Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by my name is Sylvia and I will be <unk>, operator today I would like to welcome everyone to the public service Enterprise Group third quarter 2019 earnings conference call and webcast.
At this time all participants are in they listen only mode. Later, we will conduct a question and answer session for members of the financial community at that time. If you have a question you will need to press star and the number one on your telephone keypad to withdraw your question press the pound key that's a reminder, this.
Conference is being recorded to date October 31st 2019, and will be available for a telephone replay beginning at one P.M. Eastern standard time today until 11 30 PM Eastern standard time on Friday November eight 2019.
It will also be available as an audio webcast on P.S.E. cheese corporate website I.
You W. W. Dot P. S E G dot com.
I would now like turn the conference over to Carlotta Chan. Please go ahead.
Thank you Sylvia.
Morning, and thank you for participating in our earnings call.
<unk> third quarter 2019 earnings release attachments and slides detailing operating results by company are posted on our website at Investor Dot P.S.C.G. Dot com and our 10-Q will be filed shortly.
Earnings release, and other matters discussed during today's call contain forward looking statements in estimates that are subject to various risks and uncertainties. We also discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income as reported in accordance with generally accepted accounting principles in the United States, we incur.
Reconciliations of these financial measures and a disclaimer regarding forward looking statements on our IR website in todays earnings materials.
I'll now turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of P.S. EG, joining Ralph on today's call is Dan Craig Executive Vice President and Chief Financial Officer at the conclusion of their remarks, there will be time for your questions.
Thank you Carlos Thank you all for joining us this morning.
Yes, you do you reported.
Operating earnings for the third quarter of 2019 of 98 cents per share.
Versus 95 cents per share last year's third quarter.
GAAP results for the third quarter were 79 cents per share compared with 81 cents per share in last year's third quarter.
Our results for the third quarter bring to bring non-GAAP operating earnings for the year to date, so due to $2.64 per share compared with 2056 cents per share.
The first nine months of 2018.
It is up 3%.
Regulated operations are on track to contribute approximately 75% of total up earnings for the year I reflect PSC and G.'s ongoing investment in New Jersey is energy infrastructure.
Slide six and seven summarizing the results for 2019 third quarter and year to date.
In September the New Jersey border public utilities, and I'll refer to them as the BP or.
Uproot PSC and G.'s energy strong to settlement authorizing continued investment in electric and gas system reliability and resiliency improvements over the next four years.
We expect to begin the first of these projects in the current quarter, which will continue the important economic engine.
Associated with PNC Angies investments in new Jersey's energy infrastructure.
We continue to eagerly pursue PSC and G.'s clean energy future filings to bring the benefits of energy efficiency electric vehicles energy storage and advanced metering infrastructure or am I.
At scale to our entire customer base.
Which is consistent with governor Murphy's clean energy goals.
Filing is designed to achieve the 2% electric and 0.75% gas savings contained in the 2018, New Jersey clean energy.
And this represents an order of magnitude increase because of the level of spending in our existing energy efficiency program.
In September the Beep you approve the extension of the procedural schedule in the case to March 2020 to provide the opportunity for additional discussions.
We expect to the BP use reviews, our energy efficiency proposal in clean energy filing will be informed by their energy Masterplan proceedings, which are targeted for conclusion at year end.
And and ongoing energy efficiency stakeholder process, which will continue into 2020.
In parallel we continue to engage with key stakeholders to develop the supporting policy framework on the role for utilities decoupling or lost revenue recovery.
Key metrics to measure energy efficiency program effectiveness.
Cause our energy efficiency proceeding is ongoing the beep use review of it will occur prior to those of New Jersey distribution companies that have yet to filed their energy efficiency proposals to satisfy the clean Energy Act requirements.
So busy Angie remains on track to invest $2.7 billion, an infrastructure upgrades through its transmission and distribution system. This year.
Forecast the direct over 90% of PS Egcs 13 to 15.5 billion of planned capital investment to the regulated business over the next five years remains intact.
As this PSC angies compound annual growth in rate base of seven and a half two 8.5% starting from the $19 billion level at yearend 2018.
And now over to PCG power.
Power close on the sell the 776 megawatt interests in the Keystone and Conemaugh generating units during the quarter. The cell continues the elimination of coal from P.S. EG powers fuel mix by mid 2021, when we will retire our only remaining coal units located at Bridgeport Harbor.
In the last five years PS EG power has retired early or sold about 2400 megawatts of coal fired generation.
Which has reduced the carbon intensity of what was already a long carbon sleep.
In addition earlier this week PS EG exercised an option on worse, that's ocean wind project, resulting in a period of exclusive negotiation for PS EG to potentially acquire a 25% equity interest in the project subject to negotiations toward a joint venture agreement advanced do delay.
And then any required regulatory approvals.
The Ocean Wind project was the winner of New Jersey's recent offshore wind solicitation and is an important part of governor Murphy's clean energy agenda.
The project scheduled to come online in 2024 will be located off the coast of Atlantic City, and will benefit from or spreads experience in developing offshore wind projects in the U.S. and internationally.
I'm pleased for the opportunity to apply PS egcs expertise and developing energy infrastructure in New Jersey to expanding the states resources of zero carbon generation.
Toward our goal of reducing carbon emissions.
Speaking of carbon emissions PSG continues to advocate for a national price on carbon.
Well, we understand the significant challenges to advancing climate legislation in the current Congress, we recognize the increasing focus on this topic.
