Public Service Enterprise Group - Q1 2024

Transcript

Operator (participant)

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 First Quarter 2024 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 the 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, April thirtieth, two thousand and twenty-four, 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 (Head of Investor Relations)

Good morning, and welcome to PSEG's first quarter 2024 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-Q 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 discuss non-GAAP operating earnings, which differs from net income, as reported in accordance with generally accepted accounting principles 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 (CEO)

Thank you, Carlotta. Good morning to everyone, and thanks for joining us to review PSEG's first quarter 2024 results. PSEG's financial results for the first quarter are in line with our full year expectations for 2024, and we are reaffirming our non-GAAP operating earnings guidance of $3.60-$3.70 per share. We are also continuing to execute on our long-term strategy to grow PSEG's non-GAAP operating earnings by 5%-7% through 2028, which we are also reaffirming today. This will be accomplished by investing in energy infrastructure and energy efficiency programs, which support greater electrification of transportation, homes, and workplaces, while also reducing greenhouse gas emissions, while helping our customers lower their bills.

Turning to the first quarter of 2024, PSEG reported net income of $1.06 per share, compared to $2.58 per share in 2023, which reflects the absence of mark-to-market gains that benefited first quarter GAAP earnings in 2023. non-GAAP operating earnings were $1.31 per share in the first quarter of 2024, compared to $1.39 per share in 2023. As a reminder, our non-GAAP results exclude the items shown in attachments 7 and 8, which we provide with the earnings release. The main driver for the quarter was continued rate base growth from investments focused on infrastructure replacement, which was offset by higher investment-related expense. These expenses will build over the balance of 2024 as we await the resolution of our pending distribution rate case later this year.

In addition, the nuclear production tax credit went into effect on January 1, 2024, which provides our nuclear fleet with downside price protection through 2032, an important contributor to the increasing predictability of PSEG's results. Dan will provide a detailed financial review later in the call, but I want to note for PSEG Power and Other, some margin contribution will be skewed to the back half of 2024, as we expect to realize most of the increase in 2024's gross margin versus 2023 during the second half of the year. Turning to operations, we are pleased to report that both our utility and nuclear businesses continue to exemplify operational excellence. PSE&G and PSEG Long Island met the challenge of quickly restoring service to tens of thousands of customers following severe rain and wind storms early in the year.

At PSEG Power, our nuclear fleet also operated well during the quarter, achieving a capacity factor of 96.8% and supplying New Jersey and the region with over 8 TWh of reliable, carbon-free baseload energy. Shifting to an update of our pending rate case, our combined electric and gas base distribution case, covering 57% of our rate base, is progressing as expected at the BPU. We are currently working through the discovery and documentation phase, responding to requests for information from parties to the case, and we recently submitted updated test year financials. The procedural schedule for the case includes several weeks of built-in settlement discussions beginning later in the second quarter. Based on recent and prior rate case timelines, we anticipate that this rate case will be settled later in 2024.

As a reminder, this combined electric and gas filing proposes an overall revenue increase of 9%, with a typical combined residential, electric, and gas customer seeing a proposed increase of 12% or less than 2% compounded growth over this six-year period. During the same period, we have consistently delivered on our reputation for reliability, affordability, and nationally top-tier customer satisfaction scores. With a nonstop focus on cost containment, PSEG continues to manage its O&M to minimize customer bills, while continuing to compare favorably to regional peers for residential, electric, and gas service, and are among the lowest in national comparisons on a share-of-wallet basis. Now, moving on to capital investments, we are on track to execute PSEG's five-year $19 billion-$22.5 billion capital plan through 2028.

The regulated portion of that program is $18 billion-$21 billion, and is focused on infrastructure replacement, as well as our Clean Energy Future EE program. PSEG has installed and placed into service about 1.8 million of the planned 2.3 million smart meters through our AMI program, still on schedule and still on budget for completion by year-end. These investments are projected to result in a compound annual growth in rate base of 6%-7.5% through the 2024 through 2028 period. Premised on PSEG's year-end 2023 rate base of $29 billion, which was up 10% over the prior year, and we continue to pursue potential investment opportunities for future regulated growth.

Among those opportunities we are currently evaluating are competitive transmission solicitations in the Mid-Atlantic region, similar to PSEG's award of a $424 million project from PJM's 2022 Window 3 process. In April of 2024, PSEG submitted bids to the New Jersey Board of Public Utilities, or the BPU, for its pre-build infrastructure project to support offshore wind. The BPU is expected to announce the winner or winners of the pre-build infrastructure solicitation in the second half of 2024. PSEG is also evaluating two other upcoming regulated transmission solicitations this July. The first is the BPU's second public policy solicitation for offshore wind transmission infrastructure utilizing a State Agreement Approach.

The second is PJM's 2024 Regional Transmission Expansion Plan Window 1 solicitation, which is expected to include the impacts of higher load growth forecasts that have been influenced by increased electrification expectations and data center load growth throughout PJM. At PSEG Power, our nuclear fleet is also pursuing multiple growth paths with modest capital spending needs. We have previously commented on our plans for thermal upgrades at the Salem Nuclear Station, which could potentially add up to 200 MW of additional capacity and would qualify for clean hydrogen tax credits under current rules for both additionality and hourly matching. PSEG Nuclear has also notified the Nuclear Regulatory Commission of its intention to pursue subsequent 20-year license renewals for our three reactors in New Jersey.

