Public Service Enterprise Group Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Jesse and I'm your event operator for today. I'd like to welcome everyone to today's conference entitled the Public Service Enterprise Group Third Quarter 2021 Earnings Conference Call and Webcast. At this time, All participants are in a listen only mode. Later, we will conduct a question and answer session for members of the financial community.

Operator

You may press the pound key. As a reminder, this conference is being recorded today, November 2, 2021, and will be available as an audio webcast on PSEG's Investor Relations website at investor. Pseg.com. I'll now turn the call over to your moderator for today, Carlotta Chan. Ma'am, you may go ahead.

Speaker 1

Thank you, Jesse. Good morning. PSEG has posted its Q3 2021 earnings release, attachments and slides detailing operating results by company on our website at investor.pscg.com and our 10 Q will be filed shortly. The earnings release and other matters discussed during today's call contain forward looking statements and estimates that are subject to various risks and uncertainties. We will also discuss non GAAP operating earnings and non GAAP adjusted EBITDA, which differ from net income or loss as reported in accordance with generally accepted accounting today's conference call.

Speaker 1

We include reconciliations of our non GAAP financial measures and a disclaimer regarding forward looking statements on our IR website and in today's earnings materials. I'll now turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of PSEG. 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 questions.

Speaker 2

Thank you, Varlada, and to all of you for joining us on our call this morning. As you've seen PSEG reported non GAAP operating earnings of $0.98 per share for the Q3 of 2021 versus $0.96 and earnings per share in the year ago quarter. GAAP results for the Q3 were a $3.10 Per share net loss related to transition charges at PSEG Power, and they compare with the $1.14 per share of net income for the Q3 of 2020. In this year's quarter, PSEG Power recorded a pre tax impairment loss of approximately $2,170,000,000 to reflect the announced sale of its fossil generating fleet that includes $13,000,000 of other related costs. Results for the Q3 bring non GAAP operating earnings for the 1st 9 months of 2021 to $2.96 per share.

Speaker 2

This 6.5% increase over non GAAP results of $2.78 per share for the 1st 9 months of 2020 Reflects the growing contribution from our regulated operations and continued derisking at PSEG Power. Slides 12 and 14 summarize the results for the Q3 and the 1st 9 months of 2021. The Q3 of 2021 was one of the most significant in recent PSEG history. Since July, We've announced the sale of Power's Fossil Sleep and reached the transmission rate settlement that will help lower customer bill. In addition, At our recent investor conference, we announced an increase in our 5 year capital spending plan by $1,000,000,000 A $0.12 per share increase to the common stock dividend for 2022, a $500,000,000 share repurchase program expected to be implemented upon the close of the Fossil sale and initiated a 5% to 7% long term earnings growth projection over the 2022 to 2025 period.

Speaker 2

On the ESG front, We advanced our decarbonization efforts with the elimination of coal in our fuel mix this past June. Our participation in the New Jersey Wind Port and ongoing consideration of regional offshore wind opportunities in generation and transmission demonstrates our alignment on Clean Energy Agenda and our Clean Energy Future program was recently named a Star of Energy Efficiency recipient. Of critical importance, we have staked out a leadership position in the industry by accelerating our net zero vision to and joining the UN backed race to 0 campaign that will put us on a path to establish science based targets to all of our missions across Scopes 1, 23. Later this week, I will be attending parties referred to as COP26 to engage with policymakers and further support emissions reductions goals. This includes advocating for Climate Action Now and Advancing the Case for Preserving Existing Nuclear Generation.

Speaker 2

This month, We issued a combined sustainability and climate report that outlines our progress to date and commitments for the future. We intend to continue taking meaningful climate action in response to the increased frequency and severity of extreme weather in our service area. Speaking of extreme weather, tropical storm Ida soaked parts of New Jersey with nearly 9 inches of rain within a 24 hour period and caused extensive flooding throughout the state. Our past and current Energy Strong investments that Spartan flood prone energy infrastructure brought tremendous benefit to customers during Ida, minimizing the damage to adapted substations and switching stations and keeping them operational. That said, the extreme weather did wreak havoc throughout our service area and our thoughts go out to the families who lost loved ones to the storm and to the communities still recovering from flood damaged homes and To continue these enhancements and bring them closer to the customer, we are expanding our reliability improvement programs to The last mile work we will propose in our upcoming infrastructure advancement program, which we plan to file with the BPU in a few days.

Speaker 2

This proposal, if approved, would direct approximately $848,000,000 of investment over a 4 year period to improve the reliability of our electric distribution system, addressing aging substations and gas metering and regulating stations and electric vehicle charging infrastructure at PSE and G Facilities that will support the planned electrification of the utility all this while serving the dual purpose of creating important high quality jobs and helping to further stimulate the New Jersey economy. The foundation of results for the quarter was the solid operating performances by both PSE and G and PSEG Power. This summer, the 3rd hottest on record, contributed to the hottest 1st 9 months we've ever recorded, Pushing the number of total hours with temperatures exceeding 90 degrees or greater, nearly 65% higher than the same period in 2020 and versus normal, thereby increasing peak demand. The conservation incentive program effective since June 1 for electric and October 1 for natural gas provides recovery for variations in customer usage due to weather, economic conditions and energy efficiency, thereby enabling the utility to promote maximum customer participation in energy efficiency programs without the loss of margin from lower sales. This also has a stabilizing effect on our margins more broadly.