So I hope that remarks, I made yesterday before the energy Subcommittee of the House Energy and Commerce Committee will only add to the growing call for meaningful action and thoughtful discussion on how to best address climate change.
On a related note I'm pleased to report that PS EG was again name to the Dow Jones Sustainability Index North America for the 12 consecutive year.
And one last item, we continue to await final order from the federal Energy Regulatory Commission.
Just short and that's a FERC and their effort to reform the PJM capacity auction with the approval of replacement rules.
We are optimistic that this will occur once the FERC achieves a core of three voting commissioners on this particular docket.
It could happen after November 29th when Commissioner GLIC.
Well the eligible to vote on this matter or when the Sun It confirms a new FERC Commissioner.
Given our results in the first nine months of the year, we're narrowing the full year forecast of PS IGI is non-GAAP operating earnings of $3.20 to 3030 cents per share.
From our original guidance of 315 to 335 per share.
The midpoint of the guidance is unchanged.
Represents over 4% growth and earnings from the 312 per share boasted posted in 2018.
Utility earnings continue to benefit from rate relief in the mid year Remeasurement of the pension plan has raised PSC and GE is expected full year results to a range of 1.225 billion.
The 1.250 billion.
Up from the utilities original guidance range of 1.2 billion to 1.230 billion.
We can power prices have affected PCG power's results to a range of 395 million to 420 million.
We've lowered the upper end of its original guidance, which cuts which had originally been a proposed a 395 million to 460 million.
Guidance for enterprise and others 5 million for the full year.
Thank you to our employees for delivering another solid quarter on the operations front and to recognize the tremendous work that goes into maintaining system reliability and generation availability during the summer.
I'll now turn the call over to Dan for more details in our operating results and make sure that I'm available for your questions. After his remarks.
Excellent. Thank you Ralph and good morning, everyone.
As Ralph mentioned PCG reported non-GAAP operating earnings for the third quarter 2019, 98 cents per share versus 95 cents per share in last year's third quarter.
We provided you with the information on slide 11 regarding the contribution to non-GAAP operating earnings by business for the quarter.
And slides 12, and 14 contain waterfall charts that will take you through the net changes in non-GAAP operating earnings by major business for the comparable quarter and year to date periods versus the prior year.
And now I'll review each company more details starting with P.S. CNG.
PCGS shown on slide 11 reported net income for the third quarter of 2019 68 cents per share.
Compared with 54 cents per share for the third quarter 2018.
First nine months of the year net income was $1.92 per share up 18% from $1.63 per share earned in 28.
PCGS third quarter results were driven by expanded investments and transmission. The settlement of the 2018 distribution rate review and changes to our pension plan that took effect on July 1st that lowers pension expense during the second half of 2019.
Pcs growth and transmission investment added six cents per share to quarter over quarter net income comparisons.
Putting a one cent per share positive adjustment for an estimate of the 2019 year end true.
Electric margin was three cents higher than a year ago quarter, driven by rate relief and higher weather normalized volume.
And gas margin was three cents higher than the prior year quarter driven by rate relief.
What it was lower by a penny per share compared to the significantly warmer summer experienced in 2018.
An increase in depreciation and interest expense of a penny per share each.
Related to PS Energy's expanded capital base.
Reduced net income comparisons versus the prior years third quarter.
Lower and whatever expense was a penny per share favorable comparison.
And changes to post retirement benefit or OPEB expenses as well as the split of pension plan associated with Remeasurement of pension expense effective July onest.
Had a combined three cents per share positive impact on net income compared to the year ago quarter.
The effective tax rate for the quarter recorded based upon the average annual effective tax rate.
Resulted in a positive penny per share impact.
And this effect is just timing between quarters, it's related to the flow back of excess deferred taxes and it will reverse in the fourth quarter.
The New Jersey economy continues to experience positive growth evidenced by the lowest state unemployment rate in the last 20 years.
He is easy reach the 2019 system peak of 9753 megawatts. This past July .
Compared to 2018 system peaks of 9978 megawatts.
The temperature humidity index, or THR, which is used to measure the impact of summer weather on sales was 10% lower into 2019 third quarter.
And one year ago.
Nearly 12% higher than a normal so.
Weather normalized sales for the trailing 12 months, which provides a longer term trending data remain relatively flat for electric and was 1% higher for gas.
Residential electric and gas customer growth continues to trend higher at approximately 1% per year.
Earlier this month the it seems you filed with FERC, an update through its formula rate for transmission.
Annual update is expected to go into effect January Onest 2020.
Transmission investment includes projects that will replace aging infrastructure with modern equipment, including replacing many of our 26 Kb lines to extend twenties 69 Kb power throughout the state.
These projects will improve reliability resiliency addressable digit issues and increase capacity on the system.
After incorporating these investment plans.
And reflecting the completion of returning certain excess for taxes during 2019.
Cost of residential customers will increase by approximately 2%.
And I should highlight the PSC LNG has been proactive and returning tax reform benefits the transmission and distribution customers.
In total have lowered rates by over $300 million in 2019.
Few CNG invested approximately $2 billion for the nine months ended September thirtyth.
Electric and gas transmission and distribution capital projects.
For the year, PNG expects to invest $2.7 billion to enhance reliability and increase resiliency.
CNG is projected capital spending range remains at 12 billions of 14.5 billion.
Over the 2019 to 2023 period.
