公共服務電力與天然氣 (PEG) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the PSEG 4Q and Full Year 2020 Earnings Conference Call and Webcast. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Carlotta Chan, VP, Investor Relations. Thank you. Please go ahead, ma'am.

Good morning, and thank you for participating in our earnings call. PSEG's fourth quarter and full year 2020 earnings release, attachments and slides detailing operating results by company are posted on our website at investor.pseg.com, and our 10-K will be filed shortly. The earnings release and other matters discussed during today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties.

We will also discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income as reported in accordance with generally accepted accounting principles in the United States. We include reconciliations of our non-GAAP financial measures and a disclaimer regarding forward-looking statements on our IR website and in today's earnings materials.

I will now turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of PSEG. Joining Ralph on today's call is Daniel Cregg, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for your questions. Ralph?

Thank you, Carlotta. Good morning, everyone, and thank you for joining us for our 2020 review and future outlook. PSEG reported non-GAAP operating earnings for the fourth quarter of $0.65 per share. Non-GAAP operating earnings for the full year rose by 4.6% to $3.43 per share and marked the 16th year in a row that PSEG delivered results within our original earnings guidance.

PSEG's GAAP results were $0.85 per share for the fourth quarter of 2020, compared with $0.86 per share for the fourth quarter of 2019. In addition, for the full year, PSEG reported 2020 net income of $3.76 per share compared with $3.33 per share in 2019. Details on the results for the quarter and the full year can be found on Slides 12 and 14.

I am pleased to report that PSEG's fourth quarter and full year results reflected solid contributions from both PSE&G and PSEG Power, and I'm particularly proud of the achievements of our employees during this past year as it was one of the most challenging in recent memory. Their efforts have kept our customers connected to essential energy services to power their homes, businesses and vitally important institutions.

We have also made steady progress on several key business priorities, the most important of which is our transition to becoming primarily a regulated utility with contracted generation comprised of our zero-carbon nuclear fleet and future investments in regional offshore wind. In the past 6 months, we've announced the exploration of strategic alternatives for PSEG Power's 7,200-plus megawatts of nonnuclear generating assets, and have received initial indications of interest for both the fossil and solar source assets.

PSE&G successfully initiated its landmark Clean Energy Future program, securing approval to spend nearly $2 billion in energy efficiency, smart meter installations and electric vehicle charging infrastructure, all of which will enhance New Jersey's environmental profile for years to come. In addition, the New Jersey Board of Public Utilities, I will refer to them as the BPU, recently concluded public hearings regarding PSEG Nuclear's application to extend the zero-emission certificate. I think I'll shorten that to ZEC from now, on through May 2025.

Our surface area experienced milder than normal weather during the fourth quarter, bookending the weak heating season of the first quarter in 2020. Regarding weather-normalized sales for the year, while total electric sales volume declined by 2%, gas sales rose by 1%. In both the electric and gas businesses, higher residential usage of approximately 5% largely offset declines in commercial and industrial sales, resulting in stable margins overall.

Working with COVID-19 health and safety protocols since last March, PSE&G was able to execute on its planned $2.7 billion capital spending program in 2020. These capital programs provide a critical investment to support the New Jersey economy, particularly in the early months of the pandemic, and preserved essential jobs while replacing widely important energy infrastructure and generating customer benefits of improved reliability and resiliency as well as methane reduction.

In January of 2021, the BPU approved 2 settlements with PSE&G and other parties in the Clean Energy Future Energy Cloud and Electric Vehicle proceedings. The Energy Cloud investment program is estimated to be approximately $707 million over the next 4 years and will result in a replacement of over 2 million electric meters with smart meters. The Electric Vehicle program will direct $166 million into EV charging infrastructure over the next 6 years.

With these recent settlements, the BPU has constructively addressed the vast majority of the Clean Energy Future filing, and has approved nearly $2 billion of investment to help realize New Jersey's energy goals. The energy efficiency program will also establish clean energy job training for over 3,200 direct jobs, while enabling the avoidance of 8 million metric tons of carbon emissions through the year 2050. Investing in energy efficiency programs is the most cost-effective solution to reducing carbon emissions.

Importantly, the conservation incentive of the settlement encourages the broad adoption of energy efficiency, with certain programs focusing on low and moderate-income customers that will lower bills for participating customers. We expect the balance of the Clean Energy Future filing, which includes our request to spend under $200 million on energy storage and a few remaining EV programs, will be addressed following future stakeholder proceedings.

PSE&G continues to engage with the BPU staff and Rate Counsel to advance confidential discussions toward a settlement of the return on equity related to PSE&G's formula rate for transmission overseen by the Federal Energy Regulatory Commission. The annual update under PSE&G's existing formula rate filed last October was implemented this past January. And together with cost reallocation of our revenue requirements for certain transmission projects, candidly to customers outside of our zone, this resulted in a net reduction in PSE&G customer costs.

