Public Service Enterprise Group Incorporated

Ladies and gentlemen, thank you for standing by. My name is Christy, and I am your event operator today. I would like to welcome everyone to today's conference, Public Service Enterprise Group First Quarter 2021 Earnings Conference Call and Webcast. At this time, I'll protest first on a listen-only mode. Later, we will conduct a question-and-answer session for members of the financial community. At that time, if you have a question, you need to press the star and the number 1 on your telephone keypad. To withdraw your question, please press pound and the number 1. As a reminder, the conference is being recorded today, May 5, 2021, and will be available for telephone replay beginning at 2 p.m. Eastern Time today until 11.30 p.m. Eastern Time on May 11, 2021. It will also be available as an audio webcast on PSEG's corporate website at investor.pseg.com. Alan, I'd like to turn the conference over to Kalana Chan. Please go ahead.

Thank you, Christy. Good morning. PSEG released first quarter 2021 earnings results earlier today. The earnings release attachments and today's slides can be found on the PSEG Investor Relations website, and our 10-Q will be filed shortly. The earnings release and other matters we will discuss on today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. We 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. Reconciliations of our non-GAAP financial measures and a disclaimer regarding forward-looking statements are posted on our IR website and included in in today's earnings materials. I will now turn the call over to Ralph Izzo, Chairman President and Chief Executive Officer of Public Service Enterprise Group. 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, and thank you all for joining us today. I'm pleased to report that PSEG has achieved several major milestones on our path to becoming a primarily regulated utility company with a complementary and significantly contracted carbon-free generating fleet. PSEG posted solid results earlier this morning reporting non-GAAP operating earnings for the first quarter of 2021 of $1.28 per share versus $1.03 per share in last year's first quarter. Our GAAP results for the first quarter were also $1.28 per share, versus $0.88 per share in the first quarter of 2020. Results from ongoing regulated investments at PSE&G and the effect of cold weather on PSE&G Power drove favorable comparisons at both businesses. We present details of the quarter's results on slide five of the earnings presentation. We are well positioned to execute on our financial and strategic goals for the balance of the year given this eventful quarter. beginning with nearly $2 billion of clean energy future programs, which have moved from approval to execution. PSE&G is helping to advance the decarbonization of New Jersey in a sizable and equitable way. Our clean energy future investments are paired with a jobs training program that offers opportunities to low- and middle-income New Jersey communities. Last week, the New Jersey Board of Public Utilities voted unanimously to award a continuation of the full $10 per megawatt-hour zero-emission certificates, I'll just call them ZECs from now on, for all three New Jersey nuclear units, that would be Hope Creek, Salamuna 1, and Salamuna 2, through May of 2025. This was the maximum amount that the VPU could have awarded, and we are appreciative of the support received from the many community, labor, business, environmental, and employee organizations that participated in this enormously important process. Each of these groups recognizes the value of the reliable around-the-clock and carbon-free electricity supply our nuclear plants provide. Throughout this process, our nuclear team has approached operations at the units with the utmost professionalism and dedication to safety. I congratulate PSEG Nuclear for being recognized by INPO as an industry leader in operational reliability. one of only two nuclear fleets across the industry with no scrams over the past 365 days. The BPU's decision to extend the ZEC program will advance climate action in New Jersey by helping to preserve the state's largest carbon-free generating resource and is consistent with a growing interest at the federal level in preserving existing nuclear as an essential part of a clean energy mix. We applaud the BPU for its decision which is in the best interest of the state of New Jersey, and its ability to achieve its long-term clean energy goals without compromising reliability or going backward on environmental gains made to date. Looking ahead, we will soon work with stakeholders to obtain alignment of state and federal climate goals in seeking ways to extend the duration of support for carbon-free nuclear power. During the quarter, the BPU also approved PSEG's 25% equity investment in Orsted's Ocean Wind project. In addition, Ocean Wind received a notice of intent to prepare an environmental impact statement from the Bureau of Ocean Energy Management, or BOEM, which will also review the project's construction and operations plan. In April, PJM, in close cooperation with the BPU, opened a four-month solicitation window to seek transmission solutions to support New Jersey's offshore wind generation target. This process is PGM's first public policy transmission solicitation, and we will participate in this proceeding. The recent Biden administration proposal focusing on climate action is clearly supportive of offshore wind, existing nuclear generation, and electrification of transportation. all of which are aligned with PSEG's business plan and strategy for sustainability. PSEG eagerly encourages and advocates for a national approach to accelerate economy-wide net zero emissions even sooner than 2050 in a constructive manner that expands green jobs by investing in clean energy infrastructure. I am more optimistic than ever that the momentum for real climate action is taking hold PSEG continues to press ahead with our Powering Progress vision that incorporates energy efficiency and electrification of transportation to help our customers use less energy. We are pairing that with our move to make the energy our customers use cleaner, which aligns with our efforts to preserve our existing nuclear units and pursue strategic alternatives for our fossil fleet. Then, we strive to deliver with high reliability and resiliency. which ties to our investments in energy infrastructure and the energy cloud. Today, we are also announcing progress on our strategic alternatives exploration with an agreement to sell our solar source portfolio to an affiliate of LS Power. The sale resulted from a robust marketing process, and we're pleased with the outcome of the sale, having determined that the transaction is modestly accretive on some of the parts and on an operating earnings basis going forward. We expect the solar