Earnings Call Transcript - PEG Q2 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Rob, and I am your event operator today. I would like to welcome everyone to today's conference, Public Service Enterprise Group's Second Quarter 2023 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded today, August 1, 2023, and will be available for replay as an audio webcast on PSEG's Investor Relations website at investor.pseg.com. I would now like to turn the conference over to Carlotta Chan. Please go ahead.

Carlotta Chan, IR Manager

Good morning, and welcome to PSEG's Second Quarter 2023 Earnings Presentation. On today's call are Ralph LaRossa, Chair, President and CEO; as well as Dan Cregg, Executive Vice President and CFO. The press release, attachments and slides for today's discussion are posted on our IR website at investor.pseg.com, and our 10-Q will be filed shortly. PSEG's earnings release and other matters discussed during today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. We will also discuss non-GAAP operating earnings, which differ from net income or net loss as reported in accordance with generally accepted accounting principles or GAAP in the United States. We include reconciliations of our non-GAAP financial measures and a disclaimer regarding forward-looking statements on our IR website and in today's materials. Following Ralph and Dan's prepared remarks, we will conduct a 30-minute question-and-answer session. I will now turn the call over to Ralph LaRossa.

Ralph LaRossa, Chair, President and CEO

Thank you, Carlotta. Good morning, everyone, and thanks for joining us to review PSEG's second quarter results. This morning, PSEG reported second quarter 2023 net income of $1.18 per share compared to net income of $0.26 per share for the second quarter of 2022. Non-GAAP operating earnings for the second quarter were $0.70 per share compared to $0.64 per share for the second quarter of 2022. Non-GAAP results for the second quarter of 2023 and 2022 exclude items shown in Attachments 8 and 9 provided with the earnings release. Results for the second quarter and year-to-date align with our full year 2023 non-GAAP operating earnings guidance of $3.40 to $3.50 per share, which we reaffirmed along with our outlook for 5% to 7% long-term earnings growth through 2027 in this morning's earnings announcement. Dan will also discuss our financial results in greater detail, but this was a relatively straightforward quarter for both PSE&G and PSEG Power & Other, fully meeting our planning expectations and supporting full year segment guidance. We are focused on executing our plans and growing PSEG while also increasing the predictability of our business. During the quarter, we completed PSEG's exit from offshore wind generation through the sale of our 25% equity stake in Ocean Wind 1 back to Ørsted, recovering our investment in the project. We continue to implement the solutions we outlined to address pension variability. PSEG recently executed an agreement for a pension lift-out to further reduce prospective earnings variability. This transaction covers approximately 2,000 retirees and will transfer about $1 billion of related obligations and associated plan assets to the insurer. The transaction is expected to be completed this month and will result in no changes to the amount of benefits payable for the retirees and have no material impact on PSEG's non-GAAP operating earnings in 2023. Turning now to PSEG's capital spending plans. The utility portion of $15.5 billion to $18 billion remains focused on system modernization of our aging distribution infrastructure, Last Mile support in preparation for electric vehicles and building electrification, and climate mitigation aligned with New Jersey's energy policies and our clean energy investments. PSE&G's investment program drives our expected compound annual growth rate and rate base of 6% to 7.5% from year-end 2022 to year-end 2027. The low end of this rate base CAGR assumes an extension of our gas system modernization program and our clean energy investments at their current average annual levels. While the upper end includes an extension of our Energy Strong II program, which is scheduled to conclude in 2024, as well as the remaining portion of our proposal for medium- and heavy-duty electric vehicles 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 remain mindful of customers' affordability. On this front, PSE&G continues to compare well to peers on a share of wallet basis, both in the region and 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 midyear. We are on schedule and on budget. In fact, PSE&G just installed its 1 millionth smart meter out of 2.3 million that we have planned, and we continue to notice higher spending on new business related to electric vehicles and strong demand for our energy efficiency solutions. Speaking of energy efficiency, the New Jersey Board of Public Utilities recently approved its second energy efficiency framework for the next 3-year cycle that will begin in July of 2024 and run through June of 2027. This past May, the BPU approved a $280 million 9-month extension of PSEG's first energy efficiency program to synchronize with the completion of the state's first cycle in June of 2024. You may recall that PSE&G started its energy efficiency programs earlier than other New Jersey utilities. The BPU's new framework sets guidelines for the next round of energy efficiency plans, which are now due this October for implementation in July of 2024. The energy efficiency annual reduction goals of 0.75% for gas and 2% for electric for program years 2026 and 2027 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 modernization program, we reduced methane release by approximately 22% system-wide. 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 $0.47 to $0.40 per therm. If approved by the BPU, the new rate will keep PSE&G's monthly bill for typical residential gas customers among the lowest in the region for the upcoming 2024 heating season. The BPU's future of natural gas stakeholder proceeding will also start this month, and we expect to participate in the upcoming technical conference and follow-up meetings as New Jersey achieves its emission reduction targets, which will also consider the impact on costs and jobs. Kim Hanemann, President of PSE&G, is already actively involved in the state's clean buildings working group that is considering various approaches to building electrification, including the development of Clean Heat Standard. Our overall approach to energy transition is to advocate for practical expansion of electrification in a way that protects customer affordability, safety, and reliability. We are engaging in meaningful discussions with PJM, our regional grid operator, and our New Jersey stakeholders to enhance coordination and understanding of our perspectives on future load growth and the necessary investment in existing transmission and distribution infrastructure to meet even a scaled-back version of the New Jersey energy transition. Now, turning to nuclear operations. The PSEG nuclear fleet continues to safely generate the majority of New Jersey's carbon-free baseload electricity. During the first half of 2023, our nuclear units generated over 16 terawatt hours of electricity and operated at a capacity factor of 95.8%. Charles McFeaters, who many of you met at our March investor conference, was promoted to Chief Nuclear Officer during the quarter in a smooth and well-planned transition that included the Salem 2 refueling outage completed on schedule and on budget. The Power & Other portion of PSEG's 5-year capital program is a significantly smaller amount of PSEG's total, mainly reflecting basic nuclear capital spending but includes several low-cost, high-impact projects like the Hope Creek transition from 18 months to 24-month refueling cycles. So, to conclude, I believe this quarter demonstrates our commitments. We are reiterating our full year non-GAAP operating earnings guidance of $3.40 to $3.50 per share. Additionally, we continue to build 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. This financial strength reinforces our confidence in a long-term growth rate of 5% to 7% in non-GAAP operating earnings through 2027 and supports our ability to pay a competitive and growing dividend, as we have for 116 years. Furthermore, we increased the predictability of our financial results by streamlining the business with the completed offshore wind sale and making strides in reducing pension variability with the lift-out. Finally, we are committed to keeping customer bills affordable during the energy transition through stringent cost controls and a culture of continuous improvement. You can expect us to execute our strategy while maintaining safe and reliable network operations. I'll now turn the call over to Dan for more details on the operating results, and I will be available for your questions after his remarks.