Translates into expected rate base growth at a compound annual rate of 75% to 8%.
Applied to $19 billion year end 2018 rate base.
PSC Andy's forecasted net income for 2019 has been updated the range of 1.225 billion to 1 billion billion 250 million from the original range of 1.2 billion to 1.230 billion.
Now moving to power.
Our reported non-GAAP operating earnings for the third quarter 29 cents per share and non-GAAP adjusted EBITDA of $322 million.
This compared to non-GAAP operating earnings of 39 cents per share and non-GAAP adjusted EBITDA of 360 million.
The third quarter 2018.
Pieces, you powers net income the third quarter was impacted by declining realize energy prices and lower capacity revenues.
There were partially offset by zero emission certificate revenue earned in the quarter.
PCG power closed the sale of its interest and the Keystone and Conemaugh coal fired generating stations during the third quarter.
This resulted in a pre tax loss of 402 million on the nine months ended September thirtyth.
non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure as well as income tax expense interest expense depreciation and amortization expense.
The earnings release, and Slide 20 provides you with detailed analysis of the items, having an impact on PC powers non-GAAP operating earnings relative to net income quarter over quarter.
And we have also provides you with more details on generation for the quarter and for the year to date period on slide 21 and 22.
PCG Power's results for the third quarter reflect a full quarters impact of the expected reduction in capacity revenues in PJM.
That offset higher capacity revenues in new England from the addition of Bridgeport Harbor five.
On a net basis capacity revenues lower results by 10 cents per share compared with the third quarter of 2000 team.
A full quarter Zach revenues contributed seven cents per share.
Re contracting and the impact of lower spark spreads, which reduced results by five cents per share were offset by lower cost to serve load, resulting in no net impact.
This reflects an approximately $3 per megawatt hour decline in the average hedge price compared with a year ago quarter.
Gross margin in the third quarter declined to $31 per megawatt hour from $33 per megawatt hour in the year ago quarter.
Our prices and natural gas prices were lower across PJM, New York in Maryland, Despite summer weather that was warmer than normal.
Turning to PCG powers operations.
Total generation output declined by 2% to totaled 13 point 16.3, terawatt hours in the third quarter, reflecting lower market demand and reduced output at Oak Creek, which included Acos down that unit into its scheduled fall refueling outage.
We continue to see weaker wholesale energy prices, resulting from declines in the price of gas and lower loads, which also limits to dispatch of older less efficient cc duties in an increasingly efficient PJM market.
For the third quarter, PCG Power's gas fired CGT fleet, operator that capacity factor 63%.
And produced 7.2 terawatt hours of output during the third quarter.
By 3% over the year ago quarter.
Primarily reflecting production from the three new combined cycle gas turbines at keys C. Warren in Bridgeport Harbor.
For the quarter and year to date periods PCG powers nuclear fleet operated at a capacity factor of 91%.
Reducing 7.8, Terawatt hours and 23.1 Terawatt hours respectively.
Representing 53% of total fleet generation for the year to date period.
For the year to date period Gener generation production volumes increased by 1.9 Terawatt hours to 43.5, Terawatt hours driven by higher combined cycle output of 3.2 Terawatt hours.
Largely due to the three new units.
Partially offset by lower nuclear and coal output.
This difference and generation reflects the one month outage extension at Salem, one in the second quarter for reactor vessel bolt replacements as well as the decline of creeks output that I referenced earlier.
Lower prices for power in natural gas continued to dampen generation volumes.
In addition, the completed sale of PCG powers interest in the Keystone and Conemaugh units.
Lower forecasted generation volumes by 1.2 Terawatt hours in 2019.
And by five Terawatt hours in each of the 2020 in 2021 and.
And were reflected in our second quarter 2019 volume updates.
PCG power continued to forecast full year output for 2019 of 57 59 Terawatt hours.
Remainder of expected production for the year of 13 to 14 Terawatt hours is hedged at an average price of $37 per megawatt hour.
20 twice forecast output of 52 to 54 Terawatt hours is hedged approximately 85% to 90% at an average price of $37 per megawatt hour.
For 2021, PCG power has hedged 40% to 45% of forecasted output.
The two to 54 terawatt hours at an average price of $35 per megawatt hour.
The forecast for 2019 to 2021 volumes includes production consistent with current market conditions and reflects the sale of Keystone and Conemaugh during the third quarter of 29 team.
Spark spreads in the third quarter were lower than a year ago, reflecting lower power and gas prices across the region.
And while our generation volumes approximated last years levels increment, we saw in our new combined cycle unit in Bridgeport was more than offset by reductions across the balance of the portfolio driven by declines in load across the region.
The impact of these lower prices and volumes as well as locational power price differences between where we generate power and where the load resides resulted in margin declines at power versus expectations.
And as a result, we've updated our forecast of towers 2019, non-GAAP operating earnings.
To 395 to 420 million versus the original range of 395 to 460 million.
And at lower the guidance for PCG powers non-GAAP adjusted EBITDA to 1 billion to 1.050 billion from our original guidance of 1.030 billion to 1.130 billion.
Now I'll briefly address operating results for enterprise and other.
For the third quarter, we reported income of 6 million.
A penny per share compared to net income of 9 million or two cents per share in the third quarter 2018.
The decrease in net income year over year reflects higher interest expense at the parent.
Continues to benefit from ongoing contributions from PCG long Island.
