Public Service Enterprise Group Incorporated (NYSE:PEG) Q4 2023 Earnings Call Transcript
Public Service Enterprise Group Incorporated (NYSE:PEG) Q4 2023 Earnings Call Transcript February 26, 2024
Public Service Enterprise Group Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. My name is Rob and I am your event operator today. I’d like to welcome everyone to today’s conference, Public Service Enterprise Group’s Fourth Quarter and Full Year Results 2023 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded today, February 26, 2024 and will be available for replay as an audio webcast on PSEG’s Investor Relations website at https://investor.pseg.com. I would now like to turn the conference over to Carlotta Chan. Please go ahead.
Carlotta Chan: Good morning and welcome to PSEG’s fourth quarter and full year 2023 earnings presentation. On today’s call are Ralph LaRossa, Chair, President and CEO and Dan Cregg, Executive Vice President and CFO. The press release, attachments and slides for today’s discussion are posted on our IR website at investor.pseg.com and our 10-K will be filed later today. 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 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 the prepared remarks, we will conduct a 30-minute question-and-answer session. I will now turn the call over to Ralph LaRossa.
Ralph LaRossa: Thank you, Carlotta. Good morning to everyone and thanks for joining us to review PSEG’s 2023 fourth quarter and full year results. For the fourth quarter of 2023, PSEG reported net income of $1.10 per share compared to net income of $1.58 per share in the fourth quarter of 2022. Non-GAAP operating earnings for the fourth quarter of 2023 were $0.54 per share compared to $0.64 per share in the fourth quarter of 2022. Our non-GAAP results, excluding the items shown in attachments 8 and 9, which we provided with the earnings release. For the full year of 2023, PSEG reported net income of $5.13 per share compared to $2.06 per share for the full year of 2022. Our non-GAAP operating earnings of $3.48 per share for the full year came in at the high-end of our 2023 guidance range of $3.40 to $3.50 per share and marked the 19th consecutive year that we delivered results meeting or exceeding our guidance.
Our fourth quarter 2023 financial results capped off a solid operating year. Building on this results, you can see on Slide 5 that we also reaffirm PSEG’s full year 2024 non-GAAP operating earnings guidance of $3.60 to $3.70 per share as well as our 5% to 7% earnings CAGR through 2028 and our $18 billion to $21 billion regulated CapEx plan that supports our rate base CAGR of 6% to 7.5% through 2028. In rolling forward our 5-year capital plan to 2028, we added approximately $3 billion of investments to the prior plan that started from a year end 2023 rate base of $29 billion. These are all unchanged from our January 2024 investor updates and we continue to identify potential investment opportunities for future rate base growth. Dan will discuss our financial results in greater detail following my remarks.
So I will focus on a quick look back then on our outlook and objectives for 2024. Since our last earnings call, PSEG has submitted two important filings at the New Jersey Board of Public Utilities. In early December 2023, we filed our $3.1 billion Energy Efficiency II investment program. This significantly expanded offering is driven by an increase in work to achieve the savings targets required under the BPU’s updated energy efficiency framework. If approved, this program will launch the state’s second energy efficiency cycle beginning in January of 2025 and run through June of 2027 with investments made over a 6-year period. Our EE2 filing aligns with the annual reduction goals of 0.75% for gas and 2% for electric contained in New Jersey’s Clean Energy Act of 2018, which are all unchanged and extends through the 2027 program year.
In the interim, we continue to conduct our award-winning energy efficiency program, which remains oversubscribed. This last November, we filed for a second extension to this program totaling approximately $300 million covering the July through year-end 2024 period. As a direct result of these programs, PSEG is also advancing its Clean Energy Jobs program with a focus on lower and middle-income community hiring and training. Our EE programs continue to create value by lowering customer bills, reducing energy use and emissions and providing shareholders over the return of and on the energy efficiency spending. New Jersey continues to be a national leader in promoting the broad adoption of EE, and it remains an important tool in helping us reach New Jersey’s clean energy goals.