Daniel Cregg, Executive Vice President and CFO

Great. Thank you, Ralph, and good morning, everybody. Earlier, Ralph mentioned that PSEG reported net income of $591 million or $1.18 per share for the second quarter of 2023 compared to net income of $131 million or $0.26 per share for the second quarter of 2022. Non-GAAP operating earnings for the second quarter of 2023 were $351 million or $0.70 per share compared to $320 million or $0.64 per share for the second quarter of 2022. We've provided you with information on Slides 9 and 11 regarding the contribution to non-GAAP operating earnings per share by business for the second quarter and year-to-date periods and Slides 10 and 12 contain waterfall charts that take you through the net changes for the quarter-over-quarter and year-to-date periods in non-GAAP operating earnings per share by major business. Starting with PSE&G, which reported second quarter 2023 net income of $336 million or $0.67 per share. This compares to $305 million or $0.61 per share in the second quarter of 2022. The second quarter 2023 non-GAAP operating earnings were $341 million or $0.68 per share compared to $305 million or $0.61 per share in the second quarter of 2022. The main drivers for both GAAP and non-GAAP results for the quarter were growth in rate base reflected in higher transmission formula rate, recovery of infrastructure investments with roll-in mechanisms and a benefit from the reversal and timing of taxes, which we mentioned on the first quarter call, nets to 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 $0.02 per share higher, gas margin was $0.01 per share higher driven by the clause recovery of GSMP investment. Electric margin was $0.01 per share higher, reflecting investment returns from Energy Strong and other electric and gas margin added $0.02 per share based on a benefit from the tax adjustment credit and appliance service results. Lower distribution O&M expense added $0.02 per share compared to the second quarter of 2022, primarily reflecting reduced weather-related corrective maintenance. Depreciation and interest expense increased by $0.01 and $0.02 per share, respectively, compared to the second quarter of 2022, reflecting continued growth in investment. Lower pension income resulting from 2022's investment returns, combined with lower OPEB credits scheduled to end in 2023, resulted in a $0.04 per share unfavorable comparison to the year earlier quarter. Lastly, the timing of taxes recorded through an effective tax rate, which nets to 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 SIP mechanism in effect since 2021 limits the impact of weather and other sales variances, positive or negative on electric and gas margins while importantly enabling PSE&G to promote the widespread adoption of its energy efficiency programs. Growth in the number of electric and gas customers, the driver of margin under the SIP mechanism continues to be positive and were each up 1% during the trailing 12-month period. On capital spending, PSE&G invested $900 million during the second quarter and is on plan to deliver its largest annual capital investment program at $3.5 billion. The program includes upgrades to our T&D facilities, Energy Strong II investments, last mile spend in the infrastructure advancement program, and the continued rollout of clean energy investments in energy efficiency and the Energy Cloud, including smart meters. Related to our pension, in February 2023, the BPU approved an accounting order authorizing PSE&G to modify its method for calculating the amortization of the net actuarial gain or loss component for ratemaking purposes. This change is effective for the calendar year ending December 31, 2023, and forward. For the full year 2023, PSE&G's forecast of non-GAAP operating earnings is unchanged at $1.500 billion to $1.525 billion. Moving on to Power & Other. Just as a reminder, Power & Other includes our nuclear fleet, gas operations, Long Island and parent activities, including interest expense. For the second quarter of 2023, PSEG Power & Other reported net income of $255 million or $0.51 per share and non-GAAP operating earnings of $10 million or $0.02 per share. This compares to second quarter 2022 net loss of $174 million or $0.35 per share and non-GAAP operating earnings of $15 million or $0.03 per share. We previously mentioned that during the first quarter of 2023, PSEG Power realized the majority of the approximate $4 per megawatt hour increase in the average price of our 2023 