For 2019, the forecast of PCG enterprise and other net income has been narrowed from a range of five to 10 million to simply Fivenine.
Our financial position remains strong.
PCG closed the quarter with $120 million of cash on the balance sheet with debt at the end of September .
Representing 52% of our consolidated capital.
Got it PCG power represented 33% of its capital at the end of the quarter.
During the quarter PNG issued $400 million of 30 year secured medium term notes at an interest rate of 3.2%.
Retired 250 million of maturing, 2% medium term notes.
We continue to expect to fully fund PCGS existing five year $13 billion to $15.5 billion capital investment program.
Over the 2019 to 2023 period.
Without the need to issue equity.
As Ralph mentioned, we've narrowed our narrowed our forecast of PCGS non-GAAP operating earnings for the full year to $3.20 to $3.30 per share.
Reaping the midpoint on chain.
That concludes my comments Sylvia we're now ready to answer questions.
Thank you ladies and gentlemen, we will now begin the question and answer session for members of the financial community. If you have a question. Please press star and the number one on your telephone keypad. If your question has been answered.
And you wish to withdraw your polling request you may do sell by pressing the pound key if you only speakerphone. Please pick up your handset before entering or request one moment. Please for your first question.
Your first question comes from Julian Jim.
MS from Bank of America. Please proceed.
Hey, good morning team.
Correct.
Hey, So a couple of questions first off just strategically if you could address some of the the media articles out there will be curious on how you think about the.
The state of the power business and I know you will.
Typical practices and to talk about media articles per se, but im curious how do you think about is strategically at some of the assets there.
In the future and to any extent that you do evaluate assets. How do you think about paying down debt versus reinvesting back in the business as evidenced by potentially some of this offshore wind.
Investment or at least some of the inaugural investment.
Well on the phases, a power business drilling as it gets going to be around awhile people I'm, sorry, I don't tend to be flip but.
Seems like electricity is still highly regarded and values and used by people.
And.
We have a really strong fleet from the point of view of proximity to load and environmental signature.
So I think.
With its cash flow generation and its overall operational performance.
We are always open to the suggestion as others, maybe be able to extract greater value from our assets that we can and when that's the case they come talk to us in may.
They suggest commercial terms that we find interesting and thats kind of what's happened with Keystone caught him as you're well aware.
But.
Not quite sure how else to.
Respond to your question I mean, we've got a good fleet they run well the financially sound their operationally sound and.
We're always open to commercial discussions with others about whether we can maximize the value or they can maximize the value.
Help me out here.
Yes, I mean, if theres a specific articles you're referencing doing we're we're not.
Recognizing exactly what it is but it but I think Ralph.
Kind of wait it out.
For perhaps if I can frame it this way.
You should we be thinking about more asset sales following on your first assets fell this quarter with respect to the.
With respect to the interest in key Khan.
As we've said in the past Julian we always are active in the market we both.
Look to purchase and look to engage with others. Although candidly we have made a net zero pledge that said, we will not be building or expanding our fossil fleet in anyway.
That region and vision at this point in time, but we're always engaged and.
Commercial discussions with interested parties I mean.
It doesn't change.
Okay. All right, let's move on then just quickly if I can pivot to those side.
Offshore I'm not sure when if you will how do you think about this stake versus being involved more more narrowly in the transmission side of this business. It seems like potentially a little bit of a pivot in terms of where do you all want to be involved but but without the detailed in our side. How do you think about the risk profile than just decision to be involved sort of outright ownership interest.
Yep.
We've looked at this industry.
Best we can.
And estimates are that theres the potential for up to.
18, gigawatts of offshore wind.
Developable, along the eastern United States.
Thats a number that comes out of I believe at EEI or Noah report I forget exactly which and has been an announced desire to develop about 35 gigawatts. So there is there's a potential for growth in this industry.
We are.
We're not experience in building offshore wind and.
We have a full year ahead of us in terms of due diligence and further analysis to do it does appear Julian that you're right at one to not completely.
Extricate themselves from.
Risk associated with the timing.
Oh.
Construction, but it's conceivable still that one could.
So from the costs associated with the construction. So we're learning as we go along how to how to balance that risk of.
Total project versus the components, but yet you're not going to be able to build a wire to nowhere and get paid for that that is.
Adoption that isn't available to us maybe it's available to others, but I don't think that's the case. So so we're trying to.
Learn in a measured way.
An industry that we think is going to.
Continue to grow and we're pretty proud of the person that is willing to help us learn and do some of the teaching them in their a world leader in offshore wind projects and we think we know this part of the country fairly well from a permitting point of view from a market point of view from a workforce point of view and various other.
Actress six that matter a lot to a project.
Yeah, and I think Julian Ralph referenced in his prepared remarks, but there are skills that we we can bring to this kind of a project, but obviously they are not all of the skills that are needed for this project. So that I think thats for that reason you see a and interest in potentially partnering I think certainly that's that's the case if you think about.
The.
This thing solicitation that or said one on from a new Jersey standpoint that all of that is linked and as we step forward to the extent that things are done.
On a more differentiated basis, there may be more transmission specific oriented work that that could come from.
Excellent. Thank you guys very much.
Your next question comes from Praful Mehta from Citi. Please proceed with your question.
Thanks, very much I got it.
Hey proper.
Hi, So maybe just a little bit more on the offshore wind side just wanted to understand the nature of the agreement. So is the 25% ownership reflective of your.
