Public Service Enterprise Group Incorporated

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. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session for members of the financial community. At that time, if you have a question, you will need to press the star and the number one on your telephone keypad. To withdraw your question, please press star and the number two. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded today, August 1st, 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.

Good morning, and welcome to PSEG's second quarter 2023 earnings presentation. On today's call are Ralph LaRosa, Chair, President, and CEO, as well as Dan Craig, 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 LaRosa.

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 26 cents per share for the second quarter of 2022. Non-GAAP operating earnings for the second quarter were 70 cents per share compared to 64 cents per share for the second quarter of 2022. And non-GAAP results for the second quarter of 2023 and 2022 exclude items shown in attachments eight and nine 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 at Rural 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 Ersted, recovering our investment in the project. We also continue to implement the solutions we outlined to address pension variability. PSDG 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 to 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, and preparation for EV and building electrification, climate mitigation aligned with New Jersey's energy policies, and our clean energy investments. TSE&G's investment program drives our expected compound annual growth rate in 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 wallet basis, both in the region as well as nationally. I mentioned 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 mid-year. We are on schedule and on budget. In fact, PSE&G just installed its $1 million smart meter 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 three-year cycle that will begin in July of 2024 and run through June of 2027. This past May, the BPU approved a $280 million nine-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 PSEG started its energy efficiency programs earlier than the other New Jersey utilities did. The BPU's new framework sets out guidelines for the next round of energy efficiency problems, 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 leaks 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 two basic gas supply service commodity charge reductions this past heating season, our recently filed BGSS rate proposes a reduction from 47 cents to 40 cents per therm. If approved by the VPU, 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 VPU'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 be considering the impact on costs and jobs. Tim Hahnemann, 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 a 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's energy transition. Now turning to nuclear operations, the PSEG nuclear fleet continues to safely generate the majority of New Jersey's carbon-free base load electricity. During the first half of 2023, our nuclear units generated over 16 terawatt hours of electricity and operated a capacity factor of 95.8%. Jasmine Feeders, 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 and elder portion of PSEG's five-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-month 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. 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 LEPRA 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.

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. Second quarter 2023 non-GAAP operating earnings were $341 million or $0.68 per share compared to 305 million or 61 cents 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 in timing of taxes, which we mentioned on the first quarter call, net to zero 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 two cents per share higher. Gas margin was a penny per share higher, driven by the clause recovery of GSMP investment. Electric margin was one cent per share higher, reflecting investment returns from Energy Strong. and other electric and gas margin added two cents per share based on a benefit from the tax adjustment credit and appliance service results. Lower distribution O&M expense added two cents per share compared to the second quarter of 2022, primarily reflecting reduced weather-related corrective maintenance. Depreciation and interest expense increased by one and two pennies 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 zero 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 SIPP 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 SIPP mechanism, continues to be positive, and we're 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 rate-making 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 $1,500,000,000 to $1,525,000,000. 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, PSCG Power & Other reported net income of $255,000,000, or $0.51 per share, and non-GAAP operating earnings of $10,000,000, or $0.02 per share. This compares to second quarter 2022 net loss, 174 million or 35 cents per share, and non-GAAP operating earnings of 15 million or 3 cents per share. We previously mentioned that during the first quarter of 2023, PCG 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 5 cents per share, reflecting the absence of certain full requirement BGS load contracts that remained 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 a penny per share from fewer refueling outage days in the second quarter of 2023, offset by lower capacity revenues of a penny per share compared to the year-ago quarter. O&M cost comparisons in the second quarter improved by a penny per share in 2023. Higher interest expense covering PSEG power and parent financings were two cents 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 three cents per share unfavorable versus the second quarter of 2022 and taxes another with two cents 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, PCG is forecasting generation output of 30 to 32 terawatt hours and is hedged approximately 95 to 100 percent 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 is hedged 75 to 80 percent of this generation at an average price of $38 per megawatt hour. The forecast of non-GAAP operating earnings for PCG 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 hedged price in the first quarter of 2023, as we previously discussed. Touching on some recent financing activity, as of June 30, 2023, PCG had total available liquidity of $4 billion, including $500 million of cash and cash equivalents on hand. PCG Power had net cash collateral postings of approximately $400 million at June 30th, 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 30th, 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 one-time non-cash settlement charge in the third quarter of 2023 related to the immediate recognition of unamortized net actuarial loss associated with the 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 PSEG forecasted to contribute between $1,500,000,000 to $1,525,000,000, and PSEG power and other forecasted at $200,000,000 to $225,000,000. The settlement charge related to the lift out is not included in the full year 2023 non-GAAP operating earnings guidance for PSEG, PSEG, or PSEG power and other. That concludes our formal remarks. And operator, we are ready to begin the question and answer session.