Speaker 2

The continued reopening of the New Jersey economy is unwinding some of the shift in sales experienced during most of 2020. Residential electric sales declined adjusted for weather as more people returned to work, school and other activities outside the home, partly offset by higher commercial and industrial sales. Due to the warmer than normal summer weather and a lifting of COVID-nineteen restrictions. The daily peak load for the quarter topped out at 9,620 Megawatts compared to last year's Q3 daily peak, which was slightly less at 9,557 Megawatts. Our peak load for the year remains the 10,064 Megawatt we hit on June 30, which exceeded the 10,000 megawatt mark for the first time since 2013.

Speaker 2

Moving to the 0 and infrastructure side of PSEG. We recently announced that we have submitted several joint proposals to New Jersey's competitive state agreement approach, Open Window to build offshore wind transmission infrastructure. These joint proposals submitted with our collectively named the Coastal Wind Link and leverage the experienced partnership of PSEG and Ersted in New Jersey Energy Infrastructure, our our commitment to diverse suppliers and our mature working relationships with local building and construction trades. And the networked offshore transmission system in any standalone configuration or combination. PJM is providing the technical analysis and recommendations to the New Jersey Board of Public Utilities, who will make the final decisions based on an evaluation of reliability and economic benefits, cost, constructability, environmental benefits, permitting risks and other Myriad New Jersey benefits.

Speaker 2

A BPU decision is not expected before the 3rd or Q4 of 2022. FERC has granted PJM's request to delay the next capacity auction covering the 2023 2024 energy year to late in January 2022. This revised timeline places the 2024 2025 auction into August of 2022 and the 20 5/26 auction into February of 2020 These upcoming capacity auctions will provide additional surety to the gross margin of our nuclear fleet in the outer years of our 2020 on to 2025 planning horizon. Nuclear Power's economic struggles are a national challenge I call for a broad federal solution so that individual states like New Jersey aren't shouldering more than their share of the load. We are Credit declining as market revenues increase.

Speaker 2

The proposal has support in the Senate and from the Biden administration. While passage is not assured, this would be an impactful provision for the nation's nuclear fleet, and we are hopeful that Congress can enact it. This and the company's 0 emission certificates. We expect to be offset by any out of market payment compensating nuclear for the same 0 carbon attribute. The value of the PTC for our New Jersey units would reduce the ZEC payment up to the maximum $10 per megawatt hour.

Speaker 2

However, the ZEC would not reduce the value of the would benefit from the full production tax credit. Moving forward, there needs to be broad recognition at both the state and federal level on the value of nuclear 0 carbon attributes, both To avoid backsliding for decades to come, we need to ensure that the long term viability of New Jersey's Nuclear generation is preserved as we bring more clean energy resources into the mix. Turning my attention to guidance. We are raising our forecast for full year 2021 non GAAP from the prior range of $3.50 to $0.03 per share. And this is based on results for the 1st 9 months of the year.

Speaker 2

Results for the Q3 and the 1st 9 months incorporate the planned August 1 implementation of PSE and G's transmission rate In addition, full year forecasted results also reflect PSEG Power's cessation of depreciation expense call, while otherwise continuing to contribute to consolidated results. Operating earnings guidance of $3.30 to $3.60 per share. We remain on track to execute on PSE and G's 2021 planned Capital spend of $2,700,000,000 This spend is part of PSEG's consolidated 5 year 15,000,000,000 to $17,000,000,000 capital plan, which we still intend to execute without the need to issue new equity, while continuing to offer the opportunity for consistent and sustainable growth in our dividend. Following the close of the Fossil sale, PSEG will be a 90% regulated and predominantly contracted platform of stable carbon friendly businesses. As we continue to execute on this strategy as well as on the future, we are uniquely dedicated to providing our shareholders with the premier I'll now turn the call over to Dan for more details on our operating results, and we'll make myself available for your questions after his remarks.

Speaker 3

Great. Thank you, Ralph, and good morning, everybody. As Ralph said, PSEG reported non GAAP operating earnings for the Q3 of 0.98 dollars per share versus $0.96 per share in last year's Q3. We provided you with information on Slides 1214 regarding the And 15 containing corresponding waterfall charts that take you through the net changes in non GAAP operating earnings by major business. So now I'll review each company in more detail starting with PSE and G.

Speaker 3

PSE and G reported net income of $389,000,000 or $0.77 per share for the Q3 of 2021 compared with net income of $313,000,000 or $0.61 per share for the Q3 of 2020. PSE and G's 3rd quarter results rose by $0.16 per share over Q3 2020 and reflect revenue growth from ongoing capital investments as well as several one time items. Growth in transmission rate base added $0.01 per share to 3rd quarter net income even after incorporating the August 1 implementation of PSE and G's transmission rate settlement, which FERC approved in October, bringing the return on equity and our formula rate to 9.9%. Electric margin added 0 point 2 dollars More than offset a reduction in weather normalized volumes. Gas results were $0.04 favorable compared to the year ago quarter, reflecting the absence of the gas weather normalization clause reversal in the Q3 of 2020.