Investment into the transmission or is that.
On payment of 25% to get the 25% and then subsequently there will be.
Cash outflow to invest in the transmission side, just if you could give us any color you can on how that.
That option that you have right now how that actually play out.
I think the way to think about a proposal is that the solicitation that new Jersey did.
Represented the project as a whole what I mean by that it would it would represent the turbines and see you would represent a substation and see the line in between and substation on land. So all of those are in indistinguishable project.
That is it was put forth to new Jersey and was awarded to us that so the the interest would be an interest in that project, where we still have in front of us.
Is the advanced due diligence and the partners partnership structuring with respect to that type of an investment.
Okay. So you are putting an upfront 25 something to get the 25% and then as far as a partner you were putting money to kind of been announced that project has approved.
What we have is an opportunity over the ensuing number of months and Ralph reference to roughly a years period to make a determination whether or not and interest in 25% of the project is something that we would want to do so thats currently what we are exploring.
But it would be a the 25% is not anything immediate it is more about what the ultimate interest in the project could become.
Fair enough. That's very helpful. And then just on the generation side I know Ralph you mentioned.
Things going great, but if you just look at.
From a Nick for example, 2021 perspective, you're hedging.
On the.
Based generation is down about $4 per megawatt hour blesses.
This last quarter's disclosure capacity factors that down then clearly markets. The challenging so just wanted to understand given you've been in this business for so long and could these assets. That's going on is there anything different that needs to be down to kind of better kind of deal with the current market situation like more retail or anything else that do you think would help or is the current.
And this this current quarter has more than anything else.
No. So thats fair profit I didn't mean to suggest it's going great I meant to what I meant to say is that we're still in a business that is essential and has natural customer segment, namely the whole population.
And the particular assets that were putting to that business are quite strong in terms of where I think.
Features headed as a collective society, let me be more specific.
We tried retail.
Couldn't get the scale on the profitability that we wanted we gave it a good effort for year end after years and stepped away from that clearly something we need as resolution of the PJM capacity market.
Reliability is going to continue to be served from the point of view of supply that FERC has to do something other than say that the current PJM RPM is not just and reasonable they have to replace that was rules and hopefully they will replace with rules that meet the two objectives, they've set forth, namely to eliminate price suppression and number two to less states.
To access the resources that they want to.
The thing that needs to happen is that we need to get a recognition for the attributes of different power plants. The society appears to value, but the market doesn't price in the one that's most glaring is carbon I think if we can do one or both of those things that our fleet is extremely well positioned in the meantime, it continues to generate some healthy positive.
Cash flows for the utility to make use of but if somebody else can make better use of them, we're willing to listen.
Until that time, we're quite happy to run these good assets and await further progress in price formation further progress on capacity markets further progress on the pricing of carbon but what's your observations are spot on I didn't mean to suggest that.
Sparks has expanded and that.
Everything was six in wholesale power market design.
Got it. Thanks, so much time certainly appreciate it.
Your next question comes from Greg Gordon from Evercore. Please proceed.
Thank you good morning.
Hi, there.
Two questions not to beat a dead horse on the.
On the.
Our side of the.
The house.
The willingness to entered into the negotiation with doorstep the ticket position in up in the project itself.
Feels like a bit of an evolution of your thinking in that.
Correct me, if I'm wrong and I, maybe wrong last time, we talked about this probably you you had said that your interest would lie primarily in mainly in building the infrastructure to support that kind of investment and that you weren't primarily interested in taking direct equity interest in offshore wind.
So can you talk about the evolution of your thinking there and do you think that that could be given those the quantum of the size of the potential market that you just quoted a bigger part of your strategic vision going forward and then I'll switch to over to the utility side, yes. So Greg I think it is fair to say there's been some evolution I don't know as.
Or is it the way you did but it's definitely it's fair to say there's been some evolution. The evolution really is the recognition that would ever once.
Whatever skills, one brings to the table and there's been no evolution about what our skills are in terms of this particular project.
It is an integrated hole and the project doesn't stand.
It doesn't meet its own financial expectations, if one side successfully brings that skills to the table in the other side doesn't.
And whats most challenging of courses.
How do you extricate yourself from the schedule risk for example, I mean, there may be ways. It will explore than we ever year to protect oneself cost risk.
At the end that a day, if if if the or said bill transmission.
We build transmission online but.
Turbines aren't there on times and how it or is the project succeed and vice versa.
Put winter it was out there on time or we don't build transmission lines.
They get paid so so these relative risks and returns are all part of the calculation going forward a year from now, but but yes. It is fair to say that as we've had further discussions and grown and confidence in the skills and ability about partner to do this and do this well.
That we've been a little more open minded about overall project risk and what.
That means for us.
Thank you. My second question is can you just take take us into a little more detail on the adjustment you have made on pension.
And.
Why why now and.
And how that flows to the bottom line to the accretion level that you've articulated.
Kinda supplement concept I think Greg we've.
What we did without changing any of the benefits within the pension a split of the pension among the different participants enabled a little bit of a volatility to come off of the overall expense and.
That all being what it is one outcropping of that was that that process during the year and it was at midyear. This year prompted a re measurement and so if you think about what year end look like from the standpoint of overall returns and what it looks like from a market recovery more generally.
That remeasurement ended up in.
Kind of a recognition within the overall components of the pension of effective markets have come back a little bit and so that prompted a uptick from the standpoint of overall piano impact or reduction of expense increase of income in total from the pension standpoint, So it's really nothing more than the overall management of the attention in general.
