Q1 2021 Public Service Enterprise Group Inc Earnings Call
Okay.
[music].
Ladies and gentlemen, thank you for standing by.
Ms Kristy and I am your event operator today I would now.
Welcome everyone to today's conference Public service Enterprise Group first quarter 2021 earnings conference call and webcast.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session from members of the financial community.
At that time, if you have a question you need to press the star and the number one on your telephone keypad to withdraw your question. Please press pound and the number one as a reminder, the conference is being recorded today may five 2021 and will be available for telephone replay beginning at <unk>.
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 P. S E cheese corporate web site at Investor Day P. S. E T Dot com I would now like to turn the conference over to Colada Chan Chan. Please go ahead.
Thank you Christy good morning.
C. J released first quarter 2021 earnings results earlier today.
Release attachments in todays slides can be found on the PSEG Investor Relations website, and our 10-Q will be filed shortly.
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 today's earnings material 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 Cregg executive.
As Vice President and Chief Financial Officer at the conclusion of their remarks, there will be time for your questions.
Yes.
Thank you so a lot of and thank you all for joining us today.
To report book PSEG has achieved several major milestones on our path to becoming a primarily regulated utility company with a complementary significantly car trusted carbon free generation 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 three per share from last year's first quarter.
Our GAAP results for the first quarter were also $1 28 per share.
88 cents per share in the first quarter of 2020.
Results from ongoing regulated investments.
You can see.
The effect of cold weather on PSEG 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.
Yes, Angie is helping to advance the de carbonization of New Jersey, and the sizable and equitable way.
Our clean energy future investments are paired with jobs with the jobs training program that offers opportunities for low and middle income New Jersey community.
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 Zak from Maryland for all three New Jersey nuclear units that would be Hope Creek sale and you don't want it to.
Through may of 2025.
This was the maximum amount that the V. P of critical award and we are appreciative of the support received from the many community labor business environmental and employee organizations.
Participating in this enormously important process.
Each of these groups recognizes the value of the reliable around the clock and carbon free electricity supply nuclear plants provide.
Throughout this process.
Clear channel is approached operations at the units with the utmost professionalism and dedication to safety.
I congratulate PSEG nuclear for being recognized by <unk> as an industry leader in operational reliability.
One of only two nuclear fleets across the industry with no scrams over the past 365 day.
Would they be used decision to extend the program will advance climate action in new Jersey by helping to preserve the state's largest carbon free generating resource.
Consistent with a growing interest at the federal level in preserving existing nuclear as an essential part of the clean energy mix.
We applaud the BPA free <unk> decision, which is in the best interest of the state from New Jersey, and its ability to achieve its long term clean energy goals without compromising reliability, we're going backward on environmental gains made to date.
Looking ahead, we will soon and work with stakeholders to obtain alignment of state and federal climate goals.
Seeking ways to extend the duration of support for carbon free nuclear power.
During the quarter. The BP will also improve pseg's, 25% equity investment in <unk> Ocean wind project in.
In addition, ocean wind received a notice of intent to prepare an environmental impact statement from the Bureau of Ocean energy management or bone.
Which we will also review, which will also review the project construction and operations plan.
And April PJM in close cooperation with the B to B P. You opened a four month solicitation window to seek transmission solutions to support new Jersey's offshore wind generation target.
This processes Pjm's first public policy transmission solicitation and we will participate in this proceeding.
The recent bond 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 <unk> business plan and strategy for sustainability.
PSEG eagerly encourages and advocates for a national approach to accelerated economy wide net.
Net zero emissions, even sooner than 2015 in a constructive manner that expense 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 without powering progress vision.
That incorporates energy efficiency and the electrification of transportation to help our customers use less energy use less energy, we are paring that which I'll 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 Todd through our investments in energy infrastructure and the <unk>.
Angie cloud.
Today, we're also announcing progress on our strategic alternatives exploration with an agreement to sell our solar source portfolio to an affiliate of <unk> power.
Sales 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 a sum 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 Power's continuing the exploration of strategic alternatives for its fossil generating fleet and currently anticipates, reaching an agreement around mid year.
These expected transactions along with over a decade of capital allocation directed mainly towards P. S. EOG positioned the remaining company as a primarily regulated electric and gas utilities.