This would extend the operational capabilities from 2036, 2040, and 2046 for Salem Units One and Two and Hope Creek to 2056, 2060, and 2066, respectively. Beyond these opportunities in nuclear, there has been discussion lately about the potential for direct power sales to data centers from our 3-unit Artificial Island site. We have had discussions related to both sides of the meter in recent months in the form of new business inquiries at PSEG for mid-sized data center construction of approximately 50-100 megawatts, and behind the meter inquiries for co-located facilities that prioritize highly reliable, carbon-free baseload power from existing facilities, all without the challenges faced by non-dispatchable generation. PSEG has a long history of aligning with New Jersey policy goals.

This data center opportunity has the potential to create a nexus between economic development and energy policy, and we stand ready to support New Jersey in its recent efforts to create an in-state artificial intelligence hub. Our New Jersey nuclear units could provide access to a highly reliable, carbon-free source of baseload power and infrastructure consideration that is increasingly mission-critical for the large data center developers and hyperscalers. One thing that is certain at this point is that all these opportunities in nuclear would be incremental to our long-term forecasted growth rate guidance of 5%-7% through 2028, based upon that PTC threshold price. Another differentiating factor for PSEG overall is that our nuclear operations provide the business with the added flexibility to fund its current regulated investment plan without the need to issue new equity or sell assets.

I'd like to close my remarks by thanking our employees for all they do and their dedication to 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 will be available for your questions after his remarks.

Dan Cregg (CFO)

Thank you, Ralph. Good morning, everyone. As Ralph mentioned earlier, PSEG reported net income of $1.06 per share for the first quarter of 2024, compared to $2.58 per share in 2023. non-GAAP operating earnings were $1.31 per share in the first quarter of 2024, compared to $1.39 per share in 2023. We've provided you with information on slide 7 regarding the contribution to non-GAAP operating earnings per share by business for the first quarter.... Slide 8 contains a waterfall chart that takes you through the net changes quarter-over-quarter in non-GAAP operating earnings per share by major business. Starting with PSE&G, which reported first quarter net income of $0.98 per share for both 2024 and 2023.

PSE&G had non-GAAP operating earnings of $0.98 per share for the first quarter of 2024, compared to $0.99 per share in 2023. The main drivers for both net income and non-GAAP results for the quarter were growth in rate base from continued investments in infrastructure replacement, offset by higher distribution investment-related depreciation and interest expense, not yet reflected in rates, as well as higher O&M costs. Compared to the first quarter of 2023, margin was $0.07 higher in total, driven by transmission at $0.03 per share, gas margin at $0.01 per share, and other utility margin at $0.03 per share. Distribution O&M expense increased $0.05 per share compared to the first quarter of 2023, primarily due to gas meter inspections and overhead corrective maintenance following severe rain, wind, and flooding events early in the year, and tree trimming.

Depreciation and interest expense increased by $0.01 per share and $0.03 per share, respectively, compared to the first quarter of 2023, reflecting continued growth in investment. These costs await recovery in our pending distribution rate case, anticipated to be settled later this year. Lower pension and OPEB income, resulting from the cessation of OPEB-related credits, which ended in 2023, resulted in $0.01 per share unfavorable comparison to the year earlier quarter. Lastly, the timing of taxes recorded through an annual effective tax rate, which nets to zero over a full year, had a net favorable impact of $0.02 per share in the quarter compared to 2023. Weather during the first quarter, as measured by heating degree days, was 17% warmer than normal, but 9% colder than the first quarter of 2023, which was the warmest first quarter in PSE&G's records.

As we've mentioned, the Conservation Incentive Program, or CIP, 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. The number of electric and gas customers, which is the driver of margin under the CIP mechanism, continued to grow by approximately 1% over the past year. On capital spending, as Ralph mentioned, PSE&G invested approximately $800 million during the first quarter, and we remain on track to execute on our 2024 regulated capital investment plan of $3.4 billion, focused on infrastructure modernization and electrification initiatives.

These include upgrades and replacements to our T&D facilities, last mile spend in the Infrastructure Advancement Program, ongoing gas infrastructure replacement spending, Energy Strong II investments, and a continued rollout of the clean energy investments in EE, smart meter installation, and EV make-ready infrastructure. We are reaffirming our five-year regulated capital investment plan of $18 billion-$21 billion. This 2024-2028 plan includes the $3.1 billion CEF-EE II filing made in December 2023, which would enable commitments starting January 2025 through June of 2027, based upon the BPU's EE framework, with investments being made over a six-year period. This proceeding is expected to be resolved at the BPU later this year. Moving on to PSEG Power and Other.

For the first quarter of 2024, PSEG Power and Other reported net income of $0.08 per share, compared to $1.60 per share for the first quarter of 2023. non-GAAP operating earnings were $0.33 per share for the first quarter of 2024, compared to non-GAAP operating earnings of $0.40 per share for the first quarter of 2023. For the first quarter of this year, net energy margin rose by $0.03 per share, including $0.02 favorable contribution from nuclear, driven by the net impact of the nuclear production tax credit, which went into effect January 1 of this year, partially offset by a reduction in capacity revenue. Also in energy margin, gas operations increased by $0.01 per share compared to the year-earlier quarter.