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, press the star and the number one on your telephone keypad. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the star and the number two. If you're on a speakerphone, please pick up your handset before entering your request. One moment, please, while we poll for the first question. Thank you. And the first question comes from Char Perez with Guggenheim Partners. Please receive your question.

Good morning, guys. Good morning, Char. Thanks, Char. Good morning. Dan, you talked about some uncertainties remaining with power and energy prices until we get PTC guidance. Any updates on conversations with Treasury? There seems to be some delays and other tax credit issues, so does that potentially push out the PTC implementation and does that change the calculus for power as we think about earnings, hedging, and any of the efficiency projects like refueling, cannabis, et cetera? Yeah. Thanks, Gerard.

I don't think it changes much for us. I think maybe an analogy. 2023, the corporate minimum tax kicks in and there's still guidance that we're looking for for that as well. So I think, you know, from a PTC perspective, it's a tax credit. It applies under the existing law. It states that it begins 1-1 of 2024. So I've heard nothing from the standpoint of any delay in implementation. I think what we may have the potential for is we may not know on the 1st of January exactly how they will define gross receipts. If I think about it, technically, that tax return will get filed until into 2025. I still would love to have the information now to best plan what we do, but I don't think there's any question, nothing that I've heard of anyway that would tell you that the start date would be anything other than 1-1-2024, but I have also not heard anything with respect to the date with which we will get further guidance.

And then just on the 24, you know, case expectations, I mean, you guys have highlighted the need to recover base spending that's not in much mechanisms to the tune of like 30 cents earnings in 25. As we're getting closer to a filing, can you maybe just talk a little bit about how we should think about the revenue deficiency and and the overall rate impact, as we are seeing higher costs of capital and certainly a different inflationary environment in the last five years?

Yeah, I don't think I would think about it any differently than we talked about it before. The filing date for the rate case remains fourth quarter. I think the nature of the capital that we still have in front of us to roll in all remains the same as what we've talked about before. And so it will be a part of the filing that we'll make. And again, most of that are items that we've been through proceedings with the BPU, whether it's stipulated base or whether it's some of the clauses that we've actually set up a deferral mechanism for those roll-ins. So I don't think that we're in a different place from that approach and where we'll go. I think we're just kind of moving forward and getting that filing ready to be submitted in the fourth quarter.

Okay, perfect. Very clear-cut quarter, so that's all I have. Thank you, guys. Appreciate it.

Thanks, Char.

The next question is from Jeremy Toney with J.P. Morgan. Pleased to see you with your question.

Hey, Jeremy. Hi, good morning. How are you? Good. Just wanted to get into the pension lift-out a little bit more. Just wondering if you could provide some more details, such as is there any – cash changing hands here and how does the equity fixed income mix in the lifted out portion compared to the rest and any thoughts on equity fixed income mix going forward with the strength and equity market?

