us to provide 2024 non-GAAP operating earnings guidance shortly after that business plan is completed. In early December, we intend to update our existing 2023 to 2027 CapEx and rate base projections to reflect the recent GSMP II extension through 2025 and two upcoming energy efficiency filings; one, to extend the current EE program out through the end of 2024, followed by a new filing covering the next round of EE programs through 2027.

These updates will inform our longer-term assumptions for capital and rate base projections. And we expect to post a full roll forward of the capital plan rate base and long-term earnings CAGR in the January 2024 investor update. I will now turn the call over to Dan for more details on the operating results and will be available for your questions after his remarks.

Dan Cregg: Thank you, Ralph, and good morning, everybody. As Ralph mentioned earlier, PSEG reported net income of $139 million or $0.27 per share for the third quarter of 2023 compared to net income of $114 million or $0.22 per share for the third quarter of 2022. Non-GAAP operating earnings for the third quarter of 2023 were $425 million or $0.85 per share compared to $429 million or $0.86 per share for the third quarter of 2022. We’ve provided you with information on Slides 9 and 11 regarding the contribution to non-GAAP operating earnings per share by business for the third quarter and year-to-date of 2023. Slides 10 and 12 contain waterfall charts that take you through the net changes for the quarter-over-quarter and year-to-date periods and non-GAAP operating earnings per share by major business.

Starting with PSE&G, which reported third quarter 2023 net income of $401 million or $0.80 per share compared with $399 million or $0.80 per share in the third quarter of 2022. The PSE&G had non-GAAP operating earnings of $403 million or $0.80 per share for the third quarter of ’23 compared to $399 million or $0.80 per share in the third quarter of 2022. The main drivers for both GAAP and non-GAAP results for the quarter were growth in transmission and distribution margins resulting from continued investment in infrastructure replacement and clean energy programs as well as lower O&M expense. These favorable items were offset by our anticipated lower pension income and OPEB credits, along with higher depreciation and interest expense resulting from incremental investments since the year earlier quarter.

Compared to the third quarter of 2022, transmission was $0.03 per share higher. Electric margin was $0.02 per share higher, reflecting investment returns from Energy Strong II. Gas margin was $0.01 per share higher, primarily driven by the clause recovery of our GSMP investment. Lower distribution O&M expense added $0.01 per share compared with the third quarter of 2022, and depreciation and interest expense increased by $0.01 and $0.02 per share, respectively compared to third quarter 2022, reflecting continued growth in investment. Lower pension income resulting from 2022’s investment returns, combined with lower OPEB credits scheduled to end in 2023, resulted in a $0.05 per share unfavorable comparison to the year earlier quarter. Lastly, the timing of taxes recorded through an effective tax rate, which nets to zero over a full year and other flow-through taxes had a net favorable impact of $0.01 per share in the quarter compared to third quarter of 2022.

Weather during the third quarter, as measured by the Temperature-Humidity Index, was 11% warmer than normal, but 5% cooler than the third quarter of 2022. As we’ve mentioned, the SIP mechanism in effect since 2021 limits the impact of weather and other sales variances positive or negative on electric and gas margins while enabling PSE&G to promote the widespread adoption of its energy efficiency program. Growth in the number of electric and gas customers, the driver of margin under the SIP mechanism continues to be positive and will each up by approximately 1% year-to-date. On capital spending, PSE&G invested approximately $1 billion during the third quarter and is on track to execute its largest ever investment program of $3.7 billion in a single year.

The program includes upgrades and replacements to our T&D facilities, Energy Strong II investments, last mile spend in the infrastructure advancement program, our ongoing GSMP II program continued rollout of the clean energy investments in energy efficiency and the energy cloud, including smart meters and adding new electric infrastructure to accommodate an increase in EV penetration. During 2023, we’ve taken actions to limit the impact of our pension on earnings and increase the predictability of our financial results. In February of 2023, the BPU approved an accounting order authorizing PSE&G to modify its method for calculating the amortization of the net actuarial gain or loss component for ratemaking purposes. This change is effective for the calendar year 2023 and forward.

For the full year 2023, PSE&G’s forecast of non-GAAP operating earnings is unchanged at $1.5 billion to $1.525 billion. Moving to PSEG Power & Other. For the third quarter of 2023 PSEG Power & Other reported a net loss of $262 million or $0.53 per share largely reflecting the pension settlement charge associated with the lift-out transaction. This compares to a net loss of $285 million or $0.58 per share for the third quarter of 2022. The onetime noncash settlement charge of $332 million, $239 million net of tax was related to the approximately $1 billion of PSEG Power & Other pension obligations and associated plant assets transferred to the Prudential Insurance Company. After providing for the effect of the lift out, our pension plans remain well funded, and there is no material impact on our non-GAAP operating earnings in 2023.

