Public Service Enterprise Group Incorporated

Ladies and gentlemen, thank you for standing by. My name is Jesse, and I'm your event operator for today. I'd like to welcome everyone to today's conference entitled, The Public Service Enterprise Group Third Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants are in the listen-only mode. Later, we will conduct a -and-answer session for members of the financial community. At that time, if you have a question, you'll need to press the star key, followed by the number one on your telephone keypads. To withdraw your question, you may press the pound key. As a reminder, this conference is being recorded today, November 2nd, 2021, and will be available as an audio webcast on PSEG's Investor Relations website and .pseg.com. I'll now turn the call over to your moderator for today, Carl Lotta-Chan. Ma'am, you may go ahead.

Thank you, Jesse. Good morning. PSEG has posted its Third Quarter 2021 earnings release attachments and slides detailing operating results by company on our website at .pseg.com, and our 10-queue 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 -GAAP-adjusted EBITDA, which differ from net income or loss 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'll 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.

Thank you, Veralada, and to all of you for joining us on our call this morning. As you've seen, PSEG reported non-GAAP operating earnings of 98 cents per share for the Third Quarter 2021 versus 96 cents per share in the year-ago quarter. GAAP results for the Third Quarter were a $3.10 per share net loss related to transition charges at PSEG Power, and they compare with a $1.14 per share of net income for the Third Quarter of 2020. In this year's quarter, PSEG Power recorded a pre-tax impairment loss of approximately $2.17 billion to reflect the announced sale of its fossil generating fleet that includes $13 million of other related costs. Results for the Third Quarter bring non-GAAP operating earnings for the first nine months of 2021 to $2.96 per share. This .5% increase over non-GAAP results of $2.78 per share for the first nine months of 2020 reflects the growing contribution from our regulated operations and continued de-risking at PSEG Power. Slides 12 and 14 summarize the results for the Third Quarter and the first nine months of 2021. The Third Quarter of 2021 was one of the most significant in recent PSEG history. Since July, we've announced the sale of Power's fossil fleet and reached the transmission rate settlement that will help lower customer bill. In addition, at our recent investor conference, we announced an increase in our five-year capital spending plan by $1 billion, a 12-cent per share increase to the common stock dividend for 2022, a $500 million share repurchase program expected to be implemented upon the close of the fossil sale, and initiated a 5% to 7% long-term earnings growth projection over the 2022 to 2025 period. On the ESG front, we advanced our decarbonization efforts with the elimination of coal and our fuel mix this past June. Our participation in the New Jersey wind port and ongoing consideration of regional offshore wind opportunities in generation and transmission demonstrates our alignment with the Clean Energy Agenda, and our Clean Energy Future program was recently named a Star of Energy Efficiency recipient. Of critical importance, we have staked out a leadership position in the industry by accelerating our Net Zero vision to 2030 and joining a UN-backed Race to Zero campaign that will put us on a path to establish science-based targets to all of our missions across Scopes 1, 2, and 3. Later this week, I will be attending a conference of parties, referred to as COP26, to engage with policymakers and further support emissions reductions goals. This includes advocating for climate action now and advancing the case for preserving existing nuclear generation. This month, we issued a combined sustainability and climate report that outlines our progress to date and commitments for the future. We intend to continue taking meaningful climate action in response to the increased frequency and severity of extreme weather in our service area. Speaking of extreme weather, tropical storm-soaked parts of New Jersey with nearly nine inches of rain within a 24-hour period and caused extensive flooding throughout the state. Our past and current energy storm investments that hardened flood-prone energy infrastructure were a tremendous benefit to customers during Ida, minimizing the damage to adapted substations and switching stations and keeping them operational. That said, the extreme weather did wreak havoc throughout our service area, and our thoughts go out to the families who lost loved ones to the storm and to the communities still recovering from flood-damaged homes and businesses. To continue these enhancements and bring them closer to the customer, we are expanding our reliability improvement programs to the last mile work we will propose in our upcoming infrastructure advancement program, which we plan to file with the BPU in a few days. This proposal is approved with direct approximately $848 million of investment over a four-year period to improve the reliability of our electric distribution system, addressing aging substations and gas-metering and regulating stations, and electric vehicle charging infrastructure at PSE&G facilities that will support the planned electrification of the utility fleet. All this while serving the dual purpose of creating important high-quality jobs and helping to further stimulate the New Jersey economy. The foundation of results for the quarter was the solid operating performances by both PSE&G and PSEG Power. This summer, the third hottest on record contributed to the hottest first nine months we've ever recorded, pushing the number of total hours with temperatures exceeding 90 degrees, or greater, nearly 65% higher than the same period in 2020 and versus normal, thereby increasing peak demand. The Conservation Incentive Program, effective since June 1 for electric and October 1 for