Importantly, for 2024, while the PTC begins this year, there will be a shape to our results per quarter as we move through the year. We anticipate realizing the majority of the increase in the 2024 gross margin over 2023's gross margin during the second half of the year, based upon the shape of our underlying hedges. This will differ from last year, when PSEG Power realized most of the step-up in the annual hedge price in the first quarter, based on lower pricing in the winter of 2022 compared to 2023. O&M increased by $0.03 per share, mostly driven by the start of the scheduled refueling at our 100% owned Hope Creek nuclear plant. Interest expense was $0.01 unfavorable, reflecting higher interest rates, partially offset by lower short-term debt balances.

Taxes and other were $0.06 per share unfavorable compared to the first quarter of 2023, primarily reflecting the use of a higher effective tax rate in the quarter that will reverse over the balance of 2024. From an operating standpoint, the nuclear fleet produced approximately 8.2 terawatt hours during the first quarter of 2024, compared to 8.4 terawatt hours in the year earlier period, and ran at a capacity factor of 96.8%. Our Hope Creek Nuclear Unit is undergoing its scheduled refueling outage, which will include preliminary work on the fuel cycle extension project. As a result, as is always the case with outages for our 100% owned Hope Creek unit, we expect a little higher O&M and lower generation in the second quarter.

Touching on some recent financing activity, at the end of March, PSEG had a total available liquidity of $5 billion, including $1.2 billion of cash on hand. Our revolving credit facilities totaling $3.75 billion were also extended by 1 year to March 2028 during the first quarter. At the end of March, PSEG had $500 million outstanding of a 364-day variable rate term loan, which subsequently matured in April 2024, and PSEG Power had $1.25 billion outstanding of a variable rate term loan maturing March 2025. The entirety of these term loans were swapped from a variable rate to a fixed rate, mitigating the fluctuations in interest rates. As of the end of March, given our swaps and cash position, we had minimal variable rate debt.

In early March, PSE&G issued $1 billion of 10- and 30-year secured medium-term notes, consisting of $450 million at 5.2% through March 2034, and $550 million at 5.45% through March 2054. A portion of the proceeds was used to pay the maturity of $250 million of 3.75% secured MTNs on March 15. Later in March, PSEG issued $1.25 billion of senior notes, consisting of $750 million at 5.2% through April 2029, and $500 million at 5.45% through April 2034.

A portion of the proceeds will be used to pay the maturity of $750 million of 2.875% senior notes in June. We continue to maintain solid investment grade ratings. Looking ahead, we expect that PSE&G's considerable cash generation, combined with PSEG Power's enhanced cash flow visibility from the nuclear PTC, will support the execution of PSEG's five-year capital spending plan, dominated by regulated CapEx, without the need to issue new equity or sell assets. In closing, we are reaffirming PSEG's full year 2024 non-GAAP operating earnings guidance of $3.60-$3.70 per share, which reflects continued rate-based growth from ongoing regulated investments, offset by higher depreciation and interest expense that will build over the balance of 2024 as we await resolution of our pending distribution rate case later this year.

We are also reaffirming our forecast of long-term 5%-7% compound annual growth in non-GAAP Operating Earnings through 2028, supported by our capital investment programs and the new nuclear PTC. That concludes our formal remarks, and we are ready to begin the question and answer session.

Operator (participant)

Ladies and gentlemen, we'll now begin the question and answer session for members of the financial community. If you have a question, please press the star and the number one on your telephone keypad. 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 first question. The first question is from Nick Campanella with Barclays. Please proceed with your question.

Nick Campanella (Analyst)

Hey, good morning, everyone. Thanks for taking my questions here.

Dan Cregg (CFO)

Hey, good morning, Nick.

Nick Campanella (Analyst)

Hey. So I guess, thanks for all the, the context around the direct power sales opportunities with your, with your nuclear facilities. Can you just kind of comment on the potential, just the timing around any potential announcement, and then how we should kind of think about when that could contribute to EPS if it were to be achieved? And then just, you know, I know you kind of talked about being in, like, the nexus between economic development and energy policy. So is there something that you're looking for from the state, you know, before moving forward with this? Or just what are the data points that investors should be looking for to know, whether this is becoming more of a reality or not? Thanks.

Dan Cregg (CFO)

Yeah, Nick. So look, I think the bottom line here for us is that we kind of see this as just a continuation of us following the state's policy, not setting it. And I think the governor has been very clear about his desire to attract AI jobs to New Jersey, and the infrastructure in data centers and other IT assets are things that he's looking to have in place. Now, the timing of something like this, I think, is driven by a number of different factors, right? You've got some of the hyperscale data centers and their timing, so I don't want to, I really don't want to talk for them. And I don't want to front run the governor on some things that he may or may not be working on.

We're here to support, and I think from a timing, overall timing standpoint, I would just really follow the state's announcements and policy initiatives around this effort.

Nick Campanella (Analyst)

... Okay, I appreciate that. I guess, you know, I think you also said in your remarks that you would maybe provide an update later in the fall. I guess that would be dependent on how the rate case kind of progresses. But to the extent that you're giving a, you know, a refreshed kind of financial outlook, you know, when would that be? And then also, is the data center opportunity something that could be included in that, or it would really kind of be post that 25 and beyond?

