Q2 2022 Public Service Enterprise Group Inc Earnings Call
70 per share in 2021 second quarter and just as a reminder.
I'll repeat the several times throughout this call that the second quarter 2021 included the results from our divested fossil assets and solar source.
PSEG is on track to achieve our 2022 non-GAAP operating earnings guidance of $3 35 to $3 55 per share based on results through the first six months of 2022. This is largely driven by ongoing rate base growth from regulated investments and lower costs due.
To the already mentioned sale of generation assets on the carbon free infrastructure side of the business.
Utility earnings for the first half of 2022 are up 4% over last year.
At carbon free infrastructure the year over year comparisons are skewed by our asset sales.
Also the majority of 2020 two's earnings at the carbon free infrastructure and other side of the business had been realized as of June 30.
So for the balance of 2022, the utility will continue to be the main driver of Pseg's growth profile with results squarely within our guidance range.
I am very encouraged by the revive climate compromise contained in the proposed inflation reduction Act that includes production tax credit provisions for existing nuclear and new offshore wind resources.
We hope to see it move onto the Senate, Florida This week, but more on that later.
I know many of you have been following the potential for an impact to our pension results in 2023 due to the significant declines in equity and fixed income markets since the beginning of the year.
Should market conditions remain stressed on our December 31 measurement date, we would anticipate noncash pension headwinds related to these market declines.
December 31 is the single date that will determine the pension impact for 2023.
So instead of continually updating a number as is our dynamic market changes on a daily basis, we would rather simply assure you that in the interim we are actively developing plans to counteract the potential near term headwinds to the extent that they remain at year end.
I want to emphasize that our pension remains very well funded and does not I repeat does not require any cash contributions for the foreseeable future from a funding perspective, our pensions were approximately 95% funded at year end 2021, and the increase in the discount rate year to date has kept the funding.
Leo and a comparable place to year end.
Rest assured that we will work tirelessly to mitigate the potential future headwinds, including pension supply chain in general inflationary pressures.
I Hope you will see through these near term challenges and recognize what we see that the underlying fundamental utility growth story of <unk>.
<unk> remains intact and that our valuation will reflect the improved business mix and overall derisking that continues.
All of which gives us.
The confidence to reiterate our multi year, 5% to 7% EPS CAGR from the midpoint of 2022 non-GAAP operating earnings guidance to 2025.
We remain focused on improving our system reliability and resiliency further derisking the business overall.
And maximizing affordability for our customers.
The statewide moratorium on shut offs residential electric and gas service was lifted in mid March 2022, and.
In collections and shut offs has since restarted how.
However, New Jersey did pass legislation after the moratorium ended that provided protection from shut offs to customers, who applied for payment assistance programs by June 15th of 'twenty two.
<unk> for assistance are protected from shut offs, while awaiting their application determination.
As a result, <unk> continues to experience higher accounts receivable aging, which we expect will take the next several years to reset to historical levels.
<unk> electric distribution bad debt expense is recoverable through its societal benefits clause mechanism.
And as deferred it's incremental guests distribution bad debt expense as well as other incremental COVID-19 costs for future recovery, which will likely take place in our next distribution base rate case.
A regulatory framework in New Jersey continues to be constructive working with the Btu staff and rate counsel, we reached the settlement to begin work this quarter on the infrastructure Advancement program.
The <unk> approved the settlement in June and over the next four years, we will invest $500 million to extend reliability improvements inclusive of the last mile of our distribution system.
As we prepare the grid for the rapid transition to electric vehicles and enable a greater integration of renewable energy resources.
Turning to our efforts on the environmental social and governance or ESG front.
We are continuing our internal preparations to finalize a companywide emission reduction goals.
And we will be submitting those targets to the United Nations backed science based targets initiative.
For validation that they are in fact, consistent with the objectives of the Paris agreement to limit the global temperature increase to one five degrees Celsius or less.
We have until September of 2023 to finalize and submit our targets of validation, although we're aiming to present I'll pathways before that which will address all three scopes of pseg's emissions reduction goals.
Let me turn now to commodity markets, where we've seen a continued increase in electric and natural gas prices during the second quarter and although some PJM prices have moderated recently prices remain at high levels.
With gas and electricity supply costs, which are a pass through of POC and G comprising approximately $40 to 45% of a typical residential gas and electric bill.
We are keenly focused on controlling costs to minimize the impact of rising commodity costs on these customer bills and maximizing affordability.
On the electric side PSC LNG contracts for its default Bgs basic generation service as we often refer to it.
Acquirements on a three year rolling basis.
And each year, one third of the load is procured for three year period.
New Bgs rates went into effect June <unk>.
And despite what I, just said a moment ago, but due to a decline in actual versus assumed capacity costs.
Electricity bills actually declined on.
On the gas side.
<unk> is permitted.
Permitted to recover the cost of hedging up to 80% or roughly 115 Bcf.
Of its annual residential requirements through the Bgs S tariff.
We recently filed for our anticipated <unk> cost to go into effect in rates before the upcoming winter season that will reflect current market prices at the time.
And be true up for actual costs over subsequent.
Periods.
On the nuclear side of the business, we remain fully hedged in 2022 and 2023.
A little more than half hedged in 2024.
Without ratable Baseload hedging program in effect, we should begin to see higher prices to layer in as we continue to incrementally sell tower forward into 2024, and 2025, assuming that prices remain at today's higher levels.