It was a complementary carbon free nuclear fleet and offshore wind investments that will be highly contracted.
The COVID-19 pandemic and its economic impact continues 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 will begin on may 19th following progress and vaccinating over half of the state's population and a sustained production from positivity and hospitalization rates.
PSEG 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 <unk> approval about $700 million Ami proposal in January we have begun implementation of a four year program.
Our current focus is on planning the IMI 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.
The btu in PJM that could influence future results.
Last month FERC.
FERC promulgated the new proposed rule to limit the 50 basis point RTL return on equity incentive to a three year period.
Given the <unk> administration's interest and a significant transmission build out to expand the integration of clean energy into the nation's power grid. This development was disappointed.
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 RTL as benefits from myriad risks and complications must be considered as well.
Based on the short comment window provided the proposed rule could be announced as early as the third quarter.
We will file comments to recognize the merits of continuing <unk>.
This looks to be an uphill battle given the chance to support from the supplemental group.
While we await the results of the first PJM capacity auction in three years, which PGM allowance on jet on June 2nd.
Pseg's continuing to advocate for a minimum offer price rule.
I'll just call it ballpark going forward.
That will avoid double payment for resources, such as offshore wind and nuclear or other carbon free supplies needed to achieve the goals.
Commissioner Danley has developed a state option to choose resources proposal or Soaker, Inc.
Tempted to achieve the major goals of establishing the right to states to choose their preferred capacity resources to achieve their energy policy objectives.
Eliminate double payments by states for the capacity they choose.
This proposal could have the added benefit of keeping much of FERC capacity market reform rules intact, while addressing state objections.
New Jersey is expected to issue its consultants reported and recommendation for resource adequacy. This month.
This report could determine whether a fixed resource requirement or <unk>.
Will be chosen to satisfy the state's future capacity obligations beyond the 2022 and 2023 energy or.
We continue to believe that the state could pursue with <unk> with outlets function and will suggest options to minimize the cost impact of FERC to passenger ruling on new Jersey customers.
Earlier in April the BP released in stroke proposal to address the design of the solar successor program steak.
Stakeholder meetings are being conducted to consider a solar financial incentive program that will permanently replace the solar renewable energy certificates or <unk> program.
And the temporary transitional renewable energy certificates or T. Rex program, which was instituted instituted in 2020.
Upon the state's attainment of five 1% of kilowatt hour sold from solar generation.
Given the substantial increase in new Jersey solar targets, the high cost of solar and 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 from new Jersey to optimize with solar can bring to the achievement of its equivalent was your 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 began in June for electric and in October for gas to cover variations in revenue due to energy efficiency and other index.
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 from the full year.
We are on track to execute Pseg's five year <unk>.
<unk> 14 billion to $16 billion capital program through 2025.
And has the financial strength to fund it without the need to issue new equity.
Over 90% of the current capital program is directed to <unk>.
It is expected to produce six 5% to 8% compound annual growth in rate base over the 21 to 25 period.
Starting from Pseg's year end 2020 rate base of 22 billion.
As we've noted previously <unk> considerable cash generating capabilities are supported by over 90% of its capital spending continuing to receive is a formula rate clause.
Clause based or current rate recovery.
And on capital.
Finally, I, thank our employees for their exceptional contributions to our compelling PSEG story of this quarter.
From nuclear operations, marking our second breaker to breaker uninterrupted run at Hope Creek.
Two a cross functional regulatory legal finance and government Affairs group that multi cash on clean energy future Zacks and a host of other regulatory proceedings.
Our field crews in New Jersey, and long island from exemplify our safety conscious mindset I could not be prouder of our entire PSEG.
And now I'll turn the call over to Dan for more details on our financial and operating results and will be available for your questions. After his remarks.
Yes.
Great. Thank you Ralph.
Good morning, everyone.
As Ralph mentioned PSEG reported non-GAAP operating earnings for the first quarter of 2021 of $1 28 per share versus $1 three 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.
On Slide 13 contains a waterfall chart that takes you through the net changes quarter over quarter and non-GAAP operating earnings by major business.
I'll now review each company in more detail.