Speaker 3

O and M expense was $0.01 per share favorable compared to the year ago quarter and non operating pension expense was $0.02 per share favorable compared to the Q3 of 2020. Lastly, tax expense was 0 point due to higher tax flowbacks in 2021. This impact is expected to reverse next quarter when PSE and G finalize its actual tax rate for the year. Moving to sales for

Speaker 4

the quarter, the weather for the

Speaker 3

Q3 of 2021 was 4% warmer than the year ago period and 22% warmer than normal with significantly higher than normal number of hours at 90 degrees or greater. On a trailing 12 month basis, weather normalized Sales were flat and gas sales were up nearly 2%. Growth in the number of both electric and gas customers rose by approximately 1.5 program now fully in effect for both electric and gas margins, resetting those margins to a baseline level. Going forward, about 95% of our electric distribution model and 90% of gas distribution will be stabilized via this mechanism, which will still pass through the variation in the actual number of customers. PSE and G's capital program remains on schedule.

Speaker 3

PFT and G invested approximately $670,000,000 in the 3rd quarter, aggregating to $1,950,000,000 year to date through September. This capital is part of 20 21's $2,700,000,000 electric and gas capital program to upgrade transmission and distribution infrastructure, enhance reliability and increase resiliency. We continue to forecast that over 90% of of PSEG's planned capital investment will be directed to the utility over the 2021 to 2025 timeframe. We have raised PNG's forecast of net income for 2021 to $1,430,000,000 to $1,480,000,000 from 1,420,000,000 to $1,470,000,000 Now moving to Power. Power reported a net loss of 1,933, or $3.84 per share for the Q3 of 2021, non GAAP operating earnings of 119,000,000 This compares to Q3 2020 net income of $254,000,000 or $0.51 per share, non GAAP operating earnings of $167,000,000 or $0.33 and non GAAP adjusted EBITDA of $349,000,000 Non GAAP adjusted EBITDA excludes the same items from our non GAAP operating earnings as well as income tax expense, interest expense, depreciation and amortization expense and the benefit of net operating loss purchases, which are included in net income.

Speaker 3

The earnings release on Slide 23 provides you with a detailed analysis of the items having an impact on PSEG Power's non GAAP operating earnings relative to net income over quarter. We've also provided you with more detail on generation for the quarter and for the year to date 2021 on Slide 24. Power's 3rd quarter non GAAP operating earnings were $0.10 per share lower than Q3 2020 results. Recontracting and Tower Impacts reduced results by $0.11 per share as the seasonal shape of hedging activity and higher cost to serve load versus the year ago quarter lowered gross margin. The sale of the solar source portfolio earlier in the year also lowered gross margin results by $0.02 compared to the year ago quarter.

Speaker 3

Retirement of Bridgeport, August 3, on May 31st, Power's last coal unit lowered New England capacity revenues by a to the Q3 of 2020. And gas operations were lower by $0.02 per share, reflecting the absence of a pipeline refund received in last year's Q3. O and M expense lowered results by a $0.01 per share compared to the year ago quarter as higher nuclear costs were partly offset by lower solar and lower depreciation expense associated with fossil assets moving to held for sale accounting status and the sale of the SolarSource portfolio and the early retirement of Bridgeport Harbor, combined with lower interest expense to add $0.08 per share versus the year ago quarter. Lastly, taxes and other items were $0.01 per share unfavorable compared to the Q3 of 2020. Gross margin in the Q3 of 2021 was $28 a megawatt hour compared to $33 a megawatt hour for last year's Q3.

Speaker 3

This decline reflects the seasonal price impact of re contracting, including the 3rd quarter's anticipated higher portion of the $2 per megawatt hour annualized price decline line in the hedged portfolio. We expect recontracting results in the Q4 of 2021 to moderate from Q3 levels. Now let's turn to PCC Power's operations, where total generation output of 14.9 terawatt hours matched the output of Q3 2020. Tower's combined cycle fleet produced 6.8 terawatt hours of output in response to higher market prices. The The nuclear fleet operated at an average capacity factor of 94.8 percent for the quarter, producing 8.1 terawatt hours, which represent 54% For the balance of 'twenty one, total baseload and combined cycle generation is forecasted to be 12 terawatt hours at 85% to 90% at an average price of $32 per megawatt hour.

Speaker 3

Our 3rd quarter activity included the announcement of the Fossil sale to ArcLight in August of this year. As previously mentioned, PSEG Fossil's assets have been reclassified to held for sale as of the day of the sale of the announcement. This change has prompted the cessation of depreciation and amortization expense for these held for sale units and resulted in a favorable impact to GAAP and non GAAP operating earnings through the close of the sale and contributed to the increase of our 2021 full year non GAAP operating earnings guidance. Power has raised the forecast for its non GAAP operating earnings for 2021 to 365,000,000 to $240,000,000 from $350,000,000 to $425,000,000 Our estimate of non GAAP adjusted EBITDA has also been raised to Now let me briefly address operating results for Enterprise and Other, where for the Q3 we reported a net loss of $20,000,000 or $0.03 per share compared to net income of $8,000,000 or $0.02 per share for the Q3 of 2020. The The non GAAP operating loss

