Public Service Enterprise Group Incorporated

Ladies and gentlemen, thank you for standing by and welcome to the PSEG 4QN Full Year 2020 Earnings Conference Call-in Webcast. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Carlotta Chan, VP Investor Relations. Thank you. Please go ahead ma'am.

Good morning and thank you for participating in our earnings call. PSEG's 4QN Full Year 2020 Earnings Release Attachments and Slides, detailing operating results by company, are posted on our website at .pseg.com and our 10K will be filed shortly. The 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 and non-GAAP adjusted EBITDA, which differ 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 earnings materials. I will now turn the call over to Ralph Izzo, Chairman President and Chief Executive Officer of PSEG. Joining Ralph on today's call is Dan Craig, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for your questions. Ralph?

Thank you Carlotta. Good morning everyone and thank you for joining us for our 2020 review and future outlook. PSEG reported non-GAAP operating earnings for the fourth quarter of 65 cents per share. Non-GAAP operating earnings for the full year rose by .6% to $3.43 per share and marked the 16th year in a row that PSEG delivered results within our original earnings guidance. PSEG's GAAP results were 85 cents per share for the fourth quarter of 2020 compared with 86 cents per share for the fourth quarter of 2019. In addition, for the full year, PSEG reported 2020 net income of $3.76 per share compared with $3.33 per share in 2019. Details on the results for the quarter and the full year can be found on slides 12 and 14. I am pleased to report that PSEG's fourth quarter and full year results reflected solid contributions from both PSENG and PSEG power and I'm particularly proud of the achievements of our employees during this past year as it was one of the most challenging in recent memory. Their efforts have kept our customers connected to essential energy services to power their homes, businesses, and vitally important institutions. We have also made steady progress on several key business priorities, the most important of which is our transition to becoming primarily a regulated utility with contracted generation comprised of our zero carbon nuclear fleet and future investments in regional offshore wind. In the past six months, we've announced the exploration of strategic alternatives for PSEG powers 7200 plus megawatts of non-nuclear generating assets and have received initial indications of interest for both the fossil and solar source assets. PSENG successfully initiated its landmark clean energy future program securing approvals to spend nearly two billion dollars