hedged output, which rose to approximately $31 per megawatt hour with higher winter pricing driving most of the increase. For the second quarter of 2023, gross margin rose by a total of $0.05 per share reflecting the absence of certain full requirement BGS load contracts that remain following the sale of the fossil business in 2022 and resulted in a lower cost to serve compared to the prior year. The increase in gross margin includes higher generation of $0.01 per share from fewer refueling outage days in the second quarter of 2023, offset by lower capacity revenues of $0.01 per share compared to the year-ago quarter. O&M cost comparisons in the second quarter improved by $0.01 per share in 2023. Higher interest expense covering PSEG Power and parent financings were $0.02 per share unfavorable compared to the year-ago quarter from higher variable rates on term loans and refinancing maturing debt at higher rates. Lower pension income from 2022 investment returns and OPEB credits from the lower amortization benefit mentioned earlier were $0.03 per share unfavorable versus the second quarter of 2022. And taxes and other were $0.02 per share unfavorable compared to the second quarter of 2022, reflecting a partial reversal of the effective tax rate benefit from the first quarter and lower investment income. On the operating side, the nuclear fleet produced approximately 7.7 terawatt hours during the second quarter and 16 terawatt hours for the year-to-date period in 2023, running at a capacity factor of 91.2% for the quarter and 95.8% for the year-to-date period. For the full year 2023, PSEG is forecasting generation output of 30 to 32 terawatt hours and has hedged approximately 95% to 100% of this production at an average price of $31 per megawatt hour. For 2024, the nuclear fleet is forecasted to produce 30 to 32 terawatt hours of baseload output and has hedged 75% to 80% of this generation at an average price of $38 per megawatt hour. The forecast of non-GAAP operating earnings for PSEG Power and other is unchanged at $200 million to $225 million for the full year. This forecast reflects the realization of a majority of the expected increase in the average 2023 annual hedge price in the first quarter of '23, as we previously discussed. Touching on some recent financing activity. As of June 30, 2023, PSEG had total available liquidity of $4 billion, including $500 million of cash and cash equivalents on hand. PSEG Power had net cash collateral postings of approximately $400 million at June 30, which is well below the levels experienced during 2022. Through the second quarter, we've repaid $2 billion of term loans, which were entered into during 2022 to support our collateral needs. In April, we entered into a $750 million 364-day variable rate term loan to support our liquidity needs. As of June 30, 2023, PSEG had $750 million outstanding of a 364-day variable rate term loan and PSEG Power had $1.25 billion outstanding of a variable rate term loan maturing March of 2025. As of the end of the quarter, PSEG had swapped $900 million of the power term loan from a variable rate to a fixed rate. And in May, PSE&G paid at maturity $500 million of secured medium-term notes. As Ralph mentioned earlier, PSEG recently executed an agreement for a pension lift-out that will further increase the predictability of our financial results. This transaction covers approximately 2,000 retirees from PSEG Power & Other and will transfer approximately $1 billion of related obligations and associated plan assets. This transaction will have no material impact on PSEG's non-GAAP operating earnings in 2023. Upon completion of the pension lift-out, we anticipate taking a one-time non-cash settlement charge in the third quarter of 2023 related to the immediate recognition of unamortized net actuarial loss associated with a portion of the pension involved in the transaction. After providing for the effect of this transaction, our pension plans remain well funded. As Ralph mentioned, we are reaffirming PSEG's full year 2023 non-GAAP operating earnings guidance of $3.40 to $3.50 per share, with PSE&G forecasted to contribute between $1.500 billion to $1.525 billion and PSEG Power & Other forecasted at $200 million to $225 million. The settlement charge related to the lift-out is not included in the full year 2023 non-GAAP operating earnings guidance for PSEG, PSE&G or PSEG Power & Other. That concludes our formal remarks. And operator, we are ready to begin the question-and-answer session.