Speaker 5

for the Q3

Speaker 3

was $13,000,000 or $0.02 per share compared to non GAAP operating earnings of $8,000,000 or $0.02 per share for the Q3 of 2020. Results this quarter reflected higher tax and O and M expenses of the parent versus the year ago period. For 2021, the forecast of enterprise and other is unchanged at a non GAAP operating loss of $20,000,000 From a financial standpoint, at September 30, We had approximately $3,000,000,000 of available liquidity as well as cash and cash equivalents of $1,800,000 and debt represented 58% of our consolidated capital. PSG Power had net cash collateral postings of $999,000,000 at September 30th related to out of the money hedge positions resulting from higher energy Our liquidity and cash position are ample and capable of accommodating additional cash collateral postings if necessary. Overall, our ratable hedging program remains an effective risk management tool that we implement over a rolling 3 year period, which smooths volatility in earnings through the averaging of forward sales and importantly locks in gross margin.

Speaker 3

Turning to financings during the quarter. In August, PSE and G issued $425,000,000 of 1.9 percent secured medium term notes due 2,031. Also in August, PSEG entered into a 1,250,000,000,364 day variable rate term loan agreement. In September, Power announced the retirement of its 3 senior notes totaling $1,400,000,000 on October 8. These remaining notes were retired at a redemption price that included a make whole premium of approximately $294,000,000 Following the retirement of all of its debt, PSEG Power's 8.625 percent senior notes due 2,031 were delisted from the New York Stock Exchange effective October 18.

Speaker 3

Because PSEG Power no longer has any registered securities outstanding, we'll go through a process to terminate its status as a SEC Registrar. In October, Moody's lowered the credit ratings of PSE and G, PSEG Power and PSEG. The current senior secured ratings PSE and G are A1A at Moody's and S&P, respectively, with stable credit outlooks from both agencies. PSEG Senior Unsecured Credit Ratings and PSEG Power's Issuer Credit Ratings to BBB at Moody's and S&P, respectively, also with stable outlooks from both agencies. As we outlined during the investor conference, we raised PSEG's 2021 to 2025 capital program by $1,000,000,000 to a range of $15,000,000,000 to compelling shareholder dividend with the opportunity for consistent and sustainable growth.

Speaker 3

And as Ralph mentioned, we've raised our 2021 guidance of non GAAP operating for the full year to $3.55 to $3.70 per share based on solid results year to date and the benefit from session of depreciation on fossil assets. Also, the initial 2022 non GAAP operating earnings guidance of $3.30 to $3.60 per share that we provided at the Investor Conference on September 27. That concludes my remarks. And Jesse, Ralph and I are ready to take questions.

Operator

Thank you, Mr. Craig. Ladies and gentlemen, we'll now begin the question and answer session for members of the financial community. You may do so by pressing the pound key. Again, that's star 1 to ask a question or the pound key to withdraw your request.

Operator

Speakers, our first question is from Jeremy Tonet of JPMorgan. Your line is now open.

Speaker 6

Hi, good morning.

Speaker 3

Good morning, Jerry.

Speaker 6

Just want to start off with the nuclear PTC, if I could. Just wondering if you might be able to talk a little bit more about the type of You're seeing there, confidence that it makes it through to the end. And if it does, maybe just kind of the impact on your business helping derisk and If there's any possible benefit the agencies could see could have a positive reaction here if this does go all the way through.

Speaker 2

Hi, Jeremy. Yes, so I feel very good about the bipartisan nature of the support for the BTC. I would be less than candid though if I didn't express some concerns and hesitation about the overriding piece of legislation to So the debate that's taking place right now, as you know, is around 2 separate pieces The legislation, 1 is a roughly $1,000,000,000,000 bipartisan bill. The PTC is not part of that. Then there's a Depending upon what press accounts you believe, a $1,750,000,000,000 to $1,850,000,000,000 bill that is not bipartisan, that is requiring reconciliation rules and full Democratic Party support to get through.

Speaker 2

But The nuclear component has not attracted any controversy whatsoever. I believe the estimates in that bill is that there's about 550 $1,000,000,000 of that legislation dedicated to climate mitigation. And there's widespread recognition that if we're going to make progress, it's got to Based upon the existing nuclear fleet still being around upon which to build that progress. So The house version has an 8 year PTC. Roughly speaking, it targets all in $15 per megawatt hour of tax credits starting with energy prices of $25 per megawatt hour or less.

Speaker 2

And then there's a declining scale of the PTC benefit as market revenues climb above $25 per megawatt hour, where every dollar above that level, $0.80 of PTC is removed. It kind of gets you to a $40 per megawatt hour or so outcome. There's a pre and post tax adjustment that needs to be made So it's really, I think, great news. And I think just today, for example, President Biden announced an SMR development project in Romania that's going to be done with NuScale. You should check the press accounts on that.

Speaker 2

I don't Speak for others, but it's just indicative of the support that nuclear is gaining in recognition of the pretty

Speaker 3

Yes. Jeremy, the other part of your question was How the rating agencies will look at it and clearly longer term support for nuclear is going to be much more valuable and much more stabilizing And then something on a shorter term basis, and that's something that we've been pretty vocal about for quite some time. And so I think That's a positive as well. The number of years that's been tied into the PTC has moved around a little bit, Ralph mentioned earlier, in an 8 year period. So We'll see where it goes.