Uncertainty of power prices highlights the critical need for longer revenue visibility to safeguard the economic viability of existing nuclear plants, which are increasingly recognized as an irreplaceable source of carbon free domestic energy supply I might add this is also taking place at the international level in terms of.
The recognition as an irreplaceable source of carbon free energy supply.
We continue to observe a positive shift in public sentiment and support of preserving these nuclear plants. Most recently as part of what I mentioned before the proposed inflation reduction act or <unk>.
2022.
As our country invests and energy security and climate change solutions, which can help to stabilize rising electricity prices.
This proposed legislation agreed to last Thursday by Senators mansion, and Schumer includes the nuclear production tax credits, we have advocated for over the last two years and would be in effect from January 24 through 2032.
This pricing floor for nuclear generation squarely addresses our need for a longer term framework within which we can continue to own and operate our fleet with extended revenue visibility beyond the current three year zero emission certificate cycle.
The Bill also includes transitioning to a technology neutral ITC PTC beginning in 2025 for new carbon free resources.
And there was a 15% corporate minimum tax on net book income that would impact us and our customers.
We're analyzing all aspects of the bill, including the many provisions that will help address climate change.
We are hopeful that these provisions will pass Congress.
Senate majority leader Schumer indicated his intention to bring the bill through the Senate floor. This week.
But there is a review process involving the Senate parliamentarian that could take a week by itself to complete.
If the Senate is able to approve the measure the house would likely return from the August recess to vote on it.
In the meantime, we continue to have policy level discussions with New Jersey State legislators, who were currently in summer recess to discuss a longer duration alternative to the current zero emission certificate framework for nuclear should the price were contained in the rectal reconciliation bill prove elusive.
Now, let me turn to an update of our offshore wind opportunities, which we continue to advance on a number of fronts on.
On the transmission partnership coastal wind link the timing of new Jersey's decision on state agreement approach to transmission offshore.
We expect that this October .
On Ocean wind one development efforts are ongoing as we approach the upcoming <unk> date in the coming months, while the Bureau of Ocean Energy management will continue public hearings on the draft environmental impact statement later this summer.
As it related to the opportunity to co invest with <unk>, we continue to have conversations on a variety of fronts.
In fact due diligence continues in earnest in this regard.
As I step down from my CEO duties on September 1st PSEG is well positioned to enter its 120th year of serving New Jersey with the essential energy services.
Helped to power the economic engine of the state and advance its energy policy leadership.
My role as executive chair of the board through the end of 'twenty. Two I will continue to advocate on behalf of PSEG and key policy arenas.
Later, you will hear from Ralph Larosa, and I must say he is the most well prepared ready CEO CEO elect in the history of our company and with Ralph at the helm PSEG will further advance its powering progress vision of a future where people use less energy.
And it's cleaner safer and delivered more reliably than ever.
<unk> dedicated workforce will continue the public service heritage that recently earned US The 2022 Edison Award from the Edison Electric Institute.
Electric utilities highest industry honor and recognition of Pseg's infrastructure modernization programs focused on protecting our customers and communities from extreme weather conditions.
I think Thats, our second Edison Award in the last 10 or 12 years or so.
I will now turn the call over to Dan for more details on our operating results that Dan Ralph and I will be available for your questions.
Thank you Ralph good morning, everybody.
As Ralph mentioned for the second quarter 2022 piece of <unk> reported net income of 26 per share and non-GAAP operating earnings of 64 per share.
We've provided you with information on slides nine and 11 regarding the contribution to non-GAAP operating earnings by business for the second quarter and year to date periods ended June 30.
Slides 10, and 12 contain waterfall charts that take you through the net changes quarter over quarter and first half of 2022 over first half 2021, and non-GAAP operating earnings by major business.
We'll start with Pes EMG who's.
Second quarter net income was relatively flat compared to the second quarter of 2021.
Reflecting rate base additions from our investment programs in our gas system modernization energy strong programs and the implementation of the Sip, which was largely offset by higher O&M in the quarter much of which was timing related.
Compared to the second quarter of 2021.
Transmission margin was flat as growth in rate base and other positive true up adjustments were offset.
By the August 2021 implementation of a new transmission formula rate.
Putting our base return on equity moving to nine 9% plus the 50 basis point adder.
For distribution.
Gas margin improved <unk> <unk> per share over the second quarter of 2021, reflecting the scheduled recovery of investments made under GMP and a true up from the Sip.
Electric margin rose to <unk> <unk> per share compared to the second quarter of 2021, driven by the scheduled recovery of energy strong II investments.
Other margin primarily related to a client service also added a penny per share compared to the second quarter of 2021.
O&M expense was <unk> <unk> per share unfavorable compared with the second quarter 2021, reflecting higher costs from the resumption of customer settlement proceedings as courts reopened.
Higher electric operation expense and gas tariff work.
<unk> expense was a penny per share unfavorable reflecting higher investment.
In addition, the impact of Pseg's $500 million share repurchase program had a penny per share benefit on second quarter 2022 results.
Flow through taxes, and other items had a net unfavorable impact of a penny per share compared to the second quarter of 2021, driven by the use of an annual effective tax rate that will reverse over the remainder of the year.
Summer weather during the second quarter of 2022 measured by the temperature humidity index was warmer than normal but cooler than temperatures during the second quarter of 2021.