in energy

efficiency, smart meter installations, and electric vehicle charging infrastructure, all of which will enhance New Jersey's environmental profile for years to come. In addition, the New Jersey Board of Public Utilities, I'll refer to them as the BPU, recently concluded public hearings regarding PSEG nuclear's application to extend the zero emission certificate, I think I'll shorten that to ZEC from now on, through May 2025. Our service area experienced milder than normal weather during the fourth quarter, bookending the weak heating season of the first quarter in 2020. Regarding whether normalized sales for the year, while total electric sales volume declined by 2%, gas sales rose by 1%. In both the electric and gas businesses, higher residential usage of approximately 5% largely offset declines in commercial and industrial sales, resulting in stable margins overall. Working with COVID-19 health and safety protocols since last March, PSENG was able to execute on its planned 2.7 billion dollar capital spending program in 2020. These capital programs provide a critical investment to support the New Jersey economy, particularly in the early months of the pandemic, and preserve essential jobs while replacing widely important energy infrastructure and generating customer benefits of improved reliability and resiliency, as well as methane reduction. In January of 2021, the BPU approved two settlements with PSENG and other parties in the clean energy future, energy cloud, and electric vehicle proceedings. The energy cloud investment program is estimated to be approximately $707 million over the next four years, and will result in a replacement of over 2 million electric meters with smart meters. The electric vehicle program will direct $166 million into EV charging infrastructure over the next six years. With these recent settlements, the BPU has constructively addressed the vast majority of the clean energy future filing, and has approved nearly $2 billion of investment to help realize New Jersey's clean energy goals. The energy efficiency program will also establish clean energy job training for over 3,200 direct jobs while enabling the avoidance of 8 million metric tons of carbon emissions through the year 2050. Investing in energy efficiency programs is the most cost-effective solution to reducing carbon emissions. Importantly, the conservation incentive of the settlement encourages the broad adoption of energy efficiency, with certain programs focusing on low and moderate income customers that will lower bills for participating customers. We expect the balance of the clean energy future filing, which includes our request to spend under $200 million on energy storage, and a few remaining EV programs, will be addressed following future stakeholder proceedings. PSE&G continues to engage with the BPU staff and rate council to advance confidential discussions toward a settlement of the return on equity related to PSE&G's formula rate for transmission overseen by the Federal Energy Regulatory Commission. The annual update on the PSE&G's formula rate filed last October was implemented this past January, and together with cost reallocations of our revenue requirements for certain transmission projects, candidly to customers outside of our zone, this resulted in a net reduction in PSE&G customer costs. For 2020, PSE&G once again achieved top quartile OSHA scores for CTE. We also achieved the top quartile JD Power ranking in the Eastern Large Company category for both residential, electric, and gas companies, and PSE&G posted its best-ever JD Power scores for electric and gas customer satisfaction, outpacing the average industry results on metrics that consider total monthly costs, bill clarity, fairness of pricing and options, and ability to manage monthly usage among residential customers. Also, for the 19th year in a row, PA Consulting recognized PSE&G with its Reliability 1 award as the most reliable electric utility in the Mid-Atlantic region, and for the first time, with their 2020 Outstanding Customer Engagement award. New Jersey has recently made solid progress in lowering its COVID-19 positivity rates and continues a phased reopening of businesses, schools, and other activities. We have a long history of partnering with the state to support the economy, and we continue to work with them on investment programs that can spur economic development and employment recovery, all while being quite thoughtful about managing customer rate impacts. Regarding collection activities, the moratorium on shutoffs for residential, electric, and gas services is currently scheduled to conclude in March, recognizing the economic hardship that many of our customers continue to face, PSE&G, in partnership with the BPU and community groups, is working hard to enroll customers in customer payment support programs, such as LIHEAP and Deferred Payment Arrangements. When the moratorium is lifted, we will work closely with the BPU, other stakeholders, and our customers to ensure a collections process that supports our customers' individual situations. Turning now to PSE&G Power, we're continuing all activities related to the exploration of strategic alternatives we announced last July. In the fourth quarter of last year, we launched the formal sales processes of the 467-megawatt solar source and over ,750-megawatt fossil portfolios. We are currently evaluating indications of interest and believe we are on track to announce an outcome in the second half of 2021. As we launched the strategic alternatives initiative last year and throughout the process thus far, PSE&G Power has continued to deliver on expectations for non-GAAP operating earnings and adjusted EBITDA. Last year, PSE&G Fossil posted one of its best operational performance records ever and completed its entire maintenance outage schedule without any OSHA safety violations. In addition, PSE&G Nuclear completed two complex refueling outages in 2020 with new COVID-19 safety protocols and continue its overall outstanding operating performance. These achievements speak volumes about the professionalism of our dedicated workforce that exemplifies our focus on safety and operational excellence. PSE&G Nuclear's zero-emission certificate application and the extension of the current ZEC is currently under consideration at the BPU. Last month, the BPU staff's consultant released their preliminary findings. The consultant found that all three of our New Jersey units were eligible, recognizing that each unit had a financial need for ZECs. There were other aspects of the ZEC law and we look forward to upcoming hearings where we will have the opportunity to address those items. It is clear that New Jersey recognizes the need for nuclear power in order to achieve its short and long-term clean energy goals as laid out in the State's own Energy Master Plan and DEP's 80 by 50 report. The recent weather-related power and market failures in Texas and California further underscore the importance of maintaining New Jersey's reliable resource mix. Over the next few weeks, you will hear us mention that our confidential filings show that these units are actually in need of more than $10 per megawatt hour, partly due to the fact that PGM forward market prices are lower versus 2018, which was the year of our first ZEC application. As stated in the 2018 ZEC law, nuclear operating risk and market risk must be recognized as a cost in any economic determination of ZEC eligibility. We