natural gas, provides recovery for variations in customer usage due to weather, economic conditions, and energy efficiency, thereby enabling the utility to promote maximum customer participation in energy efficiency programs without the loss of margin from lower sales. This also has a stabilizing effect on our margins more broadly. The continued reopening of the New Jersey economy is unwinding some of the shift in sales experienced during most of 2020. Residential electric sales declined, adjusted for weather, as more people returned to work, school, and other activities outside the home, partly offset by higher commercial and industrial sales. Due to the warmer than normal summer weather and a lifting of COVID-19 restrictions, the daily peak load for the quarter topped out at 9,620 megawatts compared to last year's third quarter daily peak, which was slightly less, at 9,557 megawatts. Our peak load for the year remains the 10,064 megawatt we hit on June 30th, which exceeded the 10,000 megawatt mark for the first time since 2013. Moving to the zero carbon and infrastructure side of PSEG, we recently announced that we've submitted several joint proposals to New Jersey's competitive state agreement approach, Open Window, to build offshore wind transmission infrastructure. These joint proposals submitted with IRSTED are collectively named the Coastal Wind Link and leverage the experienced partnership of PSEG and IRSTED in New Jersey energy infrastructure, our commitment to diverse suppliers, and our mature working relationships with local building and construction trades. The proposals cover onshore upgrades, new onshore transmission connection facilities, and a networked offshore transmission system in any stand-alone configuration or combination. PJM is providing the technical analysis and recommendations to the New Jersey Board of Public Utilities, who will make the final decisions based on an evaluation of reliability and economic benefits, cost, constructability, environmental benefits, permitting risks, and the use of the resources to provide the necessary resources for the projects and other myriad New Jersey benefits. A BPU decision is not expected before the third or fourth quarter of 2022. FERC has granted PJM's request to delay the next capacity option, covering the 2023-2024 energy year to late January 2022. This revised timeline places the 2024-2025 option into August of 2022 and the 2025-2026 option into February of 2023. These upcoming capacity options will provide additional surety to the gross margin of our nuclear fleet in the outer years of our 2021-2025 planning horizon. Nuclear power's economic struggles are a national challenge that call for a broad federal solution so that individual states like New Jersey aren't shouldering more than their share of the load. We are continuing efforts for secure support for existing at-risk nuclear plants in the federal tax code. The House version of the Build Back Better infrastructure legislation currently contains an eight-year production tax credit for existing nuclear of $15 per megawatt hour, with the value of the credit declining as market revenues increase. The proposal has support in the Senate and from the Biden administration. While passage is not assured, this would be an impactful provision for the nation's nuclear fleet, and we are hopeful that Congress can enact it this fall. You may recall that the New Jersey ZEC law contains considerable customer protections and specifically requires that state zero-emission certificate payments that I just referred to a moment ago as ZEC payments, be offset by any -of-market payment compensating nuclear for the same zero-carbon attribute. Specific to the nuclear production tax credit, the value of the PTC for our New Jersey units would reduce the ZEC payment up to the maximum $10 per megawatt hour. However, the ZEC would not reduce the value of the PTC, and our share of the two Pennsylvania peach-bottom units would benefit from the full production tax credit. Moving forward, there needs to be broad recognition at both the state and federal level of the value of nuclear zero-carbon attributes, both for the quality of air today and the climate tomorrow. To avoid backsliding for decades to come, we need to ensure that the long-term viability of New Jersey's nuclear generation is preserved as we bring more clean energy resources into the mix. Turning my attention to guidance, we are raising our forecast for full year 2021 non-GAAP operating earnings to a range of $3.55 per share to $3.70 per share from the prior range of $3.50 to $3.70 per share. And this is based on results from the first nine months of the year. Results for the third quarter and the first nine months incorporate the planned August 1 implementation of PSEG's transmission rate settlement. In addition, full year forecast results also reflect PSEG power cessation of depreciation expense on the fossil assets based upon the move to health bail accounting treatment in August, while otherwise continuing to contribute to consolidated results. We are also reaffirming PSEG's 2022 non-GAAP operating earnings guidance of $3.30 to $3.60 per share. We remain on track to execute on PSEG's 2021 planned capital spend of $2.7 billion. This spend is part of PSEG's consolidated five-year, 15 to $17 billion capital plan, which we still intend to execute without the need to issue new equity while continuing to offer the opportunity for consistent and sustainable growth in our dividend. Following the close of the peak of the fossil sale, PSEG will be a 90% regulated and predominantly contracted platform of stable carbon-friendly businesses. As we continue to execute on this strategy, as well as on the significant financial announcements made in our recent investor conference, we remain fully dedicated to providing our shareholders with the premier opportunity to pursue sustainable growth in earnings and dividends with an industry-leading ESG platform. I'll now turn the call over to Dan for more details on our offer and will make myself available for your questions after his remarks.