source portfolio deal to close in the second or third quarter of 2021, subject to customary regulatory and other closing conditions. PSEG powers continuing the exploration of strategic alternatives for its fossil generating fleet in mid-year. These expected transactions, along with over a decade of capital allocation directed mainly toward PSEG position the remaining company as a primarily regulated electric and gas utility with a complementary carbon-free nuclear fleet and offshore wind investments that will be highly contracted. The COVID-19 pandemic and its economic impact continue to affect the New Jersey economy. The large contribution of the transmission and residential electric and gas components to our overall sales mix has had a stabilizing effect on the margins of our utility business, as does a supportive regulatory order that authorizes deferral of certain COVID-19 related costs for future recovery. Governor Murphy recently announced that a significant easing of COVID-19 restrictions on the state's businesses, venues, and gatherings would begin on May 19th, following progress in vaccinating over half of the state's population and a sustained reduction in positivity and hospitalization rates. PSE&G has begun implementing the Clean Energy Future energy efficiency programs by initiating customer engagement and outreach, as well as advancing the Clean Energy Jobs training program I mentioned earlier, and related IT system build-out activities. Following the BPU approval of our $700 million AMI proposal in January, we have begun implementation of the four-year program, Our current focus is on planning the AMI communications network, customer outreach, and developing the installation schedule of the new meters. On the regulatory and policy front, there are several upcoming developments at the FERC, the Federal Energy Regulatory Commission, the BPU, and PJM that could influence future results. Last month, FERC promulgated a new proposed rule to limit the 50 basis point RTO return on equity incentive to a three-year period. Given the Biden administration's interest in the significant transmission build-out to expand the integration of clean energy into the nation's power grid, this development was disappointing. We have long supported the need for higher incentives for transmission investment over distribution returns based on the added complexity and risk of these projects. Coordination through the RTO has benefits, but myriad risks and complications must be considered as well. Based on the short comment window provided, the proposed rule could be enacted as early as the third quarter. We will file comments to recognize the merits of continuing the RTO order, but this looks to be an uphill battle, given the chair's support for the supplemental rule. While we await the results of the first PGM capacity auction in three years, which PGM will announce on June 2nd, PSEGs continue to advocate for a minimum offer price rule, I'll just call that MOPR going forward, that will avoid double payment for resources such as offshore wind and nuclear or other carbon-free supplies needed to achieve state goals. First, Commissioner Danley has developed a state option to choose resources proposal, or SOCR, intended to achieve the major goals of establishing the rights of states to choose their energy policy objectives and eliminate double payments by states for the capacity they choose. This proposal could have the added benefit of keeping much of FERC's capacity market reform rules intact while addressing state objections. New Jersey is expected to issue its consultant's report and recommendation for resource adequacy this month. This report could determine whether a fixed resource requirement, or FRR, will be chosen to satisfy the state's future capacity obligations beyond the 2022 and 2023 energy year. We continue to believe that the state could pursue an FRR without legislation and will suggest options to minimize the cost impact of FERC's capacity ruling on New Jersey customers. Earlier in April, the BPU released its strong proposal to address the design of the solar successor program, Stakeholder meetings are being conducted to consider a solar financial incentive program that will permanently replace the solar renewable energy certificate, or SREC program, and the temporary transitional renewable energy certificate, or TREC program, which was instituted in 2020 upon the state's attainment of 5.1% of kilowatt hours sold from solar generation. Given the substantial increase in New Jersey's solar targets, the high cost of solar, and the solar cost caps in the Clean Energy Act of 2018, we believe it is critical to develop a cost-effective approach to incent future solar generation. By far, the most efficient and cost-effective way for New Jersey to optimize what solar can bring to the achievement of its clean energy goals is to maximize grid-connected utility-scale projects by involving the state's electric distribution companies. So to wrap up my remarks, we are reaffirming non-GAAP operating earnings guidance for the full year of 2021 of $3.35 to $3.55 per share. Our guidance assumes normal weather and plant operations for the remainder of the year and incorporates the conservation incentive programs that begin in June for electric and in October for gas to cover variations in revenue due to energy efficiency and other impacts. In addition, as we mentioned on our year-end call, our 2021 guidance assumes a prospective settlement of our transmission return on equity at a lower rate and the inclusion of fossils results for the full year. We are on track to execute PSEG's five-year $14 billion to $16 billion capital program through 2025 and have the financial strength to fund it without the need to issue new equity. Over 90% of the current capital programs directed to PSE&G, which is expected to produce 6.5% to 8% compound annual growth in rate base over the 21 to 25 period, starting from PSE&G's year end 2020 rate base of $22 billion. As we've noted previously, PSE&G's considerable cash generating capabilities are supported by over 90% of its capital spending continuing to receive either formula rate, clause-based, or current rate recovery of and on capital. Finally, I thank our employees for their exceptional contributions to a compelling PSEG story this quarter. From nuclear operations marking a second breaker-to-breaker uninterrupted run at Hope Creek, to a cross-functional regulatory, legal, finance, and government affairs group that multitasks on Clean Energy Future, ZECS, and a host of other regulatory proceedings, to our field crews in New Jersey and Long Island who exemplify a safety-conscious mindset. I could not be prouder of our entire PSGT team. And now I'll turn the call over to Dan for more details on our financial and operating results, and we'll be available for your questions after his remarks.

