Public Service Enterprise Group Incorporated (NYSE:PEG) Q2 2023 Earnings Call Transcript August 1, 2023
Public Service Enterprise Group Incorporated reports earnings inline with expectations. Reported EPS is $0.64 EPS, expectations were $0.64.
Operator: Ladies and gentlemen, thank you for standing by. My name is Rob, and I am your event operator today. I would like to welcome everyone to today's conference, Public Service Enterprise Group's Second Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded today, August 1, 2023, and will be available for replay as an audio webcast on PSEG's Investor Relations website at investor.pseg.com. I would now like to turn the conference over to Carlotta Chan. Please go ahead.
Carlotta Chan: Good morning, and welcome to PSEG's Second Quarter 2023 Earnings Presentation. On today's call are Ralph LaRossa, Chair President and CEO; as well as Dan Cregg, Executive Vice President and CFO. The press release, attachments and slides for today's discussion are posted on our IR website at investor.pseg.com, and our 10-Q will be filed shortly. PSEG's earnings release and other matters discussed during today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. We will also discuss non-GAAP operating earnings, which differs from net income or net loss as reported in accordance with generally accepted accounting principles or GAAP in the United States. We include reconciliations of our non-GAAP financial measures and a disclaimer regarding forward-looking statements on our IR website and in today's materials.
Following Ralph and Dan's prepared remarks, we will conduct a 30-minute question-and-answer session. I will now turn the call over to Ralph LaRossa.
Ralph LaRossa: Thank you, Carlotta. Good morning, everyone, and thanks for joining us to review PSEG's second quarter results. This morning, PSEG reported second quarter 2023 net income of $1.18 per share compared to net income of $0.26 per share for the second quarter of 2022. Non-GAAP operating earnings for the second quarter were $0.70 per share compared to $0.64 per share for the second quarter of 2022. Non-GAAP results for the second quarter of 2023 and 2022 exclude items shown in Attachments 8 and 9 provided with the earnings release. Results for the second quarter and year-to-date align with our full year 2023 non-GAAP operating earnings guidance of $3.40 to $3.50 per share, which we reaffirmed along with our outlook for 5% to 7% long-term earnings growth through 2027 in this morning's earnings announcement.
Dan will also discuss our financial results in greater detail, but this was a relatively straightforward quarter for both PSE&G and PSEG Power & Other results fully meeting our planning expectations and supporting full year segment guidance. We are focused on proving out the execution of our plans and grow PSEG while also increasing the predictability of our business. During the quarter, we completed PSEG's exit from offshore wind generation through the sale of our 25% equity stake in Ocean Wind 1 back to Ørsted, recovering our investment in the project. We also continue to implement the solutions we outlined to address pension variability. PSEG recently executed an agreement for a pension lift-out to further reduce prospective earnings variability.
This transaction covers approximately 2,000 retirees and will transfer approximately $1 billion of related obligations and associated plan assets to the insurer. The transaction expected to be completed this month will result in no changes to the amount of benefits payable for the retirees and have no material impact on PSEG's non-GAAP operating earnings in 2023. Turning now to PSEG's capital spending plans. The utility portion of $15.5 billion to $18 billion remains focused on system modernization of our aging distribution infrastructure, Last Mile support in preparation for EV and building electrification, climate mitigation aligned with New Jersey's energy policies and our clean energy investments. PSE&G's investment program drives our expected compound annual growth rate and rate base of 6% to 7.5% from year-end 2022 to year-end 2027.
The low end of this rate base CAGR assumes an extension of our gas system modernization program and our clean energy investments at their current average annual levels. While the upper end includes an extension of our Energy Strong II program, which is scheduled to conclude in 2024 as well as the remaining portion of our proposal for medium- and heavy-duty EVs and energy storage programs as well as a potentially higher amount of investment for GSMP and energy efficiency above current levels. With this robust capital program, we are ever mindful of customers' affordability. And on this front, PSE&G continues to compare well to peers on a share of wallet basis, both in the region as well as nationally. I mentioned in the last quarter that our 2023 utility capital spending budget of $3.5 billion was the largest single year plan in our history.