But the outcropping or that was a re measurement, which prompted a lift because market prices had come back from a from where they were at the turn of the year.
Okay, great. Thank you guys yes.
Your next question comes from Christopher to newer from JP Morgan.
Good morning, guys.
I was wondering if you can give us say update on the energy Master plan Finalization.
Coming up pretty soon here, just where are maybe stakeholder discussions around this and kind of what the impact might be on the CES and energy efficiency Finalization next year.
So Chris as far as we know.
We're still expecting a year end.
Conclusion to the Master plan.
I'm going to stick with what's been publicly reported because I think thats.
Hey.
All were allowed to say and be probably all we know.
Namely there's been some debate over the future of.
Continued use of fossil fuels.
There's a desire to decrease that as soon as greatly as possible with as a recognition that fossil fuels in particular natural gas very important role in heating and various other uses in the state and therefore given the.
Housing infrastructure to building infrastructure that.
Not immediately lunda itself to moving away from.
From natural gas one has to be reasonable.
About its continued years.
So.
It was I think just last week that the BP you announced the details.
For a public review of the plan.
And there they did repeat that it would be available by the end of the year, there's been a little bit of discussion around.
How aggressive the states should be an encouraging electric vehicles and that seems to be some enthusiasm for that.
But.
Every draft. We've seen continues to espouse importance of nuclear which is important to us.
So I think those are the issues at a high level that.
That are in that we've been paying careful attention to it.
Okay, and I mean clearly.
The governors stated his position on the Penn East pipeline, which are no longer a part of but is I guess more broadly the debate in New York State on gas availability, having an impact on the discussions for the energy Masterplan so far.
So I think that that that conversation in general it's not quite as specific in New Jersey is in New York when it comes to permitting of specific projects and the ability to overcome customers, but that that general topic of.
Continued reliance on fossil fuels has made its way into new Jersey energy messed up plant.
Not in his immediate.
Hi frame is my interpretation given what we're witnessing in New York versus what we are witnessing in New Jersey.
Okay and then my second question is just a follow up on the offshore wind announcement from the other day.
It looks like you had an option to have exclusive negotiations.
Why did you kind of have to do this now if you have but year to make a final decision or or just what was the impetus behind coming out now as opposed to kind of keeping things going on in the background. Yes. So the the option to have exclusive negotiations required that we decide whether or not we wanted to preserve.
With that option for an exclusive negotiations for the for this next phase. So we we chose I know that's a little strange yes. Indeed, it does sound like an option for an option, but thats, what we had and we exercise that option at this point, we have an option to participate where it was there's no up there's no third option too.
Options function.
I'm not just covering their I'm actually articulating something accurately believe it or not so frightening.
And with that you had to specify the 25% no no that was we had an option as to what's the specify we we could have gone higher than that but we we chose to.
Focus on.
And during this space.
Measured way at this point.
Okay. Thanks for the color rough.
Chris that obviously as we learn more about the space that that number.
And can be different right I mean, we'll we'll keep getting educated.
Okay. Thank you.
Your next question comes from Shar Pourreza from Guggenheim Partners. Please proceed.
Hey.
Hey, good morning, guys structure.
So just a couple of follow ups on the prior questions.
Just first on the 21 on the power hedges.
Look like it was a bit more of a pronounced downward move in the hedges versus what you guys disclose in second quarter, and assuming kind of modestly increase your hedges course, and Sparks had some strength this quarter for Cal 21, some kind of curious what drove the downward move which looks to be a little bit more pronounced and what the dictate markets as you think about second them.
Third third quarter is there any other regional dynamics that we should be thinking about.
I think one thing to think about shore is.
To the extent that low deals are a bigger part of what's included there youre going to see some of those costs and upcoming through because or offset within within the revenue mix. So.
We tend to see a little bit of an uptick as we go through Bgs, which is one of the biggest load contracts that we have and then as we go through the year you see a little bit more of a declines as a little bit of a sawtooth from that perspective in that that maybe what you're seeing there.
Got it and then just on.
Sales and Dan the specifically, there's been reports around Bethlehem Energy center, and and sort of you marketing the assets. Some kind of curious you know is there any updates there can you confirm that and then it's you're only asset left in New York, So sort of how you're thinking about that exposure.
And I think.
You're right and I think that that's what your follow onto the question actually capture some of that concept as well its a.
Just a single asset in that area I would say years ago. There was thought processes around maybe expanding a little further.
That did not happen so we are.
Out.
And really checking value with respect to that it is a situation where.
We will go through the process and make a determination as to whether or not we want to do something based upon what we see coming out of that process.
Got it got it got tougher has referred to earlier about we're always engage the commercial conversations with that doesn't necessarily mean.
Theres a.
Any sort of requirements or or commitment or decision thats been made on.
Right.
That's helpful and thinks it's meant to be little bit more specific and then just lastly around sort of the offshore wind ventures, and I know, you're taking sort of a proof of concept.
Kind of dipping your toe in the water no pun intended but.
There's been some sort of negative dialogue from rating agencies, we've seen some downward movement and.
In ratings with some of your peers and certainly around the new England region with taking a much bigger role in this process. So I'm kind of curious how the conversations are going with the rating agencies, especially as you start to take the profit.