The second regulatory filing we made in December was our first distribution base rate case in nearly 6 years. This case addresses 57% of our rate base, given that the other 43% is regulated under FERC Formula Rate. You are aware that this filing was required pursuant to the settlement of our second gas system modernization program back in 2018. The filing proposes an overall revenue increase of 9% and the typical combined residential electric and gas customers seeing a proposed increase of 12%, or less than 2% of compounded growth over the 6-year period. We expect the procedural schedule for this rate case to be issued in near term. And based on previous rate case time lines, we anticipate that this rate case will conclude later in 2024. The largest item in the rate case is to obtain recovery of our capital expenditures, already made to modernize system infrastructure and improve reliability, but not yet in rates as well as to implement recovery of expenditures for the previously approved AMI and electric vehicle programs.
Besides capital recovery, the rate case proposes several mechanisms to mitigate the impacts of market volatility on customer bills, including insulating customers from swing in interest rates, severe weather events and revenue-related impacts of pension, providing for a more predictable monthly bill. We are also proposing a new time of use rates that will allow customers to save on their bills by shifting usage to off-peak periods, a rate option that can benefit all customers, including incentivizing residential customers to charge their electric vehicles during these off-peak hours. The BPU has added several commissioners in the past year. Governor Murphy recently appointed Michael Bange, a retired water utility executive with operations experience.
The new commissioners continue to advance a full agenda and we already have several data points over the past 6 months that are consistent with prior results, including two recent rate case settlements that adopted the existing New Jersey return on equity rate of 9.6%. These agreements between the BPU staff, Rate Counsel, other interveners and the utilities demonstrate a continued preference for settlements over adjudicated cases in New Jersey. In 2023, the BPU also approved settlements to extend our GSMP II program for 2 years to invest $900 million on infrastructure monetization and greenhouse gas reduction as well as a 9-month extension for $280 million, covering our EE1 program through June of 2024. If you’ve followed us for several years, you know that we are also laser focused on cost containment.
In 2023, we were able to lock in 4-year labor agreements with all our New Jersey represented employees, which addresses one of our largest O&M costs. This is just one example of our relentless cost discipline, which has positioned our distribution rate case increases to be the lowest in the state over the 6 years since our last rate case filing back in 2018. A comparison of our in-state electric and gas distribution rate increases since our last rate case is shown on Slide 12. PSE&G’s electric distribution CAGR was less than one-third of the average New Jersey electric CAGR and our gas distribution CAGR was less than half of the average New Jersey gas CAGR. PSE&G’s customer bills continue to compare very well with regional peers for residential electric and gas service and remain lower from a historical share of wallet basis.
Of considerable note was our ability to reduce monthly bills for typical net residential natural gas customers with three commodity reductions during 2023 prior to the 2024 heating season. In addition to this focus on affordability, we continue to provide outstanding reliability. For the 22nd consecutive year, PSE&G received a ReliabilityOne award in the Mid-Atlantic metropolitan service area from PA Consulting, an industry benchmarking group. We are very proud this combines our reputation for reliability and our regionally favorable affordability with nationally recognized customer satisfaction scores. PSE&G ranked number one for the second consecutive year in the J.D. Power 2023 U.S. electric utility residential customer satisfaction study in the East among our large utilities.
We also secured the top position in the J.D. Power 2023 U.S. electric utility business customer satisfaction study in that same region. Now, let’s turn to our capital investment programs. During the fourth quarter of 2023, PSE&G invested approximately $1 billion in energy infrastructure and clean energy, bringing the full capital spend to $3.7 billion, our largest ever single year expenditure. As I mentioned earlier, PSE&G finished 2023 with a total rate base of approximately $29 billion, which was a 10% increase over year end 2022 rate base. A key driver of this growth is our energy efficiency program, which continues to experience higher demand for residential and C&I offerings, accounting for close to $480 million of the $3.7 billion. Our infrastructure advancement program, which is focused on modernizing the last mile of our system, has never been more critical as activity in response to new service requests for EV make-ready and additional large specific projects, including data centers picks up.
We also installed and placed into service 1.5 million smart meters through our CEF Advanced Metering program or AMI. The total AMI program, which is intended to replace more than 2 million meters in total, is expected to be completed this year, still on schedule and on budget. Now turning to our nuclear operations. The nuclear production tax credit provided in the 2022 Inflation Reduction Act began on January 1 of this year and extends through 2032 with a payment of up to $15 a megawatt hour based on nuclear units gross receipts. Our nuclear fleet operated 93% capacity factor for the full year of 2023, producing approximately 32 terawatt hours of carbon-free baseload energy, which included a Salem 1 breaker-to-breaker run between refuelings.