During the second quarter, we invested approximately $900 million, bringing us to $1.7 billion year-to-date and midyear. We are on schedule and on budget. In fact, PSE&G just installed its 1 million smart meters out of 2.3 million that we have planned, and we continue to notice higher spend on electric -- new business related to electric vehicles and strong demand for our energy efficiency solutions. Speaking of energy efficiency, the New Jersey Board of Public Utilities recently approved its second energy efficiency framework for the next 3-year cycle that will begin in July of 2024 and run through June of 2027. This past May, the BPU approved a $280 million 9-month extension of PSEG's first energy efficiency program to sync us up with the completion of the state's first cycle in June of 2024.
You may recall that PSE&G started its energy efficiency programs earlier than the other New Jersey utilities bid. The BPU's new framework sets up guidelines for the next round of energy efficiency plans, which are now due this October for implementation in July of 2024. The energy efficiency annual reduction goals of 0.75% for gas and 2% for electric for program years '26 and '27 remain unchanged. The BPU also approved the performance incentive mechanism to drive energy efficiency above the preset goals. On the gas side of the utility, PSE&G filed the third phase of its gas system modernization program during the first quarter of 2023, which remains pending with the BPU. Through our gas system monetization program, we reduced methane release by approximately 22% system-wide.
And assuming the extension at similar to current levels, we expect to achieve an overall reduction in methane emissions of at least 60% over the 2011 to 2030 period. There is also good news for customer bills for this coming winter. Following 2 basic gas supply service commodity charge reductions this past heating season, our recently filed BGSS rate proposes a reduction from $0.47 to $0.40 per therm. If approved by the BPU, the new rate will keep PSE&G's monthly bill for typical residential gas customers among the lowest in the region for the upcoming 2024 heating season. The BPU's future of natural gas stakeholder proceeding will also start this month, and we expect to participate in the upcoming technical conference and on follow-up meetings as New Jersey achieves its emission reduction targets, which will also will be considering the impact on costs and jobs.
Kim Hanemann, President of PSE&G is already actively involved in the state's clean buildings working group that is considering various approaches to building electrification, including the development of Clean Heat Standard. Our overall approach to energy transition is to continue advocating for practical expansion of electrification in a manner which protects customer affordability, safety and reliability. We are having impactful conversations with PJM, our regional grid operator and our New Jersey stakeholders to increase the coordination and understanding of our relative perspectives on future load growth and the investment needed in existing T&D infrastructure to meet even a diluted version of New Jersey energy transition. Now turning to nuclear operations.
The PSEG nuclear fleet continues to safely generate the majority of New Jersey's carbon-free baseload electricity. During the first half of 2023, our nuclear units generated over 16 terawatt hours of electricity and operated at capacity factor of 95.8%. Charles McFeaters, who many of you met at our March investor conference, was promoted to Chief Nuclear Officer during the quarter in a seamless and well-planned transition that included the Salem 2 refueling outage completed on schedule and on budget. The Power & other portion of PSEG's 5-year capital program is a significantly smaller amount of PSEG's total, mainly reflecting basic nuclear capital spending, but does include several low-cost, high-impact projects like the Hope Creek transition from 18 months to 24-month refueling cycles.
So just to wrap up what I believe is a quarter that delivers on what we have committed to you, we are reiterating our full year non-GAAP operating earnings guidance of $3.40 to $3.50 per share. Second, we continue to make progress on building our earnings growth platform by keeping our largest-ever capital program on track, financed with a strong balance sheet without the need for new equity or asset sales through 2027. And this financial strength gives us confidence in our long-term 5% to 7% growth rate in non-GAAP operating earnings through 2027 and supports our ability to pay a competitive and growing dividend, as we have for 116 years. Third, we increased the predictability of our financial results by streamlining the business with the completed offshore wind sale and delivering progress on reducing pension variability with the lift-out.
Finally, we are working to keep our customer bills affordable during the energy transition with help from stringent cost controls and a culture of continuous improvement. Moving out the execution of our strategy and maintaining a safe and reliable network operations, that is what you can expect from this team. I'll now turn the call over to Dan for more details on the operating results, and I will be available for your questions after his remarks.