With the Sip in effect variations and whether positive or negative have a limited impact on electric and gas margins, while enabling the widespread adoption of <unk> energy efficiency program.
For the trailing 12 months ended June 30th weather normalized electric and gas sales reflected lower residential sales, both electric and gas lower by approximately 3%.
And higher commercial and industrial sales higher by 2% and 3% respectively.
More people return to work outside the home.
Growth in the number of electric and gas customers remain positive by approximately 1% over the trailing 12 months period.
<unk> invested approximately $741 million during the second quarter and approximately $1 $4 billion year to date through June 30.
And we are on track to execute our planned 2022 capital investment program of $2 9 billion.
The 2022 capital spending program includes infrastructure upgrades to transmission and distribution facilities.
As well as the continued rollout of the clean energy future investments in energy efficiency.
And the G cloud and smart meters.
Electric vehicle charging infrastructure.
And the new IAP investments that will begin this quarter.
<unk> forecast of net income for 2022 is unchanged at $1.510 billion.
$1.560 billion.
Moving on to a carbon free infrastructure and other where we reported a net loss of $174 million 35 per share for the second quarter of 2022.
Driven by our nuclear decommissioning trust and mark to market impacts.
And non-GAAP operating earnings of $50 million or <unk> <unk> per share.
This compares to a second quarter 2021, net loss of $486 million and non-GAAP operating earnings of $47 million, which included the results of the divested fossil and solar assets.
For the second quarter of 2022.
Electric gross margin declined by 25 per share primarily due to the sale of the 6750 megawatt fossil portfolio. This past February .
And the sale of the solar source portfolio in June of 'twenty one.
This reduction in gross margin includes re contracting approximately eight terawatt hours of nuclear generation at a $3 per megawatt hour lower average price.
In addition, <unk> added a penny per share due to the absence of the hope Creek refueling outage in the year earlier quarter.
Separately lower margins at gas operations resulted in a penny decline in gross margin versus the second quarter of 2021.
Year over year second quarter cost comparisons were better by <unk> 22 per share due to the divestitures driven.
Driven by lower O&M depreciation and interest expense that will mainly benefit first half 2022 results.
If you recall, the third and fourth quarters of 2021 reflected the solar source sale in June .
The cessation of fossil depreciation from August onwards.
And the retirement of PSEG Power's outstanding debt in October .
Current activity was a pay per share unfavorable compared with the second quarter of 2021 as a result of higher interest expense and taxes and other were opinion unfavorable compared to the second quarter of last year.
Nuclear generating output increased by over three 7% to seven five terawatt hours in the second quarter of 2022.
Reflecting the absence of a refueling outage at hope Creek in the year earlier quarter.
The capacity factor for the nuclear fleet for the year to date period through June 30 was 95, 1%.
Gcg's forecasting generation output of 14 to 16 Terawatt hours for the remaining two quarters of 2022.
And has hedged approximately 95% to 100% of this production at an average price of $28 per megawatt hour.
For 2023.
We're forecasting nuclear baseload output of 30% to 32 Terawatt hours.
<unk>, 95% to 100% hedged at an average price of $31 per megawatt hour.
And for 2024 were forecasting nuclear Baseload output of 29 to 31 Terawatt hours.
Which is 55% to 60% hedged at an average price of $32 per megawatt hour.
The forecast of non-GAAP operating earnings for carbon free infrastructure and other is unchanged at 170 million to $220 million.
This guidance for 2022 excludes results related to the fossil sale.
Fossil assets that were sold.
In February of this year.
With respect to recent financing activity and collateral postings PSEG remains on solid financial footing.
As of June 30, the PSEG money pool, including PSEG empower had of available liquidity, including cash on hand of $3 7 billion.
In April and May of 2022.
We entered into a 364 day variable rate term loan agreement totaling $2 billion.
Also in the quarter power entered into to $100 million letter of credit facilities expiring in April 24, and April 25, respectively.
And in July of 'twenty to PSEG repaid a $125 billion short term loan that was due later this month.
At net cash collateral postings of $2 5 billion at June 30th related to out of the money hedge positions as energy prices rose during the second quarter of 2022.
Collateral postings have increased subsequent to June 30, and at the end of July .
Power had net collateral postings of approximately $2 5 billion.
Most of this collateral is associated with hedges in place through the end of 2023.
And is expected to be returned to PSEG power once it satisfies its obligations under those contracts or sooner if market prices decline in the interim.
As Ralph mentioned, we are reaffirming Pseg's 2022, non-GAAP operating earnings guidance of $3 35 to $3 55 per share.
With regulated operations contributing approximately 90% of the tolls.
For the full year of 2022 <unk> net income is forecasted at one five.
1 billion to $1 $5 6 billion $1, five 1 billion to $1 6 billion and non-GAAP operating earnings for <unk> is forecasted at 170 million to 220 million.
Pseg's 2022 earnings guidance excludes financial results from the divested fossil assets and.
That includes additional interest expense related to recent financings.
Looking beyond 2022 regarding the pension item Ralph referenced earlier slide 19, and the webcast deck highlight some pension disclosure contained in our current 10-K annual report.
We outlined several items that will influence the pension impact in 2023, including updating the discount rate and interest cost.
Setting the expected return on plan assets for 2023 calculate.
Calculating the actual gain or loss on the funds.