Speaker 3

But I do think that what you have seen is increasing support, I think, We saw it initially in New Jersey as we went through the ZEC process and I think folks are getting on board in Washington as well.

Speaker 2

I don't want to beat it to death, But in addition to the emphasizing our forward looking statements, I would just remind you what the history of ITC and PTC have been. They've all had 5 10 year lifespans that have been renewed for multiple decades. So I'm not at all worried about the 8 By the way, I do want to add one other thing that's happening at COP26 right now that's great news for us is that there is a growing consensus Around a 30% reduction in methane by the year 2030. There's an article written today by Fred Krupp of EDF in The Wall Street Journal highlighting the importance of methane reduction. And that is just incredibly supportive of our gas system modernization program and continued Funding for that and expansion of that.

Speaker 2

So I think between nuclear, offshore wind and methane reduction, we're really quite well positioned for some

Speaker 6

Got it. That's very helpful. Thanks for that. Maybe switching gears here a bit. As we look to the 4Q And kind of the narrowing of the 2022 range.

Speaker 6

Can you give us a little bit more color on some of the items that have been coming in kind of ahead of plan this year and how to think about that those items if they're sustainable into 2022, and this is excluding the fossil fuel impact.

Speaker 2

Yes. I think rather than sort of front running our own guidance, just by way of reminder, we do expect to narrow that. And the real Variability is around the pension. Equity markets have been strong. Interest rates have been low.

Speaker 2

They work against each other in terms of our projected benefit

Speaker 6

Just wanted to try. Thanks. Appreciate that. And maybe the last one if

Speaker 2

I could here. Just thinking through

Speaker 6

the potential changes at FERC and Can you frame some of your expectations moving forward, both as we think about the transmission items out there and the future of the MOPR?

Speaker 2

Yes. Well, in terms of the future of the MOPR, that's candidly become less of a concern for us with the announced sale. I mean, Energy revenues are really the primary consideration for nuclear plants. That's not to say that we're completely disregard capacity revenues for our Having said that, our units have not needed to be mitigated according to the IMM. So they should be able compete in that capacity market, whatever that ends up being in the future.

Speaker 2

I'd say the other changes The FERC that we're eagerly anticipating is the recognition of the importance of transmission investment to carbon mitigation. That's a little bit I'm a head scratcher when you think about some of the mentioned earlier this year about Reducing the RTO adder for transmission ROE, which seems to have quieted down right now and has given way to the A NOPR, the Advanced Notice of Proposed Rulemaking, which is looking at transmission planning on a much more comprehensive basis. So I just think that at a high level, the things that are being discussed and taken up are favorable to our business both in terms of nuclear being able to participate in capacity markets, states being able to make renewable energy Decisions free of penalties from the prior version of the MOPR, which is important in a state like New Jersey, where people otherwise would have been paying twice for offshore wind capacity, which would have been a significant crimping of the headroom on the utility bill, which now we don't have to worry about.

Speaker 6

Got it. That's very helpful. Thank you.

Operator

Next question is from Julien Dumoulin Smith of Bank of America. Your line is now open. [SPEAKER

Speaker 5

JULIEN DUMOULIN SMITH:]

Speaker 7

Hey, good morning, team. Thanks for the time. Appreciate it. If I can keep going with Jeremy's thought process here on reconciliation and prospects. I wanted to just focus a little bit more on some of the I mean as you see the magnitude of that potential subsidy here and the opportunities afforded therein.

Speaker 7

How are you thinking about that being a complement to your current nuclear portfolio and strategy? Understanding there's All sorts of different nuances here, but would be curious to hear these as you stand here today and assuming there is something that stays the course, How could or does this fit into a future strategy?

Speaker 2

So we're closely monitoring the progress of hydrogen, Julien, but to your point, I mean the value of it to nuclear would be the ability to avoid any cycling of the nuclear plants and Being able to then yield to the lack of dispatchability of renewables and then to just continue the base load operations in nuclear where in Some cases, the offtaker might be an electrolysis project or some other hydrogen creation. And there's a hearing, I think, going on this week or next week in the Senate on alternate sources Nuclear powers in terms of its applicability to the health sciences and medical fields. So I think there's just growing recognition of nuclear as a carbon mitigant and the multiple ways that we need to act to keep it around and keep it Vibrant, whether it's a PTC or source for hydrogen creation or medical I by no means want to be a skunk at a party, though. I do think that there needs to be much more conversation around the safety of large No hydrogen generation than we're seeing right now in various forms. That's an engineering challenge.

Speaker 2

But as with other engineering challenges, I'm sure there are solutions. But that does need to be discussed much more prominently

Speaker 7

And maybe related to this, if I can, how are you thinking about just hedging? I heard your comments on collateral postings earlier, but how are you thinking about taking advantage of the current commodity deck and or frankly, any other, shall we say, long term contracting opportunities that might be arising, whether that's Crypto or data centers looking above and beyond hydrogen opportunities. I mean, certainly, we haven't seen this robust, as you say, commodity environment at some time.

Speaker 3

Yes. Julien, I think some of the crypto stuff is a little bit more niche opportunities. I think you should think about what we're doing as program for baseload power such as nuclear does make sense. What you saw within some of the numbers that we provided align very closely to if you were to just step back over time and take a look at where forward prices have been for the years that we've hedged and Take a look at those hedge prices. It's consistent with exactly what we have told you that we have done on that front.