For 2020, PSE&G once again achieved top quartile OSHA scores for [safety]. We also achieved the top quartile J.D. Power ranking in the eastern large company category for both residential electric and gas companies. And PSE&G posted its best-ever J.D. Power scores for electric and gas customer satisfaction, outpacing the average industry results on metrics that consider total monthly cost, bill clarity, fairness of pricing and options and ability to manage monthly usage among residential customers. Also for the 19th year in a row, PA Consulting recognized PSE&G with its ReliabilityOne award as the most reliable electric utility in the Mid-Atlantic region and, for the first time, with their 2020 Outstanding Customer Engagement award.

New Jersey has recently made solid progress in lowering its COVID-19 positivity rates and continues a phased reopening of businesses, schools and other activities. We have a long history of partnering with the state to support the economy, and we continue to work with them on investment programs that can spur economic development and employment recovery, all while being quite thoughtful about managing customer rate impacts.

Regarding collection activity. The moratorium on shutoffs of residential electric and gas service is currently scheduled to conclude in March. Recognizing the economic hardship that many of our customers continue to face, PSE&G, in partnership with the BPU and community groups, is working hard to enroll customers in customer payment support programs, such as LIHEAP and deferred payment arrangements. When the moratorium is lifted, we will work closely with the BPU, other stakeholders and our customers to ensure a collections process that supports our customers' individual situations.

Turning now to PSEG Power. We're continuing all activities related to the exploration of strategic alternatives we announced last July. In the fourth quarter of last year, we launched the formal sales processes of the 467-megawatt solar source and over 6,750-megawatt fossil portfolios. We are currently evaluating indications of interest, and believe we are on track to announce an outcome in the second half of 2021.

As we launched the strategic alternatives initiative last year and throughout the process thus far, PSEG Power has continued to deliver on expectations for non-GAAP operating earnings and adjusted EBITDA. Last year, PSEG Fossil posted one of its best operational performance records ever, and completed its entire maintenance outage schedule without any OSHA safety violations.

In addition, PSEG Nuclear completed 2 complex refueling outages in 2020 with new COVID-19 safety protocols, and continue its overall outstanding operating performance. These achievements speak volumes about the professionalism of our dedicated workforce that exemplifies our focus on safety and operational excellence.

PSEG Nuclear's zero-emission certificate application and the extension of the current ZEC is currently under consideration at the BPU. Last month, the BPU Staff consultant released their preliminary findings. The consultant found that all 3 of our New Jersey units were eligible, recognizing that each unit had a financial need for ZEC. There were other aspects of the preliminary findings that we view as inconsistent with the ZEC law, and we look forward to upcoming hearings where we will have the opportunity to address those items.

It is clear that New Jersey recognizes the need for nuclear power in order to achieve its short- and long-term clean energy goals. As laid out in the state's own energy master plan and DEP's 80x50 Report. The recent weather-related power and market values in Texas and California further underscore the importance of maintaining New Jersey's reliable resource mix.

Over the next few weeks, you will hear us mention that our confidential filings show that these units are actually in need of more than $10 per megawatt-hour, partly due to the fact that PJM forward market prices are lower versus 2018, which was the year of our first ZEC application. As stated in the 2018 ZEC law, nuclear operating risk and market risk must be recognized as a cost in any economic determination of ZEC eligibility.

We have responded to all information requests and have shared confidential financial information with Rate Counsel and the PJM Independent Market Monitor in order to support transparency around this important proceeding. In the absence of an extension of the current ZEC, we would not continue to operate the plant.

While the direction of public policy both in New Jersey and in the nation is the increased recognition of carbon-free energy to mitigate climate change, that realization in the form of a future price on carbon is highly uncertain at best. With the final decision on the ZEC application expected on April 27, we are hopeful that the BPU will act to extend the $10 per megawatt-hour attribute payment to preserve the nuclear units and their 3,400 megawatts of zero-carbon baseload generation through May of 2025.

The DEP is also moving forward with its investigation of resource adequacy and the potential for the creation of fixed resource -- of a fixed resource requirement service area within New Jersey, I'm just going to call that FRR in the future. We have maintained a mutual stance and the potential of an alternative capacity procurement paradigm but remains supportive of accommodations that enables state-supported resources to qualify as capacity that can satisfy both the state's capacity obligations and its clean energy goals.

As we've previously stated, the current minimum offer floor prices are not expected to prevent either our nuclear or gas-fired units from clearing in the upcoming PJM capacity auction scheduled for this May.

Now let me turn my attention to 2021 guidance. We are introducing non-GAAP operating earnings guidance of $3.35 to $3.55 per share, with the utility expected to contribute between $1.410 billion and $1.470 billion; PSEG Power between $280 million and $370 million; and parent/other is expected to post a loss of $15 million. This year, we expect PSE&G to contribute just over 80% of consolidated non-GAAP operating earnings at the midpoint of guidance. Going forward, we expect that the utility earnings will represent 80% to 90% of PSEG's non-GAAP results, with the remaining balance expected to be comprised of long-term agreements for zero-carbon offshore wind generation and our ZEC-supported New Jersey nuclear units.