In determining the fair value of the funds at year end.
As many of you know we do not smooth we apply the fair value of the fund balances to next year's expected return.
As such asset values and discount rate on December 31st will determine the impacts for next year.
Lastly, we have completed our $500 million share repurchase through open market purchases and an accelerated share repurchase program in may of 2022.
That concludes our prepared remarks and with this being Ralph as those last earnings call as CEO I'll give him an opportunity to make some closing remarks before taking your questions.
Dan I think I'll wait till later tomatoes kind of sorry about that.
But while we go right to the questions call yes.
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 the star and the number one on your telephone keypad.
Your question has been answered or you wish to withdraw your pulling request you may do so by pressing the star and the number two.
You're on a speakerphone, please pick up your handset before entering your request.
One moment please for the first question.
First question is from Shar <unk> with Guggenheim Partners. Please proceed with your question.
Hey, guys good morning sure sure.
So let me just if it's OK start on the pension side.
Can we maybe just get a little bit more details on the potential offsets that you're sort of thinking about implementing.
<unk> has estimated estimates out there and what the drag could be so whether it's 2030 40.
Whatever it ends up being do you feel like you can offset that kind of a drag and how does that potentially factor into a rate case filing in 'twenty three.
Yes.
Sure of course.
We like to think of the fact that we're always mindful of our O&M expense.
But you can always do more.
Cost versus quality consideration that we'll have to take into account. So there is no doubt we can offset some of the headwinds.
We're just not going to get into a conversation today about how easy it is to offset the <unk>.
Versus <unk> versus 'twenty.
And believe me, we've seen numbers dance around that whole range over the past six.
We're not going to do anything that compromises the long term service quality of the customers.
We're going to.
Look at every part of our cost structure to see what is the good short term decision. What's the good long term decision and then of course as you correctly pointed out the utility doesn't have a rate case that starts January one of 2024.
So we view this as a short term headwind thats not quantifiable.
On August 2nd and can only be quantified on December 31, but we're looking at a whole litany of potential cost reductions in each one of them comes with some risk and we'll draw the line, where we feel comfortable that the short term risks are manageable, but we do nothing to jeopardize the long term health of the company.
Got it thats not a quantitative answer to your question, but.
But I think it's just going to drive people crazy to everyday look at what what markets are doing and what congressional leaders visiting what.
The island nation, and what's that doing to equity markets.
Things that are simply.
Not within our control over the next few months.
Got it got it Okay. That's helpful. And then just rough on the strategy side with generation sort of with the inflation reduction at gaining traction is obviously improved visibility on nuclear which is one of the things you mentioned would be a trigger point potentially to assess whether you want the assets within the portfolio or not so any updates there.
Just around offshore wind, there's obviously, some very healthy valuation marks on the land lease values.
Your neighbor looking to provide another maybe data point soon any thoughts there and whether you would reassess value here as well. So I guess, how are you thinking about potential trigger points to exit the remaining generation business you have.
Now on the head in terms of important data points short coming in.
If the inflation reduction act passed us as it's proposed.
There are some technical amendments that were working with those sponsors to make sure.
Or are considered because of some language that is inconsistent with what people told us they're trying to achieve.
You basically have a nuclear energy price of $44, a megawatt hour give or take a few pennies.
As long as power prices in the market don't drop below $25.
And as long as power prices in the market don't go above.
So.
The nuclear assets begin to me at least to look a lot like a.
Rate base rate of return and piece of infrastructure with a steady.
And an attractive cash flows that makes them economically viable now theres a whole lot of work that needs to be chop between now and making that something thats present baidu puts his pen two and then there is the need to see what investor reaction will be if it's interpreted it the same way that we interpreted which is as I said.
Essentially yes.
Very predictable earnings stream with a very solid cash flow generation that I think serves the state of New Jersey, very well served the company very well such as the planet very well.
On offshore wind, we do have an important data point coming up and you've alluded to it. There is another company that is in a strategic review process and we will carefully monitor the outcome of that while pursuing with all of the due diligence efforts I spoke about before from coastal wind link to Ocean wind one in some other possible opportunities.
Does that.
Look it should be obvious to everyone.
New Jersey is going to build seven five gigawatts of offshore wind I think half a dozen states are going to build 30 gigawatts of offshore wind.
Going to have a significant impact on the power markets Bill headroom in opportunities to grow earnings per share for company. So it's something that we want to make sure. We are taking a long view in terms of the role we should or shouldn't play in that.
So more to follow some of it as well.
We will be following in the next few months.
Got it got it sorry, what was the test year for the rate case that you guys are going to file as it is this two three years from July of 'twenty three to June 24. So it does include 23.
It gets filed on January one of 'twenty four.
Fantastic I appreciate it guys and Ralph and Ralph Congrats.
Gotcha.
Yeah.
Our next question is from Nick Campanella with Credit Suisse. Please proceed with your question.
Hey, good morning, Thanks for taking my question.
Just acknowledging that you kind of you you reiterated the long term, 5% to 7% EPS CAGR.
When we kind of take into account the mitigation strategies you are targeting.
And as 5% to 7% CAGR is this a long term CAGR or do you still have kind of visibility on 5% to 7% growth in 'twenty three.
Yes, so Nick as you as you know in a regulated world test years and rate cases.
One does not and even though.
I guess, it's almost 90% of our Capex has some form of trackers.