Great. Thank you, Ralph, and good morning, everybody. As Ralph said, PSEG reported non-GAAP operating earnings for the third quarter of $0.98 per share versus $0.96 per share in last year's third quarter. We provided you with information on slides 12 and 14 regarding the contribution to non-GAAP operating earnings by business for the quarter and the -to-date period, and slides 13 and 15 containing a corresponding waterfall chart that takes you through the net changes in non-GAAP operating earnings by major business. So now I'll review each company in more detail, starting with PSEG. PSEG reported net income of $389 million, or $0.77 per share, for the third quarter of 2021 compared with net income of $313 million, or $0.61 per share, for the third quarter of 2020. PSEG's third quarter results rose by $0.16 per share over third quarter 2020 and reflect revenue growth from ongoing capital investments as well as several one-time items. Growth and transmission rate base added $0.01 per share to third quarter net income even after incorporating the August 1st implementation of PSEG's transmission rate settlement, which worked approved in October, bringing the return on equity in our formula rate to 9.9%. Electric margin added $0.02 per share to net income compared to the year-ago quarter as the conservation incentive program combined with energy-strong two-rollings more than offset a reduction in weather normalized volumes. Gas results were $0.04 favorable compared to the year-ago quarter, reflecting the absence of the gas weather normalization clause reversal in the third quarter of 2020. O&M expense was $0.01 per share favorable compared to the year-ago quarter, and non-operating pension expense was $0.02 per share favorable compared to the third quarter of 2020. Lastly, tax expense was $0.06 favorable compared to the third quarter of 2020, driven by the timing of taxes to reflect PSEG's lower estimated annual effective tax rate due to higher tax flowbacks in 2021. This impact is expected to reverse next quarter when PSEG finalizes its actual tax rate for the year. Moving to sales for the quarter, the weather for the third quarter of 2021 was 4% warmer than the year-ago period and 22% warmer than normal, with significantly higher than normal number of hours at 90 degrees or greater. On a trailing 12-month basis, weather normalized electric sales were flat, and gas sales were up by nearly 2%. Growth in the number of both electric and gas customers rose by approximately .5% each versus the third quarter of 2020. Ralph mentioned earlier the stabilizing impact of the conservation incentive program, now fully in effect for both electric and gas margins, resetting those margins to a baseline level. Going forward, about 95% of our electric distribution, 90% of gas distribution will be stabilized through this mechanism, which will still pass through the variation in the actual number of customers. PSEG's capital program remains on schedule. PSEG invested approximately $670 billion in the third quarter, aggregating to $1.95 billion a year to date through September. This capital is part of 2021's $2.7 billion electric and gas capital program to upgrade transmission and distribution infrastructure, enhance reliability, and increase resiliency. We continue to forecast that over 90% of PSEG's planned capital investment will be directed to the utility over the 2021 to 2025 timeframe. We have raised PSEG's forecast of net income for 2021 to ,000,000 to ,000,000 from ,000,000 to ,000,000. Now moving to power. Power recorded a net loss of ,000,000, or $3.84 per share for the third quarter of 2021, non-GAAP operating earnings of ,000,000, or $0.23 per share, and non-GAAP adjusted EBITDA of ,000,000. This compares the third quarter 2020 net income of ,000,000, or $0.51 per share, non-GAAP operating earnings of ,000,000, or $0.33 per share, and non-GAAP adjusted EBITDA of ,000,000. Non-GAAP adjusted EBITDA excludes the same items from a non-GAAP operating earnings measure as well as income tax expense, interest expense, depreciation and amortization expense, and the benefit of net operating loss purchases which are included in net income. The earnings released in slide 23 provide you with a detailed analysis of the items having an impact on PSG Power's non-GAAP operating earnings relative to net income for over quarter. We've also provided you with more detail on generation for the quarter and for the year to day 2021 on slide 24. Power's third quarter non-GAAP operating earnings were $0.10 per share lower than third quarter 2020 results. Recontracting and power market impacts reduced results by $0.11 per share as the seasonal shape of managing activity and higher cost of third load versus the year ago quarter lowered gross margin. The sale of a solar source portfolio earlier in the year also lowered gross margin results by $0.02 compared to the year ago quarter. The retirement of Bridgeport was at $0.03 on May 31st. Power's last coal unit lowered New England capacity revenues by a penny per share versus the third quarter of 2020. And GAAP operations were lower by $0.02 per share reflecting the absence of a pipeline refund received in last year's third quarter. O&M expense lowered results by a penny per share compared to the year ago quarter as higher nuclear costs were partly offset by lower solar expenses. And lower depreciation expense associated with fossil assets moving to held for sale accounting status and the sale of a solar source portfolio