Dan. Great. Thank you, Ralph, and good morning, everyone. As Ralph mentioned, PSTG reported non-GAAP operating earnings for the first quarter of 2021 of $1.28 per share versus $1.03 per share in last year's first quarter. We've provided you with information on slide 12 regarding the contribution to non-GAAP operating earnings by business for the quarter. And slide 13 contains a waterfall chart that takes you through the net changes quarter over quarter in non-GAAP operating earnings by major business. I'll now review each company in more detail. PSE&G, as shown on slide 15, reported net income for the first quarter of 2021 of $0.94 per share, compared with $0.87 per share for the first quarter of 2020, up 8% versus last year. Results improved by $0.07 per share driven by revenue growth from ongoing capital investment programs and favorable pension OPEB results. Transmission capital spending added $0.02 per share to the first quarter net income compared to the first quarter of 2020. On the distribution side, gas margin improved by $0.03 per share over last year's first quarter, driven by the scheduled recovery of investments made under the second phase of the gas system modernization program. Electric margin was a penny per share favorable compared to the first quarter of 2020 on higher weather-normalized residential volumes. O&M expense was 2 cents per share unfavorable compared to the first quarter of 2020, reflecting higher costs from several February snowstorms. Depreciation expense increased by a penny per share, reflecting higher plant and service. And pension expense was 2 cents per share favorable compared to the first quarter of 2020. Flow-through taxes and other were 2 cents per share favorable compared to the first quarter of 2020. And this tax benefit is due to the use of an annual effective tax rate that will reverse over the remainder of the year and was partly offset by the timing of taxes related to bad debt expense. Winter weather, as measured by heating degree days, was 4% milder than normal, but was 18% colder than the mild winter experienced in the first quarter of 2020. For the trailing 12 months ended March 31st, total weather normalized sales reflected the higher expected residential, and lower commercial and industrial sales observed in 2020 due to the economic impacts of COVID-19. Total electric sales declined by 2%, while gas sales increased by approximately 1%. Residential customer growth for electric and gas remained positive during the period. PSE&G invested approximately $600 million in the first quarter, and is on track to fully execute on its planned 2021 capital investment program of $2.7 billion. The 2021 capital spending program will include infrastructure upgrades to transmission and distribution facilities, as well as the rollout of the clean energy future investments in energy efficiency, energy cloud, including smart meters, and electric vehicle charging infrastructure. PSE&G is continuing to defer the impact of additional expenses in courage to protect its employees and customers as a result of the COVID-19 pandemic. PSE&G has experienced significantly higher accounts receivables and bad debts and lower cash collections from customers due to the moratorium on shutoffs for residential customers that began last March and has been extended through June of this year. We've launched an expanded customer communications program designed to inform all customers about payment assistance programs and bill management tools. As a reminder, PSE&G continues to make quarterly filings with the DPU detailing the COVID-19 pandemic-related deferrals. And as of March 31st, PSE&G has recorded a regulatory asset of approximately $60 million for net incremental costs, which includes $35 million for incremental gas bad debt expense. Electric bad debt expenses recovered through the societal benefits charge and trued up periodically. With respect to subsidiary guidance for PSE&G, our forecast of net income for 2021 is unchanged at $1,410,000,000 to $1,470,000,000. Now, moving to power, in the first quarter of 2021, PSE&G Power reported net income of $161,000,000, or 32 cents per share, non-GAAP operating earnings of $163 million or 32 cents per share, and non-GAAP adjusted EBITDA of $321 million. This compares the first quarter 2020 net income of $13 million, non-GAAP operating earnings of $85 million, and non-GAAP adjusted EBITDA of $201 million. The earnings release and slide 21 provide you with a detailed analysis of the items having an impact on Power's non-GAAP operating earnings relative to net income quarter over quarter. And we have also provided you with more detail on generation for the quarter on slide 22. PCG Power's first quarter results benefited from a scheduled improvement in capacity prices for the first half of 2021, a favorable weather comparison to the mild winter in the first quarter of 2020, and other items, some of which are expected to reverse in subsequent quarters. The expected increase in PGM's capacity revenue improved non-GAAP operating earnings comparisons by $0.03 per share compared with last year's first quarter. Higher generation in the 2021 first quarter added $0.01 per share due to the absence of the first quarter 2020 unplanned sell-in-one average. And favorable market conditions influenced by February's cold weather benefited results by $0.03 per share compared to last year's first quarter. We continue to forecast a $2 per megawatt hour average decline in recontracting for the full year, recognizing that the shape of the annual average change favors the winter months of the first quarter. The weather-related improvement in total gas send-out to commercial and industrial customers increased results by 4 cents per share. We expect some of this increase to gas ops will reverse later in 2021, reflecting the absence of a one-time benefit recognized in the third quarter of 2020 related to a pipeline refund. O&M expense was $0.03 per share favorable in the quarter, benefiting from the absence of first quarter 2020 outages at Bergen II and Salem I. A lower depreciation and lower interest expense combined to improve by a penny per share versus the quarter ago or the year ago quarter. Generation output increased by just under 1%. to total 13.3 terawatt hours versus last year's first quarter, when Salem Unit 1 experienced a month-long unplanned outage. PCG Power's combined cycle fleet produced 4.7 terawatt hours, down 8%, reflecting lower market demand in the quarter. The nuclear fleet produced 8.2 terawatt hours, up 3%, and operated at a capacity factor of 98.8% for the first quarter, representing 62% of total generation. As Ralph mentioned, Hope Creek posted an uninterrupted run between refueling outages and just began its 23rd refueling outage in April. PCG Power's forecasting generation output of 36 to 38 terawatt hours for the remaining three quarters of 2021 and has hedged approximately 95 to 100 percent of its production at an average price of $30 per megawatt hour. Gross margin for the first quarter rose to approximately $34 per megawatt hour compared to $30 per megawatt hour in the first quarter of 2020. which contained one of the mildest winters in recent history. Power prices in the first quarter of 2021 were stronger across PJM New York and New England compared to the year earlier period. This winter's temperatures were 12% cooler on average and resulted in better market conditions compared to the first quarter of 2020. Power's average capacity prices in PJM were higher in the first quarter of 2021 versus the first quarter of 2020. and will remain stable at $168 per megawatt day through May of 2022. In New England, our average realized capacity price will decline slightly to $192 per megawatt day beginning June 1st. However, Power's cleared capacity will decline by 383 megawatts with the scheduled retirement of the Bridgeport Harbor Unit 3, achieving our goal of making Power's fleet completely coal-free. Over 75% of PSEG Power's expected gross margin in 2021 is secured by our fully hedged position of energy output, capacity revenue set in previous auctions, and the opportunity to earn a full year of ZEC revenues and certain ancillary service payments such as reactive power. The forecast of PSEG Power's non-GAAP operating earnings and non-GAAP adjusted EBITDA for 2021 remain unchanged at $280 million to $370 million, and $850 million to $950 million, respectively. Now, let me briefly address results from PCG Enterprise and Other. For the first quarter of 2021, Enterprise and Other reported net income of $10 million, or two cents per share, for the first quarter of 2021, compared to a net loss of $5 million, or a penny per share, for the first quarter of 2020. The improvement in the quarter reflects higher tax benefits recorded in the first quarter of 2021, due to the use of an annual effective tax rate that will reverse over the remainder of the year, as well as interest income associated with a prior IRS audit settlement. For 2021, the forecast for PSEG Enterprise and other remains unchanged at an ad loss of $15 million. With respect to financial position, PSEG ended the quarter with $803 million of cash on the balance sheet, During the first quarter, PSE&G issued $450 million of five-year secured medium-term notes at 95 basis points and $450 million of 30-year secured medium-term notes at 3%. In addition, we retired a $300 million, 1.9% medium-term note at PSE&G that matured in March. In March of 2021, PSE&G closed on a $500 million, 364-day variable rate term loan agreement following the January prepayment of a $300 million term loan initiated in March of 2020. For the balance of the year, we have approximately $950 million of debt at PSEG Power scheduled to mature in June and September, $300 million of debt scheduled to mature at the parent in November, and $134 million of debt at PSEG scheduled to mature in June. Our solid balance sheet and credit metrics keep us in a position to fund our 2021 to 2025 capital investment program without the need to issue new equity. As Ralph mentioned earlier, we are affirming our forecast of non-GAAP operating earnings for the full year of 2021 of $3.35 to $3.55 per share. That concludes my comments, and Christy, we are now ready to take questions.