That is delayed six months some of Thats delayed one year.
We've never told people that the 5% to 7% CAGR is every year.
To be applied that it was you take the midpoint of the 'twenty two guidance and you look at where we are in 25 in the CAGR over that time frame is 5% to 7%.
Gave what 23 would be over 24.
Okay. Thank you.
And then just other aspects of the DRA just like the.
The minimum 15% tax.
How does that kind of play into affecting your business if at all and what are the offsets there.
So Daniel Daniel.
I think.
What's laid out right now Nick is pretty similar to what's in the bill back better and so I think your first screen you're going to go through is the size of the earnings from the company to determine whether or not you're subject to it and then youre going to work your way through.
Essentially we will deemphasize things like depreciation and give you a lower rate in exchange and so that trade off I think as an industry, we're going to go through and take a look and see what that means from a from a cash flow basis to the extent that that does kick in and you'll have a higher cash flow upfront going out the door.
For taxes, but whatever excess you do have is going to be carried forward indefinitely.
So we will work our way through and ultimately to the extent that that happens you have a deferred tax asset or probably more appropriately stated a smaller deferred tax liability which comes into play in the balance of your ratemaking as well. So I think we're all exploring where this is going to go to the extent it does get across the finish line.
As is I know that there are some in Washington, who had challenges.
Against this type of an increase in the first go round, but right now as it's laid out it looks pretty similar to what was then built back better.
Okay, great and if I could just squeeze one more in I think I think folks are wondering so I'll ask you just any thoughts on an analyst day this year.
Yes.
Yes, yes, Nick just Ralph the Roses, Nick right now we're planning to do an analyst day in the first quarter of 'twenty three I think Ralph has laid out a bunch of mileposts that would lead us to say that there is enough enough moving parts that it makes sense for us to.
That conversation and if in the first quarter of 'twenty three.
Alright fantastic congrats everyone. Thanks again.
Yeah.
Our next question is from Steve Fleishman with Wolfe Research. Please proceed with your question.
Yeah, Hi, good morning.
Just wanted to wish you the guy.
This is your last earnings call.
Okay.
It's been fun.
So first of all just on the pension how should we think about how the Tianjin, maybe roughly split between regulated and nonregulated parts. Okay.
You probably have 75% to 80% of it that's going towards the regulated piece of it.
Okay and then when you obviously you don't know what returns are going to be the next three years, but when you think about your.
Your confidence in the five to 725.
Is most of that just because it just gets all screwed up in the rate case, no matter what happens to the pension performing.
Thank you Stan.
And they return or is it that you're expecting the market to bounce back and the offsets.
Is it more that this is just part of the rate case.
Okay.
I figured out of more of the latter Steve obviously youre going to have the effect of markets. Both your your equity and debt markets for your asset return for the assets within the trust as well as with the discount rate's going to look like but.
Ultimately with a bigger part of the pension are being.
Being on the utility side of the house that Youre going to have a regulatory aspect of it that's going to that's going to be important as well.
Okay.
You sound like you are counting on the markets to come back or anything like that right right. Okay.
Okay and then.
Sure.
Yeah.
Ralph Izzo unfair question.
Okay. Thanks.
You've been very involved in working on this Irish law.
Just curious your best judgment on.
Patrick.
There's a little bit worried about.
Senator cinema, but the.
Tax provisions the carried interest provisions don't seem to be a big number.
So I find it hard to believe that that would.
Really result in.
Having to worry about one more.
Renegade Senator vetoing the bill.
And as.
As we head into the mid terms, there's a really good chance it looks like.
Like the Senate could retain a democratic majority.
And a lot of them feel like if they could get this over the finish line that with cement that prospect.
So I.
Given.
Given a high probability of success.
Bigger worry was.
Whether or not.
Two trillion dollar.
A piece of legislation to half a trillion.
If you lose the folks that were part of it on the house side.
But some of them more visible and outspoken members of the left wing of the Democratic Party.
I've said this is a critically important.
Climate change initiative and the most important thing we've done in this regard.
So I've gained a little bit of confidence there as well so I put it at odds at pretty strong I mean with the Senate majority leader, saying is going to bring it to the floor on Thursday.
Even before the parliamentarian is likely to rule.
I'd say the odds are looking quite good at this point.
I have one last question I forgot about.
Offshore wind transmission.
Bidding for that unit update on the process there.
Or just.
The RFP I think is going to come out the first quarter of next year for the next round is that the question.
Oh gosh.
In October date, Steve for when we're supposed to be here and back.
There has been a little bit of.
There's been work that's been ongoing on at PJM put out a piece.
Related to some of the risks and the construct ability and different elements and so folks that had some comments back on that but ultimately it sits within the <unk> jurisdiction with a with PJM, providing some some some technical supports October is still when we're supposed to hear back with the answer.
Okay, great. Thank you very much.
The next question is from John .
<unk> with Evercore ISI. Please proceed with your question.
Hey, guys good morning.
Susan.
Just on the on the pension topic, one of the discussions that we've had with investors.
It's to your earned ROE he's worked through them and thrived.
Obviously pension has been sort of a tailwind past few years and it looks like it's going to be a headwind going forward can you comment on Dan just aren't worth as authorized returns at the utility currently and then how are you modeling that going forward in your 5% to 7% target I'm I'm interested in.
Turns versus the authorized levels. Thank you.