Non-GAAP operating earnings were $22 million or $0.05 per share for the third quarter of 2023 compared to non-GAAP operating earnings of $30 million or $0.06 per share in the third quarter of 2022. We previously mentioned that during the first quarter of 2023, PSEG Power realized the majority of the approximate $4 per megawatt hour increase in the average price of our 2023 hedged output which rose to approximately $31 per megawatt hour with higher winter pricing driving most of that increase. For the third quarter of 2023, gross margin rose by a total of $0.03 per share primarily reflecting the roll-off of certain full requirement BGS load contracts and had a higher cost to serve, resulting in a $0.04 per share of benefit compared to the prior year.

The gross margin improvement also included higher generation which added $0.01 per share, resulting from the absence of a Hope Creek refueling outage that started at the end of last year’s third quarter. These positive variances were partially offset by lower capacity revenues of $0.02 per share compared with the year ago quarter consistent with prior year capacity auction. OEM cost comparisons in the third quarter improved by $0.03 per share, driven by the absence of Hope Creek refueling outage expenses that were partly incurred in 2022’s third quarter. Lower depreciation expense was $0.01 favorable compared with the year ago quarter, while higher interest expense was $0.01 unfavorable. Lower pension income from 2022 investment returns and OPEB credits from the lower amortization benefit were $0.03 per share unfavorable versus third quarter 2022.

Taxes and other were $0.04 per share unfavorable compared to the third quarter of 2022, reflecting a partial reversal of the effective tax benefit from the first quarter of 2023. On the operating side, the nuclear fleet produced approximately 8.1 terawatt hours during the third quarter and 24.3 terawatt hours for the year-to-date period in 2023, running at a capacity factor of 95.3% and 95.8% for the quarter and year-to-date periods, respectively. For the full year 2023 PSEG is forecasting generation output of 30 to 32 terawatt hours and has hedged approximately 95% to 100% of this production at an average price of $31 per megawatt hour. For 2024, the nuclear fleet is forecasted to produce 30 to 32 terawatt hours of baseload output and has hedged 85% to 90% of this generation at an average price of $38 per megawatt hour.

The forecast of non-GAAP operating earnings for PSEG Power & Other is unchanged at $200 million to $225 million for the full year. This forecast reflects the realization of a majority of the expected increase in the average 2023 annual hedge price in the first quarter of ’23, as we previously discussed. For the balance of the year, higher interest expense largely captured in our November 22 update is expected to reduce PSEG Power & Other results. Touching on some recent financing activity, as of September 30, PSEG had total available liquidity of $3.8 billion, including $57 million of cash on hand. PSEG Power had net cash collateral postings of approximately $350 million at September 30, which is substantially below the elevated levels seen last year.

In August, PSE&G issued $500 million of 5.2% secured medium-term notes due August 2033 and issued $400 million of 5.45% secured medium-term notes due August 2053. In September, PSE&G retired $325 million of 3.25% secured medium-term notes at maturity. Subsequent to the end of the third quarter, PSEG issued $600 million of 5.88% senior notes through October 2028 and $400 million of 6.13% senior notes due October 2033. Prior to pricing these notes, $800 million of treasury locks were executed, which had a positive fair value of $14 million, and this benefit will be amortized over the life of the senior notes, partially offsetting interest expense. Proceeds from the sale of the senior notes will be used for general corporate purposes, including the repayment of $750 million of PSEG debt maturing this November.

As of September 30, 2023, PSEG had $500 million outstanding of a 364-day variable rate term loan maturing in April 2024 and PSEG Power had $1.25 billion outstanding of a variable rate term loan maturing March of 2025. As of the end of the quarter, PSEG had swapped $900 million of the power term loan from a variable to a fixed rate serving to mitigate the impact of higher interest rates. As of September 30, reflecting our swaps, approximately 5% of our total debt was at a variable rate, which is down by half since year-end 2022. We continue to maintain a solid financial position with limited exposure to variable rate debt given the improvement in our collateral position, a staggered maturity schedule and PSEG Power cash generation to support funding our regulated business.

In closing, we are reaffirming PSEG’s full year 2023 non-GAAP operating earnings guidance of $3.40 to $3.50 per share. PSE&G is forecasted between $1.5 billion to $1.525 billion and PSEG Power & Other is forecasted at $200 million to $225 million. That concludes our formal remarks. And operator, we are ready to begin the question-and-answer session.

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Q&A Session

Operator: [Operator Instructions] The first question is from Nicholas Campanella with Barclays. Please proceed with your question.

