Public Service Enterprise Group Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2021

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Carol, and I'm your event operator today. I would like to welcome everyone to today's conference, Public Service Enterprise Group's 2nd 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 for members of the financial community.

Operator

As a reminder, this conference is being recorded today, August 3, 2021, and will be available beginning at 2 o'clock p. M. Eastern Standard Time today as an audio webcast on PSEG's corporate website at investor. Pseg.com. I would now like to turn the conference over to Carletta Chan.

Operator

Please go ahead. Thank you, Carol. Good morning, and thank you for participating in our earnings call. PSEG's 2nd quarter 20 21 earnings release, attachments and slides detailing operating results by company are posted on our website at investor. Pseg.com, And our 10 Q will be filed shortly.

Operator

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 or loss as in accordance with generally accepted accounting principles in the United States. We include reconciliations of our non GAAP financial measures and a disclaimer regarding I'll now turn the call over to Raoul Bizzo, Chairman, President and Chief Executive Officer of PSEG. Joining Ralph on today's call is Dan Craig, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for your questions.

Operator

Scott?

Speaker 1

Thank you, Carlotta. Thank you everyone for joining us this morning. PSEG reported non GAAP operating earnings of $0.70 per share for the Q2 of 2021 Versus $0.79 per share in last year's Q2. GAAP results for the Q2 were $0.35 per share net loss Related to transition charges at PSEG Power. And that compares with $0.89 per share of net income for the Q2 of 2020.

Speaker 1

Also in the quarter, PSEG Power recorded a pretax impairment A $519,000,000 at its New England asset group, partly offset by a pre tax gain of $62,000,000 from the sale Of the Solar Source portfolio. We continue to make great progress on a number of fronts to position ourselves for Future. We had a strong operating quarter that once again produced non GAAP operating earnings in line with our expectations for the year. Our results for the Q2 bring non GAAP operating earnings for the first half of twenty twenty one to $1.98 per This 9% increase over non GAAP results of $1.82 per share for the first half of twenty twenty Reflects the growing contribution from our regulated operations and continued derisking at PSEG Power. Slides 13 and 15 summarize the results for the quarter and the first half of the year.

Speaker 1

It's been a year since we announced our intentions The focus business will be complemented by a significantly contracted carbon free generating portfolio Consisting of our nuclear fleet and investments and opportunities in regional offshore wind. The marketing of the fossil assets has garnered a Significant level of interest from numerous qualified buyers in a competitive process, which is advancing as expected And we expect to provide you with more information on this process in the very near future. I'm pleased that we've reached a balanced agreement with the New Jersey Board of Public Utilities and the division of Rate Council on PSE and G's transmission rig, which If approved by FERC, we'll resolve a significant regulatory uncertainty for us and provide a timely rate reduction for customers. PSE and G has agreed to voluntarily reduce its annual transmission revenue requirement, which includes a reduction in its base return on equity To 9.9% from 11.18%. If approved by the FERC, a typical electric residential customer We'll save 3% on their monthly bills.

Speaker 1

New Jersey continues to experience positive economic activity Governor Murphy lifted the public health emergency order in June, our largest customer class in terms of sales, The commercial segment has shown a rebound in electricity demand. Electric sales overall adjusted for weather were up nearly 4% over percent decline in residential sales as people gradually return to work outside the home. The warmer than normal Summer has also increased PSE and G's average daily peak load for the quarter to 5,480 Megawatts compared to last Your second quarter average of 5,100 Megawatts and the 5,330 Megawatts experienced in the pre COVID quarter 2019. And so far this summer, PSE and G's load has peaked at 10,064 Megawatts on June 30, Exceeding the 10,000 megawatt mark for the first time since July 19 of the year 2013, 8 years ago. Turning to clean energy developments in New Jersey, the BPU in June awarded a 2nd round of offshore wind projects totaling 2,658 Megawatts and is now halfway towards the state's goal of procuring 7,500 Megawatts of Offshore Wind Generation by 2,035.

Speaker 1

The award was split between the 15 10 Megawatt Atlantic Shores project and Ersted's 1148 Megawatt Ocean Wind 2. The OREX prices And last week, the BPU approved the new solar successor incentive framework that consists of 2 programs, Determine incentive and a competitive solicitation incentive, which would apply to larger projects defined as 5 megawatts and above. Incentive levels for the administratively determined segment range from $90 per megawatt hour for net metered residential projects To $70 to $100 per megawatt hour for the commercial and community solar segments And up to $120 per megawatt hour for certain public entity projects. You will recall that the prior Program consisting of solar renewable energy credits or as we frequently refer to them as SRECs, average well above $200 per megawatt hour over the past decade and combined with net metering subsidies and federal tax credits Provided layered incentives topping $300 per megawatt hour. So this successor program is a positive step towards Balancing the need for clean energy while recognizing the importance of affordability for our customers.