For PSEG Power, over 70% of its 2021 gross margin has been secured by way of energy hedges, capacity revenues established in prior auctions, zero-emission certificates, and ancillary service payments. However, for 2021, recontracting at lower market prices, higher costs tied to a Hope Creek refueling outage and the absence of tax benefits realized in 2020 result in the lower non-GAAP operating earnings guidance for 2021.

Our PSEG 5-year capital spending forecast has been updated to $14 billion to $16 billion for 2021 through 2025, and includes approximately $2 billion of Clean Energy Future investments as well as the expected extension of the Gas System Modernization Program and Energy Efficiency program at their average annual run rates for the last 2 years of the period, that being 2024 and 2025.

Consistent with past years, approximately 90% or $13 billion to $15 billion of this capital program will be directed to grow regulated operations at PSE&G. This ongoing investment in essential energy infrastructure and clean energy programs is expected to produce 6.5% to 8% compound annual growth in rate base over the 5-year period, starting from $22 billion at year-end 2020.

On Slide 10, we've provided you with an ultimate view of our updated capital for 2021 through 2025. We've classified it by investments in decarbonization, energy transition, climate adaptation for resilience and reliability and methane reduction. As a side bar, any spend for offshore wind will be incremental to these totals and is not included in the $14 billion to $16 billion capital plan [note]. We also expect that our strong cash flow will enable us to fund our entire 5-year capital spending program as well as our planned offshore wind investments during the '21 through '25 period, without the need to issue new equity.

As we continue to plan from the responsible reentry to our offices and facilities currently targeted for this July, I have to thank our dedicated employees for their professionalism, persistence and flexibility over the past year. Whether responding to a myriad of COVID-19 challenges or their excellent injury-free response to the nor'easter that we just experienced this past month, employees across our organization has embodied operational excellence as they provide our New Jersey, New York, Connecticut and Mid-Atlantic customers with reliable essential energy services.

Before moving to Dan's financial review, I will summarize the new initiatives in place for future growth and areas of our continued strategic focus. These range from the new clean energy future investments behind-the-meter to infrastructure opportunities supporting electrification of transportation and a growing mix of renewables in the distribution system, to expanding the existing aging infrastructure replacement programs to assist the New Jersey economic recovery.

In addition, we are advancing the strategic alternative exploration through a robust bidding process, pursuing near-term opportunities to expand our offshore wind investments in the Mid-Atlantic and are engaged in ongoing efforts to preserve the New Jersey nuclear fleet, the most cost-effective and most reliable source of baseload supply to reduce emissions.

Each of these actions serves to further PSEG's already strong ESG leadership position, which we continuously strive to improve. In 2020, we moved to decarbonize our generating fleet, announced an investment in New Jersey offshore wind and initiated a landmark energy and efficiency investment to bring universal access to a broad range of clean energy opportunities. In 2021, we joined the company network of the Ceres organization, that's C-E-R-E-S, to advance our climate advocacy. We will achieve a coal-free generating fleet in June, and we recently published our first ESG performance report.

PSEG is getting recognized for our ESG initiatives by Standard & Poor's, who has included us in their 2021 Sustainability Yearbook. And by the Dow Jones Sustainability Index, who was named PSEG and to the North American index for 13 years in a row. We were also gratified to be named to the 2021 listing of America's Most Responsible Companies by Newsweek magazine, and the Forbes List of Best Employers for Diversity in 2020 and Best Employers for Veterans in 2020.

The Board of Directors' recent decision to increase the company's common dividend to the indicative annual level of $2.04 per share is the 17th increase in the last 18 years, and reflects our ongoing commitment to returning capital to our shareholders to enhance our total return profile as we also pursue growth.

There is no lack of opportunity for PSEG as we continue the transformation to a primarily regulated electric and gas utility, focused on clean energy infrastructure, complemented with contracted zero-carbon generation. We are working towards a sustainable future where customers universally use less energy. The energy they use is cleaner and its delivery is more reliable and more resilient. We are confident that pursuing this strategy will enhance our ability to provide our customers with essential energy services, which has been our core mission for the last 118 years.

I'll now turn the call over to Dan for more details on our operating results, and I'll be available with him for your questions after his remarks.

Terrific. Thank you, Ralph. Good morning, everybody. As Ralph said, PSEG reported non-GAAP operating earnings for the fourth quarter of 2020 of $0.65 per share, and we've provided you with information on Slides 12 and 14 regarding the contribution of non-GAAP operating earnings by business for the fourth quarter and for the full year of 2020. Slides 13 and 15 contain waterfall charts that take you through the net changes quarter-over-quarter and year-over-year, and non-GAAP operating earnings by major business.