have responded to all information requests and have shared confidential financial information with rate council and the PGM independent market monitor in order to support transparency around this important proceeding. In the absence of an extension of the current ZEC, we would not continue to operate the plans. While the direction of public policy both in New Jersey and in the nation is the increased recognition of carbon-free energy to mitigate climate change, that realization in the form of a future price on carbon is highly uncertain at best. With the final decision on the ZEC application expected on April 27th, we are hopeful that the BPU will act to extend the $10 per megawatt hour attribute payment to preserve nuclear units and their 3,400 megawatts of zero carbon base load generation through May of 2025. The BPU is also moving forward with its investigation of resource adequacy and the potential for the creation of a fixed resource requirement service area within New Jersey. I'm just going to call that FRR in the future. We have maintained a neutral stance on potential of an alternative capacity procurement paradigm but remain supportive of accommodations that enable state-supported resources to qualify as capacity that can satisfy both the state's capacity obligations and its clean energy goals. As we've previously stated, the current minimum offer floor prices are not expected to prevent either our nuclear or gas-fired units from clearing the upcoming PGM capacity auction scheduled for this May. Now let me turn my attention to 2021 guidance. We are introducing non-GAAP operating earnings guidance of $3.35 to $3.55 per share with the utility expected to contribute between ,000,000 and ,000,000. PSG power between ,000,000 and ,000,000 and parent others expected to post a loss of ,000,000. This year we expect PSG to contribute just over 80% of consolidated non-GAAP operating earnings at the midpoint of guidance. Going forward, we expect that the utility earnings will represent 80 to 90% of PSG's non-GAAP results with the remaining balance expected to be comprised of long-term agreements for zero carbon offshore wind generation and our ZEC-supported New Jersey nuclear units. For PSG power, over 70% of its 2021 gross margin has been secured by way of energy hedges, capacity revenues established in prior auctions, zero emission certificates, and ancillary payments. However, for 2021, re-contracting at lower market prices, higher costs tied to a Hope Creek revealing outage, and the absence of tax benefits realized in 2020 result in the lower non-GAAP operating earnings guidance for 2021. Our PSG five-year capital spending forecast has updated the $14 billion to $16 billion for 2021 through 2025 and includes approximately $2 billion of clean energy future investments as well as the expected extension of the gas system modernization program and energy efficiency program at their average annual run rates for the last two years of the period, that being 2024 and 2025. Consistent with past years, approximately 90% or $13 billion to $15 billion of this capital program will be directed to grow regulated operations at PSG. This ongoing investment in essential energy infrastructure and clean energy programs is expected to produce .5% to 8% compound annual and rate base over the five-year period starting from $22 billion at year end 2020. On slide 10, we've provided you with an alternate view of our updated capital program for 2021 through 2025. We've classified it by investments in decarbonization, energy transition, climate adaptation for resilience and reliability, and methane reduction. As a sidebar, any spend for offshore wind will be incremental to these totals and is not included in the $14 billion to $16 billion capital plan. We also expect that our strong cash flow will enable us to fund our entire five-year capital spending program as well as our planned offshore wind investments during the 21 through 25 period without the need to issue new equity. As we continue to plan for the responsible entry to our offices and facilities currently targeted for this July, I have to thank our dedicated employees for their professionalism, persistence, and flexibility over the past year. Whether responding to a myriad of COVID-19 challenges or their excellent injury-free response to the nor'easter that we just experienced this past month, employees across our organization have embodied operational excellence as they provide our New Jersey, New York, Connecticut, and Mid-Atlantic customers with reliable essential energy services. Before moving to Dan's financial review, I will summarize the new initiatives in place for future growth and areas of our continued strategic focus. These range from the new clean energy future investments behind the meter to infrastructure opportunities supporting electrification of transportation and a growing mix of renewables in the distribution system to expanding the existing aging infrastructure replacement programs to assist the New Jersey economic recovery. In addition, we are advancing the strategic alternative exploration through a robust bidding process, pursuing near-term opportunities to expand our offshore wind investments in the Mid-Atlantic, and are engaged in ongoing efforts to preserve the New Jersey nuclear fleet, the most cost-effective and most reliable source of base-load supply to reduce emissions. Each of these actions serves to further PSEG's already strong ESG leadership position, which we continuously strive to improve. In 2020, we moved to decarbonize our generating fleet, announced an investment in New Jersey offshore wind, and initiated a landmark energy efficiency investment to bring universal access to a broad range of clean energy opportunities. In 2021, we joined the company network of the C-REES organization, that's -E-S, to advance our climate advocacy. We will achieve a coal-free generating fleet in June, and we recently published our first ESG performance report. PSEG is getting recognized for our ESG initiatives by Standard & Poor's, who has included us in their 2021 sustainability yearbook, and by the Dow Jones Sustainability Index, who has named PSEG to the North American Index for 13 years in a row. We were also gratified to be named to the 2021 listing of America's most responsible companies by Newsweek Magazine, and the Forbes list of best employers for diversity in 2020, and best employers for veterans in 2020. The board of directors' recent decision to increase the company's common dividend to the indicative annual level of $2.04 per share is the 17th increase in the last 18 years, and reflects our ongoing commitment to returning capital to our shareholders to enhance our total return profile as we also pursue growth. There is no lack of opportunity for PSEG as we continue the transformation to a primarily regulated electric and gas utility, focused on clean energy infrastructure, complemented with contracted zero carbon generation. We are working towards a sustainable future where customers universally use less energy, the energy they use is cleaner, and its delivery is more reliable and more resilient. We are confident that pursuing this strategy will enhance our ability to provide our customers with essential energy services, which has been our core mission for the last 118 years. I'll now turn the call over to Dan for more details on our operating results, and I'll be available with them for your questions after his remarks.