and the early retirement of Bridgeport Harbor combined with lower interest expense to add $0.08 per share versus the year ago quarter. Lastly, taxes and other items were a penny per share unfavorable compared to the third quarter of 2020. Gross margin in the third quarter of 2021 was $28 a megawatt hour compared to $33 a megawatt hour for last year's third quarter. This decline reflects the seasonal price impact of re-contracting including the third quarter's anticipated higher portion of the $2 per megawatt hour annualized price decline in the hedge portfolio. We expect re-contracting results in the fourth quarter of 2021 to moderate from Q3 levels. Now let's turn to PSG Power's operations where total generation output of 14.9 terawatt hours matched the output of third quarter 2020. Power's combined cycle fleet produced 6.8 terawatt hours of output in response to higher market prices. The nuclear fleet operated at an average capacity factor of .8% for the quarter producing 8.1 terawatt hours which represent 54% of total generation. For the balance of 21 total base load and combined cycle generation is forecast to be 12 to 14 terawatt hours and is 85 to 90% at an average price of $32 per megawatt hour. Power's third quarter activity included the announcement of the fossil sale to Arclight in August of this year. As previously mentioned, PSG Fossil's assets have been reclassified to help for sale as of the day of the sale of the announcement. This change has prompted the cessation of depreciation amortization expense for these held for sale units and resulted in a favorable impact to GAAP and non-GAAP operating earnings through the close of the sale and contributed to the increase of our 2021 four-year non-GAAP operating earnings guidance. Power has raised the forecast for its non-GAAP operating earnings for 2021 to 365 to 440 million from 350 to 425 million. Our estimate of non-GAAP adjusted EBITDA has also been raised to 870 to 970 million from 850 to 950 million. And let me briefly address operating results for Enterprise and other, where for the third quarter we reported a net loss of 20 million or 3 cents per share compared to net income of 8 million or 2 cents per share for the third quarter of 2020. The non-GAAP operating loss for the third quarter was 13 million or 2 cents per share compared to non-GAAP operating earnings of 8 million or 2 cents per share for the third quarter of 2020. Results this quarter reflected higher tax and O&M expenses at the parent versus the year ago period. For 2021, the forecast of Enterprise and other is unchanged at a non-GAAP operating loss of 20 million dollars. From a financial standpoint, at September 30, we had approximately 3 billion dollars of available liquidity as well as cash and cash equivalents of 1.8 billion and debt represented 58 percent of our consolidated capital. The PSTG Power had net cash collateral postings of 999 million at September 30, related to -the-money hedge positions resulting from higher energy prices during the third quarter of 2021. It's been several years since a sustained rise in power prices has caused collateral postings of this magnitude. Our liquidity and cash positions are ample and capable of accommodating additional cash collateral postings if necessary. Overall, our Rattleball Hedging Program remains an effective risk management tool that we implement over a rolling three-year period, which smooths volatility and earnings through the averaging of forward sales and importantly locks in gross margin. Turning to financings during the quarter, in August, PSTG issued 425 million dollars of 1.9 percent secured medium-term notes due to 2031. Also in August, PSTG entered into a 1.25 billion, 364-day variable rate term loan agreement. In September, Power announced the retirement of its three single notes, totaling 1.4 billion on October 8. These remaining notes were retired at a redemption price that included a make-hold premium of approximately 294 million dollars. Following the retirement of all of its debt, PSTG Power's 8.625 percent senior notes due to 2031 were delisted from New York Stock Exchange effective October 18. Because PSTG Power no longer has any registered securities outstanding, we'll go through a process to determine its status as a split SEC registrar. In October, Moody's lowered the credit ratings of PSTG Power and PSTG. The current senior secured ratings of PSTG are A1A at Moody's and S&P, respectively, with stable credit outlooks from both agencies. PSTG's senior unsecured credit ratings and PSTG Power's issuer credit ratings, plate 2, triple B at Moody's and S&P, respectively, also with stable outlooks from both agencies. As we outlined during the investor conference, we raised PSTG's 2021 to 2025 capital program by a billion dollars to a range of $15 to $17 billion. We continue to anticipate execution of this five-year capital program without the need to issue new equity as we continue to offer a compelling shareholder dividend with the opportunity for consistent and sustainable growth. And as Ralph mentioned, we've raised our 2021 guidance of non-GAAP operating earnings for the full year to $3.55 to $3.70 per share based on solid results here today and the benefit from cessation of depreciation on fossil assets. Also, we're funding the initial 2022 non-GAAP operating earnings guidance of $3.30 to $3.60 per share that we provided at the investor conference on September 27. That concludes my remarks. And Jesse, Ralph and I are