Speaker 3

That said, we have always talked a little bit too about the fact that while that's a general range, there is some A little bit of a range around what we can hedge as we go through those times. And so in times like what we've seen more recently, there's been a little bit more We have a very strong liquidity to try to capture some of those prices. But if you think about it over the long run and over a 3 year hedging period, you're not going to be able to move the needle that much with respect To what's been done on the nearer term and as you step out, while prices are a little bit backwardated, there's maybe a little bit less of an opportunity, We're into a little bit of a challenge on liquidity. So will we seek to capture some of these higher prices? Absolutely.

Speaker 3

But should you We anticipate that it's going to have a very big move on the needle, I think, against the backdrop of a base of hedges that we have and the backwardation and

Speaker 8

Thanks, John.

Operator

Next question is from Shahriar Pourreza of Guggenheim Partners. Your line is now open.

Speaker 9

Hey, good morning, guys.

Speaker 2

So Ralph, just not to beat a

Speaker 10

dead horse, but just starting on the nuclear side for And you obviously highlighted the PTC opportunities and potential upside from federal nuclear incentives. I'm just curious, over the long term, right, as you're thinking about the portfolio, could sort of federal policy, can that change your view on keeping these assets over the long Could there still be a better steward of your nuclear capital as you move towards becoming essentially a pure wires business with offshore wind Shonality.

Speaker 2

Sure, Sean. It's a fair question. And it's really TBD. I think The more we can make the nuclear fleet look like a regulated asset, some combination of predictable cash flows. My sense then is that would be something that investors would view more consistently within the predictable earning Dreams of our regulated business.

Speaker 2

But I think what we'll do is we'll let investors tell us, right? Well, I've not been quiet about the I think given our strength of our balance sheet, the security of our dividend, the lack of a need for equity, Growth in our rate base, the regulatory relations we have, I think we're premium utility. It's not showing up in our valuation yet. So We'll get there. And then the question will be, is nuclear an adder to that ESG profile, which further enhances our Premium status or not and we'll be guided by how our investors view that.

Speaker 2

But our number one objective is, First of all, safe nuclear operations. We've achieved that. Our number 2 objective is long term economic viability of those plants. I think we're on the cusp of that. And And then we'll be able to better answer the important question that you raised.

Speaker 2

I'm not trying to duck it. I just Rest assured, it's foremost in our thinking too.

Speaker 10

No, no, I think that's a fair point. I mean, that's a paraphrase. It's obviously more to come and And you are sensitive to how, I guess, investors ascribe value to these assets and

Speaker 2

whether there is a terminal. Okay, perfect. That was

Speaker 10

the first question. And then just lastly, as we're thinking about the strong performance in 2021, are you starting to see some O and M flex being carried into 22, I. E, do you have sort of that ability to pre fund some of the work going into the tail end of 2021 that creates some contingency to execute in 2022 as we're thinking about bridging from 2021 being a relatively strong year into 2022.

Speaker 2

Well, so there's always a little bit on the margin, but it's not I mean the last thing you want to do to massive work management plans is I'll hand them and stand them on their head, right. So you would not change a nuclear refueling outage plan. You You wouldn't change your major maintenance on large transmission assets. Can you move some tree trimming up because the first frost hasn't hit? Yes, Yes, you can, but you're still on a 4 year cycle.

Speaker 2

So there's some incremental stuff you can do, but not big items.

Speaker 10

Got it. Terrific. Thanks guys. I've seen

Speaker 3

you in a couple of days. Appreciate it.

Speaker 2

Yes. Thanks. Yes, sir.

Operator

Next question is from Durgesh Chopra of Evercore ISI. Your line is now open.

Speaker 8

Hey, good morning. Thank you for taking my question, Ralph and Dan. Just you mentioned I just want a little bit more clarity on the proposals that you submitted with the PPU and PJM in conjunction. Are those transmission solutions? Or is it a combination of some in offshore wind transmission.

Speaker 2

So they're both. They're primarily Offshore wind to, 1st of all, create a grid out in the ocean that connects the 7.5 gigawatts that are planned. Secondly, to bring that onto land. And third is the upgrades that are needed on land to support this injection of new supply. But it's dominated by the assumption that there'll be an additional 4 gigawatts of offshore wind In New Jersey.

Speaker 3

But just for clarity to guess that there are both on land and at sea, but they are the proposals are not both

Speaker 5

generation and transmission. It is only

Speaker 3

a transmission solution. And so New Jersey It is only a transmission solution. And so New Jersey is about halfway through the awards that they've had towards their goal of 7,005 Megawatts of the actual generation of the turbines. And so this is essentially an effort to seek getting that power back to shore. So it is not incremental generation that this effort that the BPU in conjunction with PJM is It is just a transmission solution, but it's both at sea and online.

Speaker 8

Perfect. I appreciate that clarity. So it is regulated It's a combination of onshore and offshore. Thank you for that. Can you size that for us?

Speaker 8

How again, Ralph, you had previously talked about a 9 figure number in terms of transmission investment opportunities. What are we talking about in terms of size with these proposals? And When could we see you layer these projects into your CapEx plan if approved?