Daniel Cregg: Great. Thank you, Ralph, and good morning, everybody. Earlier, Ralph mentioned that PSEG reported net income of $591 million or $1.18 per share for the second quarter of 2023 compared to net income of $131 million or $0.26 per share for the second quarter of 2022. Non-GAAP operating earnings for the second quarter of 2023 were $351 million or $0.70 per share compared to $320 million or $0.64 per share for the second quarter of 2022. We've provided you with information on Slides 9 and 11 regarding the contribution to non-GAAP operating earnings per share by business for the second quarter and year-to-date periods and Slides 10 and 12 contain waterfall charts that take you through the net changes for the quarter-over-quarter and year-to-date periods in non-GAAP operating earnings per share by major business.
Starting with PSE&G, which reported second quarter 2023 net income of $336 million or $0.67 per share. This compares to $305 million or $0.61 per share in the second quarter of 2022. The second quarter 2023 non-GAAP operating earnings were $341 million or $0.68 per share compared to $305 million or $0.61 per share in the second quarter of 2022. The main drivers for both GAAP and non-GAAP results for the quarter were growth in rate base reflected in higher transmission formula rate, recovery of infrastructure investments with roll-in mechanisms and a benefit from the reversal and timing of taxes, which we mentioned on the first quarter call, nets to 0 over the course of the year. These favorable items were partly offset by our anticipated lower pension income and OPEB credits, along with higher depreciation and interest expense from increased investment versus the year earlier quarter.
Compared to the second quarter of 2022, transmission was $0.02 per share higher, gas margin was $0.01 per share higher driven by the clause recovery of GSMP investment. Electric margin was $0.01 per share higher, reflecting investment returns from Energy Strong and other electric and gas margin added $0.02 per share based on a benefit from the tax adjustment credit and appliance service results. Lower distribution O&M expense added $0.02 per share compared to the second quarter of 2022, primarily reflecting reduced weather-related corrective maintenance. Depreciation and interest expense increased by $0.01 and $0.02 per share, respectively, compared to the second quarter of 2022, reflecting continued growth in investment. Lower pension income resulting from 2022's investment returns, combined with lower OPEB credits scheduled to end in 2023, resulted in a $0.04 per share unfavorable comparison to the year earlier quarter.
Lastly, the timing of taxes recorded through an effective tax rate, which nets to 0 over a full year and other flow-through taxes had a net favorable impact of $0.06 per share in the quarter compared to the second quarter of 2022. Second quarter weather typically contains both heating and cooling sales. For 2023, winter weather during the second quarter was 23% warmer in terms of heating degree days than the second quarter of 2022, and summer weather was 34% cooler than second quarter 2022 as measured by the temperature humidity index. As we've mentioned, the SIP mechanism in effect since 2021, limits the impact of weather and other sales variances, positive or negative on electric and gas margins while importantly, enabling PSE&G to promote the widespread adoption of its energy efficiency programs.
Growth in the number of electric and gas customers, the driver of margin under the SIP mechanism continues to be positive and were each up 1% during the trailing 12-month period. On capital spending, PSE&G invested $900 million during the second quarter and is on plan to deliver its largest annual capital investment program at $3.5 billion. The program includes upgrades to our T&D facilities, Energy Strong II investments, last mile spend in the infrastructure advancement program and the continued rollout of the clean energy investments in energy efficiency and the Energy Cloud, including smart meters. Related to our pension, in February 2023, the BPU approved an accounting order authorizing PSE&G to modify its method for calculating the amortization of the net actuarial gain or loss component for ratemaking purposes.
This change is effective for the calendar year ending December 31, 2023 and forward. For the full year 2023, PSE&G's forecast of non-GAAP operating earnings is unchanged at $1.500 billion to $1.525 billion. Moving on to Power & Other. Just as a reminder, Power & Other includes our nuclear fleet, gas operations, Long Island and parent activities, including interest expense. For the second quarter of 2023, PSEG Power & Other reported net income of $255 million or $0.51 per share and non-GAAP operating earnings of $10 million or $0.02 per share. This compares to second quarter 2022 net loss of $174 million or $0.35 per share and non-GAAP operating earnings of $15 million or $0.03 per share. We previously mentioned that during the first quarter of 2023, PSEG Power realized the majority of the approximate $4 per megawatt hour increase in the average price of our 2023 hedged output, which rose to approximately $31 per megawatt hour with higher winter pricing driving most of the increase.