ready to take questions. Thank you, Mr. Craig. Ladies and gentlemen, we'll now begin the question and answer session for members of the financial community. As a reminder, if you have a question, please press the star key followed by the number one on your telephone keypads. If your question has been answered and you wish to withdraw your request, you may do so by pressing the pound key. Again, that's star one to ask the question or the pound key to withdraw your request. If you're on a speakerphone, please pick up your handset before entering your request. One moment, please, for the first question. Speakers, our first question is from Jeremy Tenet of J.K. Morgan. Your line is now open.

Hi, good morning. Hi, Jeremy. Just wanted to start off with the nuclear PPC, if it could. I was just wondering if you might be able to talk a little bit more about the type of support you're seeing there, confidence that it makes it through to the end. And if it does, maybe just kind of the impact on your business helping de-risk and if there's any possible benefit the agencies could see, could have a positive reaction here if this does go all the way through.

Hi, Jeremy. Yeah, so I feel very good about the bipartisan nature of the support for the PPC. I would be less than candid if I didn't express some concerns and hesitation about the overriding piece of legislation to which it's attached. So the debate that's taking place right now, as you know, is around two separate pieces of legislation. One is a roughly $1 trillion bipartisan bill. The PPC is not part of that. Then there's a, depending upon what press accounts you believe, a $1.75 to $1.85 trillion bill that is not bipartisan, that is requiring reconciliation rules and full Democratic Party support to get through. But the nuclear component has not attracted any controversy whatsoever. I believe the estimates in that bill is that there's about $550 billion of that legislation dedicated to climate mitigation. And there's widespread recognition that if we're going to make progress, it's got to be based upon the existing nuclear fleet still being around upon which to build that progress. So the House version has an eight-year PPC. Roughly speaking, it targets all in $15 per megawatt hour of tax credits, starting with energy prices of $25 per megawatt hour or less. And then there's a declining scale of the PPC benefit as market revenues climb above $25 per megawatt hour, where every dollar above that level, 80 cents of PPC is removed. It kind of gets you to a $40 per megawatt hour or so outcome. There's a pre and post-tash adjustment that needs to make that, but for simplicity's sake. So it's really, I think, great news. And I think just today, for example, President Biden announced an SMR development project in Romania that's going to be done with New Scale. You should check the press accounts on that. I don't want to speak for others. But it's just indicative of the support that nuclear's gaining in recognition of the pretty aggressive carbon reduction goals that

need to be achieved. Jeremy, the other part of your question was how the rating agencies will look at it. And clearly, longer-term support for nuclear is going to be much more valuable, much more stabilizing than something on a shorter-term basis. And that's something that we've been pretty vocal about for quite some time. And so I think that's a positive as well. The number of years that's been tied into the PPC has moved around a little bit. Ralph mentioned earlier an eight-year period. So we'll see where it goes. But I do think that what you have seen is increasing support, I think, universally. We saw it initially in New Jersey as we went through the ZEC process. And I think folks are getting on board in Washington as well.

I don't want to beat it to death, Jeremy, but in addition to emphasizing our forward-looking statements, I would just remind you what the history of ITC and PPC have been. They've all had five- and 10-year lifespans that have been renewed for multiple decades. So I'm not at all worried about the eight-year PPC. By the way, I do want to add one other thing that's happening at COP26 right now that's great news for us, is that there is a growing consensus around a 30 percent reduction in methane by the year 2030. There's an article written today by Fred Krupp of EDF in the Wall Street Journal highlighting the importance of methane reduction. And that is just incredibly supportive of our gas system modernization program. We continue funding for that and expansion of that. So I think between nuclear, offshore wind, and methane reduction, we're really quite well positioned for some important investments going forward.

Got it. That's very helpful. Thanks for that. Maybe switching gears here a bit, as we look to the 4.2 update in kind of the narrowing of the 22 range, can you give us a little bit more color on some of the items that have been coming in kind of ahead of plan this year and how to think about those items if they're sustainable into 2022, and this is excluding the fossil fuel impact.

Yeah, I think rather than sort of front running our own guidance, just by way of reminder, we do expect to narrow that and the real variability is around the pension. Equity markets have been strong, interest rates have been low. So they work against each other in terms of our projected benefit obligation at year end, but I don't think we want to go further than that at this point in time,

Jeremy. Got it. Just wanted to try. Thanks. Appreciate that. Maybe the last one, if I could, here. Just thinking through the potential changes at FERC and return to a full commission, can you frame some of your expectations moving forward both as we think about the transmission items out there and the future of the MOPR?

Yeah, well, in terms of the future of the MOPR, that's can't really become less of a concern for us with being out of sale. I mean, energy revenues are really the primary consideration for nuclear plants. That's not to say that we completely disregard capacity revenues for our nuclear fleet. Having said that, our units have not needed to be mitigated according to the IMM, so they should be able to compete in that capacity market, whatever that ends up being in the future. I think the other change at this FERC that we're eagerly anticipating is the recognition of the importance of transmission investment to carbon mitigation. That's a little bit of a head scratcher when you think about some of the mention earlier this year about reducing the RTO adder for transmission RWE, which seems to have quieted down right now and has given way to the A-node, or the advanced notice of proposed rulemaking, which is looking at transmission planning on a much more comprehensive basis. So I just think that, you know, at a high level, the things that are being discussed and taken up at FERC are favorable to our business, both in terms of nuclear being able to participate in capacity markets, states being able to make renewable energy decisions free of penalties from the prior version of the MOPR, which is important in a state like New Jersey, where people otherwise would have been paying twice for offshore wind capacity, which would have been a significant crimping of the headroom on the utility bill, which now we don't have to worry about.

Got it. That's very helpful. Thank you.

Next question is from Julian Demolen-Smith of Bank of America. Your line is now open.

Hey, good morning, team. Thanks for the time. Appreciate it. If I can keep going with Jeremy's thought process here on reconciliation and prospect, I wanted to just focus a little bit more on some of the complementary nature of nuclear and specifically hydrogen here. I mean, as you see the magnitude of that potential subsidy here and the opportunities afforded therein, how are you thinking about that being a complement to your current nuclear portfolio strategy, understanding there's all sorts of different nuances here, but would be curious to hear, at least as you stand here today, and assuming there is something that stays the course, how could or does this fit into a future strategy?