This step, but little bit more forward as proof of concept starts to kick in there and eventually be potentially could take a bigger piece, whether its transmission or what have you I'm curious if theres any dialogue right now you've had with the rating agencies in the does any concerns coming from their end.
Yes, sure what I would say about that is that obviously.
Surely we understand that aspect of what you're talking about from the from the standpoint of current exposure.
As described by Ralph where we are right now is in a situation, where we will continue the dialogue into.
The next number of months and into next year to make a determination as to what the ultimate path is going to be so there's.
Wariness that this is.
A possibility for us to make that investment.
Theres, an understanding as to the nature of the magnitude relative nature relative magnitude of the investment.
And it falls into the broader camp.
Where we are in total and where we come from from the standpoint of.
Financial strength as well so it's it's not something that.
That were blind to we're aware of and and as are the rating agencies, but.
That's part of our overall diligence has as we go through the next year. So.
Got it. Thank you thanks, guys congrats.
Your next question comes from Travis Miller from Morningstar. Please proceed with your question.
Hello, Thank you.
I was.
Like your options on options on options like a follow on on following a follow on.
In the offshore winter.
Yeah.
The 25% wondering how you're thinking about that.
As a percentage of the project or as a dollar amount.
What are your thoughts there why not leave it more open to a 10% or 50%.
What's that capital at risk that you think about.
Yes so.
With those that percentage is based upon an agreement we have with or said.
And suffice to say Travis that we've done some financial analysis that has.
Total project cost expectation built in and that for us.
Related return.
And if during the course of the next year, we find out the project that's a 25%.
Dollar value that we expected isn't what the project is promising.
Then we have the option to not participate at all so those terms is still being negotiated with or said.
Yeah.
But yes, we do have some expectations of what that 25% amounts to in dollars and sense and we'll spend a year of making sure that those expectations are.
As solid as they can possibly be and that there isn't some.
Other realities that would cause us to basically walk away.
I anticipate that we're in this.
In good faith, and with a fair amount of work done already but a lot more to be done.
Okay, and then when you think about that amount of capital.
That you would put into offshore wind.
How do you think about that in terms of Bucketing.
Return on capital.
Across the two businesses there, though the.
The utility so in terms of returns versus putting more capital into the utility versus.
Returns relative to say buying back stock for other going to corporate level or even power.
Philosophy on that hasn't changed review share repurchase as value neutral that unless there's a dislocation in the market that.
The market is accurate and therefore, one is not creating or destroying value aftermarket is out of whack than you might be able to create value.
Purchase at the right time, and we apply cost to capital to the regulated operations, which is lower than the cost of capital to the unregulated operations. This would be an unregulated operations. So therefore, we have a higher hurdle rate that we subject ourselves too because of the greater risk.
When we compare to the power business writ large I would say that we are trading off merchant risk for.
Some operational risks, we just don't know the offshore wind business as well as we know the nuclear business and the combined cycle business, but we like the contracted or said has received from the state in New Jersey, It's actually a regulatory order and we like their experience base. So where we are comfortable enough at this point to enter into this option agreement that says that.
Well if of commercial risk versus operational risk with this partner is worth taking.
And over the course of next year, we have to turn that into.
Even even.
Greater comfort as result of the diligence that needs to be done.
Yes that was a lengthy speech, but the answer is the return expectations on offshore wind would exceed the return expectations also.
Over the utility having said that we're still very much committed to the utility representing over 90% as our capital deployment over the next five years.
And in the finance team have done a great job of making sure that all of these things are possible within the investment potential of the.
The enterprise so.
Got it. Thanks. That's helpful. Then and just real quick on the utility side I know you guys. Just got through obviously, a big rate case, but given the spending plan and what's on the table in terms of energy Masterplan. Another.
Possible.
Separate outside of general rate case, what is your thinking on timing of general rate case. So we have a requirement to glemba in five years from our and our GMP, which is 2023 is what we really felt December 2023, I think.
So we've got four more years.
What we need to worry about that.
And nothing before that correct.
Okay, great. Thanks, so much.
Your next question comes from Paul Patterson Glenrock Associates. Please proceed with your question.
Good morning recall.
Okay.
Question about transmission in the last couple of months, we've been seeing.
For put out a few orders.
Trying to.
Expand I guess competition or were voiced concern about competition not being in specific areas of transmission.
Development and also PGIM, we think put out cost containment filing.
Well.
Not that long because I think you guys have actually filed some stuff and I'm just thinking.
When you look at these actions.
Do you think about the potential impact on you guys. If it's possible I know that the variety borders.
Actually for any granularity your I guess, but but what the potential impact might be in terms of transmission development from your perspective, if these things.
Come to pass.
I guess initially filed.
So I think what you're referring to fall as an attempt by others and.
Even for to bring some life into FERC order 1000.
Which I've been in outspoken critic of in terms of the.
Tremendous cost.
And administrative burden it has imposed upon.
Customers in exchange for very very little.
Benefit in terms of.
Creative and.
Valuable solutions to transmission reliability issues.
What I.
What I'll say today is what we said when FERC order 1001st came out which is to the extent.
Potentially.
Introduces competition to our own.
Service territory and projects that we would.
Embarked upon than we would make ourselves available to other territories, where we would be allowed to compete now as long as that is indeed, a level playing field across archos.
Hi, kind of like our skill sets and our ability to compete.
To the extent to other Archos don't make it as open playing field list, perhaps PJM might then that would be an issue we'd have to raise it first and get fixed.