Terrific, thank you Ralph. Good morning everybody. As Ralph said, PSEG reported non-GAAP operating earnings for the fourth quarter of 2020 of 65 cents per share, and we've provided you with information on slides 12 and 14 regarding the contribution of non-GAAP operating earnings by business for the fourth quarter and for the full year of 2020. Slides 13 and 15 contain waterfall charts that take you through the net changes quarter over quarter and year over year in non-GAAP operating earnings by major business. I'll now review each company in more detail, starting with PSEG. PSEG's net income for the fourth quarter of 2020 increased by four cents to 58 cents per share compared with net income of 54 cents per share for the fourth quarter of 2019, as shown on slide 17. For the full year, PSEG's net income increased by 16 cents per share, or 6.5 percent, compared with the previous quarter of 2019 results. This improvement reflects an 8 percent increase in rate base at year end 2020 to just over $22 billion, which as we note on slide 22 does not include approximately $1.8 billion of construction work in progress or CWIS. That's mostly transmission. The continued growth in utility earnings resulting from investments in transmission added two cents per share versus the fourth quarter of 2019. Gas margin was two cents favorable, reflecting GSMP roll-ins and higher weather normalized volume. Electric margin was flat compared to the fourth quarter 2019, as higher weather normalized volumes were offset by lower demand. Mild temperatures during the quarter had a negative three cents per share impact, mostly reflecting recovery limitations under the earnings test of the gas weather normalization clause. O&M expense was flat versus the fourth quarter 2019. Higher distribution depreciation expense of a penny per share offset lower pension expense of a penny per share in the quarter. Taxes and other were three cents per share favorable, partly reversing the negative seven cents per share impact that the timing of taxes had on third quarter 2020 net income. Recall in the third quarter, flow through taxes and other items lowered net income by seven cents per share compared to the third quarter 2019. And we indicated at that time that about half of the seven cents would reverse in the fourth quarter. The balance is related to bad debts, which we anticipate reversing in the future based upon the timing of actual write-offs. Early winter weather in the fourth quarter, as measured by the heating degree days, was nine percent milder than normal and 14 percent milder than in the fourth quarter of 2019. The full year, PSE&G's webinar normalized residential electric sales increased by 5.6 percent due to the COVID-19 work from home impact, but a larger decline in residential use. Total webinar normalized gas sales were up 1.2 percent for 2020, led by a 4.9 percent increase in residential use, partially offset by a smaller decline in the commercial and industrial segment. For both electric and gas sales, higher residential usage largely offset declines in commercial and industrial sales, resulting in stable margins overall. PSE&G invested $700 million in the fourth quarter as part of its 2020 capital investment program of approximately $2.7 billion, directed to infrastructure upgrades of transmission and distribution facilities to maintain reliability, increase resiliency, make life cycle replacements, and clean energy investments. PSE&G's updated five-year capital spending plan includes investing $2.7 billion in 2021, and as detailed on slide 21, approximately $960 million is allocated to transmission, $700 million to electric distribution, which includes approximately $200 million for Energy Strong 2, $875 million to gas distribution, which includes over $400 million for GSMP2, and $200 million for new clean energy future EE programs and the beginning of the AMI rollout. The clean energy future EE investment will ramp up to approximately $125 million in 2021 before reaching a full annual run rate of about $350 million in 2023. As Ralph mentioned, the BPU approved two CEF settlements in January, totaling approximately $875 million, covering energy cloud and electric vehicle investments. The capital and operating costs of these programs will begin to be recovered in PSE&G's next rate proceeding, expected to be filed in the second half of 2023. From the start of the programs until the commencement of new base rates estimated in late 2024, the return of and on capital will be included for recovery in these rates, as well as operating costs and stranded costs associated with retirement of the existing leaders. Of these amounts, the vast majority, about 90%, receives contemporaneous or near-contemporaneous regulatory treatment either through the FERC formula rate or clause recovery mechanisms or recovering rates as replacement spend for new business. As Ralph also mentioned, we continue settlement discussions with the BPU staff and rate council regarding our FERC transmission return on equity. Although our forecast for 2021 assumes a resolution effective in the near term, those discussions remain confidential and ongoing. PSE&G's net income for 2021 is forecasted at ,000,000 to ,000,000, which reflects an assumed reduction of our transmission formula rate, as well as incremental investment in T&B infrastructure and energy efficiency. So moving to power, PSE&G Power reported non-GAAP operating earnings of 10 cents per share in the fourth quarter, unchanged from the non-GAAP results in the fourth quarter of 2019. Results for the quarter brought Power's full year non-GAAP operating earnings to ,000,000, or $84 cents per share, compared with 2019's non-GAAP results of ,000,000, or $81 cents per share. Non-GAAP adjusted EBITDA totalled $182 million for the quarter and $990 million for the full year of 2020, and this compares to non-GAAP adjusted EBITDA of $198 million and ,000,000 for the fourth quarter and full year of 2019, respectively. Non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure, as well as income tax expense, interest expense, depreciation, and amortization expense. Earnings release and the waterfall on slides 13 and 15 provide you with a detailed analysis of the items having an impact on PSE&G Power's non-GAAP operating earnings relative to net income quarter over quarter and year over year from changes in revenue and costs. We've also provided you with added detail on generation for the fourth quarter and full year on slide 26. PCG Power's fourth quarter non-GAAP operating earnings were aided by the scheduled increase in PCG Power's average capacity prices in PJM covering the second half of 2020 and higher gas operations, which resulted in improved non-GAAP operating earnings comparisons of $0.04 and $0.01 per share, respectively, compared to the fourth quarter of 2019. However, lower generation output and re-contracting at lower market prices reduced non-GAAP operating earnings by a total of $0.08 per share versus the year-ago quarter. A decline in O&M expenses in the quarter improved results by a penny per share and reflects the absence of the Hope Creek refueling outage that occurred in the fourth quarter of 2019. The extension of the peach bottom nuclear operating licenses contributed to lower depreciation expense of a penny per share, and lower taxes improved non-GAAP operating earnings by a penny over the year-ago quarter. Gross margin for the quarter was $32 a megawatt hour, a $1 per megawatt hour improvement over the fourth quarter of 2019, mainly reflecting the scheduled increase in capacity prices that began June 1, 2020, and remained in place through May of 2021. For the full year, 2020 gross margin was $32 a megawatt hour, a $32 a megawatt hour improvement over the fourth quarter of 2019. Mild fall temperatures and holiday-related spikes in COVID-19 positivity rates dampened market demand in New Jersey and kept power prices and natural gas prices lower than the quarter and year-ago comparisons. So let's turn to Power's operations. Total output from Power's generating facilities declined 9% in the fourth quarter of 2020 compared to the fourth quarter of 2019. And planned outages at Fossil and an extended outage at the Salem 1 nuclear unit reduced fourth quarter generation levels compared to the fourth quarter in 2019. However, full year 2020 output of 53 terawatt hours came in above our 50 to 52 terawatt hour forecast. The nuclear fleet operated at an average capacity factor of .9% in the quarter and .3% for the combined cycle fleet operated at an average capacity factor of .2% in the quarter and .3% for the full year, generating approximately 22 terawatt hours in 2020. The three newest combined cycle generating units at Keys, Seaworn, and Bridgeport Harbor 5 posted an average capacity factor of over 75% for the full year 2020. And this coming June, PSG Power will complete the planned early retirement of the 383 megawatt coal-fired Bridgeport Harbor 3 generating station, eliminating the last coal unit in power fleet. For 2021, Power has edged approximately 90 to 95% of its expected output of 48 to 50 terawatt hours at an average price of $32 per megawatt hour, which represents an approximately $2 per megawatt hour decline from 2020. In addition, 2021 average hedge prices no longer include cost-based transmission charges for New Jersey's basic generation service contracts due to a change in how they are billed and collected. This change further reduces revenues by approximately $3 per megawatt hour starting on February 1st of 2021 and is offset on the cost side, so there's no P&L impact as a result. We're forecasting 2021 non-GAAP operating earnings and non-GAAP adjusted EBITDA at PSG Power to be $280 million to $370 million and $850 million to $950 million dollars, respectively. Power segment guidance reflects a full year of fossil and solar operations, lower expected generation volume, and lower market prices, as well as the absence of a one-time tax benefit realized in 2020. Now let me briefly address the results from Enterprise and Other, which reported a net loss that increased by $0.03 per share compared to the fourth quarter of 2019, and reflects lower tax benefits compared with the fourth quarter of 2019, and lower results from PSG Long Island. Regarding PSG Long Island, following several challenges related to our response to Tropical Storm East IAS, we've made significant improvements in our outage management, telephony, business continuity, and other systems and processes. The Long Island Power Authority filed a complaint against PSG Long Island in New York State Court last December, alleging multiple breaches of the Operating Services Agreement, or OSA, in connection with PSG Long Island's preparation and response to Tropical Storm East IAS. We are in discussions with LIPHT to address their concerns, which could include potential amendments to our OSA with LIPHT, and to resolve all claims. As a reminder, our 12-year contract is scheduled to run through 2025. We are committed to addressing the identified performance issues and to continue our strong track record of performance for Long Island's customers since taking over operations. For 2021, PSG Enterprise and Other is forecasted to have a net loss of $15 million, as parent financing and other costs exceed earnings from PSG Long Island. PSG ended 2020 with approximately $3.8 billion of available liquidity, including cash on hand of $543 million and debt representing 52 percent of our consolidated capital. In December, PSG issued $96 million of 8.63 percent senior notes due April 2031 in exchange for a like amount of 8.63 percent senior notes due April 2031, originally issued at Power, which were cancelled following the completion of the exchange. PSG also retired a $700 million term loan at maturity. Power's debt a percentage of capital declined to 27 percent on December 31st, from 28 percent at September 30th. To summarize, non-GAAP results for the quarter were $0.65 per share. Full year 2020 non-GAAP operating earnings were $3.43 per share. And as we move into 2021, our guidance for the year is $3.35 to $3.55 per share, with regulated operations expected to contribute over 80 percent of consolidated results. The range for 2021 reflects incremental investment in our T&D infrastructure and a ramp up of the new clean energy future programs, as well as an assumed reduction in the return on equity of our transmission formula rate during the year at PSEMG and a full year of fossil and solar operations at PSG Family. PSG also raised its common dividend by 8 cents per share to the indicative annual level of $2.04, a 4 percent increase over 2020. The 2021 indicative rate continues to represent a conservative 59 percent payout of consolidated earnings at the midpoint of 2021 guidance, and utility earnings alone are expected to cover 140 percent of the dividend at the midpoint of 2021 guidance. We still expect our strong cash flow will enable us to fully fund PSG's five-year, 14 to 16 billion dollar capital investment program, as well as our plan to offer wind investment during the 2021 to 2025 period without the need to issue new equity. That concludes my comments, and Shelby, we are now ready to take questions.