<unk> as shown on slide 15 reported net income for the first quarter 2021 of 94 per share.
Compared with 87 per share for the first quarter of 2020.
Up 8% versus last year.
Results improved by <unk> <unk> per share driven by revenue growth from ongoing capital investment program.
Favorable pension OPEC results.
Transmission capital spending added <unk> <unk> per share for the first quarter net income compared to the first quarter of 2020.
On the distribution side gas margin improved by <unk> <unk> 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 volume.
O&M expense was <unk> <unk> per share unfavorable compared to the first quarter of 2020, reflecting higher costs from several February snow storms.
Depreciation expense increased by a penny per share, reflecting higher plant in service and.
And pension expense was <unk> <unk> per share favorable.
Compared to the first quarter of 2020.
Flow through tax flow through taxes, and other were <unk> <unk> per share favorable compared to the first quarter of 2020.
And as 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 31.
Total weather normalized sales reflected the higher expected residential and lower commercial and industrial sales observed in 2020 due to the economic impacts from COVID-19.
Total electric sales excuse me declined by 2%.
While gas sales increased by approximately 1%.
Residential customer growth for electric and gas remained positive during the period.
<unk> 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.
<unk> is continuing to defer the impact of additional expenses incurred to protect its employees and customers as a result of the COVID-19 pandemic.
<unk> experienced significantly higher accounts receivables and bad debts, and lower cash collections from customers due to the moratorium on shut offs 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, PSEG continues to make quarterly filings with the Btu detailing the COVID-19 pandemic related deferrals.
As of March 31st <unk> 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 expense is recovered through the societal benefits charge and true it up periodically.
With respect to subsidiary guidance for PSEG, our forecast of net income for 2021 is unchanged at $1.410 billion to $1 $470 million.
Moving to power in the first quarter of 2021, PSEG power reported net income of $161 million or <unk> 32 per share.
Non-GAAP operating earnings of $163 million or 32 per share.
Non-GAAP adjusted EBITDA of $321 million.
This compares to 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.
PSEG 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 Pjm's capacity revenue improved non-GAAP operating earnings comparisons by <unk> <unk> per share compared with last year's first quarter.
Higher generation in the 2021 first quarter added <unk> <unk> per share due to the absence of the first quarter 2021 plants column one outage.
And favorable market conditions influenced by February as cold weather benefited results by <unk> <unk> per share compared to last year's first quarter.
We continue to forecast a $2 per megawatt hour average decline in re contracting 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 <unk> <unk> per share.
We expect some of this increased gas ops will reverse later in 2021.
Selecting the absence of a onetime benefit recognized in the third quarter of 2020 related to our pipeline refund.
O&M expense was <unk> <unk> per share favorable in the quarter benefiting from the absence of first quarter 2020 outages at Bergen to and sell them one.
And lower depreciation and lower interest expense combined to improve by a penny per share.
Versus the quarter ago, a year ago quarter.
Yeah.
Generation output increased by just under 1%.
To totaled $13 three terawatt hours versus last year's first quarter. When <unk>, you don't want experienced the month long unplanned outage.
PSEG Power's combined cycle fleet produced four seven terawatt hours down, 8%, reflecting lower market demand in the quarter.
The nuclear fleet produced $8, two terawatt hours up 3%.
Net 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.
PSEG 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% of this 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.
And this winter as 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.
We will remain stable at $168 per megawatt hour.
From a megawatt day through May of 2022.
In new England, our average realized capacity price will decline slightly to $192 per megawatt day beginning June one.
However, power's cleared capacity will decline by 383 megawatts with the scheduled retirement of the Bridgeport Harbor units free.
Achieving our goal of making powers 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 <unk> 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 at $370 million.
And $850 million to $950 million respectively.
Now, let me briefly address results from PSEG enterprise and other for.
For the first quarter of 2021 enterprise and other reported net income of $10 million or <unk> <unk> per share.
For the first quarter of 2021 compared to a net loss of $5 million or a penny per share for.
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 a net 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 <unk> 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% yes.
In addition, we retired a 300 million.
One 9% medium term notes at peace EMG that matured in March.
In March of 2021, PSEG 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 reaffirming our forecast of non-GAAP operating earnings for the full year of 2021 of.