Having said all of that I still believes that FERC order 1000 was a solution in search of a problem.
And has.
Created more problems. It has done anything else. So we will continue to try to point that out to FERC actual cases.
Sure.
Administrative costs and burdens have exceeded overall project costs and certain jurisdictions and.
This notion is just.
FERC will be far better off spending as time figuring out how to fix wholesale power markets and trying to fix something that has unbroken, namely transmission construction.
Okay I hear you there any any sense as to how some of these Mike or is it just I guess too early to say, maybe how so these things Mike.
Fallout using.
Too early to say okay.
Okay great.
My questions have been answered thanks, so much.
Your next question comes from Michael Lapidus from Goldman Sachs. Please proceed with your question.
Ralph very basic question.
Paul how are you thinking about now that you're.
Few quarters behind the rate case or after the rate case, how are you thinking about the impact of regulatory lag in the coming years, and whether you think rate base growth and earnings growth at PSC and GE will move in lockstep.
Yes, so so remember Michael I think it's about 90% I forget the exact number but I will go up I totally get the I'll do some were studying.
Our Capex does get contemporaneous return.
At the risk of some modest actually there's no must still going to post about our employees.
I do a great job controlling ownership so the anemic load growth we have.
Is enough to help us combat the regulatory lag associated with 10% that doesn't get contemporaneous return isn't enough to make up for all of it and how clauses do have some back end.
Capex that does not get close recovery, but candidly it is backend and closer to the rate case test year. So.
We we always have the ability to file for rate sooner, if we needed to select became too much.
But believe me all hands on Dec are focused on earning our allowed return and.
Candidly, Dave Deli and the team its utility towards longer job.
So Michael the other thing to remember as well as at the transmission side of that business has a formula rate.
Filing which is through contemporaries as well.
And can you remind us what is the formula rate increase in transmission for 2020 for starting in January 2020.
What's the dollar amount for that.
Aggregate amount I think was an approximately to 300 million dollar number.
It's a year over year jump, that's a little bit bigger than the norm, though because if you think about last year. There was some particular tax flow backs, which are not there. So from a from a year over year standpoint, it's a little bit higher than the norm because of the absence of that give back which.
We will conclude at the end of this year.
Got it so roughly 300 million step up from 2019 2020.
Yes, yes.
Thank you guys much appreciate it thanks.
Your next question comes from Paul Fremont from Mizuho.
All right. Thanks.
If you were not to take an equity interest in the in the offshore wind project can you give us an idea how much.
Capital spending would be involved connector project on your side.
So Paul I don't think any analysis has been done yet on what the land impacts or.
Of the project.
Suffice to say the generator lead.
Which is a transmission like it's not FERC regulated it doesn't get to rate base treatment.
Would be much bigger than any kind of on land adjustments that needs to be made and it's probably not unreasonable to assume that given that this lead would connect in someone else's service territory that the art TEP type of impact in our area.
We would not be something that.
Materially change our capital budget.
Okay.
And then I guess I just wanted to follow up on something that you guys. Thank you mentioned earlier the net zero pledge.
We shouldn't assume trenchers for Keystone, and Conemaugh or that you're looking to replace that capacity and if you were too.
Okay.
Let's say Bethlehem.
You wouldn't be looking to sort of replacing that or would you.
No I don't.
Im not I wasn't sure I understand your question, but but.
The answer is no.
In fact, almost the opposite what we said is that we would not be acquiring fossil driven generation. So that would imply that replacing those would not have.
Okay, I, just want to sort of make sure that I understood. What you meant by that okay. Thank you.
Your final question comes from Sophie Karp from Keybanc. Please proceed with your question.
Hi, Good morning, guys. Thank you for taking my question.
Just wanted to go real quick back to the offshore wind and.
If you were to take a 25% stake in that project.
Assuming that would be a sizeable chunk of cash involved eventually in it and as an investment too.
How should we think about youre kind of Capex plan evolving in when when we get updates on that.
Well as how do you plan to fund that as far as debt and equity mix et cetera.
Yes, Okay, I think the way to think about that as we've been talking about a timeframe over the next number of months and two year to make an ultimate determination as to.
The investments that we may make and I think thats the right timeframe to think about some of those incremental details right. So you took down there.
At some point.
Just trying to decision you took down a little bit Capex plan and so is that fair to say that you have some headroom there versus your original plan, maybe that you contemplated at the analyst day, Yeah, I think thats, a fair way to think about.
Got it thank you.
Mr. His own Mr. crack there are no further questions. At this time. Please continue with your presentation are closing remarks.
Thanks, everyone for joining us.
Lots of questions about offshore wind I.
I guess that was the big surprise, but the real message we want to make sure. We leave you with is that.
We continue with just extremely steady performance. We're we're on track to deliver on everything. We've we've told you about earlier in the year and have been telling you about for many years.
Summer sat is solid.
Preserving our financial strength.
This is giving us the opportunity to pursue some expanded clean energy future opportunities and those are everything from the clean energy future filing that is still very much alive of being discussed with the BP, you and offshore wind, which we've now exercise the option to pursue an option. So.
That's really where we want to leave you a wish you all are happy Halloween have a safe and enjoyable holiday and we look forward to seeing you in about 10 days in Florida, Thanks, everyone for joining us on the call.
Ladies and gentlemen that does conclude your conference call for today, you may disconnect and thank you for participating.