As a reminder, if you would like to ask a question, please press star, followed by the number one on your telephone keypad. That's star one. We ask that you limit yourself to one question and one follow-up. Your first question is from Jeremy Tonet of JP Morgan.

Hi, good morning.

Morning.

Just wanted to start off with the power sales, if I could. If there's any additional color that might be possible, including maybe the relative progress of the solar versus the wind assets there, and if the events in Texas last week have any impacts on the process overall?

So I'll handle that because Dan will be too modest. When Dan laid out for the board in July what this process would look like in terms of participants, timing, expected outcomes. I knew he'd done good work in terms of assessing it and coming up with some predictions, but I got to tell you he's nailed every element of it. So the process is going exactly as planned. Our near-death experience in January of 2014 with our own polar vortex really has winterized these assets in a way that I'm sure Texas will now follow suit with. So no, Texas has not had any impact on us. I don't apologize for not being able to give more information. We will give greater clarity sometime in the summer, I'm sure, as we get past the round two bids. But so far, no surprises. The process is going well, and our assets are fully winterized as a result of the 2014 polar vortex that we experienced.

Got it. That makes sense. Maybe just kind of flipping over to the transmission ROE and just what time expectations for transmission ROE reduction are incorporated into your 2021 guide here. Should we assume any changes are on a prospective basis versus having a retroactive impact as well?