In wrapping up, I want to note a few other highlights. For the 16th consecutive year, PSEG has been named to the Dow Jones Sustainability North America Index. And for 2024, PSEG will also be included in the S&P Global Sustainability Yearbook. U.S. News & World Report also recently named PSEG to its inaugural list of 200 best companies to work for. And in 2023, we were recognized by the CPA-Zicklin Index as a trendsetter for corporate political disclosure practices and accountability. We also completed the sale of our last fossil unit in Hawaii last year, making PSEG Power, one of the few carbon-free baseload generating fleets in the country. This fleet is well situated to benefit from potential data center growth, hydrogen hubs and a license extension with none of the potential upside in our current 5-year plan.
PSE&G continues to execute on a robust set of growth investments aligned with New Jersey’s energy policy goals as well as expected growth from increased electrification, including EV adoption, port electrification as well as new business, including data center loads. These last two mentions were recently recognized by PJM in their January 2024 load forecast report for RPS zone. We are very pleased with the progress made thus far to increase the predictability of PSEG, an important part of achieving this comes from our ability to execute on our current 5-year capital investment plan without the need to issue new equity or sell assets. PSEG has delivered on what we said we would do, and I look forward with confidence in this team’s ability to continue to execute on our business plan in the years ahead.
I’d like to close my remarks by thanking all 12,500 plus PSEG employees for their dedication and safety, reliability and our customers. I’ll now turn the call over to Dan to discuss our financial results and outlook in greater detail and I’ll be available for your questions after his remarks.
Dan Cregg: Thank you, Ralph and good morning everyone. As Ralph mentioned earlier, PSEG reported net income of $5.13 per share for the full year of ‘23 compared to net income of $2.06 per share for 2022. Non-GAAP operating earnings for the full year of 2023 were $3.48 per share compared to $3.47 per share for 2022. For the fourth quarter of 2023, net income was $1.10 per share compared to $1.58 per share in 2022, and non-GAAP operating earnings were $0.54 per share for the fourth quarter of 2023, compared to $0.64 per share in 2022. We’ve provided you with information on Slide 7 and 9 regarding the contribution to non-GAAP operating earnings per share by business segment for the fourth quarter and full year of 2023. Slides 8 and 10 contain waterfall charts that take you through the net changes, the quarter-over-quarter and full year periods and non-GAAP operating earnings per share by major business.
Starting with PSE&G, we reported fourth quarter 2023 net income of $0.58 per share compared to $0.70 per share in 2022. The PSE&G had non-GAAP operating earnings of $0.59 per share for the fourth quarter of 2023 compared to $0.70 per share in 2022. The main drivers for both net income and non-GAAP operating earnings results for the quarter were growth in investments in transmission and gas distribution. These favorable items were offset by the expected decline in pension income and lower OPEB-related credits as well as anticipated higher depreciation, amortization and interest expense resulting from higher investments, not yet reflected in rates and the timing of O&M in the quarter that was within our expectations for the full year. Compared to fourth quarter 2022, margin was $0.03 higher, driven by transmission at $0.01 per share, and gas margin also at $0.01 per share higher, primarily driven by the clause recovery of our GSMP investment.
Other utility margin was also $0.01 per share favorable. Distribution O&M expense increased $0.05 per share compared to the fourth quarter of 2022, reflecting seasonality and operational timing. But for the full year, distribution O&M was flat versus 2022. Depreciation and interest expense each increased $0.02 per share compared to the fourth quarter of 2022, reflecting continued growth in investment. Lower pension income resulting from 2022’s investment returns, combined with lower OPEB credits, which ended in 2023, resulting 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 zero across the full year and other flow-through taxes had a net unfavorable impact of $0.01 per share in the quarter compared to 2022.
Weather during the fourth quarter, as measured by heating degree days, was 15% warmer than normal and 13% warmer than the fourth quarter of last year. As we’ve mentioned, the Conservation Incentive Program, or SIP mechanism limits the impact of weather and other sales variances positive or negative on electric and gas margins while helping PSE&G broadly promote the adoption of its energy efficiency programs. Growth in the number of electric and gas customers, the driver for margin under the SIP mechanism has remained positive with each up by about 1% in 2023. On capital spending, as Ralph mentioned, PSE&G invested approximately $1 billion during the fourth quarter and completed its largest single year investment program at $3.7 billion for the full year.