So we're closely monitoring the progress of hydrogen, Julian, but to your point, I mean, the value of it to nuclear would be the ability to avoid any cycling of the nuclear plants and being able to then yield to the lack of dispatchability of renewables and then to just continue the base load operations of nuclear where, in some cases, the off-taker might be an orotrolysis project or some other hydrogen creation. And, yeah, there's a hearing, I think, going on this week or next week in the Senate on alternate sources of nuclear power in terms of its applicability to the health sciences and medical fields. I think there's just growing recognition of nuclear as a carbon mitigant and the multiple ways that we need to act to keep it around and keep it vibrant, whether it's a PTC or a source for hydrogen creation or medical science. I by no means want to be a skunk in a party, though. I do think that there needs to be much more conversation around the safety of large-scale hydrogen generation than we're seeing right now in various forms. That's an engineering challenge, but as with other engineering challenges, I'm sure there are solutions, but that does need to be discussed much more prominently than it's getting attention right now.

And maybe related to this, if I can, how are you thinking about just hedging? I heard your comments on collateral postings earlier, but how are you thinking about taking advantage of the current commodity deck and or, frankly, any other, shall we say, long-term contracting opportunities that might be arising, whether that's crypto or data centers, you know, looking above and beyond hydrogen opportunities? I mean, certainly we haven't seen this robust, as you say, a commodity environment at some time.

Yeah, and I think some of the crypto stuff is a little bit more niche opportunities. I think you should think about what we're doing as being aligned with what we've talked about in the past. We still think that a multi-year hedging program for baseload power, such as nuclear, does make sense, but you saw within some of the numbers that we provided align very closely to, if you were to just step back over time and take a look at where forward prices have been for the years that we've hedged and take a look at those hedge prices that it's consistent with exactly what we have told you that we have done on that front. That said, we have always talked a little bit, too, about the fact that while that's a general range, there is some, kind of a little bit of a range around what we can hedge as we go through those times. And so in times like what we've seen more recently, there's been a little bit more activity to try to capture some of those prices. But if you think about it over the long run and over a three-year hedging period, you're not going to be able to move the needle that much with respect to what's been done on the nearer term. And as you step out, while prices are a little bit backwardated, there's maybe a little bit less of an opportunity. You'll run into a little bit of a challenge on liquidity. So will we seek to capture some of these higher prices? Absolutely. But should you anticipate that it's going to have a very big move on the needle, I think, against the backdrop of the base of hedges that we have and the backwardation and some liquidity challenges on the back end, it'll be more moderated of an impact.

Got it. Excellent team. That's what I see soon. Thank you, John. Thanks, Sean.

Next question is from Shar Perez of Guggenheim Partners. Your line is now open.

Hey, good morning, guys. So, not to beat a dead horse, but just starting on the nuclear side for a sec. And you obviously highlighted the PTC opportunities and potential upside from federal nuclear incentives. I'm just curious, over the long term, as you're thinking about the portfolio, could sort of federal policy, can that change your view on keeping these assets over the long term? Or could there still be a better steward of your nuclear capital as you move towards becoming essentially a pure wires business with offshore wind optionality?

Sure, Sean. That's a fair question. And it's really TBD. I think the more we can make the nuclear fleet look like a regulated asset, some combination of predictable cash flows, my sense then is that would be something that investors would view more consistently within the predictable learning streams of our regulated business. But I think what we'll do is we'll let investors tell us, right? Well, I've not been quiet about the fact that I think given our strength of our balance sheet, the security of our dividend, the lack of a need for equity, the growth in our rate base, the regulatory relations we have, I think we're a premium utility. It's not showing up in our valuation yet, you know, so we'll get there. And then the question will be, is nuclear an adder to that ESG profile, which further enhances our premium status or not? And we'll be guided by how our investors view that. But our number one objective is, first of all, safe nuclear operations. We've achieved that. Our number two objective is long-term economic viability of those plants. I think we're on the cusp of that. And then we'll be able to better answer the important question that you raised. I'm not trying to duck it. I just, rest assured, it's foremost in our thinking too.

No, no, I think that's a fair point. And that's a paraphrase. It's obviously, you know, more to come. And you are sensitive to help, you know, I guess investors ascribe value to these assets and whether there is a terminal. Okay, perfect. That was the first question. And then just lastly, you know, as we're thinking about, you know, the strong performance in 21, are you starting to see some O&M flex being carried into 22? I.e., do you have sort of that ability to pre-fund some of the work going into the tail end of 21 that creates some contingency to execute in 22 as we're thinking about bridging from 21 being a relatively strong year into 22?

Well, so there's always a little bit on the margin, but it's not, I mean, the last thing you want to do to massive work management plans is offend them and stand them on their head. Right. So, you know, you would not change a nuclear refueling outage plan. You wouldn't change your major maintenance on large transmission assets. Can you move some tree trimming up because the first frost hasn't hit? Yeah, you can, but you're still on a four-year cycle. So there's some incremental stuff you can do, but not big items.

Got it. Terrific. Thanks, Scott. I've seen a couple of days. Appreciate it. Yes, thanks.

Next question is from Durgess Chopra of Evercore ISI. Ear lines now open.