Yes, so the second question is one that I can give greater specificity on. Yes, it would only be at FERC, not withstanding the time lapse to the actual decision, the tariff adjustments go to the filing date and not sooner. So yes, it would be prospective. As you can appreciate, just given the nature of the negotiation that we're involved in, we really can't disclose what we've assumed in terms of the guidance. But that shouldn't be a big surprise. We don't break out the guidance in terms of individual components, whether it's weather or outage durations of plants and things of that nature. So we are where we were for a while now. We're close. Both sides are eager to resolve this. But in deference to the BPU, they've had an incredibly active agenda for the past two years. And they are dealing with the same challenges everyone else is in terms of working from home. And despite that, they've successfully done one offshore wind solicitation there in the middle of the second one. They've done stakeholder processes for SRR energy efficiency. So they're getting a lot done. And this ROE discussion is part of that portfolio activities, but not resolved yet.

Got it. Fair enough. Figured I'd give it a try. Thank you.

You won't be the first. You won't be the last. I'm sorry. You won't be the first.

Your next question is from Julian Demolin Smith of Bank of America.

Hey, good morning, team. Thanks for the time and the opportunity. So what's intriguing in your slides, you talk about potential investments in offshore wind here as well. Can you talk about, you know, obviously some dynamics and certainly evolving from quarter over quarter. Can you talk your latest expectations on offshore and how that could fit into your capital budgeting process and earnings all together as best you see it today between, you know, expanding ownership and potential new leases, et cetera?

So at just a high level, Julian, I'm sure you're aware that there's an ongoing solicitation in Maryland. There's a second round in New Jersey. We have not fully developed our jointly owned Garden State Offshore Energy site, jointly owned with Orsted down off of the coast of Cape May. So there's been 29,000, I think, megawatts of hopes and dreams announced by states up and down the East Coast and 9,000 megawatts of awards granted. So even if we were to just focus in the mid-Atlantic region, going from Maryland to Delaware to New Jersey, there are ample opportunities. And as I said a moment ago, we still have leasehold that's not fully developed. So I don't think we've said anything more specific than that, right Dan? So we'll just probably have to leave that there.

Maybe if I can ask you to put parameters or how you think about this business, maybe that might be more palatable, right? For instance, how do you think about return metrics and palatability? Obviously, we've seen some data points out there in the Americas and Europe of late. And then separately, do you have any thoughts about what percent ownership in a given project, et cetera, what size it should be relative to the business? Anything that you're thinking about to help size it out and even at the minimum, or how do you think about the return palatability, if you will?

Yeah, I mean, so first of all, I think we've been clear that we don't view ourselves as the lead developer. We do this in partnership with others. And right now we have an option for 25% on ocean wind. And we have entertained possibly going as high as 50% previously on this project. There is likely to be a transmission solicitation that will be managed by PJM on behalf of New Jersey that we feel very confident that we could do something of that sort without necessarily meeting partners, although we would be welcome to partnerships in that regard to. I think at the end of the day, our number one growth engine remains rate-based growth in PSD&G. Having said that, there's a window of opportunity here as states aggressively pursue offshore wind. And we don't want to have ourselves excluded from that. The commercial risk is completely mitigated by the PPA or the orders. And the operational risk is mitigated by making sure you partner with a world-class partner. And we think we have that in Orsted. So the risk profile is something that we're now comfortable with. It took us the better part of, I guess it was close to two years of us kind of inching along. And we're very grateful for Orsted's patients. But on the transmission side, I think the risk rewards that we're very comfortable with, and it always was. And on the wind farm side, having the right partner mitigates that. We've never disclosed what our hurdle rates are, but suffice to say, even though I think we can manage the risk, both the commercial and the operational risk, as I just mentioned, we wouldn't do these projects for lower than – we would only do these projects for above-utility returns.

Actually, another thing to think about too is they come about solicitation by solicitation. So as far as what the ultimate endgame is going to be, it gets determined in those bite-sized chunks as we work our way through both New Jersey and Maryland and the transmission opportunity that Ralph talked about. So that will be the manner in which we will come to what the ultimate outcome is.

Got it. Okay. Yeah, fair enough. I'll leave it there. Thank you guys very much. Have a great day. Thank you.

Your next question is from Michael Lepates of Goldman Sachs.

Hey, Ralph. Thank you for taking my question. One on the utility, just looking out at the CAPEX guidance, I want to make sure I understand something. I'm looking out at this, and it basically has transmission spend falling off a cliff, meaning spending levels year by year. Just curious, when you think about the type of things that may backfill it to maybe where it doesn't fall off as much in years three through five, what are the type of things, what are the type of opportunities that your engineering teams are looking at?

Yeah, so a couple things that happen, Michael, is that even though the numbers look like they're coming down in years four and five, as we get closer to that point in time, we learn more, and that very spend comes back up. So one thing you could see is just more of the same. You're not going to see a Susquehanna-Roseland mega project, at least that's not readily predictable. But you could see more of the 69 kV upgrade and just the transmission budget coming up as we get more knowledgeable about what the grid status is. I think one of the areas, though, that we are increasingly paying attention to, and it's difficult to quantify, is as a result of the pandemic, I believe long-term patterns, lifestyle patterns are going to change. I know at PCG we're already telling our employees that many more of them will be able to work from home. The combination of the household becoming now a place of business and greater penetration of electric vehicles, which are charged at the household, and the growth of electric devices in home, whether it's smart devices, communication devices, is really changing the whole calculus behind the importance of reliability into the home. So I'm right now in the office with Dan and Carlotta, and we've got multiple 26 kV feeds into this building because Newark is a commercial center for New Jersey. That's true in New Brunswick and many other downtown commercial areas throughout New Jersey. That's not true in my home, and it's not true in anybody's home in New Jersey. So the need to invest in the last mile to reflect the reliability expectations as the home becomes a commercial center and really a bunch of small business operations is a public policy discussion that I think is just beginning to take place and is no way reflected in our numbers. So I'd say you'll see those numbers come up in the future. They always come up in the future, either because we'll just get smarter about the traditional stuff we need to do, or there's this whole last mile question that we'll need to grapple