Yeah. So Jeremy, I'm going to, I'm going to have Dan give you some details. I don't know, discuss much on the PIC or pension investment committee plans, but I will, I just wanted to kind of preface it by saying a couple of things. One, you know, really proud of the work that the entire team here did at PSEG. I mean, it was a lot of hard work. And we talked about this pension lift out not too long ago and got to the point where we executed on it, you know, in a very timely manner. So just really happy with the work that they did. Really happy about the way that we were able to protect our retirees and the folks that, you know, have done so much for us over the years and the way that we transacted here and be a lot of details and we'll get out to those folks but I'm very happy about that part of this process as well and certainly happy about the results that we were able to achieve which they don't go into a little more detail here but it's more and more of the execution that we've talked about and trying to build that confidence for you all that you know you're expected from us yes Jeremy to your more particular questions the so your first question about cash transacted and

By its very nature, what the transaction is, is a liability for future pension payments that will move out of the company and that liability will be matched basically with cash that's going to go out with it. Yes, there is a cash element to the transaction. However, you should think about that cash as coming out of the pension trust where those liabilities will be paid from. from more general corporate cash. Don't think about any cash from that perspective solely from the trust. That said, and I think that is a very logical way to think about it given your second question, which is where does that cash come from? And so we have investments across a bunch of different elements and spectrums of investments that we have made through different managers in the pension trust. And I think just the most natural way to think about it, without putting too fine a point on it, is it's roughly 20% of the pension. And you could think of us as essentially taking about 20% of our investments across the board and moving them over. That won't be a perfect interpretation, but pretty close to how to think about what it would look like on a go-forward basis from the remaining mix within the fund. I think that's a simple way to think about it, but an appropriate way to think about it.

Got it. That's very helpful. Thanks for that. And then thinking about the pension lift out here and thinking about kind of 5% to 7% growth, Kager, as previously communicated, is there any impact that we should think about here from this transaction?

No, you should not. I think the 5% to 7% you should think about is being intact. Really, Jeremy, this was all about looking to the potential variability in results that we could see corporately because of the size of the pension. And that was the driver behind the transaction. Ralph made a hugely important point. We've said all along the first thing that we needed to do with our diligence was ensure that this was going to be a move that would protect the benefit to our retirees. We did significant diligence there, felt very comfortable there. And then secondarily, it needed to ultimately come through in a way that made sense to the company as well. And so that's exactly what we did. I think that managing that variability going forward is what we have talked about for a while and what we wanted to deliver on. And you could see some very, very de minimis effects as we step forward within the plan, but nothing that's going to move us out of that range at all.

Got it. That's very clear and helpful. I'll leave it there. Thanks. Thanks, Jeremy.

The next question is from the line of David Arcara with Morgan Stanley. Pleased to see you with your question.

Hey, David. Hey, thanks. Good morning. Good morning. Quick follow-up on the lift-out. What does that leave you at in terms of a funding ratio post the transfer there?

Yeah, so we finished the year at 87%, and the year has been pretty good as we've worked through. So you can kind of think about that as increasing into the low 90s. And so we're in a good position from a funding perspective with what remains still within that kind of a range as we go forward from here.

Okay, got it. Perfect. And then on the Hope Creek fuel cycle extension, is that kicking off earlier here than you had anticipated previously, or is that still on track toward the potential fall 2025 outage that you had mentioned previously in the investor day?

Yeah, two separate things. So good pick up, David. Definitely on track for that date that we talked about in the investment day. But the work starts earlier, right? Because it's just a lot of engineering work that needs to be done because some of that fabrication starts years in advance. So the engineering is taking place and kicked off. We have a good idea of the cost or minimal as we had explained. And it's on target for that date that we had said. So again, more execution from the team down there.

Yeah, great. Thanks. And then just one other minor question related to that, just as a follow on. How are you thinking about hydrogen and the prospect of potentially producing hydrogen at your nuclear facilities? Do you have involvement or any perspective on the discussions going on now in terms of framing up that policy structure and how additionality um, might be, might be considered. I'm just wondering if that's a front of mind for you.