Good morning. Thank you for taking my question, Ralph and Dan. Just, you know, you mentioned the, I just want a little bit more clarity on the proposals that you submitted with the BPU and PJM in conjunction. Are those transmission solutions or is it a combination of some offshore wind with transmission?

So they're both. They're primarily offshore wind to first of all create a grid out in the ocean that connects the seven and a half gigawatts that are planned. Secondly, to bring that onto land. And third is the upgrades that are needed on land to support this injection of new supply. But it's dominated by the assumption that there'll be an additional four gigawatts of offshore wind developed in New Jersey.

But

just

for clarity's against, that they are both on land and at sea, but they are, the proposals are not both generation and transmission. It is only a transmission solution. And so New Jersey's about halfway through the awards that they've had towards their goal of 7,500 megawatts of the actual generation of the turbines. And so this is essentially an effort to seek getting that power back to shore. So it is not incremental generation that this effort that the BPU in conjunction with PJM is pursuing. It is just a transmission solution, but it's both at sea and on land.

Perfect. I appreciate that clarity. So it is regulated transmission. It's a combination of onshore and offshore. Thank you for that. Can you size that for us? How, again, in, you know, Ralph, you previously talked about a nine-second number in terms of transmission investment opportunities. What are we talking about in terms of size of these proposals? And, you know, when can we see you learn these projects into your CAPEx plan at Hapu? Yeah,

so it's no longer nine figures. It's now ten. And the schedule has not been carved in stone. But what's been said by PJM is that they would expect to make their technical assessment known to the New Jersey BPU sometime late in Q1, early Q2 next year. The BPU said that they will probably take six months to evaluate that, and therefore it would not be decided prior to Q3. But they are motivated to try to make a decision before Q4 because the next solicitation of offshore wind farms as a supply piece are due at the end of next year. So the hope would be that whoever is bidding an offshore wind farm for the next tranche would have the benefit of knowing what transmission resources would be available to them.

Got it. So it sounds like, you know, Q4, 2020. And then any sort of guidance on capital dollars or rate base we might be looking at for these opportunities or these initial opportunities rather? Yeah.

But they range in size. And as I said, it is ten figures. It doesn't round to 11. It would stay in the ten-figure range. But it really does depend on which or how many, if that were the case, on our proposals the BPU and PJM were to embrace. Yeah.

The only other thing I would mention to maybe help you to guess is that if you think about the timing for the capital, this would run towards the back half of the decade from an in-service perspective. So if you're kind of in the 2028, 2029-ish kind of a timeframe for in-service, you're going to see some of that capital come in over a somewhat longer period of time.

Understood. Appreciate the detail on that, guys. Thank you so much.

You're welcome.

Next question is from Paul Peterson of Glen Rock Associates. Your line is now open.

Hey, good morning. Hi, Paul. Hey, Paul. Just to sort of follow up on those questions, with respect to the CapEx, I recall there was a potential for AFU-DC. Is that not still the case for the offshore wind transmission project?

Yeah, there absolutely will be, Paul.

Sure. And so, and I just was wondering, you got a number of projects, and I realize that it's all sort of very early, but when you talk about the range, could you give us maybe possibly quantify just a little bit more what the range from the low end to the high end might be? Or is that just too early?

Are you talking about from the standpoint of investment potential?

Yes.

Yeah, I mean, I think it is a little hard to tell by virtue of a couple of things. One, it's just recently submitted, and Ralph gave you the timeline for when we'll start to get a determination of, you know, we feel very good about our proposals, but it's unknown exactly what's going to come back. And on top of that, there are a series of different proposals that are out there, and so the prospect of all of them actually being part of the solution is unlikely, and so you're going to get piece parts and you don't know what they're going to do from the standpoint of magnitude of bidder. So I think it's brilliant. It's just a little bit tough to gauge. You know, I do think, as I said, I think we have a solid position with respect to what we have submitted, but that said, it's tough to tell exactly where they're going to go with the solutions they see and how wide they may distribute.

Have you seen proposals from other parties so far?

We have not seen others' proposals. What we have seen is that the magnitude of proposals that are in, I'm not mistaken, I think the number was 79 proposals. In fact, the players that are involved, we submitted ourselves, you know, nine different proposals. So that gives you just an indication as to there's a lot of potential different ways to get at what the problem that they are trying to solve is, and so they will have to analyze all that from a technical, from a cost, from an ongoing operation standpoint to make their determination.

And then with respect to the technical assessment that PJM is going to be making, do you know if that's going to be just simply given to the BPU or is that going to be more widely provided to people like us?

Well, I suspect it will be just given to the BPU because the BPU is the decision maker here, and whether or not the BPU makes that public or not remains to be seen. I mean, typically the board doesn't reveal the detailed scoring of its assessment of projects, they just announce the winners.

Okay. I really appreciate it. My other questions have been answered. Thanks so much. Have a great one. Thank you,

Paul. Next question is from David R. Carl of Morton Stanley. Your line is now open.

Okay, good morning. Thanks for taking my question. Let's see, posted a

good customer growth this quarter, one and a half percent in electric and gas. I was wondering if you could remind us kind of how that compares to your longer term assumptions for the increase in the customer count over time.