I'll now review each company in more detail, starting with PSE&G. PSE&G's net income for the fourth quarter of 2020 increased by $0.04 and to $0.58 per share compared with net income of $0.54 per share for the fourth quarter of 2019, as shown on Slide 17. For the full year, PSE&G's net income increased by $0.16 per share or 6.5% compared with 2019 results. This improvement reflects an 8% increase in rate base at year-end 2020 to just over $22 billion, which, as we note on Slide 22, does not include approximately $1.8 billion of construction work in progress or CWIP, that's mostly in transmission.

The continued growth in utility earnings resulting from investments in transmission added $0.02 per share versus the fourth quarter of 2019. Gas margin was $0.02 favorable, reflecting GSMP roll-ins and higher weather-normalized volume. Electric margin was flat compared to the fourth quarter of 2019 as higher weather-normalized volumes were offset by lower demand. Mild temperatures during the quarter had a negative $0.03 per share impact, mostly reflecting recovery limitations under the earnings test of the gas weather normalization clause.

O&M expense was flat versus the fourth quarter of 2019. Higher distribution depreciation expense of $0.01 per share offset lower pension expense of $0.01 per share in the quarter. Taxes and other were $0.03 per share favorable, partly reversing the negative $0.07 per share impact that the timing of taxes had on third quarter 2020 net income.

Recall in the third quarter, flow-through taxes and other items lowered net income by $0.07 per share compared to the third quarter of 2019, and we indicated at that time that about half of the $0.07 would reverse in the fourth quarter. The balance is related to bad debts, which we anticipate reversing in the future based upon the timing of actual write-offs.

Early winter weather in the fourth quarter as measured by the heating degree days was 9% milder than normal and 14% milder than in the fourth quarter of 2019. For the full year, PSE&G's weather-normalized residential electric sales increased by 5.6% due to the COVID-19 work-from-home impact, but a larger decline in commercial sales resulted in total electric sales declining by 2%.

Total weather-normalized gas sales were up 1.2% for 2020 led by a 4.9% increase in residential use, partially offset by a smaller decline in the commercial and industrial segment. For both electric and gas sales, higher residential usage largely offset declines in commercial and industrial sales, resulting in stable margins overall.

PSE&G invested $700 million in the fourth quarter as part of its 2020 capital investment program of approximately $2.7 billion, directed to infrastructure upgrades of transmission and distribution facilities to maintain reliability, increase resiliency, make life cycle replacements and clean energy investments.

PSE&G's updated 5-year capital spending plan includes investing $2.7 billion in 2021. And as detailed on Slide 21, approximately $960 million is allocated to transmission; $700 million to electric distribution, which includes approximately $200 million for Energy Strong II; $875 million to gas distribution, which includes over $400 million for GSMP II; and $200 million for new Clean Energy Future EE programs and the beginning of the AMI rollout. The Clean Energy Future EE investment will ramp up to approximately $125 million in 2021, before reaching a full annual run rate of about $350 million in 2023.

As Ralph mentioned, the BPU approved 2 CEF settlements in January, totaling approximately $875 million, covering Energy Cloud and Electric Vehicle investments. The capital and operating costs of these programs will begin to be recovered in PSE&G's next rate proceeding expected to be filed in the second half of 2023.

From the start of the programs until the commencement of new base rates estimated in late 2024, the return of and on capital will be included for recovery in these rates as well as operating costs, and stranded costs associated with the retirement of the existing leaders. Of these amounts, the vast majority, about 90%, receives contemporaneous or near contemporaneous for regulatory treatment either through the FERC formula rate or clause recovery mechanisms, or recovered in rates as replacement spend or new business.

As Ralph also mentioned, we continue settlement discussions with the BPU Staff and Rate Counsel regarding our FERC transmission return on equity. Although our forecast for 2021 assumes a resolution effective in the near term, those discussions remain confidential and ongoing.

PSE&G net income for 2021 is forecasted at $1.410 billion to $1.470 billion, which reflects an assumed reduction of our transmission formula rate as well as incremental investment in T&D infrastructure and energy efficiency.

So moving to Power. PSEG Power reported non-GAAP operating earnings of $0.10 per share in the fourth quarter, unchanged from the non-GAAP results in the fourth quarter of 2019. Results for the quarter brought Power's full year non-GAAP operating earnings to $430 million or $0.84 per share compared with 2019's non-GAAP results of $409 million or $0.81 per share.

Non-GAAP adjusted EBITDA totaled $182 million for the quarter and $990 million for the full year of 2020, and this compares to non-GAAP adjusted EBITDA of $198 million and $1.035 billion for the fourth quarter and full year 2019, respectively. Non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure, as well as income tax expense, interest expense, depreciation and amortization expense.

The earnings release and the waterfall on Slides 13 and 15 provide you with a detailed analysis of the items having an impact on PSEG Power's non-GAAP operating earnings relative to net income quarter-over-quarter and year-over-year from changes in revenue and costs. We've also provided you with added detail on generation for the fourth quarter and full year on Slide 26.