No, you know, it's not top of mind because it's not a big driver for us one way or the other, but, um, it's something we certainly want to do for two, for a couple of reasons. I mean, one, it's, uh, it's the right thing to do from an environmental standpoint if we can, we can help on the hydrogen development front. So that's one piece of it. Two, it's good for the region economically for New Jersey in the southern part of the state down there. If we could get some activities, additional construction activity, more jobs, that southern area around our Salem plant has been challenged economically over the years. So another positive from that aspect. And then from the third, you know, look, it is going to have some incremental financial impacts for us. I think conditionality might make a lot of sense, but Again, I think we're a small player in that, and we'll see where policymakers go with it.

Okay, great. Thanks for the color. I appreciate it.

Thanks, David.

The next question is from Durgesh Chopra with Evercore ISI. Please receive your third question.

Hey, Durgesh.

Hey, Raoul. Good morning. Thanks for taking my questions. I want to go back to the pension lift out real quick, Dan. Congrats for getting it done in short order here. If memory serves me right, the portion of the pension which is not covered by rates or on the regulatory side was around 30%, and this lift out is for 20%. I'm just wondering what are you doing with the 10% that is not covered by rates? Any thoughts there?

Yeah, your order magnitude is right there, Durgesh. And, you know, essentially the transaction and the go-forward pension plans would have been more complicated to do this kind of a transaction with active employees because you've kind of got a moving target, right? Your service cost continues to go forward, and those kind of elements come into play. And so right now, just think about what sits outside of this lift out in power and other as just being status quo.

Got it. Okay. That's helpful. And then just any thoughts on potential for a settlement in the GSMP filing? You know, you've had a nice track record here. Energy efficiency was a very constructive outcome. So any color you can share there?

Yes. I'll give you a couple pieces. Yes, last night was the first public hearing that we had on the GSMP filing. 17 individuals spoke in favor of the filing, one against. So just in sheer numbers and conversation, it was a very positive outcome. Four public officials spoke in favor of the project and the work that's been done so far by our folks out in the field. So really, really positive there. So I'm very optimistic that public sentiment is in the right direction. That should all lead to a continuation of our opportunity to settle. I would be surprised if we were in a situation that was anything but a settlement when we get to the end of this.

Excellent. Congrats, guys. Great quarter here.

Thank you.

The next question comes from the line of Carly Davenport with Goldman Sachs. She was here with her questions.

Hey, good morning. Thanks for taking the questions. Hey, Carly. Maybe just to start, as you think about the regulatory environment in New Jersey, a couple of new commissioners have joined the commission there. Anything that you'd highlight in terms of changes or expectations around the regulatory landscape there following the personnel additions?

Yeah, no, nothing that I would expect to change dramatically. Look, we've got some real good conversations that are going on. And what I can tell and what folks have had going from conversations would be aligned with the things that the two new commissioners have talked about, you know, focused on environmental issues, focused on affordability. I think what we're doing on the GSMP program is completely aligned from that standpoint, especially with the methane reductions that are involved there and the work that we're doing. getting those pipes ready for whatever they may carry down the road. The electrification work is certainly aligned with comments that those new commissioners have made in other settings before they were in the commission. So I think that's a real good sign. And then from an affordability standpoint, boy, I got to tell you, the more we dig into this in preparation for our upcoming rate case, the prouder I am of what New Jersey has done over the years. I mean, no matter which way you look at it, the rate increases for the entire state, I'm not just talking about us, but for the entire state have really stayed below inflation rates. And with all the work that we're doing to electrify homes, electrify transportation, and clean up the grid, You know, it's, it has really proved out in New Jersey that we can, if you do it right, you can do it in an affordable way and and the numbers are proven that out. So. Um, I think everything we're doing is aligned with what those 2 new commissioners would expect and things that they have said in. Prior positions that they felt great.

That's helpful. Thank you. And then. Just on collateral postings, it looks like that was down to about $400 million at quarter end. Any thoughts on how we should think about the cadence of incremental hedges rolling off from here?