Ladies and gentlemen, we will 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 pound followed by the number one. If you're on a speakerphone, please pick up your handset before entering your request. One moment, please, for the first question. The first question is from the line of Julian Dumoulin-Smith with Bank of America.

Good morning. Hey, good morning. Thank you. Well, first off, if you don't mind, there was an article this morning here in Reuters, I believe, around federal support for production tax credits. Obviously, you all just received your own state-level support here on ZEX. Can you talk about how those two might mesh together, understanding that obviously ZEX It's very early days on any federal effort here. And then related to that on the nuclear front, as you think about your cost reduction efforts and offsetting the dis-energy, how should we think about the cost structure sitting above the nuclear plant sort of once everything's said and done after this year? Can you think about that, too?

Hi, Julian. Thanks for your question. So in the New Jersey statute, the 2018 statute, there's an explicit offset that would reduce the ZEC payment if there's a federal payment for the carbon-free attributes of the plants. We have always maintained that whether it's nuclear or wind or solar, that reducing the nation's carbon emissions should be governed by a nationwide program. So we are actively pursuing these federal remedies. And yes, they would be, as I just said a moment ago, offset the ZEC. I don't know that I fully understand your question about the cost structure that's on top of the plans.

Let me rephrase that, if you don't mind, Steve. Sure. Thank you, Rob. Just as you think about the legacy SG&A, sort of the corporate costs, as you think about divesting these other packages here, can you just elaborate as to how you think about sort of what the run rate is of that business without asking what the actual profitability of the nuclear plants are? How do you think about the cost structure therein just as we look to refine ourselves in kind of a 22 going forward basis?