with. Got it. And then my question, and this is a little bit of maybe one for Dan, in the rate base by year exhibit, one of the footnotes talks about the billion aid, Dan you brought it up, the billion aid of transmission that is construction work in progress. Can you remind me, you earn on that QIP, you just don't necessarily earn a cash return in that prompt year?

Yeah, we earn on the QIP. Frankly, Michael, the reason that it really is in there is from the concept of when folks have done the calculation and tried to figure out whether or not there was over earning going on, that people sometimes would miss the QIP component. And so all we really try to do is lay that out so that people were aware.

But if I think about the true earnings power of the business, meaning of transmission rate base, I would actually add that on top of the stack bars.

Yeah, right, exactly.

Okay, thank you, Dan. Much appreciated, guys. You all have a good weekend.

Your next question is from Steve Fleischman of Wolf Research.

Hey, good morning. Hi, hey guys. So just a question on the 80 to 90% from PSCNG that you highlighted, Ralph. So, you know, that's a little bit less than I would have thought after selling these fossil assets. And I know you mentioned offshore wind, but that's not for a while. So could you just give it, is it more like 90% once the sale is done and before the offshore wind? And then it kind of comes down again some or how should I think about that range?

Yeah, so there's some building blocks that I'm sure you're aware of, Steve, right? So the foundation, the house, the roof, everything, but maybe the unnecessary furniture is the utility. And that's got a rate-based kager of six and a half to eight percent. And that'll do a little worse because of O&M or a little better because of low growth. But as you know, both those numbers have hovered around zero and there'll be some regulatory lag maybe in some of the final years as clause mechanisms have some non-clause recovery back into them. But that's, the utility is what, 80% this year or close to that and continue to grow. The thing is this year we're still including all fossil. That'll go away, but hopefully New Jersey will abide by their own energy master plan nuclear will still be around. So that'll be on top of the utility. You may recall our BGSS, that sticks around, that's on top of the utility. Long Island, not extending these IEIS challenges, we're assuming will stick around, that's on top of the utility. And then yes, we're making some assumptions in year 2024, mostly 2025 on ocean wind. So those are making up the 10 to 20%. And I'd rather not narrow that and I certainly don't want to give it to you, but by year. I do want to remind you that we are very much interested in willing after the, if we sell the fossil units, when we sell the fossil units, once this process is over, going to revisit the notion of multiple year earnings guidance and a investor meeting where we kind of recalibrate everyone and try to provide greater clarity of what the company looks like with those different components. But right now in the middle of a competitive solicitation for the assets, in the middle of the ZEC negotiation and an ROE negotiation, that's the best I can do for you.

Okay. Okay. And then one other question just on nuclear. If I heard you right, I think you reiterated that you would shut the nuclear plants. But I think you said, you know, if the ZEC is anything but the $10 that currently is given the market prices are even lower. Is that correct? That's correct

Steve. You know, we, you know, we value our corporate citizenship in the state. And I think we've shown over the past few months how important it is to follow the BPU's leadership in terms of its clean energy aspirations and Governor Murphy's aspirations. We've had some very constructive outcomes because we have followed their lead on energy efficiency, on AMI, on electric vehicles. Having said that, you know, the nuclear plants need more than $10. And what we've said is we'll look at longer term solutions for that, hopefully coming out of the federal government with a price on carbon. Hopefully, if that doesn't work, coming out of the FRR process. And that's the only reason, and the only reason why we would accept $10 now is because that's all the state can do. So that's really not a negotiation. That's just kind of the match the state has available to it. And that's why we need it. And we need more than that. So that's kind of where we're stuck, right? If you need more than $10, you can't accept less than $10. And when the other party can only offer you $10, then that Venn diagram ends up at one point and only one point, which is $10. But that does not preclude the need for additional work after that. And as the risk of state in the obvious, if you don't get the $10, then what confidence can you possibly have that the longer term solution can be realized? And that's why we would shut the units. So I guess I could have simply said yes to you, but I gave you a very length explanation of the yes.

Now that I appreciate. Thank you. I'll let someone else ask.

Your next question is from David Arcara of Morgan Stanley.

Well, hi, good morning. Thanks so much for taking the question. I was going to ask basically a follow up on that last line of thinking. With the new FERC in place, do you think there's a chance that New Jersey doesn't end up pursuing FRR if it sees a new path ahead for MOPR? And how do you think about your strategy with the nuclear plant if that were to happen?