Yeah, Carly, I think if you think about us continuing to do what we've historically done, it's probably the right answer, maybe just for a little bit of a different reason. I answered the question earlier on the PTC timing issue. and, you know, that Char had asked. And, you know, we are still waiting, but we've also thought through what some of those potential outcomes could be from the Treasury regs, and we're taking into account, admittedly a little bit in the dark, what they could look like as we're continuing to move forward. So I think until we know something different, I'd say it's an educated – thought process, but maybe not as educated as we'd like with the guidance that we have in thinking about what to do. But we are layering on some incremental hedges as we go through time. I think you've seen within the material today over the last quarter, you've seen a little bit more and a little bit of a higher price. So we're just trying to be smart about it in a situation where we don't know everything we'd like to know. But hopefully we'll get some information soon from Treasury.

Got it. Thanks so much.

The next question is from the line of Julian DeMullion Smith with Bank of America. Please proceed with your questions.

Good morning, team. Thank you guys very much. Appreciate it. I just wanted to follow up on a few things that have been said here. First off, coming back to that pension lift out, I just wanted to run this by you guys. Just with the billion dollars, applying a return on asset, flipping the liability around conversely, I mean, Sounds like that might be like maybe upwards of a nickel drag here. Again, it's difficult from the outside to run the math. But does that sound like ballpark? Is it a drag? Is there sort of a net drag on a run rate 24 basis, if you will? Or are there other offsets here to think about? Just to close out on that one.

Yeah, no, Julian. Listen, I don't think those numbers you just quoted would be aligned with the words de minimis. So we – I think that would – be a little bit more than what we would certainly expect, and that aligns with what our expectations are.

Got it. Thank you for clarifying that. I appreciate it. And then separately, look, did I just hear you say additionality might make sense on the nuclear side? I just wanted you to, if you don't mind, clarify your thoughts around that.

No, I could understand why people would make that argument. So it might make sense in some circles to do that, right? It certainly wouldn't make the most sense from a – if you just want to generate hydrogen and create hydrogen from the nuclear plants. But I could understand why people make that argument from a tax credit standpoint, right? Because if you're getting tax credits for providing clean energy into the grid and then you convert that to hydrogen, do you get both tax credits? And I could understand that, right? Just a legitimate argument to make. So – Is that something we're taking a position on one way or the other? But I can certainly understand why some people would approach it that way. And I could understand why other people would approach it. Hey, listen, we really have to kickstart the hydrogen generation. And so, therefore, we want to see that. We want to see all those tax credits go to that angle. I think that's a real policy call that some folks are going to need to make within Washington. So we'll see where it goes.

Got it. All right. Excellent. And then just meanwhile, I mean, if not, you know, going down the hydrogen route, I mean, how do you think about, you know, parallel avenues of data centers or what have you just to maximize your opportunity set around these nuclear plants? Obviously, we've seen some of your peers out there maximizing around some of these low carbon transactions, if you will.

Yeah, so again, I think what Dan has been saying from the beginning, and I'm just going to reinforce here, is we really need to understand what Treasury is going to seem to be the revenues. And once we understand that, then we can optimize that, you know, for our shareholders. Everything that I've been saying up to this point is just respectful of the conversation that's been taking place. It's not meant to take sides on anything. So even whether it's data centers and, you know, we try to do what's right for New Jersey and New Jersey customers. And so, hey, does that make sense? Is it a data center here? Where is that data center? Are we wheeling power? There's all sorts of things that are going to go into our thought process as we go forward. And the number one is what Dan has been saying. Let's see what the rules of the Treasury say as to how revenues are going to be calculated.

Right, got it. But the point is you'll come up with a – or you could come up with a new strategy pro forma for wherever the IRS lands on some of these regs. Stay tuned for an update from you.

Yeah, 100%. But, again, give us a week to digest the rules when they come out, and then we'll have a plan ready. Those conversations are not – we already are looking at things inside. We'll figure it out.

You're already working on things pro forma here with folks.

Always. That's why we're able to move as fast as we can. Yep. Love it.

All right. Good luck, guys. We'll speak to you then.

Thanks, Julie.

Our next question is from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Hey, Paul. Good morning. How are you doing? So just... Almost all my questions have been answered, but just on... I apologize for missing this. What is the expected gap impact of the liftout?