Yeah, we have set a goal for ourselves today. that there would be no stranded costs that would remain upon a divestiture of assets. The philosophy we've adopted is that we want to be extremely ambitious in eliminating positions, but extremely accommodating in helping people get reassigned to the extent that their skills match needs in the company. We turn over 7% of our employee population every year, so We're always looking for talent. Now, the one exception to that, of course, is that to the extent that we have people like myself whose compensation was spread over a bigger asset base, that's going to be something that we will have to make up in a different way, and we obviously have certain positions like that that will be the case. So, no, we are quite focused and intent upon not having any residual income stranded support or overhead costs remaining after the S&P.

Be them direct or indirect, as Ralph pointed out.

Right. Excellent team. And just clarifying, there's no further clues you can offer us on the sale price for the portfolio today, outside of not taking a write-down, I presume.

Yeah, so it's a big bracket. It was between $500 and $600 million. And the The value accretion is based upon an average of the next three years of what we thought the EBITDA would be. And the earnings accretion is if we use the proceeds simply to retire debt. So we're not making any heroic assumptions. So it was, as I said in my remarks, it was a robust process. We had credible participants. The prices we received were quite credible, and we think it worked quite well. You're tired of hearing me say this, but so far the only surprise I've had since July is that there have been no surprises. And I hope I can continue to say that, and I'm sure I will.

Indeed. Well, congratulations again on the progress. Speak to you soon.

Thank you. Our next question comes from Jeremy Tenet with J.P. Morgan.

Hi, good morning. Hi, Jeremy. Just wanted to take a step a bit higher level here with Biden plan. And granted, you know, it's very early here. Things can change. But just wondering what you're looking for here and how could it impact PEG, you know, as far as what it could mean for offshore wind, transmission development? or even kind of different things such as, you know, nuclear with green hydrogen in the future? Just, you know, any type of thoughts that you could share as far as what possibilities or what you're looking for here?

Sure, Jeremy. You know, we were one of a very small group of companies, candidly, in our industry who wrote to the president and supported his 80% reduction by 2030 for the electric sector. And we're working with members of Congress on making sure that nuclear is included in any clean energy standard in a technology-neutral way. Candidly, we have been talking to folks about the possibility that if tax credits are extended for carbon-free energy, that nuclear would be eligible for that as well. That to an extent, an incentive system is set up to achieve these targets that they not be technology-specific, but that they be... I'll repeat myself here, technology indifferent as long as you're achieving the desired outcome, which is carbon reductions. We know that there's a lot of wisdom to an all-the-above approach, including nuclear, solar, wind, carbon capture and storage. And we're pleased to see what the President has said about prospects for offshore wind. New Jersey's in the middle of a second round solicitation looking for another 2.4 gigawatts. Maryland is seeking an additional few hundred megawatts. So I do think the momentum is real, and the combination of enthusiasm coming out of Washington and enthusiasm on the part of governors in the region in which we operate leads me to believe that there is going to be a lot of opportunity to invest both in the transmission infrastructure needed to access carbon-free resources and the continued development of carbon-free resources, as well as the preservation of existing carbon-free resources. Don't forget, I know you know this, but nationwide, the existing nuclear fleet is responsible for just over 50% of the carbon-free energy in the nation, even though it only supplies 20% of the total electricity. And in New Jersey, those numbers are even more pronounced. Our nuclear plants are over 90% of the carbon-free energy. So you've got this really nice confluence of political leadership in the capital and in the states. all rowing the boat in the same direction.

Got it. That's very helpful. Thanks. And granted, as you said, federal support could supersede what happens at the state level, and it's great to see you just got the three-year extensions there. But just wondering, as you look down the road here today, Do you see the potential for changes to the ZEC program in New Jersey, be it higher levels, longer duration, or just trying to get a feeling for what you think might be possible there?

Yeah, we've been quite consistent in saying that we see a multi-phase process to secure the long-term viability of our nuclear plants, and getting round two of ZECs was the successful culmination of phase one. In phase two... There are three pathways we're going to explore. One is a federal pathway, be that a clean energy standard or a production tax credit. We talked about that just a moment ago, so we're going to work hard to pursue that because it is global climate change, not New Jersey climate change. The second path is to be an honest broker and advisor to the state in its pursuit of an FRR. That, as I said in my remarks, is in process, and we're expecting to see a summary report from the state's consultant sometime this month. That's just a little bit behind schedule, but not by much, and the state has some time to do that thoughtfully and well. In the unlikely event that all of that doesn't achieve the long-term economic viability of the nuclear plant stem, we would talk to state policymakers about modifying the ZEC program to To do that, it is pretty clear that a three-year process is untenable in such a capital-intensive asset. And as we said throughout the ZEP proceeding, the $10 per megawatt hour was not commensurate with the cost of capital associated on a risk-adjusted basis with operating those plants, but given the opportunity to pursue these three other remedy paths, that we would accept the $10 per megawatt hour. So I do think that there's a... there's a fair amount of opportunity to change the economic support for the nuclear plants.

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

Next question comes from the line of Sean Parisa with Guggenheim and Partners.

Hey, guys. Good morning.

Hey, Sean.