Nicholas Campanella: So I just — I wanted to ask on looking forward to ’24, if the broad market kind of underperforms here that could maybe affect your pension headwind, but also kind of understanding that you’ve done a lot of derisking this past year to take the volatility out, you had the lift out, you have the accounting order. Just — could you just give us any sense how we should think about kind of pension contribution as a percentage of earnings for ’24 or just even relative to the drag you’ve had year-to-date? Is there a drag that we should be thinking about for ’24? And any detail on how pension has performed year-to-date versus your expectations as well would be helpful.

Ralph LaRossa: Yes, Nick. Sure. So listen, first of all, I appreciate you recognizing the work that Dan and his team and the regulatory team did already here. And we’re seeing the benefits of it, right? We had — I’ll talk in engineering terms, we’ve reduced the sign of the sine wave and there’s less volatility. So, there’s nothing that we’ve seen or expect that it’s going to become problematic for us as we look at ’24. But I’ll let Dan give you any more details he wants to provide on that, but just the result of some good work that we’ve accomplished this year.

Dan Cregg: Yes. And think that’s really what we set out to do. It doesn’t eliminate the effect of markets moving because we still do have attention, but we’ve been able to minimize the magnitude of what we would see. So, as we step through the year, markets have moved, they’ve been off a little bit in the last few months. We got another couple of months to go to we see where we land. I think that we’re not immune to some of those movements, but I think the work that we’ve done will lessen that effect. And as we’re looking at it now, the magnitude of what we intend to see or what we anticipate seeing as we move through year-end is something we can still manage through the overall O&M budget.

Nicholas Campanella: Okay. That’s helpful. And nice to see that you’re ahead of plan on the CapEx, obviously, there’s a bias hire here as you roll forward. And I guess we’ll get more of those details in January, but as we kind of think about putting higher CapEx through the model, just how are you thinking about equity proceeds, if at all?

Dan Cregg: No. There is no — there has been no and there is no intention to have any equity issuance as we go through the capital plan that we have in front of you. So we’ve had $15.5 billion to $18 billion for the utility through ’27 all year. We’re still within that range as you look across the five years, that $3.7 billion is a great performance. So, we’ve been able to continue to move forward on that. But what you’re seeing there is great and it’s helpful, but it is still within our overall range. And there is no equity that we’re going to need to fund even the high end of that range.

Ralph LaRossa: And Nick, let me just double down on that, right? We’ve been saying to everyone that we can, no equity, no kind of equity and no sale of assets, so…

Operator: The next question is from the line of Shar Pourreza with Guggenheim Partners. Please proceed with your question.

Shar Pourreza: Let me just slightly tweak Nick’s question around ’24. I mean, obviously, it’s going to be a big year for PSEG with the rate case filing and your PTC guidance for nuclear and then the ZEC’s on setting, right? I guess how do you plan to sort of embed the various scenarios into ’24 guidance when you roll forward at 4Q, even if you’re we’re thinking about this directionally? I mean, obviously, a swift resolution of the GRC could be part of this I guess, so how do we think about your base assumptions there? And any changes to the interest rate assumption and $0.30 under earning headwind for PSE&G that was presented a year ago, any incremental puts and takes on regulatory lag in the preceding year?

Ralph LaRossa: Yes, Shar. All great questions. And again, I’ll give Dan some chance to answer details here, but you hit on all the moving parts that we’re considering. And a lot of that has to do with driving for what our time frame is that we’re going to come out with the — with our earnings in December. So Dan, can you just give any more on some of those items.

Dan Cregg: Yes, sure. We’ll finalize where we’re heading and let you know. And I think, there’s always some assumptions you’re going to make as you step forward, I think, on the rate case. We will file that at some point during this quarter. We’ve said that it usually takes somewhere between 9 to 12 months to move through. So, we’ll make our assumptions around that. I would love to be able to tell you that we’re going to have PTC guidance in hand, and we’re going to know exactly where things land. But I think that there’s a reasonable set of assumptions that you can make within that uncertainty until we get those regulations, and we’ll do that. And our guidance on interest rates really will be driven by what we see in the market.

[Technical Difficulty] We captured the moves that we’ve seen over the last year or so. And so, all of those will come into play, and I think we’ll still be able to speak with confidence with respect to an overall guidance range for ’24, and we’ll do that soon.

Shar Pourreza: And again, I don’t want to put you in a corner, but it seems like there’s probably more tailwinds and tail risks that as we’re thinking about that shift from ’23 to ’24. Is that a fair assessment?

Dan Cregg: Well, look, I think what we’ll put forth is a balanced view. I think that both from Nick’s question before and some of the things that you referenced, those are the kinds of things that will come into play as we put the estimate together. But I still think the way that the business is set up we’re not going to have to worry about weather movements because of our decoupling. We’ve got a smaller pension variability that Ralph just mentioned. We’ve captured most of the interest rate moves. So, I think the work that we have been doing over the last 1.5 years or so is really going to pay off to enable us to be able to speak with confidence on that range when we put it out.