The gap impact?

Oh, the gap impact. Yes, so what we said is both as we look at 2023, the minimus impact, not even worth kind of including within any models, very, very small impact anticipated, and then going forward, I'd say the same, right? There's a very modest positive arbitrage, but by the same token, what we've also talked about here is we will see a one-time charge come through from the standpoint of the unrecognized element. And so the absence of that going forward does provide somewhat of an offset. So I would not think of that as having much of an impact 23 or going forward. The main driver that we talked about is mitigating the volatility.

Okay, but the charge itself is not going to be big either, is what you're saying?

No, that one charge, so if you take a look at our year-end 2022, that unamortized amount was about $2 billion. So we've disclosed that we would see something in the low 200s after tax from the standpoint that was in the release of the amortization of that charge. So think about the pension as a whole having that unamortized balance. And if this is about a 20% impact, you're seeing about that coming through on the one-time charge.

Okay. Thanks for your clarity. Our next question is from the line of Anthony Crowdell with Muzoho Securities. Please proceed with your questions.

Hey, good morning, Ralph. Good morning, Dan. Good morning, Anthony. Good morning, Anthony. You may have addressed this in Durgash's question, so I apologize. But if we think about from year end to now, you had the approval from the BPU on the pension smoothing and now the lift out. How much of your pension volatility have you reduced or removed from the end of 2022?

A little less than half, somewhere between 40 and 50 percent.

Okay. And then I appreciate you did go through that this is for the Peg Power employees, unregulated, and in the fourth quarter, you're going to file the general rate case where I believe you're going to request a pension tracker. If the company is unsuccessful or the regulators do not approve the pension tracker, I mean, is this an option that you would look deeper into for the regulated employees or just structurally, it's very hard to do it for existing employees, this type of lift out?

Yeah, Anthony, so we will absolutely have a conversation with the BPU about a mechanism to address pensions and the volatility around that. So they worked with us on the last mechanism. They worked with other companies. So we'll be in there having a conversation about it. It's good for ratepayers as well as us. It reduces their volatility as well over a longer period of time as you're going for rates. So it makes sense for everyone. That said, we always will continue to take a look at things like we just executed on, but I will tell you that it's really tough to figure out for active employees what the right formula is for all the reasons that Dan mentioned. I think it was to Gash earlier. How long is somebody going to work? What's going to be their earnings trajectory? And so on and so forth. Those pieces of the puzzle make it tougher when you have a group of employees like we just went through. It was a lot easier to have that conversation and, again, got us in a really good place.

Great. Thanks for taking my questions.

Thanks, Anthony.

Our next question is from the line of Ryan Levine with Citi. Please proceed with your questions.

Good morning. Given the range of gross receipt treatment outcomes from Treasury, what's the range of 24 hedges that you'd be considering adding on to your nuclear plate?

Yes. I think, Ryan, it's a tough question to answer given that we don't have what we need to have from Treasury. You know, we have been stepping into hedges as we've approached the year. fairly similar to what we've done in the past to be as prepared to mitigate the market volatility as we can. And so I think that question is going to be best answered when we do have that guidance and as we continue to go through the rest of the year.

Just to follow up on that, I mean, when I look back on where you were last year at this time from a hedge standpoint and you were meaningfully more hedged on a one-year forward basis than you are today, given that comment, what's driving the lower hedge profile?

Well, and Ryan, the other thing I would add to that is we've said in the past that we've tended to work our way through a three-year period within a range of a kind of a band of hedges across those three years. And so there are periods of time where we will try to take a look at what the market looks like within that range to take advantage of market opportunities. And so if you just think about where we've been historically from a price point perspective and where we are now, I think the opportunities led us to be a little bit higher within that band before and a little bit lower within that band compared to last year right now.

which at the end of the day is exactly the way Dan has managed this for years, and the team has managed it for years, and they've looked for those opportunities. So absent really clear guidance from Treasury, we're doing what we've done in the past.