A couple questions here. First, just curious how you're thinking about maybe capital allocation from the fossil sale, pending sale, and especially as you guys are getting over the finish line. I mean, kind of with the de-risking nature of the transaction, do you sort of need the cash proceeds for their de-levering, or do you anticipate the transaction to be credit accretive? And maybe at some point, how efficiently do you think you could redeploy proceeds on the organic side? Because we've seen some pretty healthy transactions on the asset side with PE. So curious there.

Yeah, it's a great question, Char. And, you know, we've said, you know, throughout the year and even before, if you take a look at the capital program that we have in front of us for 21 to 25, that we could fund that without the need for incremental equity. So, Take that as it is and start to think about the sale of the business and proceeds coming in. There's going to be excess proceeds. Your question is the right one. What do you think about for use of proceeds? There's debt at the power level. If you think about working your way through some of the terms of that debt, you'll see that some of the conditions therein are reliant upon some of the assets that are being sold. I think pay down of debt at the power level is an obvious first use of proceeds. We would anticipate excess proceeds beyond that, at which point you start to take a look at how we have described the business and how we've described the business as continuing to grow the utility. It has a fairly voracious appetite. The existing capital plan can be done without additional equity. But as we step through time, as we've always said, if you take a look at the five-year capital plan, there are additional things that end up coming to bear during those four or five-year periods and then towards the back end of that plan that are not known at the beginning. So there certainly ends up being opportunity at the utility. We've had a lot of discussion about offshore wind. We've talked about investing in ocean wind. and that we would not intend to do ocean wind as a one-off project, so we would either be in the business or not. So opportunities will come there, and they tend to be lumpy when they come based upon the various solicitations. So I think there's another opportunity to deploy capital there, and then there is always the opportunity to return some capital to shareholders. But to your point, we have said very often that to the extent that we look at some of the transactions that are going on and people are paying more than one times rate-based to get the ability to earn on a dollar of rate-based, that's a challenging economic situation for us. So we have looked and we'll continue to look at those opportunities, but to date they have kind of fallen below the optimal things that we can do with our capital.

Got it, got it. And then just a, you know, a transmission ROE question. You know, how active... Ralph and Dan, are your discussions on returns now that some of the other agenda items have been taken off the BP plate? And this is in light of the headlines from the FERC ALJs on pretty draconian views for ROEs and cap structures, which obviously sent a message to investors. How qualitative do you think the BPU is in regard to target ROEs, both at the transmission and state level side in light of what we're seeing at the federal side?

And so I think the conversations remain very constructive. And the issue, as you correctly pointed out, Char, has been a combination of how busy the board was given what we wanted to do. But that's only part of it. I mean, the board is in the middle of a second-round solicitation on offshore wind for 2.4 gigawatts. They're in the middle of an FRR proceeding. They regulate water companies, other electric and gas companies, and then COVID does introduce an element of inefficiency in terms of how and when it can be. So there's been no indication in the conversations that anyone is any less motivated to find a common ground than when we started. And I realize it's over a year ago that we started that, so I know I can believe it. taken that amount of time but that's just a function of what I said a moment ago and again the motivation for us is to get a fair outcome that removes any uncertainty on the part of our investors and as well as to provide some level of rate relief for customers and the motivation for the board staff is to achieve that same rate relief but to do it now instead of getting immersed into a FERC proceeding that might resolve itself in many years from now.

Got it. Terrific.

Thank you, Ralph and Dan. Thank you. Appreciate it. Very comprehensive. Thanks, Ralph.

The next question comes from one of the gosh choppy with Evercore SISI.

Hey, good morning. Thanks for taking my question. Maybe just, you know, just clarification on the FERC discussion we were just having. Have you quantified what the 50 basis points elimination does in terms of an earnings impact to you guys?

Yeah, I think we did. Degas said it would be about a $0.06 a share on an annual basis.

Perfect. Thank you. And then just maybe give your thoughts on directionally how you're thinking about the uh pgm here the the capacity option here next month maybe you can just talk about it directly where you see prices going and then how does that impact your sort of process of um of selling the the fossil assets yeah i guess so that you know we have had a long and and story history of not trying to predict in public where things are going we've

I think we've done a decent job internally of having our own views, but ultimately, as a participant there, don't tend to share too many. I mean, the only thing I would say is that if you take a look overall at the parameters that have been put forth for this auction, there is more of a bearish tilt than a bullish tilt, if I think back, compared to some prior auctions. Okay. You know, we'll get the results June 2nd and see where things go. But on balance, we see just as a comparison to prior auctions, we see a little bit more bearish than bullet signals coming out of this one just from the inputs that we've gotten so far.

Yeah, that's super helpful. I mean, is that just any color on sort of your discussions with, you know, with active parties interested in those assets? You know, what are you seeing there?

uh... so i think it'll play a little bit of a role but tend to think about the assets that were so i guess they are assets with They're very efficient, great capacity factors, and so they're getting significant spark spreads that ultimately drive their value. Capacity has some of the value, obviously, but given how much they run, I think the energy margins are going to be critical to that determination. And this auction is going to be one year, and... What folks will see after that, they can draw some conclusions from a year. But as I just talked about, you think about historical auctions compared to the current auctions, you're going to have differences in the parameters as you step through time. So I think that the capacity auctions of the past have not been a problem. a wonderful forbearer of what could happen in future auctions. So, obviously, each participant is going to take a look at that and see what they're going to do with it from a bid perspective. But it's not as big of an impact to look at a historical capacity auction as some other things.