PSEG Power's fourth quarter non-GAAP operating earnings were aided by the scheduled increase in PSEG Power's average capacity prices in PJM covering the second half of 2020; and higher gas operations, which resulted in improved non-GAAP operating earnings comparisons of $0.04 and $0.01 per share, respectively, compared to the fourth quarter of 2019. However, lower generation output and recontracting at lower market prices reduced non-GAAP operating earnings by a total of $0.08 per share versus the year ago quarter.

A decline in O&M expenses in the quarter improved results by $0.01 per share, and reflects the absence of the Hope Creek refueling outage that occurred in the fourth quarter of 2019. The extension of the Peach Bottom nuclear operating licenses contributed to lower depreciation expense of $0.01 per share, and lower taxes improved non-GAAP operating earnings by $0.01 over the year ago quarter.

Gross margin for the quarter was $32 a megawatt hour, a $1 per megawatt hour improvement over the fourth quarter of 2019, mainly reflecting the scheduled increase in capacity prices that began June 1, 2020 and remained in place through May of 2021. For the full year, 2020 gross margin was flat at $32 per megawatt hour compared to full year 2019. Mild fall temperatures and holiday-related spikes and COVID-19 positivity rates dampened market demand in New Jersey and kept power prices and natural gas prices lower than the quarter and year ago comparisons.

So let's turn to Power's operations. Total output from Power's generating facilities declined 9% in the fourth quarter of 2020 compared to the fourth quarter of 2019. And planned outages at Fossil and an extended average at the Salem 1 nuclear unit reduced fourth quarter generation levels compared to the fourth quarter in 2019. However, full year 2020 output of 53 terawatt hours came in above our 50- to 52-terawatt-hour forecast. The nuclear fleet operated at an average capacity factor of 78.9% in the quarter and 90.3% for the full year, producing nearly 31 terawatt hours of zero-carbon baseload power.

The combined cycle fleet operated at an average capacity factor of 46.2% in the quarter and 48.3% for the full year, generating approximately 22 terawatt hours in 2020. The 3 newest combined cycle generating units at Keys, Sewaren and Bridgeport Harbor 5 posted an average capacity factor of over 75% for the full year 2020. And this coming June, PSEG Power will complete the planned early retirement of the 383-megawatt coal-fired Bridgeport Harbor 3 generating station, eliminating the last coal unit and power fleet.

For 2021, Power has hedged approximately 90% to 95% of its expected output of 48 to 50 terawatt hours at an average price of $32 per megawatt hour, which represents an approximately $2 per megawatt hour decline from 2020. In addition, 2021 average hedge prices no longer include cost-based transmission charges for New Jersey's basic generation service contracts due to a change in how they are built and collected. This change further reduces revenues by approximately $3 per megawatt hour, starting on February 1, 2021, and is offset on the cost side, so there's no P&L impact as a result.

We're forecasting 2021 non-GAAP operating earnings and non-GAAP adjusted EBITDA at PSEG Power to be $280 million to $370 million and $850 million to $950 million, respectively. Power segment guidance reflects a full year of fossil and solar operations, lower expected generation volume and lower market prices, as well as the absence of a onetime tax benefit realized in 2020.

Now let me briefly address operating results from Enterprise and Other, which reported a net loss that increased by $0.03 per share compared to the fourth quarter of 2019, and reflects lower tax benefits compared with the fourth quarter of 2019 and lower results from PSEG Long Island. Regarding PSEG Long Island, following several challenges related to our response to Tropical Storm Isaias, we've made significant improvements in our outage management, telephony, business continuity and other systems and processes.

The Long Island Power Authority filed a complaint against PSEG Long Island in New York State Court last December alleging multiple breaches of the operating services agreement, or OSA, in connection with PSEG Long Island's preparation and response to Tropical Storm Isaias. We are in discussions with LIPA to address their concerns, which could include potential amendments to our OSA with LIPA and to resolve all claims. As a reminder, our 12-year contract is scheduled to run through 2025. We are committed to addressing the identified performance issues and to continue our strong track record of performance for Long Island's customers since taking over operations.

For 2021, PSEG Enterprise and Other is forecasted to have a net loss of $15 million as parent financing and other costs exceed earnings from PSEG Long Island.

PSEG ended 2020 with approximately $3.8 billion of available liquidity, including cash on hand of $543 million and debt representing 52% of our consolidated capital. In December, PSEG issued $96 million or 8.63% senior notes due April 2031 in exchange for a like amount of 8.63% senior notes due April 2031, originally issued at Power, which were canceled following the completion of the exchange. PSEG also retired a $700 million term loan at maturity. Power's debt as a percentage of capital declined to 27% on December 31, to 28% at September 30.

To summarize, non-GAAP results for the quarter were $0.65 per share, full year 2020 non-GAAP operating earnings were $3.43 per share. And as we move into 2021, our guidance for the year is $3.35 to $3.55 per share, with regulated operations expected to contribute over 80% of consolidated results. The range for 2021 reflects incremental investment in our T&D infrastructure and a ramp-up of the new Clean Energy Future programs as well as an assumed reduction on return on equity of our transmission formula rate during the year at PSE&G and a full year of fossil and solar operations at PSEG Power.