Speaker 1

PSEG's existing solar programs are essentially fully subscribed. We'll continue to work with the state MBP on programs that can help meet the solar goals in the Energy Master Plan. PSEG continues to make tangible progress on our own decarbonization and ESG goals. In the second quarter alone, we closed on our 25% Pretty stake. In the 1100 Megawatt Ocean Wind Project in New Jersey, that's the Ocean Wind 1 project obviously.

Speaker 1

We retired our last coal unit at Bridgeport Harbor in Connecticut, making our generating fleet coal free and moved up our net zero vision by 20 years to 2,030. But not only did we accelerate the net zero vision, we also expanded it to include Scope 1, direct greenhouse gas emissions And scope 2 indirect greenhouse gas emissions from operations at both PSEG Power and PSE and G. Expanding the net zero vision to include both the utility and power operations is a significant move forward in our And one that will both inspire and challenge us to do more and do it better. Coming up, PSEG is preparing to bid into a competitive process wind target by 2,035. The potential projects can cover onshore upgrades, new Onshore transmission connection facilities, new offshore transmission connection facilities and a networked offshore to include among other things, an evaluation of reliability and economic benefits, cost, constructability, Environmental benefits, permitting risks and other New Jersey benefits.

Speaker 1

This The transmission open window will be jointly conducted by PJM and the New Jersey Board of Public Utilities. PJM will lead the technical analysis of the And the BPU will be the ultimate decision maker. We support the state's efforts to procure transmission in a manner that is most reliable, Constructible and cost effective for our customers. All of this is great progress in our decarbonization efforts and continues to demonstrate our alignment with Clean Energy Agenda and our industry leadership on environmental stewardship. New Jersey's recent endorsement of the environmental Extends the $10 per megawatt hour carbon free This extension will allow us along with stakeholders in New Jersey and at the federal level the time we need to work long term economic solution to keep our merchant nuclear fleet economically viable and preserve its currently During the ZEC deliberations, a growing recognition that these nuclear units were economically at risk, but Finally important to New Jersey's ability to reach its clean energy and carbon goals gained further traction.

Speaker 1

The importance of the New Jersey nuclear unit With the fixed resource requirement, often we refer to that as an FRR, we expect that the BPO will be closely watching to see whether FERC accepts PJM's just filed modifications to the minimum offer price rule, which appears to better align the PJM capacity market with New Jersey's Clean Energy Goals. The results of the first PGM capacity auction in 3 years, influenced by a COVID-nineteen pandemic stifle Demand curve serves as further evidence of the market risks faced by our nuclear units. This sentiment is shared by Biden administration Officials, including DOE Secretary, Granholm and White House Domestic Climate Advisor, Gina McCarthy, who have both spoken publicly on the importance of nuclear energy as a clean energy resource. We continue to work on promoting a Federal nuclear production tax credit proposal, where the value of the credit declines as market revenue increases. This is the primary federal policy That would help prevent premature closing of merchant plants, whose market revenues are not currently covering costs and risks.

Speaker 1

Other options, such The federal nuclear grant program administered by the Department of Energy are also being discussed. However, we and others in the To share the view that a competitive grant program will not provide timely relief nor the certainty these plants need to remain operational. Nonetheless, we're encouraged by the attention that at risk nuclear plants are getting in Washington. And we especially appreciate New Jersey Congressman Bill Pascrell, who's leading this effort in the House of Representatives and Senators Carden, Manchin and Booker in the Senate. That said, we do expect the federal infrastructure effort to take the better part of the rest of the year to unfold.

Speaker 1

On the social side of ESG during the Q2, we recognized the Juneteenth holiday by giving employees paid time off To commemorate and celebrate this important day in our nation's history and supported our LBGTQ plus community with numerous events for Pride Month. Also in June, PITG was named to Just Capital's Top 100 Companies Supporting Healthy Families and Communities. Overall, we had a solid quarter and results through the first half of the year have positioned us To update our full year guidance somewhat earlier than has been our practice, we are raising by $0.05 per share the bottom end of PSEG's non GAAP operating earnings guidance for full year 2021 to a range of $3.40 to $3.55 per share Based on favorable results at PSE and G and Power through the 1st 6 months of the year. This update also contribute to consolidated results through the end of the year. We're on track to achieve the utility's 2021 planned capital spending of 2 point $7,000,000,000 on schedule and on budget.

Speaker 1

The spend is part of PSEG's consolidated 5 year $14,000,000,000 to $16,000,000,000 capital plan, which we still intend to execute without the need to issue new equity, while also continuing to offer the on January 4, 2022 after 35 years of dedicated service to the company. Kim Hahneman, Who has been named PSE and G Senior Vice President and Chief Operating Officer was promoted to succeed Davis President and COO of PSE and G effective June 30th. In support of a seamless transition of leadership at PSE and G, Dave is serving as an Executive Advisor through the end of the year. With her promotion, Kim is the 1st woman to lead New Jersey's largest electric and gas utility in our 118 year history. Many of you know Kim is the power behind the transmission build out over the past 10 years, and I hope all of you will have the opportunity to meet her in the near future.