Ralph LaRossa (CEO)

Yeah, Nick, I think those are really kind of a couple of different pieces there, right? So we'll roll forward later in the year as we roll forward every year. I think we start out with the CapEx and some other items at the end of the year, and then our earnings beginning of next year. But the data center specific, we're not going to change our plan. You know, power is still a very small part of this company's earning stream. It is all upside, so I understand the attention to it. But what we'll do is we'll roll in any PPAs, whether it be on data centers or hydrogens opportunities or anything else that we have down at the plant.

We'll optimize it, and as soon as we agree on terms around something like that, we'll roll it in and be transparent about it. But right now, our plan as we look forward is to continue to project ourselves out based upon that PTC floor.

Nick Campanella (Analyst)

Fair enough. I really appreciate the time. Thanks.

Ralph LaRossa (CEO)

Thanks, Nick.

Operator (participant)

Our next question is from the line of Jeremy Tonet with J.P. Morgan. Please proceed with your questions.

Jeremy Tonet (Analyst)

Hi, good morning.

Ralph LaRossa (CEO)

Good morning, Jeremy.

Jeremy Tonet (Analyst)

Just wanted to touch base on a non-data center question here. You've been closely following, you know, the state and regional transmission needs for offshore, and now that data centers have come into the equation having an outsized impact, how do you see the transmission system changing overall, and how do you see PSEG's role in it?

Ralph LaRossa (CEO)

Yeah, Jeremy, I think it's really... My advice is to keep a very close eye on the PJM RTEP process. As they continue to reevaluate the topology of the transmission grid, I think there'll be opportunities across the PJM footprint. You know, look, you got to just take a look at what happened with Talen as a very simple example. That power plant was connected to our Susquehanna-Roseland line. That power, at least 100 MW or so of it, won't be flowing out of the power plant into the grid, and so that'll have an impact on the topology, in a very simple term. Then you've got data centers popping up in different locations.

We have a number of requests that have come into our utility that we're processing, not of the magnitude of a hyperscale, you know, but smaller edge-type computing solutions. And so, you know, each one of those will have an impact. And the place where it all comes together, I would, you know, encourage you to take a look at, is through that RTEP process. Offshore wind will be one of the generation solutions for it, but there will be need for additional modifications to the grid, and it's a TBD for all of us.

Jeremy Tonet (Analyst)

Got it. That's helpful. And then, you know, just thinking about the picture at large, in you know, structuring tariffs in a way that doesn't impact other ratepayers. Just wondering if you could provide any other thoughts on that. I guess, making sure, you know, this is developed in a way such that other ratepayers don't bear more burden.

Ralph LaRossa (CEO)

Yeah, so look, if it's a behind-the-meter solution, the way ratepayers will be held harmless on that is that, you know, there won't be any additional infrastructure charges, so they wouldn't be burdened with additional infrastructure other than if there's new generation that comes on and we... You know, it has to be supplied into the grid, and there's different paths. Those interconnection agreements are the way that that's handled through cost allocations in the PJM market today. So I think there's a very fair and transparent way that that's taken care of. And I think each state has a different solution for in front of the meter data centers or loads that are popping up.

You know, those state individual tariffs, and I guess, you know, every state will take a look at it from an economic development standpoint and determine how they want to handle it. But we haven't seen any changes in New Jersey to the tariff requirements for new business expansions.

Jeremy Tonet (Analyst)

Got it. That's helpful. I'll leave it there. Thanks.

Operator (participant)

Our next question comes from the line of Durgesh Chopra with Evercore ISI. Please proceed with your questions.

Durgesh Chopra (Analyst)

Hey, good morning, team. Thanks for giving me time.

Ralph LaRossa (CEO)

Morning, Durgesh.

Durgesh Chopra (Analyst)

Hey. Hey, good morning, Ralph. Hey, just, Dan, maybe just what are, like, just any updates on the nuclear PTC, guidance from the IRS? It seems like we've been waiting on it forever. And then, any implications that you see coming from that guidance, you know, on your financial plan, please?

Ralph LaRossa (CEO)

Yeah, Durgesh, I wish I had a better answer for you, but we continue to wait for guidance to come out of Treasury. I know that there's been a host of different approaches to Treasury to try to spur some information to come out, but I know, I know that you know that the PTC began January first, so we are in it.

Dan Cregg (CFO)

... and I continue to think that the most important definition is, as we've all thought about it, the definition of gross receipts. And so that's what we're waiting for more than anything else. I think we're, you know, moving forward, finding out a little bit more about what 2024 looks like every day that goes by in 2024. And we continue to do what we've been doing, try to think about what different potential outcomes could come from Treasury, and try to position ourselves as ideally as we can against the backdrop of that uncertainty. And I think we're doing fine there, but we would prefer to have it. I don't have a date for you. I don't have an estimated date, and I've not heard that one is forthcoming.

I think we're in the same boat, Durgesh. I think we're just waiting.

Durgesh Chopra (Analyst)

I appreciate that color. Sounds like you're kind of planning different scenarios, and you've kind of baked that risk and opportunity into your 2024 guidance. Is that a fair way to put it, Dan?

Yep. Yep, I think that's exactly right.