PSEG also raised its common dividend by $0.08 per share for the indicative annual level of $2.04, a 4% increase over 2020. The 2021 indicative rate continues to represent a conservative 59% payout of consolidated earnings at the midpoint of 2021 guidance, and utility earnings alone are expected to cover 140% of the dividend at the midpoint of 2021 guidance. We still expect our strong cash flow will enable us to fully fund PSEG's 5-year $14 billion to $16 billion capital investment program as well as our planned offshore wind investment during the 2021 to 2025 period without the need to issue new equity.

That concludes my comments. And Shelby, we are now ready to take questions.

(Operator Instructions) Your first question is from Jeremy Tonet of JPMorgan.

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

So I'll handle that, because Dan will be too modest. When Dan laid out for the Board in July what this process would look like in terms of participants, timing, expected outcomes, I knew he's done good work in terms of assessing it and coming out with some predictions. But I got to tell you, he's nailed every element of it. So the process is going exactly as planned.

Our near-death experience in January of 2014 with our own polar vortex really has winterized these assets in a way that I'm sure Texas will now follow suit with. So no, Texas has not had any impact on us. I do -- I don't apologize for not being able to give more information. We will give greater clarity sometime in the summer, I'm sure, as we get past around 2 bids. But so far, no surprises. The process is going well, and our assets are fully winterized as a result of the 2014 polar vortex that we experienced.

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

Yes. So the second question is one that I can give greater specificity on. Yes, it would only be prospective. Typically, when something is filed as FERC -- at FERC, notwithstanding the time left to the actual decision, the tariff adjustments go to the filing date and not sooner. So yes, it would be prospective. As you can appreciate, just given the nature of the negotiation that we're involved in, we really can't disclose what we've assumed in terms of the guidance. But that shouldn't be a big surprise. I mean we don't break out the guidance in terms of individual components, whether it's weather or outage durations of plants and things of that nature.

So we are where we were for a while now. We're close. Both sides are eager to resolve this. But in deference to the BPU, they've had an incredibly active agenda for the better part of 2 years, and they are dealing with the same challenges that everyone else is in terms of working from home. And despite that, they've successfully done one offshore wind solicitation, they're in the middle of the second one. They've done stakeholder processes for FRR, energy efficiencies. So they're getting a lot done, and this ROE discussion is part of that portfolio of activities, but not resolved yet.

Your next question is from Julien Dumoulin-Smith of Bank of America.

So what's intriguing in your slides, you talked about potential investments in offshore wind here as well. Can you talk about -- obviously, there's some dynamic and certainly evolving from quarter-over-quarter, can you talk about your latest expectations on offshore and how that could fit into your capital budgeting process and earnings altogether as that -- as you see today between expanding ownerships and potential new leases, et cetera?

So just a high level, Julien. I'm sure you're aware that there's an ongoing consultation in Maryland. There is a second round in New Jersey. We have not fully developed our jointly owned Garden State offshore energy site, jointly owned with Ørsted down off of the coast of Cape May.

So there's been 29,000, I think, megawatts of hopes and dreams announced by states up and down the East Coast, and 9,000 megawatts of awards granted. So even if we were to just focus in the Mid-Atlantic region, going from Maryland to Delaware to New Jersey, that there are ample opportunities. And as I said a moment ago, we still have a leasehold that's not fully developed. So I don't think we've said anything more specific than that, right, Dan? So we'll just probably leave it there.

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

Yes. I mean, so first of all, I think we've been clear that we don't view ourselves as the lead developer, we do this in partnership with others. And we -- right now, we have an option for 25% on Ocean Wind, and we have entertained possibly going as high as 50% previously on this project. There is likely to be a transmission solicitation that will be managed by PJM on behalf of New Jersey that we feel very confident that we could do something of that sort without necessarily needing partners, although we would be welcome to partnerships in that regard, too.

I think at the end of the day, our #1 growth engine remains rate-based growth in PSE&G. Having said that, there is a window of opportunity here as states aggressively pursue offshore wind, and we don't want to have ourselves excluded from that. I think the commercial risk is completely mitigated by the PPA or the orders, and the operational risk is mitigated by making sure you partner with a world-class partner, and we think we have that in Ørsted.

So the risk profile is something that we're now comfortable with. It took us the better part of, I guess, was close to 2 years of us kind of inching along, and we're very grateful for Ørsted's patience. But on the transmission side, I think the risk rewards there we're very comfortable with -- always was, and on the wind farm side, having the right partner mitigates that. We've never disclosed what our hurdle rates are, but suffice to say, even though I think we can manage the risk, both the commercial and the operational risk, as I just mentioned, we wouldn't do these projects for lower than -- we would only do these projects for above-utility returns.

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

Our next question is from Michael Lapides of Goldman Sachs.