The $3 35 to $3 55 per share.
That concludes my comments from Christy we are now ready to take your questions.
Yes.
Ladies and gentlemen, we will now begin the question and answer session from members of the financial community.
Hey, do you have a question please press the star and the number one.
Telephone keypad.
If your question has been answered.
To withdraw your poling requests you may do so by pressing pound followed by the number one.
Speaker, please pickup your handset before entering your request one moment. Please for the first question.
Yeah first question is from the line of Julien Dumoulin Smith with Bank of America.
Okay.
Hey, good morning, Dan Thanks, Pete.
Well first off if you don't mind there was an article this morning here in Reuters I believe around the federal support for production enhancement. Obviously you. All please proceed your own state level support here on <unk> can you talk about how those two might mesh together understanding that obviously.
It's very early days on any federal effort here and then related to that on the nuclear from as you think about your cost reduction efforts and offsetting dis synergies how should we think about the cost structure above sitting above the nuclear plant.
Once everything said and done after this year, if you think about that too.
Hi, Julian Thanks for your question so.
In the New Jersey statute for 2018 statutes.
And explicit.
Offsetting.
That would reduce the zech payment if there is a federal payment or the carbon net carbon free attributes.
Of the plants.
And we have always maintained that.
Whether its nuclear or.
Wind or solar.
Reducing the nation's carbon emissions should be.
Governed by a nationwide program.
So.
So we are actively pursuing these federal remedies and yes, they would be as I, just said a moment ago offset the zick I don't know that I fully understand your question about the cost structure on top of.
The plant.
Let me rephrase that if you don't mind.
Thank you Ron.
If you think about that.
<unk> 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 EBITDA business, we're not asking what the actual profitability of the nuclear plants. How do you think about the cost structure there.
As we look to refine ourselves in kind of a 22 going forward basis that we have set a goal for ourselves, but there will be no stranded costs.
And that would remain upon divestiture of assets.
The philosophy, we've adopted is that we want to be extreme.
Extremely ambitious and eliminating positions but extremely.
Comma dating and helping people get reassigned.
To the extent that their skills match needs in the company right. I mean, we we turned over 7% of our employee population of the year. So.
We're always looking for talent.
The one exception to that of course is that an expense that we have people like myself.
Whose compensation was spread over a bigger asset base.
That that's going to be something that we will have to make up in a different way and we obviously have certain conditions like that.
Will be the case so.
Although we are.
We're quite focused on intent upon not having any residual.
It's trended.
<unk> or overhead costs remaining after the <unk>.
The them direct or indirect as Ralph pointed out.
Right excellent team and just to clarify there is no further clues you can offer from the sale price for the portfolio today outside of not taking rate got it yes.
Yes so.
Bracket 40, its a big bracket it was between five and $600 million.
Andy.
The value accretion is based upon an average over the next three years of what.
What we thought the EBITDA would be in the <unk>.
Earnings accretion is if we use the proceeds simply to retire debt. So we're not we're not making any heroic assumptions.
It was as I said in my remarks, it was a robust process we had.
Credible participants that we had.
Yeah.
The prices, we received where we're quite credible and.
And we think it works 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 so.
And I hope I can continue to say that I'm sure I will.
Indeed, well congratulations again on the progress.
Good.
Thank you. Our next question comes from the line of Jeremy Tonet with Jpmorgan.
Hi, good morning.
Hi, Jeremy.
Just wanted to take a step a bit high level here with binding plan and granted.
Very early here things can change, but just wondering what youre looking for here and how could it impact pegged as per.
It is what it could mean for offshore wind transmission transmission development or even kind of different things such as that.
Nucor.
With green hydrogen and hydrogen in the future just any any type of thoughts that you could share as far as what possibilities or what you're looking for here.
We were one of the.
Very small group of companies candidly in our industry.
Book to the President and supportive as 80% reduction by 2030 for the electric sector.
And we're working with members of Congress on making sure that.
Nuclear is included.
A clean energy standard.
And it technology neutral way.
Candidly, we have been talking to folks.
The possibility to net of tax credits are extended for carbon free energy that nuclear will be eligible for that as well.
To the extent an incentive system is set up.