For the second quarter of 2023, gross margin rose by a total of $0.05 per share reflecting the absence of certain full requirement BGS load contracts that remain following the sale of the fossil business in 2022 and resulted in a lower cost to serve compared to the prior year. The increase in gross margin includes higher generation of $0.01 per share from fewer refueling outage days in the second quarter of 2023, offset by lower capacity revenues of $0.01 per share compared to the year ago quarter. O&M cost comparisons in the second quarter improved by $0.01 per share in 2023. Higher interest expense covering PSEG Power and parent financings were $0.02 per share unfavorable compared to the year ago quarter from higher variable rates on term loans and refinancing maturing debt at higher rates.
Lower pension income from 2022 investment returns and OPEB credits from the lower amortization benefit mentioned earlier were $0.03 per share unfavorable versus the second quarter of 2022. And taxes and other were $0.02 per share unfavorable compared to the second quarter of 2022, reflecting a partial reversal of the effective tax rate benefit from the first quarter and lower investment income. On the operating side, the nuclear fleet produced approximately 7.7 terawatt hours during the second quarter and 16 terawatt hours for the year-to-date period in 2023, running at a capacity factor of 91.2% for the quarter and 95.8% for the year-to-date period. For the full year 2023, PSEG is forecasting generation output of 30 to 32 terawatt hours and has hedged approximately 95% to 100% of this production at an average price of $31 per megawatt hour.
For 2024, the nuclear fleet is forecasted to produce 30 to 32 terawatt hours of baseload output and has hedged 75% to 80% of this generation at an average price of $38 per megawatt hour. The forecast of non-GAAP operating earnings for PSEG Power and other is unchanged at $200 million to $225 million for the full year. This forecast reflects the realization of a majority of the expected increase in the average 2023 annual hedge price in the first quarter of '23, as we previously discussed. Touching on some recent financing activity. As of June 30, 2023, PSEG had total available liquidity of $4 billion, including $500 million of cash and cash equivalents on hand. PSEG Power had net cash collateral postings of approximately $400 million at June 30, which is well below the levels experienced during 2022.
Through the second quarter, we've repaid $2 billion of term loans, which were entered into during 2022 to support our collateral needs. In April, we entered into a $750 million 364-day variable rate term loan to support our liquidity needs. As of June 30, 2023, PSEG had $750 million outstanding of a 364-day variable rate term loan and PSEG Power had $1.25 billion outstanding of a variable rate term loan maturing March of 2025. As of the end of the quarter, PSEG had swapped $900 million of the power term loan from a variable rate to a fixed rate. And in May, PSE&G paid at maturity $500 million of secured medium-term notes. As Ralph mentioned earlier, PSEG recently executed an agreement for a pension lift-out that will further increase the predictability of our financial results.
This transaction covers approximately 2,000 retirees from PSEG Power & Other, and will transfer approximately $1 billion of related obligations and associated plan assets. This transaction will have no material impact on PSEG's non-GAAP operating earnings in 2023. Upon completion of the pension lift-out, we anticipate taking a onetime noncash settlement charge in the third quarter of 2023 related to the immediate recognition of unamortized net actuarial loss associated with a portion of the pension involved in the transaction. After providing for the effect of this transaction, our pension plans remain well funded. As Ralph mentioned, we are reaffirming PSEG's full year 2023 non-GAAP operating earnings guidance of $3.40 to $3.50 per share, with PSE&G forecasted to contribute between $1.500 billion to $1.525 billion and PSEG Power & Other forecasted at $200 million to $225 million.
The settlement charge related to the lift-out is not included in the full year 2023 non-GAAP operating earnings guidance for PSEG, PSE&G or PSEG Power & Other. That concludes our formal remarks. And operator, we are ready to begin the question-and-answer session.
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