Shahriar Pourreza, Analyst

Dan, you talked about some uncertainties remaining with power and energy prices until we get that PTC guidance. Any update on conversations with treasury? There seems to be some delays, obviously, in other tax credit issues. So does that potentially push out like the PTC implementation, and does that change the calculus for power as you think about earnings hedging in any of the efficiency projects like refueling gas, etc.?

Daniel Cregg, Executive Vice President and CFO

Thanks, Shahriar. I don't believe it changes much for us. As we look to 2023, the corporate minimum tax will be implemented, and we're still waiting for guidance on that. From the perspective of the PTC, it's a tax credit that will apply under the current law, beginning on January 1, 2024. I haven't heard anything indicating a delay in its implementation. However, we might not have clarity on how gross receipts will be defined by January 1. The tax return will not be filed until 2025, and I would prefer to have that information now for better planning. But I have no doubt, based on what I've heard, that the start date will remain January 1, 2024, although I haven't received any updates regarding when we will receive further guidance on the credits.

Shahriar Pourreza, Analyst

And then just on the '24 case expectations, I mean, you guys have highlighted the need to recover base spending that's not in much mechanisms to the tune of $0.30 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 the overall rate impact as we are seeing higher cost of capital? It's certainly a different inflationary environment in the last few years.

Daniel Cregg, Executive Vice President and CFO

Yes, I don't think I would think about it any differently than we talked about it before, right? 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 in getting that filing ready to be submitted in the fourth quarter.

Operator, Operator

The first question comes from Shahriar Pourreza with Guggenheim Partners.