Understood. Appreciate the call. Thank you.

Next question comes from INFD Splatchman with Wolf Research.

Hey, good morning. Thanks. I think most of my questions were answered, but just on the fossil sale just discussed, based on the initial bid you've had and different scenarios for the auction, how confident are you that you will complete a sale out of this and get somewhere in the range you were expecting?

Steve, I think We have had a robust process. I think that we've had a lot of interest. I think the assets themselves deserve and have drawn a lot of interest. So, you know, I guess I'd echo what Ralph said a couple minutes ago. If we think about that things have gone as expected, I think that's a relative positive for continued progress here, and we would anticipate coming to a good conclusion.

Okay. And then on the offshore winds, both – the commitment you've made so far and potential future ones. When will we get a little more kind of insight into the amount of investment you're going to make and timing of that? Yeah. So that happens in increments, Steve, right?

So good news out of all of that, the environmental impact statement, will be done, and I think that's a 22 event. We've talked about making some capital decisions in the second half of this year, what's called our pre-FID decision. And as I say, I forgot what FID stands for, Financial Investment Decision. And then I think there's another major decision a year later than that. So it's multiple steps in the process. We're pleased with how things are going right now. We're There's some cash flow changes that are being bandied about that need to be sorted through in terms of our original premise of being a tax equity partner. And I think right now, to be honest with you, that team is more focused on execution and there's a little bit more attention being paid to the ongoing solicitations to creating further opportunities.

Yeah, see the dynamic environment that we've had from a credit perspective in Washington does tend to shift things around. And as Ralph said, we're the tax equity in the Social Wind Project. So it remains a little bit in flux exactly what it will look like because the tax equity is going to be influenced by the ultimate tax rules where they sit. So we've had some changes over time with respect to, I guess, last December you saw a shift between the equalization, if you will, between PTC and ITC. And with all of the, I guess I'd say proposals as opposed to proposed legislation, because it's not at that stage yet with respect to where some of these credits may go, it's got to turn into actual legislation before we know a final answer there. So those will tend to influence ultimately some of the cash flows in the initial years too.

Okay. And this question kind of got asked, but I'll just ask it a little differently, Derek. Given the FERC NOPR that came out, how is that, if at all, impacting your ability to settle the New Jersey transmission ROE? Is that tying into it at all, or do you feel okay?

It's, of course, part of the background environment in which we're talking. Okay. It's sort of ironic. Six months ago, we were having this conversation. I think you would have phrased that as, And of course, our colleagues at the regulatory team were saying, I need another 50 basis points. We need to have it lower. And our response was, that's not guaranteed. And it turned out we were right. And now we're tempted to say, well, with the RTO later being taken away, then our settlement number needs to be higher. And guess what they're saying? Well, there's no guarantee that's going to happen. So So it's part of that. The negotiation has always been around the base R weight, and both sides realized that any RTO incentive adder was separate and apart from their compensation.

Okay. Okay. Thank you.

Next question comes from Lionel Powell, Patterson and McLean Rock Associates.

Hey, good morning. Good morning, Paul. Just quickly on the market for offer cap, as you're aware, there was a filing by P3 sort of seeming somewhat concerned about whether or not there was going to be a safe harbor that they perceived to be, whether that was going to be continuing for this upcoming auction. And I was wondering, you know, I didn't see really anybody other than them raise this issue and obviously counter filings and what have you, but any sense as to whether or not that's a significant issue or could impact you guys in any significant way?

Not to my knowledge, Paul. Dan and I are looking at each other right now saying, gee, we haven't joined any. alarm bells over that at all.

Okay, great. And then just with the MOPR and the FRR, given where the MOPR is and these things that are happening at PJM plus what we're having at FERC, what are the chances that there will be any significant action until the MOPR issue is resolved with respect to the FRR?

I think what the state will do is continue to make progress on what an FLR should look like if the MOPR doesn't resolve the duplicative payment. I don't want to conjecture whether the state would proceed with the FLR if the duplication and the capacity payment were eliminated. The state might choose to continue anyway, just that to assert its independence and to not have to worry about the future FERC going back in the other direction, right? So, because New Jersey's clearly in, it's for the long haul in terms of securing carbon-free energy. And we've had some sizable changes in direction as FERC, whether it's the MOPR, whether it's the RTO ladder. And I could see the states just saying, okay, I can't live that way. Let me turn my own course. Having said that, they might equally say I don't need to chart that course for a little while because the offshore wind that's coming into play in the 2024 energy year will no longer have this penalty imposed upon it. It does give the state some optionality if the moper is fixed.

Okay, great. Thank you.

And if resolved quick enough, perhaps gets done before anything gets finalized on the FRR, that would, I think, be the ideal scenario. that the state would have all the information to be able to finalize against.

Does that make sense?

Thank you. Our next question comes in the line of David Okoro with Morgan Stanley.

Hi, thanks so much for taking my question. How do you think about your chances in the offshore transmission solicitation and the eventual scale of that opportunity?