Okay. And then just, you had this very nice chart that you used to share, I think it was, maybe a bit dated now, which showed your balance sheet capacity, in terms of, you know, funding more or higher CapEx, and you've all this opportunity, whether it's transmission, you know, related or on the nuke side, I know that's going to be capital light. But generally speaking, at the utility, whether it's energy efficiency, whether it's the transmission opportunity, just can you give us a sense of, and the CapEx plan recently was raised lately, right? In December, 13% over the prior five-year. So maybe can you give us a sense of how much more capital can the balance sheet cover without issuing any equity, if there's a way to do that? Thank you, Dan.

Dan Cregg (CFO)

Yeah, you know, we've talked about it, it's gonna come off of the FFO to debt. And I think that, you know, one of the things that when you did see that increase in capital that you referenced, there are different FFO to debt implications, depending upon exactly what the capital is. And kind of on the opposite ends of the spectrum, our energy efficiency program has a recoverable life, depreciable life, amortizable life, whatever you want to call it, of, you know, closer to 10-12 years, and our more infrastructure-oriented investments have a longer recoverable life.

So when you look at those particular investments, you're gonna see much less of an impact on your FFO to debt, because you're going to see a lot of cash coming back to you quicker to the extent that it's EE benefits, as something that's more steel on the ground, whether it's on the transmission side or electric or gas side. And then, you know, to your other point, I totally agree with your comment that on the power side, it would be capital light, but it could be FFO positive in a fairly significant way. So those are the elements that move around. If we're in the mid-teens, our current threshold for where we are is 13, 14, depending upon whether you're talking about Moody's and S&P.

So, we've got some room in there, but I think it's not a... It's gonna depend a little bit on the nature of the investment. And I think as you saw more of that increase coming from EE of late, it was more credit-friendly for us to move in that direction.

Durgesh Chopra (Analyst)

That's helpful. Thank you. I appreciate the time.

Dan Cregg (CFO)

Thank you.

Operator (participant)

Our next question is from the line of Shahriar Pourreza with Guggenheim. Please proceed with your questions.

Shahriar Pourreza (Analyst)

Hi, good morning, team. It's actually Constantine here for Shar. Thanks for taking the questions.

Dan Cregg (CFO)

Hey, Constantine.

Shahriar Pourreza (Analyst)

Yeah, I really appreciate the commentary on the nuclear opportunity. Maybe a bit of nuance. From your perspective, is behind the meter a scalable opportunity for data centers in New Jersey, or is it a bit more kind of one-off as you look at it? And maybe, as you mentioned, there's a level of potential grid dependence, and do you see that becoming a concern at all for regulators, or is that kind of getting addressed in other forums, regulatory forums?

Dan Cregg (CFO)

Yeah, I look, the grid. I'll go backwards on that. The grid dependence, Constantine, I think is, it's not just data centers, right? We're seeing electrification across the board, and as policymakers continue to move in that direction, we have to be aware and make sure that the system is being built out correctly. I think it's being handled on multiple fronts. It's being handled at FERC. It'll be handled at each individual state, but there's plenty of avenues for those conversations to take place and to keep the burden to customers to a minimum. So no concerns on what's about that. On the scalable side, I'm going to give it to Dan, because his team does a lot of work on the commercial front.

I'll just tee up that there's, you know, there are different ways you can look at it, and Dan's team is doing a great job of talking to multiple folks and looking at multiple solutions, that he can give you some more detail about it. Yeah, Constantine, it's a great question, but it, if I try to think about exactly the nature of how you're asking, I think that by definition, if you're gonna do something behind the meter, you're gonna do it at scale. And so I think that, you know, you wouldn't move into that situation with something that was not of scale and grow at the scale, other than the natural fact that I think you're not going to have a data center of scale appear immediately.

And so it's more likely, and from what we have seen, you would see something that would be agreed to be of scale that would come in over time. And so if you—if that meets your definition of scalable, meaning it's gonna grow as you step through time, I think that the answer would be yes, but I think you'd want to set that all up right at the jump. Yeah. And Constantine, the only thing I'd add to what Dan said, just a reminder, you know, where we sit-

Ralph LaRossa (CEO)

...geographically is a great spot, but I also point out to everyone, we're the only merchant site that has three units on it. So the ability to scale there is a little bit different, and the ability to back up the supply is also very different. So, we're really excited about whatever those opportunities might be down the road because of that.

Shahriar Pourreza (Analyst)

Thank you. That's abundantly clear. And maybe as we look a little bit more broadly at just supply and demand in power markets and power prices that are now well north of the PTC levels for, you know, the 2025, 2026 strip, which kind of continue to be, you know, the PTCs that were the core planning input. Do you plan to update guidance as you kind of recontract or start realizing those revenues? And do those become accretive to the credit metrics and kind of the investment capacity that you talked earlier about?

Dan Cregg (CFO)

Yeah, I think if there's a change in how we are looking at things and what we are seeing, that is in place and locked for a period of time for us to be able to say something about it, I think that's a logical time for us to do something. Constantine, you've seen these markets for a long, long time. You know that they come up, they come down, and they're cyclical. And so, in an instant, when they are higher, our intention is to try to be more predictable and come out to investors and let them know what they can count on, and to the extent that there are some upside opportunities, speak about it, but not have it be embedded until it is real.

We're trying to just kind of keep things grounded, and so my sense is with that, that you will probably see that as you continue to go forward from us.

Shahriar Pourreza (Analyst)

Excellent. Sounds like a good problem to have.