Speaker 2

Yes. So it's no longer 9 figures, And the schedule has not been carved in stone, but what's been said by PJM is that they would expect to make their technical assessment known to the New Jersey BPU sometime late in Q1, early Q2 next The BPU said that they will probably take 6 months to evaluate that and therefore it would not be decided prior to Q3, But they are motivated to try to make a decision before Q4 because the next solicitation of offshore wind farms as a supply piece are due at the end of next year. So The hope would be that whoever is bidding an offshore wind farm for the next tranche would have the benefit of knowing what transmission resources would

Speaker 8

Got it. So it sounds like Q4 2020. And then any Sort of guidance on capital dollars or rate base, we might be looking at with these opportunities or these initial opportunities rather?

Speaker 2

So They range in size. And as I said, it is 10 figures. It doesn't round to 11. It would stay in the 10 figure range, but it really does depend on which or how many if that were the case of our proposals, the The BPU and PJM want to embrace.

Speaker 3

Yes. The only other thing I would mention too that may be helpful, Durgesh, is that if you think about The timing for the capital, this would run towards the back half of the decade from an in service perspective. So if you're kind of in the 2028, 2029 ish kind of a timeframe for in service, you're going to see some of that capital come over a somewhat longer period of time.

Speaker 8

Understood. Appreciate the detail and color there guys. Thank you so much.

Speaker 2

You're welcome.

Operator

Next question is from Paul Petersen of Glenrock Associates. Your line is now open.

Speaker 4

Hey, good morning. Hi, Paul.

Speaker 3

Hey, Paul.

Speaker 4

Just to sort of follow-up on With respect to the is that not still the case for the offshore wind transmission project.

Speaker 3

Yes, there absolutely would be, Paul. Sure.

Speaker 4

And so and I just was wondering, You've got a number of projects and I realize that it's all sort of very early, but when you've talked about the range, could you give us maybe possibly Quantify just a little bit more what the range from the lower

Speaker 5

end of the range from the lower end of the range from the lower end of the range from the lower end of the range from the lower end of the range from the lower end of

Speaker 3

the range from

Speaker 5

the standpoint of investment

Speaker 3

potential.

Speaker 4

Yes.

Speaker 5

Yes. I mean, I I think it is a little hard to tell by virtue of a

Speaker 3

couple of things. One, It's just recently submitted and Ralph gave you the timeline for when we'll start to get a determination of we Very good about our proposals, but it's unknown exactly what's going to come back. On top of that, there are proposals that are out there. And so the prospect All

Speaker 5

of them actually being part of the solution is bidders.

Speaker 3

So I think it's early.

Speaker 2

I do think, as I said,

Speaker 3

with respect to what we have submitted, But that said, it's tough to tell exactly where they're going to go with it and how wide they may distribute.

Speaker 4

Have you seen proposals from other parties so far?

Speaker 3

We have not seen others' proposals. What we have I think the number was 79 proposals.

Speaker 2

I said there are only 79.

Speaker 3

Players that are involved, we submitted ourselves, we submitted proposals. So that gives you just an indication as to there's a lot of potential different ways to get at what the problem that they are trying to solve is. And so They will have to analyze all that both from a technical, from a cost, from an ongoing operations

Speaker 4

And then with respect to the

Speaker 2

I suspect it will be just given to the BPU because the BPU is a And Whether or not the BPU makes that public or not remains to be seen. I mean, typically,

Speaker 4

Okay. I really appreciate it. My other questions have been answered. Thanks so much. Have a great one.

Speaker 2

Thank you,

Operator

Next question is from David Arcaro of Morgan Stanley. Your line is now open.

Speaker 11

Hey, good morning. Thanks for taking my question. Let's see, you posted good customer growth this quarter, 1.5% in electric Gas. I was wondering if you could remind us kind of how that compares to your longer term assumptions for the increase in the customer count over time.

Speaker 3

It's comparable. I think we're in that range. We may be just a hair below that on an ongoing basis. I think it's kind of been around a one It's something that we do update on a regular basis based upon the data that we get regularly. But So it's a little bit lower than that, but we do see customer growth going on into the future.

Speaker 11

Okay. Got it. That's helpful. And then I I was wondering if you could just talk about heading into the winter here for the gas business with what we've seen natural gas prices to could you talk about the pressure on the customer bill heading into the winter, maybe how you Have been hedged into the winter heating season and anything, any kind of relief or strategies that you're pursuing for managing that customer bill increase here over the next couple of Thanks.

Speaker 3

Yes. So David, I think that the mechanisms that are in place are there and do protect the customer Well, both on the electric and the gas side, because obviously when gas prices go up, you see the effect on the gas side, 2 times during the year. And so there's because of some timing and some kind of a technical aspect to what we're looking through the ability to So you can think about that on the gas side as being 5% and 5% is on just the supply side of things that you Most customers, I think, on the electric side, the best model Think about is the provider last resort contract for BGS. And so what folks are paying now are prices that were established this Past February, the February before and the February before that on a onethree, onethree, onethree basis. And so nothing will change from the residential J.