To achieve these targets that.
Not the technology specific with it.
I'll repeat myself here technology.
Indifferent as long as you are achieving the desired outcome, which is corporate reductions.
We know that there is.
A lot of wisdom tooth or all the above approach.
<unk> nuclear.
Solar wind carbon capture and storage.
And we're pleased to see what I said about prospects for offshore wind in New Jersey is in the middle of the second mouse solicitation with two four gigawatts.
Maryland is seeking an additional 100 megawatts.
So I do think the momentum is real.
And the combination of enthusiasm coming out of Washington.
He has them on the part of governors in the region in which we operate.
That leads me to believe that there is going to be a lot of opportunities.
To invest both in the transmission infrastructure needed to.
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 as the existing nuclear fleet is responsible for just over 50% of the carbon free energy from the nation, even though.
<unk> 20 per cent of the total electricity and in New Jersey, those numbers, 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 capital and in the states all rowing the same we're willing to both the same direction.
Got it that's very helpful. Thanks.
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 extension there, but just wondering as you look down the road here do you see the potential for changes to the JAK program in New Jersey be at higher levels longer duration or just trying to get a feeling for what you think might be possible there yes.
We've been quite consistent in saying that.
We see a multi phase process to secure the long term viability of our nuclear plants.
Getting down to <unk>.
The successful combination of phase one.
In phase II.
<unk> three pathways, we're going to explore one is a federal pathway.
Is that a.
Clean energy standard or a production tax credit.
And we talked about that just a moment ago. So we're going to work hard to pursue that because it is global climate change net new Jersey climate change.
Second half is too.
Being honest broker and advisor to the state in its pursuit of <unk>.
And that as I said in my remarks.
In process and we're expecting to see.
A summary of report from this stage consultants sometime this month.
Just a little bit behind schedule, but not by much in this day that from time to do that thoughtfully and well.
In the unlikely event that all of that doesn't occur.
Achieved long term economic viability of the nuclear plants, then we would.
The state policymakers about modifying does that program.
To do that.
It's pretty clear that a three year <unk>.
Processes untenable in such a capital intensive asset and as we said throughout the day preceding the $10 per megawatt hour.
Was not commensurate with the.
Our cost of capital associated on a risk adjusted basis for operating the plants, but given the opportunity to pursue these three other remedies pads that we would accept the $10 per megawatt. So I do think that there's a there's a fair amount of opportunity.
Change the.
Economic support for the nuclear plants.
Okay.
Great that's helpful I'll leave it there thanks.
Next question comes from the line of Sean <unk> with Guggenheim Partners.
Hey, guys good morning Dara.
Couple of questions here first just curious how you're thinking about maybe capital allocation from the fossil sale pending sale, especially as you guys are getting over the finish line.
With the Derisking nature of the transaction do you sort of need the cash proceeds.
We're delevering 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 on on the asset side with <unk>. So curious there.
Yes, it's a great question, Charles and we've said.
Throughout the year and even before if you take a look at the capital program that we have in front of us for 'twenty, one to 25 that we could fund that without the need for incremental equity so.
Ill take that as it is and start to think about the sale of the business and proceeds coming in and Theres going to be excess proceeds and so your question is the right. One what do you what do you think about for use of proceeds and so.
There is debt at the power level.
And if you think about working your way through.
Some of the terms of that debt deal you will see that some of the conditions, there and not as reliant upon some of the assets that are being sold so I think pay down of debt at the power level.
As 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 businesses continuing to grow the utility.
It is 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.
There are additional things that end up coming.
To bear during those four or five year periods, and then towards the backend of that plan that are not known at the beginning so theres 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 intend to do ocean wind as a one off projects. 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 theres another opportunity to deploy capital there.
And then there is always the opportunity to return some capital to shareholders.
The day 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 base to get the ability to earn on a dollar of rate base, that's a challenging economic situation for us so.
We have looked and we will continue to look at those opportunities but to date they have they.
They have kind of fallen below the optimal things that we can do with our capital.
Got it got it and then just a.
Transmission ROE question.
How active.
Ralph and Dan are your discussions on returns now that some of the other agenda items have been taken off the BP played in.