Ralph LaRossa (CEO)

Yeah, and just a reminder, Constantine, that highly visible and liquid PJM West Hub is not necessarily reflective of the entire PJM marketplace. So those numbers aren't dead on for everybody.

Shahriar Pourreza (Analyst)

That's very fair. I appreciate your time today. Thank you.

Dan Cregg (CFO)

Thanks.

Operator (participant)

The next question is from the line of Carly Davenport with Goldman Sachs. Please proceed with your questions.

Carly Davenport (Analyst)

Hey, good morning. Thanks for taking the questions.

Dan Cregg (CFO)

Good morning, Carly.

Carly Davenport (Analyst)

For all the details so far. Maybe just on the Hope Creek outage, you mentioned that you're doing some of the initial work on the kind of fuel cycle shift there with the outage. Could you just talk a little bit about sort of the scope of what's getting done and how much will be left in order to make that shift as we get to 2025?

Dan Cregg (CFO)

Yeah, it's Carly, it's a very small piece of the puzzle that's going on now. There's a lot of engineering work that's going on. There's work that's being done on what we're doing, a rewind on the generator that imparted this outage. We've got a upgrade that we're doing. We're basically cleaning out some old insulation on the cooling tower, which provides us, you know, about 8 MW of additional capability there. I mean, small little pieces, but really helps us in some based upon weather conditions and the rates that are required. So lots of work to optimize the unit itself in anticipation of that fuel change that we're going to be making down the road.

You know, the investments will be made at Hope Creek over the next couple of fuel cycles, and then we'll be ready for the ultimate change to the 24-month cycle.

Carly Davenport (Analyst)

Got it. Okay, great. That's helpful. And then maybe you just mentioned a bit, you know, higher O&M related to the Hope Creek outage, and then you talked a bit at the beginning about some of the storm activity that you had to respond to earlier this year. Just any thoughts on where O&M for the full year could sort of trend versus last year with some of those early moving pieces in mind?

Dan Cregg (CFO)

Yeah, Carly, we may see it to move a little bit higher. You know, it's funny, we talked a little bit about the weather in the earlier remarks, and it was a fairly mild winter, but it was a really wet winter, and we had some storms that were not exactly temperature-driven as much as they were precipitation-driven. So some of that drove costs a little bit higher, as did... You know, anytime we have a Hope Creek outage, it's 100% owned, so there's a little bit of a bigger impact there. Some years we'll have that, some years we won't. So you'll see that come through on the power side. But really, the storms were one of the contributors to the first quarter's impact on O&M.

Carly Davenport (Analyst)

Got it. Okay. Appreciate that color. Thank you.

Dan Cregg (CFO)

Thanks.

Operator (participant)

Our next question is from the line of Andrew Weisel with Scotiabank. Please proceed with your questions.

Dan Cregg (CFO)

Morning, Andrew.

Andrew Weisel (Analyst)

Hi, good morning. Appreciate the details on the nuke. Maybe just one, if I can kind of pin you down a little bit to size up the opportunity. How much nuclear capacity do you have that's not committed to state programs like the ZECs or other obligations? In other words, how many megawatts could actually be committed to a new dedicated customer?

Dan Cregg (CFO)

Yeah, Andrew, I think, look, you can look at what happened at Talen as a, you know, a placeholder for size of units that hyperscalers are thinking about. Just a reminder, our state plan kind of ends in May of 2025, right? So we're-- I don't see a data center being built before May of 2025 down at that site. We may be in discussions with folks and have something to say sooner than that, but I don't expect any power to be flowing to a data center before May of 2025 when that program ends. And then, you know, it's-- then we'll see what the rules say on the IRA and how the PTCs interact with any of these kind of agreements that are reached.

Andrew Weisel (Analyst)

Okay, but your expectation is the entire portfolio is available?

Ralph LaRossa (CEO)

... I think the entire portfolio could be available for long-term contracts. And again, I think that falls into a bunch of different scenarios.

Dan Cregg (CFO)

Yeah, I don't think there's anything that's a restriction, and we'll continue to work forward and keep you posted.

Andrew Weisel (Analyst)

Okay, great. Just wanted to clarify that. Then second, pivoting to the energy efficiency side of the utility, the EE2 program, you filed in December, calls for $3.1 billion of spending, much bigger than the first program at about $1 billion. Can you just talk to some of those dynamics of why each incremental kilowatt hour of savings is so much more expensive? And maybe more importantly, are you seeing any pushback from the BPU or key stakeholders, or is this all well understood and supported?

Ralph LaRossa (CEO)

Yeah, Andrew, it's kind of simple as to why the dollar per megawatt saved goes up, right? I mean, you're going from changing light bulbs, which was the first effort that we started way back when, and thermostat changes, to now you're upgrading HVAC units and moving into commercial and industrial operations. So that's very different, just from a dollar per megawatt hour saved standpoint. As far as the pushback, you know, this was all part of the BPU's triennial. So a lot of what was submitted was based upon the needs identified by the Board of Public Utilities, and really are not a surprise. The question will be, just from a total spend standpoint, how far they would like to go.

I don't think there'll be a lot of arguments about the cost per, based upon, one, our historic performance, which has been really good, and then, second, the type of work that we'll be doing going forward.