The program included upgrades and replacements to our T&D facilities, Energy Strong II investments, last mile spend in the infrastructure advancement program, ongoing gas infrastructure replacements via base and GSMP II spending, continued rollout of the clean energy investments in energy efficiency, smart meter installation and EV make-ready infrastructure. We recently rolled forward our 5-year regulated capital investment plan to 2028, amounting to $18 billion to $21 billion, which incorporates both the new $3.1 billion CEF-EE II filing as well as the $300 million expansion of the existing EE program through the end of 2024. For 2024, our regulated capital investment plan totals approximately $3.4 billion. Moving on to PCG Power and Other.
For the fourth quarter of 2023, PCG Power & Other reported net income of $0.52 per share compared to net income of $0.88 per share for 2022. Non-GAAP operating loss was $0.05 per share for the fourth quarter of 2023 compared to a non-GAAP operating loss of $0.06 per share for 2022. For the fourth quarter of 2023, net energy margin rose by $0.05 per share after including lower capacity revenues that were $0.03 per share unfavorable and gas offset were lower by $0.01 per share compared to the year earlier quarter. O&M comparisons in the fourth quarter improved by $0.01 per share, driven by the absence of a Hope Creek refueling outage. Lower interest expense was $0.01 per share favorable, primarily the result of lower collateral requirements. Lower pension income from ‘22 investment returns and OPEB credits from the lower amortization benefit were $0.03 per share unfavorable versus fourth quarter of 2022.
And taxes and other were $0.03 per share unfavorable compared to the fourth quarter of 2022, reflecting a partial reversal of the effective tax rate benefit from the first quarter of 2023. On the operating side, the nuclear fleet produced approximately 7.3 terawatt hours during the fourth quarter and 32 terawatt hours for the full year of 2023, running at a capacity factor of 86% and 93% for the quarter and full year, respectively. At year-end 2023, PCG Power had hedged approximately 90% to 95% of its expected generation for 2024 and at an average price of $38 per megawatt hour, up from $31 per megawatt hour in 2023. Touching on some recent financing activity. As of December 31, PSEG had total available liquidity of $3.4 billion, including $54 million of cash on hand.
PCG Power had net cash collateral postings of approximately $113 million at December 31, more consistent with historical experience and substantially below the elevated levels seen during 2022. This reduction in collateral also helped to bolster PSEG’s cash from operations to $3.8 billion for the full year 2023 versus $1.5 billion for the full year of 2022. At year-end 2023, PSEG had $500 million outstanding of a 364-day variable rate term loan maturing in April 2024 and PCG Power had $1.25 billion outstanding of a variable rate term loan maturing in March of 2025. We’ve swapped a total of $1.4 billion from these two term loans at PSEG Power and PSEG from a variable to a fixed rate to mitigate variability in interest rates. As of December 31, reflecting our swaps, approximately 4% of our total debt was at a variable rate, which is down nearly 8% since year-end 2022, driven by a reduction in parent short-term debt of nearly $1.7 billion.
We continue to maintain solid investment-grade ratings. Looking ahead, we expect that PSE&G’s considerable cash generation combined with PCG Power’s enhanced cash flow visibility from the nuclear PTC will support the execution of PSEG’s 5-year capital spending plan, which is dominated by regulated CapEx without the need to issue new equity or sell assets. In closing, we executed on our 19th year in a row of meeting or exceeding our non-GAAP operating earnings guidance. We are reaffirming PSEG’s full year 2024 non-GAAP operating earnings guidance of $3.60 to $3.70 per share, and we are reaffirming the extension of our 5% to 7% operating earnings compounded annual growth rate through 2028. That concludes our formal remarks and we are now ready to begin the question-and-answer session.
Operator: [Operator Instructions] The first question is from Shahriar Pourreza with Guggenheim Partners. Please proceed with your question.
See also 17 European Countries that Allow Dual Citizenship and 11 Countries with the Best Military Special Forces in the World.
To continue reading the Q&A session, please click here.