This is in light of the headlines from the FERC ALJ is on from.
I am pretty draconian views from row, and cap structures, which obviously, we sent the message to investors. How qualitative do you think the Btu is in regard to target <unk>, both on the transmission and state level side in light of what we're seeing at the federal side.
I think the conversations remain very constructive.
And the issue.
As you correctly point it out Shaw has been okay.
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 of offshore wind from two four gigawatts.
It wasn't that far off proceeding.
They regulate order growth.
These other electric and gas companies.
Then COVID-19 does introduce.
An element of.
Inefficiency in terms of how and when.
So.
Anyone has any less.
Motivated on the economy.
When we started and then I know I realize it's over a year ago that we funded that arguably it's taken net amount time, but that's just a function of what I said, a moment ago and against the motive.
Fair outcome that removes any uncertainty on a part of.
Our investors and as well as to.
But provide some level of rate relief for our customers and the motivation for.
The board staff as to.
But she has a team regularly but to do it now insists.
Getting immersed into FERC proceeding it might resolve itself in many years from now.
Got it terrific. Thank you Ralph and Dan. Thank you I appreciate it very comprehensive thanks.
Sure.
Yeah.
The next question comes from the line of the cash choppy with Evercore ISI.
Yeah.
Hey.
Good morning.
Thanks for taking my question maybe just.
<unk>.
Just clarification on the <unk>.
Our discussion you were just having have you quantified what the 50 basis points and elimination does in terms of an earnings impact to you guys.
Yes, I think we did.
Gosh instead, it would be about a six cents a share on an annual basis.
Perfect. Thank you.
And then just maybe get your thoughts Directionally, how you're thinking about the PJM.
<unk> here.
The capacity auction year next month.
Maybe you can just talk about Directionally, where do you see prices going and then how does that impact your sort of process.
Offsetting the fossil assets.
Yes.
We have had a long and storied history of not trying to predict.
Like where things are going with.
We've done a decent job internally of of 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.
Then a bullish if I think back compared to some prior auction. So we.
We will get the results June 2nd and see where things go but on balance we see just just as a comparison to prior auctions, we see a little bit more bearish than than bullish signals coming out of this one just from from the inputs that we've gotten so far.
Okay, that's super helpful.
Is that just any color on sort of your discussions with.
The Doctor parties interest from those assets what are you.
What are you seeing there.
So I.
I think it'll play a little bit of a role if I tend to think about the assets that we're selling to guests they are assets with a they're very efficient.
Great capacity factors and so theyre 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 auction youre 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.
A wonderful forebear of what could happen in future auctions. So obviously each each participant is going to take a look at that and see what theyre going to do with it from a bid perspective, but.
It's not as big of an impact to look at our historical capacity auction.
There's some other things.
Understood I appreciate the color. Thank you.
Next question comes from the line of Steve Fleishman.
Both research.
Hey, good morning. Thanks.
I think most of my questions were answered, but just on the.
Thoughtful sale just discussed.
Based on the initial bid you've had in different scenarios for the auction how confident are you that you.
You will complete a sale out of this.
Sure.
And get somewhere in the range or 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.
I guess I'd Echo what Ralph said, a couple of 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 conclusion.
Okay.
And then on the offshore wind both.
The commitment you've made so far and potential.
Future ones when will we get a little more.
Kind of insight into that.
The amount of the investment youre going to make and timing of that.
Yes.
So that happens in income and recurring fee right. So.
The good news it evolve.
Such statements will be done.
From 2002 event.
Talked about making some capital decisions in the second half of this year.
It's called out free.
<unk> decision.
And as I say that I forgot what I understand from a financial investment decision.
And then I think there's another major decision a year later.
Other than that but.
So it's multiple steps in the process.
Pleased with how things are going right now.
From tax law changes at a range.
Bandied about.
Sorted through.
In terms of our original premise moving a tax equity partner.
Uh huh.
I think right now it can be honest with you that that team is more focused on execution.
A little bit more attention being paid to the.
Ongoing solicitations to creating further opportunities.
You'll see that the dynamic environment that we've had from a from a credit perspective in Washington does tend to shift things around and as Ralph said, we're the <unk>.
Tax equity and the social when projects so.