Speaker 3

Rice:] standpoint until we get to next year and the auction that will come this February will get put in place Next June, what will get put in place is for 1 third that will roll off and the remaining Two thirds will be sticky from the prior two auctions. So that has a mitigating effect as well. That mechanism has a mitigating effect as does the fact that if you think about some of the Most current prices on the electric side, they are higher for the current year, for the upcoming year than they are for the following couple of years. We've got a backward And so that auction in February will cover 3 years forward, which will have a higher priced year for 2022 if you just look at the forwards and then lower as you go into 'twenty So if we are in a position where prices like we're seeing now are sustained for the longer term, obviously, that would all Work its way down to the retail customer, but if anything is shorter lived, you're going to see less of an impact because of those mechanisms that I described.

Speaker 11

Okay, got it. That's helpful. Thanks so much.

Operator

Next question is from Michael Lapides of Goldman Sachs. Your line is now open.

Speaker 9

Hey, guys. Thank you for taking my question. I want to come back to the transmission for offshore wind. Your proposal is both for an offshore and onshore component, I think. I'm not entirely sure I understand it.

Speaker 9

When I think about the onshore component, Does the utility where the substations are, where the plants are being landed Effectively where the substation where the capacity is first hitting onshore. Is that the utility that probably has a competitive Vantage for the approval or the grant to build out the onshore transmission.

Speaker 2

Yes, Michael. So we put forward a series of proposals that can be used in a comprehensive manner. It wouldn't be at all without proposals. There are alternative options that are in there. And they can also be mixed and matched with proposals made by others.

Speaker 2

So we tried to create as robust a set of options for PJM and the BPU as was possible. Yes. The short answer to your specific question is, yes, there are some onshore advantages to being the landing point from a right of way point of view as an example. But beyond that, it's really just a question of what are the Path lengths, what are your relationships with suppliers, your ability to manage the work and be cost competitive? And what do those right of ways look like with respect to environmental permits and other issues that will come up?

Speaker 2

So I guess technically the short answer is yes, there are some advantages, but they by no means assure victory for whoever that substation

Speaker 6

Got it.

Speaker 9

Thank you. Much appreciated.

Operator

Next question is from Jonathan Arnold of Vertical Research. Your line is now open.

Speaker 12

Yes. Good morning, guys.

Speaker 2

Hi, John. Hi, John.

Speaker 12

I have a quick hedging question. In the disclosure, you say that 90% of the gross margin for 2022 is locked in via energy capacity and Zacks. I'm just curious whether the then the percentages And prices that you then give for 2022, 2024, 2024 are on that basis or is that just energy?

Speaker 5

From

Speaker 12

the when you then say 90% 29% to 20 2%, 75% to 80% for 20 3%, are those sort of on a full gross margin basis? Or are those just the percentage of the baseload output?

Speaker 2

I got you. Yes, yes, yes.

Speaker 3

They are energy based challenges. That's the energy number.

Speaker 2

We don't have the capacity options for some of the outer years, right?

Speaker 12

That number is really just to look at energy rather than energy and capacity, is

Speaker 2

that the

Speaker 3

You got it. That is

Speaker 5

Okay, perfect. That was really like everything else you just said. Thank you.

Operator

Thank you, participants. That is all the time we have for questions. Mr. Izzo, Mr. Craig, you may now continue with your closing remarks.

Speaker 2

Great. Thank you, So thanks everyone for joining us today. I know that we'll see a bunch of you in EEI. Dan and Carlotta, Brian and Ralph LaRosa will be with you in warm and sunny Florida. I am off to chilly and drizzly Glasgow, I'm looking forward to it.

Speaker 2

I think there's some important things to be done there. We'll be arguing and helping the administration argue for Significant reductions in carbon and significant support for all the things that we are advocates of from energy efficiency to offshore wind and and virtual conferences. So thanks again for joining us today. Take care.

Operator

Ladies and gentlemen, that concludes your conference call for today. Thank you all for participating. You may now disconnect.

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Key Takeaways

  • PSEG reported Q3 non-GAAP operating earnings of $0.98 per share (up from $0.96) and raised full-year 2021 guidance to $3.55–3.70 per share, while GAAP results included a $2.17 billion pre-tax impairment loss on the announced sale of its fossil fleet.
  • Since July, the company has announced the sale of its fossil generating fleet, secured a transmission rate settlement to lower customer bills, increased its 5-year capital plan by $1 billion, raised the 2022 dividend by $0.12 per share, initiated a $500 million share repurchase, and set a 5–7% long-term earnings growth target through 2025.
  • On the ESG front, PSEG eliminated coal from its fuel mix, advanced offshore wind via the New Jersey Wind Port and joint transmission proposals, accelerated its net-zero vision by joining the UN Race to Zero campaign, and issued a combined sustainability and climate report.
  • Regulated utility operations benefited from an exceptionally hot summer—peak hours >90°F rose by ~65%—while the conservation incentive program and transmission rate mechanism stabilized margins; PSE&G invested ~$1.95 billion year-to-date through Q3 and lifted its 2021 net income guidance to $1.43–1.48 billion.
  • PSEG is actively advocating for a federal nuclear production tax credit to derisk its nuclear fleet, enhance zero-carbon attributes, and explore clean hydrogen opportunities, positioning nuclear power as a cornerstone of its clean energy transition.
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Earnings Conference Call
Public Service Enterprise Group Q3 2021
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