Dan Cregg (CFO)

Yeah, Andrew, also within what the BPU did, I think to their credit, they tried to take a philosophy in approaching this, that they wanted to target things through this program that they viewed would not happen otherwise. And so, you know, these light bulbs is an example of that, given that incandescents are off the shelf. But in other examples, too, things that were gonna happen anyway are not a great target for this kind of a program. It's to try to expand what would otherwise happen. And so that, I think, expands the reach a little bit, moves them to a better place, but may cost a little bit more to get it done.

Andrew Weisel (Analyst)

Okay, very clear. Thanks so much.

Dan Cregg (CFO)

Thanks, Andrew.

Operator (participant)

Our next question is from the line of Steve Fleishman with Wolfe Research. Please proceed with your questions.

Steve Fleishman (Analyst)

Hi, good morning.

Ralph LaRossa (CEO)

Hey, Steve.

Steve Fleishman (Analyst)

Sorry, another... Hi, sorry, another nuclear question. So just, you know, we've talked about this hypothetically, you know, the last, let's say, 6, 9 months, you know, hydrogen. I think there's supposed to potentially be, like, a offshore wind port next to the plants or around there, and then obviously, data centers now. Just should we think about these as things, all things you can do there, or you, you have to kind of focus to one, and, and data centers is now kind of top of the list?

Ralph LaRossa (CEO)

No, Steve. So, it's a great question. So, the port is built. I mean, they've done a ton of work down there, and that was the New Jersey Economic Development Authority has done a lot of work there. I don't know if we can pull a ship up there yet, but we're pretty darn close. So there's been a ton of activities completed. And they started to lease some space to some of the offshore wind developers. And so I think from a state standpoint, that's going pretty well. Then there's additional land that's available and, you know, you could put a data center there, you could put-- How big it is, is a question, right?

You know, you got to figure all of that out based upon each individual developer's design criteria and what they might be considering and the size that they're looking for. You could put a hydrogen unit there. You might have an electrolyzer or something that makes some sense to go there, or maybe it goes a little bit off property, right? And again, it all depends upon the rules that come out, what we finally see from the IRA implementation. So, we're thinking about it as all of the above in an optimization strategy. Just figure out what is the best way for us to, you know, use that electricity that's coming off the units and do it in a way that's completely aligned with the state's policy. So you could do it all.

It's just a matter of, you know, what the policy is of the state and how big any one of those individual opportunities become.

Dan Cregg (CFO)

Yeah, and on the hydrogen front, Steve, as just a reminder, an uprate there would meet both additionality and hourly matching to the extent that those limitations continue on hydrogen. So I do think we feel pretty good about what we have the ability to do down there and don't see limitations on having to pick one or the other.

Steve Fleishman (Analyst)

Okay. And then just the other—I guess the other part of this is just reliability in New Jersey overall, and just that, you know, a lot of focus on offshore wind that's been delayed and the like. And just... So I guess from that standpoint, that last standpoint, can kind of, you know, how are, how are you in this alignment with the state, thinking about that aspect to be able to do something behind the meter at nuclear?

Ralph LaRossa (CEO)

Yeah. So, Steve, that power flows a whole bunch of different ways, right? Not just in New Jersey, but other states, right? So it's more of a PJM question as to that specific unit and those specific megawatts. But I will say this, and you know, we've said it in multiple settings, so I apologize if it's a repeat, but that 2003 blackout gave us the opportunity to rebuild the transmission infrastructure, and we did that. Then Sandy comes along, and we rebuilt the switching stations and substations. So we're well prepared for this. I think New Jersey is uniquely prepared, and I've got my economic development hat on here for a second, but I think we're in a really good place, and the margins aren't quite as tight as some others might have.

So I think we're looking at this and trying to figure out what's the best solution for the state, and we're doing it in partnership, not one-off of the state's plans. So we feel pretty good.

Steve Fleishman (Analyst)

Great. Thank you.

Ralph LaRossa (CEO)

Thanks, Steven. Don't apologize for asking a nuclear question. We chose to stay in, so we welcome the question.

Steve Fleishman (Analyst)

Oh, yeah. No worries.

Operator (participant)

Our next question is from the line of Ryan Levine with Citi. Please just give us your question.

Ryan Levine (Analyst)

Hi, everybody. I had a, I guess, one or two more on nuclear. In terms of the duration of contracts that your counterparties may be willing to sign, I think in your comments you mentioned long term. Any color you could share around how long long term is as you look at it? And then to the extent that there's transmission constraints in PJM, how does the timeline of any investment there play into ability to serve that longer term outlook?

Dan Cregg (CFO)

Yeah, Ryan, I think the, you know, the simple answer on the first question is, if somebody's going to come in and build a data center, that's going to be a very, very significant investment, and it's going to be around for a long time. So, I don't have a specific number of years to give you, but I think long term is pretty comfortably thought about as being long term. And I think on the transmission side of things, you know, Ralph just really, I think, gave the right response. As much as we have built out the transmission system, given what we went through about 20 years ago and 10 years ago, I do think we're prepared for whatever flows need to happen within the region.

So, both of those, I think are in pretty good shape.

Ryan Levine (Analyst)

Then to follow on the last line of questionings, to the extent that there's policy opportunities to maybe attract this customer base to the state, are there any legislation initiatives that you're keeping an eye on that may make it more palatable for other stakeholders to attract this load to the service territory?