It did remains a little bit of flux exactly what it will look like because the tax equity is going to be influenced by the ultimate actuals, where they've set so we.
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 it to.
Actual legislation before we have a final answer there so those will tend to influence ultimately.
Some of the cash flows in the initial years too.
Okay and then this question kind of got asked but I'll just ask it a little differently.
Given the FERC <unk>.
That came out just how are you how has that if at all impacting your ability to settle.
The New Jersey.
Transmission.
ROE is that.
I can do it at all or are you okay.
Part of the background environment in which we're talking.
Okay.
Ironic.
Six months ago, when we were having this conversation I think he would've phrases.
The other way.
[laughter] family conversation and of course.
Our.
Colleagues regulatory team were saying high value.
The basis points, we need to have it.
Lower and our sponsors that's not guaranteed.
Right.
And now were tempted to say well with the <unk> being taken away then our settlement numbers to be higher.
No guarantee that's going to happen so.
So it's part of the background that the negotiation has always been around the base Roe.
Both sides realized.
RTL incentive.
It was a separate and apart from that growth.
Okay.
Okay. Thank you.
Got it.
Next question comes from the line of Paul Patterson with claim rock associates.
Hey, good morning.
Paul.
Hum.
Quickly on those through the market for a while for cash.
As you're aware there's.
There was a filing by Q3.
<unk>.
Seems somewhat concerned about.
Whether or not there was going to be a safe harbor.
<unk>.
That had been that they perceive to be.
The day, whether that was going to be continuing for this upcoming auction.
And.
And I was wondering I didn't see really anybody other than them raised this issue.
Obviously counter filings and what have you but.
Any sense as to whether or not that's a significant issue that could impact you guys.
Significant one.
Not to my knowledge.
Looking at each other right now.
Joining me.
Bill Wrang any alarm bells over that at all.
Okay, Great and then just with the <unk> and the <unk>.
Given.
We're the <unk> in these things that are happening at PJM, plus what we're having FERC.
Is there what are the chances that there will be any significant accident until.
The mobile issues resolved with respect to the <unk>.
I think what the state will do is to continue to make progress on what it.
Should look like.
If the bulk of it doesn't resolve.
Payment.
I have not I.
I don't want to conjecture.
This statement proceed with CFO.
The duplication in the catastrophe eliminated.
They might choose to continue anyways.
To start its independent non has to worry about the future FERC.
Going back from the other direction right. So.
New Jersey is clearly.
For the long haul in terms of securing carbon free energy and we've had zone.
Some sizable changes in direction of FERC from over whether it's the latter.
I could see the states are saying, okay, I can put it that way.
From my own color of course, having said that.
When you say.
Need to chart, the course for a little while because.
The offshore wind that's coming into play.
2024 energy here.
This penalty imposed upon them.
Just to get the state some optionality if some operating metrics.
Okay got it thank you.
Resolves quick enough, perhaps gets done before anything gets finalized.
That would I think be the ideal situation that the state would have all the information to be able to finalize it yes.
That makes sense. Thank you.
Your next question comes from the line of David <unk> with Morgan Stanley.
Hi, Thanks, so much for taking my question.
How do you think about your T V.
The offshore transmission lifted she and the eventual scale of that opportunity.
Yes so.
What are the landing points.
Switching station of ours.
Give us a hard and fast advantage et cetera.
No the area we know.
Right away as we know.
The transmission flows.
Understand how to engineer.
Multiple solutions too.
Free net power online without.
Creating any of the reliability issues.
Oh.
I don't.
Given our scale.
Magnitude of the opportunity we have right because it's an RFP. So if we start throwing numbers out there.
Right.
Yes.
A fair amount of information from what we think.
Moving.
But it is a consequential number I mean, it is something that.
Sizable project.
Good day.
Capital.
Okay, great. Thanks, that's helpful.
And I guess I was just curious.
Cable issues that they ran into just wondering if that's something that needs to kind of re evaluation or changes economics in any way for the Ocean wind project.
So.
I don't want free.
Pretend to be an expert on that I think the economic impact is more on having to go back and fixed as opposed to designing in advance to avoid.
But so.
That's a better question.
<unk>.
The worst day.