One on the utility, just looking out at the CapEx guidance, I want to make sure I understand something. I'm looking out at this and it basically has transmission spend falling off a cliff, meaning spending levels year by year. Just curious, when you think about the type of things that may backfill it to maybe where it doesn't fall off as much in years 3 through 5, what are the type of things, what are the type of opportunities that your engineering teams are looking at?

Yes. So a couple of things that happened, Michael, is that even though the numbers look like they're coming down in years 4 and 5, as we get closer to that point in time, we learn more and that very spend comes back up. So one thing you could see is just more of the same. You're not going to see us [just plan like] a Roseland mega project that -- at least that's not readily predictable. But you could see more of the 69 KV upgrade and just the transmission budget coming up as we get more knowledgeable about what the grid status is.

I think one of the areas, though, that we are increasingly paying attention to, and it's difficult to quantify, is as a result of the pandemic, I believe long-term patterns, lifestyle patters are going to change. I know at PSEG, we're already telling our employees that many more of them will be able to work from home. The combination of the household becoming now place of business and greater penetration of electric vehicles, which are charged at the household, and the growth of electric devices in the home, whether it's smart devices, communication devices, is really changing the whole calculus behind the importance of reliability into the home.

So I'm right now in the office with Dan and Carlotta, and we've got multiple 26 KV feeds into this building because New York is a commercial center for New Jersey. That's true in New Brunswick and many other downtown commercial areas throughout New Jersey. That's not true in my home, and it's not true in anybody's home in New Jersey. So the need to invest in the last mile to reflect the reliability expectations as the home becomes a commercial center and really a bunch of small business operations is a public policy discussion that I think is just beginning to take place, and there's no way reflected in our numbers.

So I'd say you'll see those numbers come up in the future. They always come up in the future, either because we'll just get smarter about the traditional stuff we need to do or there's this whole last-mile question that we'll need to grapple with.

Got it. And then my question, and this is a little bit of -- maybe one for Dan. In the rate base by year exhibit, one of the footnotes talks about the $1.8 billion -- Dan, you brought it up, the $1.8 billion of transmission that is construction work in progress. Can you remind me, you earn on that quip, you just don't necessarily earn a cash return in that [prompt] year?

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

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

Yes, right. Exactly.

Your next question is from Steve Fleishman of Wolfe Research.

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

Yes. So there's some building blocks that I'm sure you're aware of, Steve, right? So the foundation, the house, the roof, everything but maybe the unnecessary furniture is the utility, and that's got a rate base CAGR of 6.5% to 8%. And that will do a little worse because of O&M or a little better because of load growth. But as you know, both of those numbers have hovered around 0 and there'll be some regulatory lag maybe in even some of the final years as clause mechanisms have some non-clause recovery back into them. But that's -- utility is, what, 80% this year or close to that, and to continue to grow.

This year, we're still including all fossil, that will go away. But hopefully, New Jersey will abide by their own energy master plan and nuclear will still be around, so that will be on top of the utility. You may recall on our BGSS, that sticks around. That's on top of the utility. Long Island, notwithstanding, you saw its challenges worsen, but will stick around. That's on top of the utility. And then yes, we're making some assumptions in year 2024, mostly 2025, on Ocean Wind. So those are making up the other 10% to 20%. I'd rather not narrow that, and I certainly don't want to give it to you by year.

I do want to remind you, though, we are very much interested and willing after the -- if we sell the fossil units, when we sell the fossil units once this process is over, are going to revisit the notion of multiple-year earnings guidance and an investor meeting where we kind of recalibrate everyone and try to provide greater clarity of what the company looks like with those different components. But right now, in the middle of a competitive solicitation for the assets, in the middle of the ZEC negotiation and an ROE negotiation, that's the best I can do for you. So...

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

You're right, Steve. We value our corporate citizenship in the state. And I think we've shown over the past few months how important it is to follow with BPU's leadership in terms of its clean energy aspirations and Governor Murphy's aspirations. We've had some very constructive outcomes because we have followed their lead on energy efficiency, on AMI, on electric vehicles.

Having said that, the nuclear plants need more than $10. And what we've said is we'll look at longer-term solutions for that, hopefully, coming out of the federal government with a price on carbon hopefully if that doesn't work, coming out of the FRR process. And that's the only reason -- and the only reason why we would accept $10 now is because that's all the state can do. So that's really not a negotiation, that's just kind of the match the state has available to it, and that's why we need it. And we need more than that. So that's kind of where we're stuck, right?

If you need more than $10, you can't accept less than $10. And when the other parties can only offer your $10, then that Venn diagram ends up at one point and only one point, which is $10. But that does not preclude the need for additional work after that. And at the risk of stating the obvious, if you don't get the $10, then what confidence can you possibly have that the longer-term solution can be realized, and that's why we would shut the unit. So I guess I could have simply said yes to you, but I gave you a [wide] explanation of a yes.

Our next question is from David Arcaro of Morgan Stanley.