Yes, I mean, I think I guess, if you want to think about what we would anticipate on a go forward basis. It would be earning our allowed return and so yes, youre going to have some tailwind some headwinds from various items that should certainly is one and you're right. If I think about it in the immediate term you've got some more has the potential for more headwinds.
If you look backwards theres been some tier ones, but there's other items that have offsets in <unk>.
Also come into play, but I think if you want to think about what we're anticipating as we've looked at 25 I think it's we're anticipating earning our allowed return and Dan I mean, 40% of rate basis transmission, which is basically true up exactly every year right. If I'm not mistaken doesn't the conservation incentive program.
Or a range, where we fall outside that range.
They're not eligible and so we.
We stick to that allowed return basically all the entities.
The way that that that that mechanism works.
It has got a balance related to your earned returns. So we are pretty pretty close to that to that level throughout.
Got it thanks I guess.
Forward looking plan has you burning coal close to the authorized is the key takeaway here.
Just Ralph.
Wanted to go back to sort of the strategic review.
You're an offshore how critical and this is how critical is being involved with the offshore generation side.
Winning you know with some of these offshore transmission opportunities, obviously, you'd previously indicated roughly I think over $1 billion in opportunity.
And we'll hear about it in October , but how you know how critical it is from a strategic standpoint to be in the generation to get some of these transmission awards, where you think those are two independent things I think those are two independent things I don't think its critical at all.
Santa Joana.
Just reinforces that.
Great. Thanks, guys appreciate the update.
The next question is from David Arcaro with Morgan Stanley . Please proceed with your question.
Hey, good morning, Thanks, so much for taking my question.
Could you talk a little bit as to the hedging environment for 2024 right now for power.
Is there any update on your ability to take advantage of the current commodity backdrop to accelerate some hedging from here and what's the liquidity looking like.
Yes, theres market liquidity out there, David we couldnt closeout the entire position in a very short term, but there's liquidity to be able to continue to do what we anticipate doing which is staying on our on a ratable path I mean, I think we've got a.
A market environment, which has higher pricing than what we have seen historically.
But by the same token we have got a fairly backward dated curve and so those two items I think are.
A little bit at odds with respect to where things may be going so we're we're moving along related to our ratable hedging program kind of within the bounds that we set anticipate general cost structure remains.
Got it thanks that makes sense.
And.
It's early but just wondering as you think about some of the strategic considerations over the next.
Over the next year or so any any early thoughts on how you'd redeploy.
Capital.
Use of proceeds.
Some of these strategic.
Endeavour's might unlock.
Unlock cash flow.
I think one of the things that.
It's really important about the infrastructure advancement program.
The recognition.
The credit of the board of public utilities.
The under investment.
Oh, let's just say the lack of investment that has followed the last mile. Because there was so much to do with the higher voltage part of the system.
And all the good work, we did in transmission and inside plant.
That resulted in our second Edison Award and just an outstanding outcome in what was a devastating.
Flood event hurricane either.
All of that work that went so well at the high voltage now needs to go towards the lower voltage part of the system and IAP was a recognition of that.
500, plus million dollars of the $800 million ASIC approved I think shows that.
We're entering a new era of people working from home.
Losing power of the home is not just annoying blinking lights on the microwave oven.
You can't charge your car you can't do your work you can't call. Your neighbor you cant find out where the kids are in that level of resiliency and reliability.
It's something that customers are demanding so I think that there is a lot of opportunity in that in that last mile that we're just beginning to explore and touch upon so as we've often said in the past David.
There's a long runway of utility investment needs.
We still have a lot of aging infrastructure, we havent placed I forget what I've lost track of what the runway is on the TSMC program at the current spend rate as you see.
20, some odd years I think.
So the number one gating function that has been is and will be just making sure that we.
Have customer affordability, and we're always mindful of that but in terms of opportunities to redeploy that.
10 things that used to keep me awake at night that was somewhere around number 20.
Got it got it thanks, so much really appreciate it.
Our next question is from Julien Dumoulin Smith with Bank of America. Please proceed with your question.
Hey, congratulations again, well have Ralph and Ralph.
Just going to keep going here on the screen here on the five to seven and I want to come back and I know, we asked you I think we've been last time here, but.
The expectation of this persisting beyond 'twenty three on the five to seven.
That include the latest net pension headwinds and power Mark to market, where do you stand them, reflecting that again just.
Again, I guess it is moving around I guess its rate case because of what is your expectation and then related to that if you can what is the current.
Asset performance year to date, you've kind of implied a comment in your prepared remarks, but if you can quantify that'd be great.
Yeah, Julien I think it's consistent with what we've what we've been saying I think we're not going to know exactly what that number is going to be until 12 31 that is the nature of how we do our accounting and that's where we're going to stand and so I think we're going to have that part of the puzzle determined at that time.
And given the variability we've seen in markets you could see some movement. There I would argue that if you if you take a look at how we are invested.
With kind of in the mid fifties on there on the equity side and then.
Some some real assets and the balance being on the debt side, you can kind of make a determination that if you use just the benchmarks I think youre going to be in the right ballpark against that backdrop, we're going to do exactly what Ralph talked about we're going to go through we're going to drive through all the initiatives that we've started to lay out.
Made determinations on some will continue to make determinations on other than trying to make sure we strike the right balance between around the business right.
And managing our way through some near term headwinds and the magnitude of those.