So I mean, in short, if there's anything that's possible, right? And I think what New Jersey's goal is, at least what we've encouraged New Jersey to set as its goal, it wasn't because we had any better insights than the state already did, is to not pay twice the capacity. And under the current construct, without question offshore wind will not clear the market. At some point in the future, it's likely nuclear won't clear the market. I'm referring to the capacity market. So as New Jersey grows its carbon-free footprint, and even its existing carbon-free footprint in former nuclear, you'd have increasing double payments for capacity. And it is about $25 to $30 million per gigawatt that you end up paying. So that starts adding up very quickly. Now, if you went to a unit-specific FRR, which is something we were supportive of during the original capacity market discussions, if PJM could come up with some sort of stakeholder process that has a regional price on carbon, there's a whole bunch of ifs, and I won't bore you with the litany of them because they're all equally improbable, then yes, maybe the state can do something differently than a simple broad-based FRR. But at the end of the day, the mechanism has to be one that avoids the custom of burden of paying twice for capacity. That's really what the option

is. And David, to some degree, it also comes down to timing. So as things stand today, you do have that double payment issue that Ralph talked about. And so your question is, if something changes at FERC, would something change in New Jersey? And so part of it comes down to how quickly might you see something change at FERC, and where would New Jersey be in their process? And these things tend to not happen extremely quickly. So again, that backed up, you do start to have that double payment Ralph talked about in 25. So it's a bit of a, not necessarily a race, but it's two timelines coming to that year's capacity determination with respect to how quickly FERC could move and what New Jersey's reaction would be to whatever it is they do and how much of a solution it is to that double payment problem. So those are some of the things to think about with respect to how the parties might be approaching a change from the current path.

Got it. That's helpful color. And just in terms of how that influences your strategic thinking around the nuclear plant, is it fair to say, you know, if you do get a $10, Zach, you still think there's more that would be needed for the nuclear plants to provide longer term clarity beyond just getting that though?

Yes. There's two things have become obvious since the passage of the law in 2018. Power markets continue to decline more so than we expected them to. That's only going to get worse as more zero marginal cost removals are introduced to the market. And we're in a market that dispatches on marginal cost and the nuclear plants rely on those inframarginal revenues to make their economics work. And that is getting flatter and lower each passing year. Secondly, the state has very ambitious carbon free energy goals, which are great, which we completely applaud. But they're so ambitious that they exceed the current license life of the nuclear plants. And you're not going to go into relicensing and you're not going to make capital improvements on the basis of a three year ZEC process. Even if it was adequately compensating you, which it isn't. So the two problems with the ZEC are the overall dollar amount and the duration of the review process. So, and we just wanted that over the past few years as the market continues to implode on itself. So for nuclear plants, we are also used to do great. They're running 70 plus percent of the time, and they're enjoying nice spark spreads and they're working beautifully. So, so yeah, long term nuclear questions and need to resolution, but there are multiple pathways to get there.

Okay, understood. Thanks so much.

Your next question is from Paul Fremont of Mizuho.

Hey,

how are you? Just a quick question on the hedging. There were, I think some other adjustments that were originally in your hedge calculations, like some renewable programs and maybe ancillary charges. Are those eliminated as well? So now should there be sort of no adjustment whatsoever to the $32 number that you're providing?

Now think about it the opposite way, Paul, that the single change is dealt with with respect to transmission charges. So

you would continue to add the other charges into your number?

Yeah, or stated another way, not try to back out those pieces.

Okay,

as a revenue oriented number, we've stripped out capacity as a separate item. And now since transmission is not in the revenue, it will not be in the revenue.

Okay. And then the other question I have is you have a 25% option, obviously on ocean wind. If you were to go to a higher level, would that just be a separate negotiation that you would need to have with Orsted? Or is there any contractual right that you have to go higher?

No, we have to get their approval.

Okay. And then the last, if I take your comments, you guys don't want to be sort of a majority in a project. So the limit of where you would be is roughly 50% or less?

That's correct.

Okay. Thank you very much.

Welcome. So I think we're at the appointed hour. Thank you all for joining us. Just by way of recap, the rate based growth of the utility as it has for the past decade plus, continues to drive the EPS growth at PSE&G, all the while doing things that are vitally important to customers. And we continue to project now a .5% to 8% CAGR in that rate based over the next five years, doing things that are really driven by state policy leadership and an aging infrastructure that has to attract our attention to meet the needs of customers. I think an ad is a positive outcome from what has occurred last year is this conservation incentive program providing much greater, even greater stability to utility revenues. The positive constructive outcomes we've had with the BPU, again, I'm repeating myself, by virtue of us following their lead on energy master plan and public policy accomplishments that they had targeted, have all just made for a terrific, terrific set of outcomes. Yes, we do have an ROE, a negotiation and a ZEC application that is in front of the BPU. A resolution of those two items will introduce a prolonged period of regulatory calm and significant execution of these great programs that we've got through before. We'll give you greater classification on the strategic alternatives in a couple of months, but as I said a moment ago, I couldn't be happier with the fact that it's met every one of our expectations so far, and I think it will continue to do so. I would be remiss if I didn't close my boxes. I have, sadly for each of the last three quarters, by expressing my thanks to all of you who have family members or loved ones who are frontline workers in what is an improving situation, but still a tragic situation related to COVID-19. I know that it's got to be a tremendous burden on you and your families, but please from our family at PSEG, a sincere thank you to anyone who's engaged in that. Otherwise, we look forward to seeing you, albeit as pixels, over the next few weeks. I know there's a bunch of conferences coming up, and maybe in the not too distant future, seeing you live and in the flesh. Thank you. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.