Daniel Cregg, Executive Vice President and CFO

Yes, Jeremy, to address your specific questions. Regarding your first question about cash transacted, this transaction inherently involves a liability for future pension payments that will be withdrawn from the company, with that liability being matched essentially by the cash going out. Therefore, yes, there is a cash element to the transaction. However, consider that cash as coming from the pension trust, which is the source for those liabilities. From a broader corporate cash perspective, do not view it as cash coming solely from the general accounts but rather from the trust itself. In relation to your second question about the source of that cash, we have diverse investments across various categories managed within the pension trust. A straightforward way to conceptualize this is that roughly 20% of the pension investments will be allocated to this purpose. While this might not capture every detail perfectly, it provides a reasonable approximation of the future allocation from the remaining mix within the funds. So, I think this framework is both simple and appropriate for understanding the situation moving forward.

Jeremy Tonet, Analyst

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

Daniel Cregg, Executive Vice President and CFO

No, you should not consider any impact on the 5% to 7% growth rate, which should remain intact. This transaction was primarily about assessing the potential variability in our corporate results due to the size of the pension, which was the main reason for the move. Ralph made a crucial point—our first priority was to ensure that our actions would protect the benefits for our retirees. We conducted extensive due diligence on that front and felt confident about it. Secondly, we needed to ensure that it ultimately made sense for the company. That's exactly what we accomplished. Managing that variability moving forward has been a focus of ours, and while there may be very minimal effects as we progress within the plan, it will not cause us to move outside of the projected range at all.

David Arcaro, Analyst

Quick follow-up on the lift-out. What does that leave you in terms of a funding ratio post the transfer there?

Daniel Cregg, Executive Vice President and CFO

Yes. So we finished the year at 87% and the year has been pretty good as we work 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.

Ralph LaRossa, Chair, President and CEO

Yes, good observation, David. We are definitely on track for the date discussed during the Investment Day. However, the work begins earlier since a considerable amount of engineering work is required, and some fabrication starts years in advance. The engineering has commenced, and we have a solid understanding of the costs, which are minimal as previously stated. Everything is aligned for the target date we mentioned. So, once again, we rely on the team's execution down there. No, it's not top of mind because it's not a big driver for us one way or the other, but it's something we certainly want to do for a couple of reasons. I mean one, it's the right thing to do from an environmental standpoint, if 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, look, it is going to have some incremental financial impacts for us. I think additionality 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.

Durgesh Chopra, Analyst

I want to revisit the pension lift-out quickly, Dan. Congratulations on completing it promptly. If I recall correctly, the part of the pension not covered by rates or regulations was about 30%, and this lift-out pertains to 20%. I'm curious about what you plan to do with the remaining 10% that isn’t covered by rates. Any insights on that?

Daniel Cregg, Executive Vice President and CFO

Yes, your order of magnitude is right there, Durgesh. And 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 kind of got a moving target, right? Your service cost continues to go forward. And those kinds of elements come into play. And so right now, just think about what sits outside of this lift-out in Power & Other as just being status quo.

Ralph LaRossa, Chair, President and CEO

Durgesh, I'll give you a couple of pieces. Yes, last night was the first public hearing that we had on the GSMP filing. 17 individuals spoke in favor of the filing, 1 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.

Carly Davenport, Analyst

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 would highlight in terms of changes or expectations around the regulatory landscape there following the personnel additions?

Ralph LaRossa, Chair, President and CEO

Yes, I don't anticipate any dramatic changes. We have some positive discussions happening, and it seems like they align with what the new commissioners are focusing on, such as environmental issues and affordability. Our GSMP program is well aligned with these priorities, particularly regarding methane reductions and our preparations for future pipeline usage. The electrification efforts we are making also resonate with the comments those new commissioners have previously made before joining the commission, which is encouraging. From an affordability perspective, as we prepare for our upcoming rate case, I am increasingly proud of New Jersey's progress. Rate increases across the state have largely remained below the inflation rate, and our initiatives to electrify homes, transportation, and improve the grid demonstrate that it is possible to achieve these goals affordably. The data supports that if approached correctly, we can ensure affordability while meeting the expectations of the new commissioners based on their previous roles.