And what we see by virtue of doing the things that we've identified there's going to be what's going to determine where we end up in 2023. So.
It's a little bit dynamic right now, but that's that's going to drive ultimately, where we land within 2023 and that guidance will be forthcoming.
Right and maybe implicitly within if you expect the utility to grow 5% to seven specifically right.
So again.
What would you expect the utility to grow 5% to seven specifically as well right.
So we give you a rate base CAGR on utility right.
Don't break each business separately in terms of the CAGR, but.
As you know Julien.
Given 90% of our Capex.
Get some type of contemporary and return.
The utility earnings should equal rate base up minus O&M minus regulatory lag plus any new customer growth, which is not part of the Sip. So in those last three pieces are pretty small, but they can chew.
<unk> things to ask the first decimal point.
We don't breakout each company separately in terms of the CAGR.
But these guys actually I just go back to the last question just very briefly.
I only had five percentage points to 24 at this point.
Is it just about the prospects on federal support here that hold you back just to make sure.
Yeah.
Okay.
Say your question again Julien.
Just on the only adding about five percentage points on 24 hedging.
If that intuitively, maybe you would layer in more.
I got a question is more is this.
Federal support and uncertainty from a legislative perspective hold you back.
I mean, I think frankly, it's just more consistent with respect to how we're thinking about the ratable program, we are a little bit higher than what a ratable three year would have you have the math turned out to be and then so we have some of those ranges, but we want to stay within a bit of a ratable band Ah.
<unk> is while the backwardation that exists within the curve and so I think that we.
We will continue to move forward continuing to hedge at the prices that we're seeing as we go forward.
But I think it would.
We anticipate us to be outside of that round will range in the near future.
Got it alright, well congrats again to both.
I'm sure I'll catch you soon.
Thanks.
The next question is from Ross Sandler with UBS. Please proceed with your question.
Good morning, how are you.
So I just I just wanted to go to slide 22 in nature I understand the dynamic here between the potential.
Call it potential put it as a nuclear PTC at the federal level in the Jackson New Jersey.
Think about.
The 55% to 60% that you've got hedged at $30 a megawatt hour out in 2024.
Now status quo I would add to $10 two that again a price on that hedge piece is about $42 a megawatt hour.
But if I were to get the nuclear PTC that would be somewhere between 42 to $4 a megawatt hour and that would actually be upside.
To that pricing right because the deck would go away.
New Jersey, if I understand it correctly it would be replaced essentially by the nuclear PTC at the federal level.
I got that right is that the right understanding of how that right now.
Okay.
And then the non hedged piece.
Come back to the nuclear PTC price.
Yes.
Well it would it would basically be either the current price if it were over $44 four would be the 42 to 42 at the nuclear PTC, if that's what we get.
Or it wouldn't be that whenever you had you had questions back.
That's where we stay so am I thinking about that correctly, yes, I think that's right. So you think about what theyre doing in Washington, and essentially as a floor.
And to the extent that realized exceeds that then the PTC basically just drips away as as you realized goes up.
And Youre right so.
<unk> right.
Right.
Look to hedge further piece of that is U S.
Following on to Julians question here, where you go through your ratable hedging.
You know if hedging where they move up above that $32 it would be above the nuclear PTC.
But if you lose $10 that you'd have to come back to the nuclear PTC level does that did that.
You should think about that I guess I'm trying to say if you're hedged at $35 right you get a credit for the PTC up to that 44 level.
In the bedroom PTC case or.
You're hedged at $34, you would have $35 would actually be 45 case.
Am I thinking about that correctly that does not have the state is not to give you $10 right.
Right Okay.
Through through 25.
And the the crisp definition with respect to the realized that you apply in determining what the PTC is to get you to that 44 is going to be finalized within the details, but that's our expectation.
Okay. Okay that makes sense to me. Thank you I just wanted to make sure I was getting the <unk> correctly as we potentially change what applies to the power side in New Jersey for nuclear thank.
Thank you very much.
The next question is from Michael <unk> with Goldman Sachs. Please proceed with your question.
Hey, guys. Thank you for taking my question and congratulations to both Ralph.
Well the Rosa.
My question is probably more for Dan Dan you talked a little bit about collateral postings and being a little over right around $2 $5 billion at the end of July .
That cash if I, if I understand correctly comes back over the next 18 months between now and year end 2023. So how should we think what does that mean does that mean that it's simply a reduction and maybe your draws on your credit facility that shows up so short term debt on the balance sheet will actually go down by that amount by the time, we get to 2023.
End of 'twenty, three if we leave all else constant.
You're thinking about it exactly right Michael so they're as they think about incremental draws to to fund that and as that comes back we would just take out the source of that was used to fund in the first place.
And in the source Thats being used to fund it is simply short term data or credit facility up top at the holding company level, Yes, that's exactly right.
Okay.
And if I were to apply my follow on question relates to the to the inflation reduction Act if I were to apply that to the minimum tax requirement to 2022.
How big of a cash flow impact would that be on this year using your guidance for this year how material.
Yeah.
I wouldn't give you like a single year look because you can have one time items that would come through.
So if you think about this year we closed.
The fossil sales so youre going to have some some kind of disruptions and what it normally like I think I think if I would try to do the math and it's going to depend year over year over the longer term, but you're going to basically take a look at what's your delta is within your accelerated depreciation with the Delta is within the rates if theres going to be other pieces that are going to move but I think those are the two biggest moving pieces that you'd have.