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

So I mean, the short answer is anything is possible, right? And I think what New Jersey's goal is, or at least what we've encouraged New Jersey to set as its goal, it wasn't because we had any better insights than the state already did, is do not pay twice for capacity.

And under the current construct, without question, offshore wind will not clear the market. At some point in the future, it's likely nuclear won't clear the market. I'm referring to the capacity model. And solar, certainly won't clear the capacity market. So as New Jersey grows its carbon-free footprint, and even its existing carbon-free footprint for nuclear, you'd have increasing double payments for capacity. And it is about $25 million to $30 million per gigawatt that you end up paying. So that starts adding up very quickly.

Now if you went to a unit-specific FRR, which is something that we were supportive of during the original capacity market discussions if PJM could come up with some sort of stakeholder process that has a regional price on carbon, there's a whole bunch of ifs and I won't bore you with the litany of them, because they're all equally improbable, then yes, maybe the state can do something differently than a simple broad-based FRR. But at the end of the day, the mechanism has to be one that avoids the customer burden of paying twice for capacity. That's really what the outcome would be.

And David, to some degree, it also comes down to timing. So as things stand today, you do have that double payment issue that Ralph talked about. And so your question is, if something changes at FERC, would something change in New Jersey? And so part of it comes down to how quickly might you see something change at FERC and where would New Jersey be in their process? And these things tend to not happen extremely quickly.

So against that backdrop, you do start to have that double payment Ralph talked about in 2025. So it's a bit of a -- not necessarily a race, but it's a 2 timelines coming to that year's capacity determination with respect to how quickly FERC could move and what New Jersey's reaction would be to whatever it is they do and how much of a solution it is to that double payment problem. So those are some of the things to think about with respect to how the parties might be approaching a change from the current path.

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

Yes. So there's chipping that became obvious since the passage of the law in 2018. Power markets continue to decline, more so than we expected it to. That's only going to get worse as more 0 marginal cost renewables are introduced to the market, and we're in a market that dispatches our marginal cost. And the nuclear plants rely on those infra-marginal revenues to make their economics work. And that dispatch curve is getting flatter and lower each passing year.

Secondly, the state has very ambitious carbon-free energy goals, which are great, which we completely applaud. But they're so ambitious that they exceed their current licensed life of the nuclear plants. And you're not going to go into relicensing and you're not going to made capital improvements on the basis of the 3-year ZEC process, even if it was adequately compensating, which it isn't. So the 2 problems with the ZEC are the overall dollar amount and the duration of the review process.

So -- and we supported that over the past few years as the market continues to implode it on itself, so -- for nuclear plants. We -- our [fossil] aims to right. They're running 70-plus percent at the time, as Dan said, they're enjoying nice spark spreads, and they're working beautifully. So yes, long-term nuclear questions [are needing resolution]. But there are multiple pathways to get there.

Your next question is from Paul Fremont of Mizuho.

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

No, think about the opposite way, Paul. The single change is the delta with respect to transmission charges.

And that's just the...

So then the...

Right. [That] would be the answer to that.

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

Yes. Or stated another way, not try to back out those pieces. As a revenue-oriented number, we've stripped out capacity as a separate item. And now since transmission is not in the revenue, it will not be in revenue.

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

No, we have to get their approval. Yes.

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

That's correct.

Okay.

So I think we're at the appointed hour. Thank you all for joining us. Just by way of recap. The rate base growth at the utility, as it has for the past decade plus, continues to drive the EPS growth at PSE&G, all the while doing things that are vitally important to customers. And we continue to project now a 6.5% to 8% CAGR in that rate base over the next 5 years, doing things that are really driven by state policy leadership and aging infrastructure that has to attract our attention to meeting the customer needs.

I think and add is a positive outcome from what has occurred last year is this conservation incentive program, providing much greater -- even greater stability to utility revenues. The positive constructive outcomes we've had with the BPU, again, at the risk repeating myself, by virtue of us following their lead on energy master plan and public policies, accomplishments that they had targeted, have all just made for a terrific set of outcomes.

Yes, we do have an ROE negotiation and it's that application that is in front of the BPU. Resolution of those 2 items will introduce a prolonged period of regulatory calm and significant execution of these great programs that we've dealt with before. We'll give you greater clarification on the strategic alternatives in a couple of months, but as I said a moment ago, I couldn't be happier with the fact that it's met every one of our expectations so far, and I think it will continue to do so.

I would be remiss if I didn't close my remarks, as I have sadly for each of the last 3 quarters, by expressing my thanks to all of you who have family members or loved ones who are frontline workers in what is an improving situation, but still a tragic situation related to COVID-19. I know that it's got to be a tremendous burden on you and your families, but please, from our family at PSEG, a sincere thank you to anyone you know who's engaged in that.

Otherwise, we look forward to seeing you, albeit as pixels, over the next few weeks. I know there's a bunch of conferences coming up, and maybe in the not-too-distant future seeing you live and in the flesh. Thank you. Have a great day everybody.

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