Daniel Cregg, Executive Vice President and CFO

Yes, Carly, I believe that continuing with our historical approach is likely the right choice. As I mentioned earlier regarding the PTC timing, we are still awaiting more information. We've considered the potential outcomes from the treasury regulations, although we have limited clarity on what those may look like as we proceed. Until we receive new information, my thoughts are educated but may lack the depth we would prefer given the current guidance. We are also implementing some additional hedges as time goes on. In our recent materials from the last quarter, you may have noticed some increases in pricing. We are making prudent decisions in an uncertain situation. Hopefully, we'll receive more updates from the treasury soon.

Julien Dumoulin-Smith, Analyst

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 $1 billion implying a return on asset flipping the liability around conversely. I mean it 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.

Ralph LaRossa, Chair, President and CEO

Yes. No, Julien, listen, I don't think those numbers you just quoted would be aligned with the words de minimis. So I think that would be a little bit more than what we would certainly expect and not aligned with what our expectations are. No, I could understand why people would make that argument. So it might make sense in some circles to do that, right? It certainly would make the most sense from an environmental standpoint, if 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, look, it is going to have some incremental financial impacts for us. I think additionality 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. Yes, so again, more execution from the team down there. Yes. No, nothing that I would expect to change dramatically. Look, we've got some real good conversations that are going on. From what I can tell and what folks have had going from conversations would be aligned with the things that new commissioners are talking about, focus on environmental issues, focus on affordability.

Paul Patterson, Analyst

So almost all my questions have been answered. But I apologize for missing this. What is the expected GAAP impact of the lift-out?

Daniel Cregg, Executive Vice President and CFO

Yes. As we evaluate 2023, we expect a minimal impact that is not significant enough to include in any models. The anticipated effect is very small. Looking ahead, I would say the same applies; there is a slight positive arbitrage. However, we have mentioned that there will be a one-time charge related to the unrecognized element. The absence of this going forward will somewhat offset that. Therefore, I wouldn't consider it to have much of an impact in 2023 or beyond. The primary focus for us is on managing volatility.

Anthony Crowdell, Analyst

You may have addressed this in Durgesh'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?

Daniel Cregg, Executive Vice President and CFO

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

Paul Freeman, Analyst

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

Daniel Cregg, Executive Vice President and CFO

Yes. I think as you take a look year-to-date, one of the things we talked about upfront 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.

Ralph LaRossa, Chair, President and CEO

I want to leave you with this thought. As we established our new management team and shared our vision, we mentioned that we wouldn't make significant changes and would maintain our strategy. However, this quarter has reinforced many points we've communicated over the past six months. It's crucial for us to align with public policy, especially in New Jersey, and we have a dedicated workforce that collaborates effectively with us. This alignment has enabled us to perform as we did. I would highlight three significant achievements this quarter. Firstly, our exit from offshore wind was executed in a manner we are very proud of. We carefully evaluated that opportunity and exited while maintaining our financial and policy integrity, as well as our labor relations in New Jersey. Secondly, we continued to align with public policy through our energy efficiency filing, allowing us to capitalize on new opportunities presented by the Board. Lastly, we made progress on pension execution, and I'm pleased with the accomplishments realized through impressive teamwork from various members of our team. Additionally, I want to acknowledge the efforts during the recent heat storm in New Jersey. Our appliance service technicians quickly repaired malfunctioning air conditioners, and our overhead line workers ensured pole-top transformers were operational. The underground teams maintained the network in Newark and other areas, while our call takers provided timely information to customers regarding power restoration. Their work was exceptional and seamless. This situation has revealed further opportunities for us to improve in the future, and I cannot stress enough how well we executed during the storm and across all areas last quarter. I appreciate everyone for tuning in, and we will continue to build your confidence as we move forward into the rest of 2023. Thank you, and I look forward to speaking with you next quarter.

Operator, Operator

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