<unk>.
And how much does that 6% by you going from 21% to 15%.
Compared to the magnitude of what you're getting through the tax benefits that would be taken away that arent in your book income.
So that's the trade off and it's going to vary a little bit by year, depending upon what.
Capital, you're deploying and where you are within the.
The accelerated depreciation scheme.
I hate to sound really big picture here, and I'm going to try and do it.
Big deal medium deal small deal.
I think it's.
Probably somewhere between I think to the extent that youre going to see an incremental payment you're going to end up having an indefinite carryforward on your credit and basically that's going to reduce your deferred taxes. So to the extent that deferred taxes end up reducing your rate base. When you have a deferred tax liability. It seems like you would have the potential that from a regulatory perspective you'd have a incur.
Rental rate based component on the regulatory side of the business and that's where most of the capital and so I think it's still going to play out and see where we end up in the final determination.
But somewhere in between.
Got it thanks, Dan much appreciate it guys.
Okay.
You're right Michael that is a question for Dan.
[laughter].
Thanks for coming up upon on the hour cause I'm not we are on.
Okay.
Time for one more question, yes sure.
The next question is from Jeremy Tonet with Jpmorgan. Please proceed with your question.
Hi, good morning, gentlemen.
Best of luck to Ralph and Ralph Thank you and.
Just wanted to kind of pick up on the last point, a little bit there if I could as it relates to the IRA.
As it is how would this impact your financing strategy and agency thresholds in past.
But I think ultimately there is the potential for a lot of pieces Jeremy.
Kind of tough to give it really crisp answer you've got some something if I think about just a couple of pieces that are going on youre going to have a PTC on nuclear that's either going to kick in in a certain magnitude are not kicking in in a certain magnitude because youre above or below that floor. So you've got some some cash variability there.
<unk> got an offer when you've got some some PTC potential versus ITC and youre going to make the tradeoff, there which has a.
Different impacts for cash and for book and then you've got this mineral tax item, which could be an incremental.
Draw on cash and so I think.
Having the balance sheet strength that we have we have the ability obviously to work through these issues.
But I think the incremental financings around the edges with would be changing based upon the timing of some of these things when we see.
Any potential minimum tax incremental payments reversing.
The timing of any of these credits that come through so those are the things you would look to.
But I think you've got a lot of time between now and final passage to actually figure out what the actual impact is going to be.
Got it and just one little point there is it fair to say PTC visibility for Nukes would change agency view there versus three years ago.
Certainly a favorable item.
Magnitude of that change.
To be determined I think.
Like we talked about it could be incremental dollars it could be a florida, which provides stability, which reduces risk, which the agencies would like so either way.
Think about both the flexibility on the offshore wind as well as the PTC for nuclear I think both of them are value additive from the standpoint.
Both of these options that we have on the generation side.
Got it thanks, just the last one if I could.
As it relates to the IAP process are there any takeaways.
This process at this time and particularly as it relates to how you might view.
Future extensions of ethane GSM.
Programs.
I think less <unk> and more in last mile.
This was the first proposal that we put in front of the <unk> to start the long runway of work that we have on the last mile and we were very pleased with the acknowledgement of that need and the work that we have ahead of us. So I think more than anything else I would look to the.
The IAP if it's a signal for anything it's the acknowledgment of the work that does need to be done on the last mile. The system on a more proactive basis, rather than just run to failure.
Got it that's helpful I'll leave it there thanks.
Thanks sure.
So look it's been mentioned a couple of times. This is my last quarterly earnings call.
It's something of a cliche, but I'd have to tell you. It's been just a genuine honor and privilege to this.
For 15 years.
And for those of you who are still on the call.
Or listening to the webcast.
I, just I want to extend human hope Youll accept my sincere. Thanks for all of the conversations all of the probing questions you've offered over those years.
And I'm not I'm not kidding, it serve to make us a better company and hopefully it starts to make me a better CEO .
All gentlemen, genuinely miss those interactions.
But I cannot overemphasize the company is in great hands with the new Ralph.
With Dan and the entire senior team.
We've worked side by side for a long time and I have just.
100% confidence that they will do a far better job than I.
Okay.
Due on my own certainly in the early stages.
Now I know that you're all eager to learn more about pensions and nuclear economics and ownership in offshore wind prospects in you will and you will.
But I'm I'm encouraging our leadership team to continue our proud tradition of taking a long term view and.
And gathering important information before rushing into decisions that might have short term appeal, but long term consequences.
So and I think we.
We're literally talking about weeks and maybe months before we get some really important data points.
That come our way.
So with that it's now my pleasure to turn the call over to Ralph.
Thank you Ralph.
A few items I wanted to touch on.
First I want everyone to know how excited I am for our future. We are very well positioned by our power and progress vision and I look forward to continuing to work that we have started.
Second I wanted to thank all of you on our call for the kind and some 40 words I've received from so many of you since the announcement in April and I look forward to meeting with you throughout the remainder of 2022.
Finally, I wanted to thank you Ralph.
Thank you for all you've done for this great company, our customers and our employees. Thank you for the industry leadership and specifically your leadership on addressing climate change issues.
And last but not least I. Thank you for the time and effort you've given to me personally.
And with that Kyle I think we're ready to close the call.
Ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
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