So one of the landing points is a switching station of ours. And that doesn't give us a hard and fast advantage, except we know the area. We know the right of ways. We know the transmission flows. We understand how to engineer multiple solutions to bring that power on land without creating any other reliability issues. Have we given a scale of the magnitude of the opportunity? I don't think we have, because it's an RFP. So if we start throwing numbers out there, then give our competitors a fair amount of information about what we think we'll be bidding. But it is a consequential number. I mean, it's something that would be a sizable project and a good use of capital.

Okay, great. Yeah, thanks. That's helpful. And I guess I was just curious with Orsted's recent cable issues that they ran into, just wondering if that's something that needs kind of reevaluation or changes economics in any way for the Ocean Wind Project.

So, you know, I don't want to pretend to be an expert on that. I think the economic impact is more on having to go back and fix as opposed to designing in advance to avoid. but that would be a better question to ask of the folks at ORSPEC. We will, of course, see all of that included in the project financial analysis during the pre-FIP stage, but I don't have a more specific answer for you than that. I know what's been in the public domain has been existing projects and mitigation.

Okay, got it. Thanks so much.

Your next question comes from Michael Lopez with Goldman Sachs.

Hey, guys. Thanks for taking my question. Real quick, first of all, offshore wind, are you thinking that your interest is primarily owning or co-owning or owning stakes in projects that primarily serve New Jersey, or are you looking to be more broad, more diverse across the eastern seaboard and with more venture partners besides just the one you're doing on ocean winds?

So, yeah, so we would accept broader opportunities. As you probably know, Michael, our Garden State Offshore Energy site that we co-own with Orsted has ready access to Maryland, and it's actually been used for something called the Skipjack Project, which serves Maryland. It could also reach into Delaware, should Delaware choose to pursue offshore wind, and can reach New Jersey. It's at the southern tip of New Jersey. So that has a three-state reach. Our arrangement with Orsted is in a certain part of the mid-Atlantic region, so we're free to work with others outside this region. But as you're well aware, most of the participants in offshore wind are seeking partnerships, if at all, with local utilities for a variety of regulatory and transition planning reasons. So while we would be open to it, I think it's safe to conclude that our primary focus and emphasis is with this partner in this mid-Atlantic region.

We've got to choose, Michael, a pretty opportunity-rich area as well. I mean, we have said that we wouldn't expect to be going to the Philippines to be doing any projects there, but if you think about what is closer to home, it is a pretty opportunity-rich area.

Got it. And then just one last one. On ocean wind or on other New Jersey ones, can you remind me, once the PPA is signed, who warehouses construction cost risk? Is that the project developers? Is it the customer? Like, how does that work?

That's the project developer. So the PPA, the board order, has an energy price. and then an escalator for 20, 25 years, I forget. And anything that's, any costs or issues that were not anticipated or planned for are at the risk of the developer.

Got it. Thank you, Ralph. Much appreciated.

Your final question comes from the line of Jonathan Arnold for Vertical Research Partners.

Good morning, guys. Just a quick one. On the offshore again, can you remind us, Ralph, if you have any problems with ocean wind, too, at this stage, or if there's an opportunity to have one?

So, Jonathan, you broke up, and then the chance that Dan heard you better than I did is Or maybe you just need to repeat the question, John.

No, my question was whether you have, just if you could remind us what your involvement or the potential involvement with Ocean Wind 2 might be, the project that was bid in to the current solicitation.

Yeah, so basically that's an Orsted project, and if they want to partner with someone, we have to write a first refusal in doing that.

Great. Thank you for that. And then just one clean-up issue on the power and the balance sheet. And, Dan, I heard you mention your comments about use of proceeds. Is there an amount of debt that you've indicated you would continue to carry on power? You know, just trying to sort of gauge how we should think about some of these – and things that are coming up and what the go-forward balance sheet might look like.

There's not a number that we've put out, Jonathan. I think the way to think about it is that there's cash flows that come off of power, and certainly those cash flows are financeable to the extent that there's a, for instance, a longer-term solution for nuclear, then you've got a longer-term understanding as to what that could be and it could carry on. an incremental amount of debt for a longer period of time, depending upon where all that lands. And separate and apart, not necessarily a power, but the offshore wind proposal, as Ralph talked about, it escalates for 20 years, and that price is fixed. So, yes, the construction risk is on the developer, but what you see from a revenue stream standpoint is not market-oriented. You get paid the OREC, and then you provide back the market revenues that would come from that. So there's some stability there as well, so. have put a number on that, but there is a financeable cash flow stream in both of those instances.

So your comments before were not sort of pointing to kind of a debt-free power then?

Right, not necessarily. Certainly it would probably not be the same issuances that would be there, but it could carry some debt on the other side of that.

Okay, and then just maybe in a similar vein, any plans to term out the parent maturity that's coming up in November, or is that one you're just going to retire?

It'll be based upon everything else that happens between now and then, which includes the status of what's going on from a sales perspective.

Okay, great. Thank you, guys.

Thanks, John. I think we're going to wrap up at this point. Thank you all for joining us. And I know we've been on the phone for about an hour, but the message I hope you heard is a fairly simple one, and that is that we're executing on our plan and doing the things that we said we would do to reinforce and create a primarily ESG-leading utility. So thank you again for spending time with us, and I hope to see you all soon in person. Have a great day, folks. Thank you.

Ladies and gentlemen, that does conclude your conference call for today. You may disconnect, and thank you for participating.