We'll of course see all of that included.
And project financial analysis.
Pre stage.
I don't have any more specific.
What's been in the public domain has been existing projects.
The mitigation.
Okay got it thanks, so much.
Your next question comes from the line of Michael Lapides with Goldman Sachs.
Hey, guys. Thanks for taking my question real quick first of all offshore wind are you thinking that you're.
Their interest is primarily owning or coding or our own stakes in projects that primarily serve new Jersey.
Are you looking to be more broad more diverse across the eastern seaboard and with more venture partners. Besides just the one youre doing on Ocean wind.
So yes, we would.
Okay.
<unk>.
Opportunities.
As you probably know Michael our.
Garden State offshore energy site that we call it horse dead.
Has ready access to Maryland.
And it's actually been used for something called the Skipjack project, which says Maryland.
We also reach into Delaware should Delaware choose to pursue.
And can reach New Jersey southern.
So that is a breach.
Our arrangement with <unk>.
Certainly.
Out of the mid Atlantic region. So we're free to work with others outside of this region.
But as you as you're well aware.
Most of the parties.
Offshore wind are.
Seeking partnerships if at all with local utilities.
For a variety of regulatory.
Planning transmission planning reasons, so while we would be open to it I think.
Its safe to conclude that our primary focus and emphasis.
As with this partner in this.
Mid Atlantic region.
Michael is 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 the 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 that the customer like how does how does that work.
The project developer right a PPA.
The order.
Yeah.
Energy price.
And then an escalator for.
2025 years I forget.
Any anything net.
Any costs or issues that.
Were not anticipated or planned for at the risk of development.
Got it thank you Ralph much appreciate it.
Your final question comes from the line of Jonathan Arnold from vertical research partners.
Yes, good morning, guys.
Yeah.
Just a quick one on <unk>.
Offshore again can you remind us Ralph.
Inc.
Ooh opened with Ocean wind to the stage.
And over there is kind of an opportunity to have one.
So Jonathan you broke up a little chance to Dan heard you better than the items.
Or maybe you just need to repeat that he would get the question Jonathan not.
My question was whether you have just if you could remind us what your involvement <unk>.
<unk> involvement with Ocean wind.
It might be.
Prosigna was bid in to the current solicitation.
So.
Basically that.
Our <unk> project.
And if they want to partner with someone we have the right of first refusal in doing that.
Great. Thank you for that and then just one just to clean up in Q1.
On the kind of learn in the balance sheet.
Thank you.
Yes, so as you mentioned.
Comments about Sam.
Use of proceeds.
The amount of debt.
You indicated you would continue to carry on power.
Just trying to sort of gauge how we should think about some of these.
Thanks for coming out from what.
We've been full of balance sheet might look like.
There is not a number that we put out.
Jonathan I think the way to think about it is that there's there's cash flows that come off of power and certainly those cash flows are financeable to the extent that there is a for instance, a longer term solution for nuclear.
Got a longer term understanding as to what that could be and it could carry.
An incremental amount of debt for a longer period of time, depending upon where all that lands.
And separate and apart from southern power with 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 Arizona developer, but what you see from a revenue stream standpoint is not.
Market oriented.
Pay the <unk> and then you provide back the market revenues that would come from that so there is some stability there as well. So we have put a number on that but there there is a.
Financeable cash flow stream and book.
Are those instances so your comments before.
So you're pointing to in kind of a debt free power.
Mhm.
Right not necessarily certainly it would not 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.
Similar vein.
Any plans to term out the parent on maturity that's coming up in November it was that one youll just going up.
It'll be based upon everything else that happens between now and then and which includes the status of what's going on from a sales perspective.
Okay, great. Thank you guys nice job.
Commenting a wrap up at this point.
Thank you all for joining us.
And I know where is the non phone for about an hour.
Message I hope you heard is a fairly simple one day.
That is that we're executing on our plan.
And doing the things that we said we would do.
To reinforce and created primarily ESG leading utility.
So thank.
Thank you again for spending time with us.
I hope to see you all soon in person.
Great. Thank.
Thank you.
Ladies and gentlemen that does conclude your conference call for today, you may disconnect and thank you for participating.
Okay.
Okay.
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