It's comparable. I think we're in that range. We may be just a hair below that on an ongoing basis. I think it's kind of been around a one percent. It's something that we do update on a regular basis based upon the data that we get regularly. It's a little bit lower than that, but we do see customer growth going on for the

future. Okay, got it. That's helpful. And then I was wondering if you could just talk about heading into the winter here for the gas business with what we've seen natural gas prices do. Can you talk about the price harm the customer bill heading into the winter? Maybe how you have been hedged into the winter heating season and anything, any kind of relief or strategies that you're pursuing for the winter? And managing that customer bill increase here over the next couple of months. Thanks.

Yes, so David, I think that the mechanisms that are in place are there and do protect the customer pretty well, both on the electric and the gas side, because obviously the gas price is going to go up. You see the effect on the electric prices. And so what we have and we actually refer to within our remarks is an ability to put forth a five percent increase on that commodity component of the bill two times during the year. And so there's a, because of some timing and some kind of a technical aspect to work through, the utilities in the state are looking for the ability to do that. So you can think about that on the gas side as being, you know, five percent and five percent is just the supply side of things that you may end up seeing. And then most customers, I think on the electric side, the best model to think about is the provider of last resort contract for BGS. And so what folks are paying now are prices that were established this past February, the February before, and the February before that on a one-third, one-third, one-third basis. And so nothing will change from the residential standpoint until we get to next year. And the auction that will come this February will get put in place next June. What will get put in place is for one-third that will roll off and the remaining two-thirds will be sticky from the prior two auctions. So that has a mitigating effect as well. That mechanism has a mitigating effect, as does the fact that if you think about some of the most current prices on the electric side, they are higher for the current year, for the upcoming year, than they are for the following couple of years. We've got a backward-rated curve. And so that auction in February will cover three years forward, which will have a higher price year for 2022 if you just look at the forwards and then lower as you go into 2023 and 2024. All to say that that also has a very moderating effect how this stuff will ultimately flow through to the customer bill. So if we are in a position where prices like we're seeing now are sustained for the longer term, obviously that would all work its way down to the retail customer. But if anything is shorter lived, you're going to see less of an impact because of those mechanisms that I described.

Okay, got it. That's helpful. Thanks so much.

Next question is from Michael Lapitz of Golden Saks. Your line is now open.

Hey, guys. Thank you for taking my question. I want to come back to the transmission for offshore wind. Your proposal is both for an offshore and onshore component. Hank, I'm not entirely sure I understand it. When I think about the onshore component, does the utility where the substations are, where the plants are being landed effectively, where the substation where the capacity is first hitting onshore, is that the utility that probably has a competitive advantage for the approval or the grant to build out the onshore transmission?

Yeah, Michael. So we put forward a series of proposals that can be used in a comprehensive manner. They wouldn't even go on without proposals. They're alternative options that are in there. And they can also be mixed and matched with proposals made by others. So we tried to create as robust a set of options for PGM and the BPU as was possible. Now, the short answer to your specific questions, yeah, there are some onshore advantages to being the landing point from a -of-way point of view as an example. But beyond that, it's really just a question of what are the path lengths? What are your relationships with suppliers, your ability to manage the work and be cost competitive? And what do those -of-ways look like with respect to environmental permits and other issues that will come up? So I guess technically the short answer is yes, there are some advantages, but they by no means assure victory for whoever got substation on the

roof. Got it. Thank you. Much appreciated.

Next question is from Jonathan Arnold of Vertical Research. Your line is now open.

Yeah. Good morning, guys. Hi, John. Quick hedging question. In the disclosure, you say that 90 percent of the gross margin for 22 is locked in via energy capacity in ZACs. I'm just curious whether then the percentages and prices that you then give for 22, 23, and 24 are on that basis or is that just energy? From the... When you then say 90 percent for the 29, 22, 75 to 80 for 23, are those sort of on a full gross margin basis or are those just the percentage of the base load output?

Oh, I got you. Yeah, yeah, yeah. They are energy-based. They're

just energy. We don't have the capacity options for some of the other years, right?

But that number is really just a look at energy rather than energy and capacity, is that the... You got it. That is correct, yes. Okay. Perfect. That was really what everybody else got. You just said thank you. Yep, yep.

Thank you, participants. That is all the time we have for questions. Mr. Izzo, Mr. Craig, you may now continue with your closing remarks.

Great. Thank you, Jesse. So thanks so much for joining us today. I know that we'll see a bunch of you in EEI. Dan and Carlotta, Brian and Ralph LaRosa will be with you in warm and sunny Florida. I am off to chilly and twizzly Glasgow, although I'm looking forward to it. I think there's some important things to be done there. We'll be arguing and helping the administration argue for significant reductions in carbon and significant support for all the things that we are advocates of, from energy efficiency to offshore wind and nuclear and a variety of other things, including methane reduction. So I will miss you there, but I will catch up with many of you at upcoming virtual conferences. So thanks again for joining us today and take care.

Ladies and gentlemen, that concludes your conference call for today. Thank you all for participating. You may now disconnect.