Ralph LaRossa (CEO)

Yeah, no. So I believe, again, I'm putting my other hat on. I believe the state has plenty of solutions for new businesses to move to New Jersey or to start up here. There's a number of different initiatives down at the EDA that could attract businesses, and I don't think anything that I've seen would require additional legislative changes. There may be some to speed things up or expand opportunities for folks, but I'm pretty confident that the state has the tools in its tool chest to reach out to the opportunity set it has.

Ryan Levine (Analyst)

Thanks for taking my questions.

Operator (participant)

Our next questions are from the line of Travis Miller with Morningstar. Please proceed with your questions.

Travis Miller (Analyst)

Hi, everyone. Thank you. Since I don't have to apologize for a nuclear question, I suppose I'll jump in with another one here. Just thinking about what a contract at a very high level might look like for a co-located facility, and mainly I'm thinking about who would take the risk on there of perhaps a non-performance or something like that. Is that something you'd be comfortable with, or is that something you're going to essentially make the offtaker take that risk?

Ralph LaRossa (CEO)

Travis, I would simply tell you it's way too soon for us to be talking about anything like that. You know, we're not in a position to talk about any details or any discussions. I would say this to you, though: We've answered the question a bunch of times, and I'll tie it back to the hydrogen opportunities. We don't want to get into the commodity risk, commodity risk situation. So what we basically look at this is, you know, we put a meter at point A, and folks can pick it up from there and figure out what they're going to do with the electricity.

And I don't see data centers or electrolyzers or anything else that might happen in that space as different. And, Dan, you want to add?

Dan Cregg (CFO)

No, I mean, the only thing I would say is just from a practical perspective, if you think about a three-unit site, you've got a lot of redundancy and the ability to deal with things like that. And so obviously, contractual T's and C's are going to be worked through as across the entire breadth of whatever agreement you come to. But I think we start from a position of strength there.

Travis Miller (Analyst)

Okay, perfect. No, that's, that's great. It's fair. And then one other question on the transmission in your bids and proposals there. How much does what you proposed or put in those bids depend on a second round of offshore wind projects coming in? Any of it or some of it?

Ralph LaRossa (CEO)

Well, yeah. So Travis, I think there's two, two answers there. First, the PBI, the pre-build opportunity does not require that. It's basically very similar to what happened in the first solicitation, where, use an analogy, it's a catcher's mitt for pipes coming in or wires coming in from the offshore wind farms. So that piece really is not dependent. I think the size and scope. The next solicitation is clearly dependent upon the, the so, you know, what, how big that offshore wind opportunity gets for the state as a whole. And that, we have not seen the scope of what that might look like yet.

Travis Miller (Analyst)

Okay. Would that be through the PJM process or through New Jersey process?

Ralph LaRossa (CEO)

It would be a PJM process initiated by the State Agreement Approach from New Jersey. So New Jersey would pick up the phone, call PJM, and ask them to run the process for, on behalf of the state. Yep.

Travis Miller (Analyst)

Okay, great. Thanks so much, I appreciate it.

Ralph LaRossa (CEO)

Thank you.

Operator (participant)

Thank you. Our last question is from Paul, line of Paul Patterson with Glenrock Associates. Please just give us your questions.

Ralph LaRossa (CEO)

Hello, Paul.

Paul Patterson (Analyst)

How are you doing?

Ralph LaRossa (CEO)

Good.

Paul Patterson (Analyst)

So, just to sort of follow up on the transmission stuff, I was wondering if you could, what your thoughts might be with respect to the upcoming transmission policy agenda that's coming up here with FERC in the next few weeks. Any thoughts about what you think might be coming out there and how it might affect you guys?

Ralph LaRossa (CEO)

No, I think. Look, there's five or six items that are there. We have some folks that are heavily involved in transmission in our wires organization, some of the other ones. So we're staying abreast of it. I think FERC has remained balanced under the current chair, and I don't expect some wild swings in the outcomes there, but we're monitoring it closely right now, Paul, and I wouldn't have much more to add than that.

Paul Patterson (Analyst)

Okay. And then just on another big policy push that we're seeing from different officials is grid enhancing technologies, and just wondering if you're, if you see how you see that might, how that might impact you guys or your operations in the next few years?

Ralph LaRossa (CEO)

Yeah. So look, some of that grid enhancing is really been focused. I think there was a New York Times article on it, about the upgrades of some of the conductors that people have installed. And we've looked at some of that and piloted some of that. As we've talked about, we've done a lot of transmission upgrades. We've also built into our system the ability to do some additional upgrades, but I think that just becomes a cost benefit for the consumer based upon what additional capacity we would get out of it, and whether or not, you know, we wouldn't want to front run the need.

So it's something we'll monitor and it's something that, you know, PJM, again, will have in their tool chest to make some determinations upon how they want to solve some of the gaps that might get created as we move forward here with electrification.

Paul Patterson (Analyst)

Okay, awesome. Thanks so much.

Ralph LaRossa (CEO)

Thanks.

Operator (participant)

Thank you. There are no further questions at this time, and I'd like to turn the floor back to Mr. LaRossa for closing comments.

Ralph LaRossa (CEO)

You know, I just simply want to thank you all for your continued confidence and support. We welcome all these questions, and we really look forward to getting together with most of you at AGA later in May. So again, thank you to our employees, to our customers, and to our investors, and we'll see you all in California. Take care.

Operator (participant)

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