Okay. And then shifting topics, how does the recently approved second energy efficiency framework impact the company's approach to energy efficiency into the next filing later this year?

Yeah, I don't think it impacted – what's going to happen in the next filing. What really will impact what's going to happen in the next filing is what was just released by the Board of Public Utilities, which is their triennial report or direction. It was an order that came out on energy efficiency. And we're still studying that, but that has a lot of upside for us there that we think will really encourage additional energy efficiency investments from companies like ours. So more to come on that, but I would encourage you to take a hard look at that order, because I think it really did provide a good roadmap for all the utilities in New Jersey to follow and provide some opportunity for us.

Thanks for taking my questions.

Thanks, Rob.

Rob, we'll take one last call, and then we'll turn it back to Ralph for closing comments.

Thank you. That last call will come from Paul Freeman with Ladenburg-Stalman.

Hey, thanks. Quick question on generation gross margin year-to-date and how we should think about generation gross margin for your following year hedges.

Yeah, I think as you take a look year-to-date, One of the things we talked about up front was the hedge price. We saw most of that uplift within the first quarter. So we got more of the benefit from the timing of the hedges that were put on during the winter period. I think what you're more likely to see as you go through the balance of the year is a little bit of a change from the standpoint of looking back at 22 when we kind of rolled off our final load serving contracts compared to where we are now without them. is that we have a little bit higher cost to serve last year compared to what we're seeing this year because of those contracts. And so most of the top line benefit has been recognized year over year, if you take a look at where the hedge prices are, but the cost to serve will benefit as we go through the balance of the year, Paul.

So if I look at next year, you would expect the gross margin to be roughly comparable in terms of how it's calculated or the differential to the hedge price as it is this year?

No, we'll give you guidance next year for next year's results as we head in there. But I think next year you're also going to have a situation where you'll have PTCs in place that'll change things. So it's a more complicated structure that we can talk through as we go forward and to give the next year's guidance.

Great. Thank you very much.

Thanks, Paul.

Thanks, Paul.

Thank you. I would now like to turn the floor back over to Mr. LaRosa for closing comments.

Thank you. So I would just leave everyone with this. As we kind of put this new management team in place and talked about things, we said we weren't going to change much. We were going to continue our strategy. But I think this quarter kind of reinforced a lot of things that we've been telling you over the first six months. here. Alignment with public policy, especially in the state of New Jersey, is really important. And the great work from the workforce that we have and our alignment with them on a regular basis. And the reason for that is that we were able to execute the way we did. Three big wins, I'd say, this quarter are exit from offshore wind done in a way that really I would say we're very, very proud of. We entered, we took a hard look at that opportunity, and we exited in a way that both we were able to keep our heads up financially, policy-wise, and with the labor workforce in the state of New Jersey as we did that. Second, we stayed aligned with public policy on our energy efficiency filing and took a good step forward. But as a result of that, we'll really be able to take some advantage of some new orders that came out from the board that we just talked about. So again, really aligned with policy and a workforce that can deliver on that. Third piece was what we just talked about on the pension execution and the work that was done there. And again, I just want to reinforce how happy we are that we were able to accomplish all the things that we set out to accomplish through some great, great teamwork from a number of folks here on our team. And then I don't want to lose sight of the heat storm that we just had here in New Jersey and the work that was done, again, by a number of folks that have stepped up time and time again, whether it's our appliance service technicians out fixing air conditioners that have gone bad, to our overhead line workers making sure that the pull-top transformers are back in service and the underground folks making sure the networks here in Newark and other cities are up and running and the call takers answering any questions customers might have as far as timing of restoration for the few that did go out of power. It was just great work and really was seamless. And it did identify some additional opportunities for us in that last mile, which we're going to learn from and continue to put into our plans. I can't say enough about execution on the heat storm, but execution across the board on all the things that we've accomplished in the last quarter. So I appreciate you all calling in and listening, and we'll continue to build your confidence as we move forward through the remainder of 23. Thanks, and talk to you next quarter.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.