Speaker 1

Speaking of meeting, New Jersey has among the highest rates of fully vaccinated people in the country. But vaccination rates in the state have recently plateaued. So we're carefully monitoring the impact that highly contagious variants are having on updated health and safety protocols. So whether in person or virtually, we are looking forward to hosting an investor event in the fall when we expect to So now I'll turn the call over to Dan for more details on our operating results, and we'll rejoin you at the end of this for your questions.

Speaker 2

Great. Thank you, Ralph, and good morning, everybody. As Ralph said, PSEG reported non GAAP operating earnings for the Q2 of 2021 waterfall charts that take you through the net changes in non GAAP operating earnings by major business. I'll now review each Company in more detail starting with PSE and G. PSE and G reported net income of $309,000,000 or $0.61 per share for the Q2 of 2020 Compared with net income of $283,000,000 or $0.56 per share for the Q2 of 2020.

Speaker 2

PF ENG 2nd quarter results reflect revenue growth from ongoing capital investment programs. Growth in transmission added a penny per share to 2nd quarter net income, reflecting continued infrastructure investment as well as the timing of transmission O and M in the quarter Enter us from prior year filings. Electric margin added $0.02 per share to net income compared to the year earlier quarter, driven by commercial and industrial Reflecting higher margins in April May compared to the COVID-nineteen restrictions that affected prior year results And the implementation of the Conservation Incentive Program or SIP Mechanism

Speaker 1

in June.

Speaker 2

Gas margin at a penny per share, driven by the gas modernization program rate roll ins. Gas related bad debt expense and O and M expense were both $0.01 per share favorable Compared to the year earlier quarter, driven by the timing of COVID related deferrals since the issuance of the BPU's order in the 3rd Quarter of last year. An increase in distribution related depreciation due to higher rate base, Lower net income by a penny per share, non operating pension expense was $0.02 per share favorable compared to the Q2 of 2020, reflecting the continued recognition strong asset returns experienced last year. Tax expense was $0.02 unfavorable compared to the Q2 of 2020, Driven by the timing of adjustments to reflect PSE and G's estimated annual effective tax rate. The transmission agreement PSE and G, the BPU and rate council that Ralph mentioned earlier has been filed with FERC for approval with an August 1st requested effective date.

Speaker 2

There's no timetable for when FERC must respond. However, we will begin recording the impacts of the settlement on our financials starting with the August 1st requested effective date. The agreement would reset the base ROE for PSE and G's formula rate to 9.9% from 11.18%, which lowers the annual transmission Requirement by about $100,000,000 per year on a pre tax basis. Other key elements of the settlement lower annual depreciation expense by approximately $42,000,000 which has a corresponding reduction in revenue that results in no net impact on earnings And an improved cost recovery methodology for our administrative and general costs and investments in materials and supplies. The agreement also Includes an increase to PSE and G's equity ratio from 54% to 55% of total capitalization.

Speaker 2

The financial is expected to lower PSE and G's net income by approximately $50,000,000 to $60,000,000 or $0.10 to $0.12 per share on an annual basis in the 1st 12 months Weather for the Q2 was significantly warmer than the Q2 of 2020, with humidity index that was 34% higher than normal and a significantly higher than normal number of hours at 90 degrees or The New Jersey economy continued to recover in the 2nd quarter, increased by total weather normalized electric sales by approximately 4 Compared to the Q2 of 2020, which was at the height of the COVID-nineteen economic restrictions. On trailing 12 month basis weather normalized electric and gas sales were each higher by approximately 1% with residential electric and gas usage up by 4% and 2% respectively. The conservation center program was started June 1st for electric sales, removes the variations of weather, Economic activity, efficiency and customer usage from our financial results, resetting margins to a baseline level. This new mechanism supports PSE and G's ability to maximize customer participation in energy efficiency programs without losing margins from lower sales. A similar program covering gas sales will commence October 1st and replace the weather normalization clause.

Speaker 2

PSE and G's Capital program remains on schedule. PSE and G invested approximately $700,000,000 in the 2nd quarter and 1 point This capital is part of 20 21's $2,700,000,000 electric Gas infrastructure program to upgrade transmission and distribution facilities and enhance reliability and increase resiliency. We continue to forecast over 90% of PSEG's planned capital investment will be directed to the utility over the 21 to 2025 timeframe. PSE and G's forecast of net income for 2021 has been updated to 1,420,000,000 $1,470,000,000 from $1,210,000,000 to $1,270,000,000 Now Moving on to power. PTG Power reported non GAAP operating earnings for the Q2 of EBITDA of $159,000,000 This compares to non GAAP operating earnings of $0.24 per share and non GAAP adjusted EBITDA of 2 $58,000,000 for the Q2 of 2020.

Speaker 2

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 Slide 23 provide you with a detailed analysis The items having an impact on PSG Power's non GAAP operating earnings relative to net income quarter over quarter. We also provided you with more detail on generation for the quarter and for the first half of twenty twenty one on Slide 24. GCU Power's 2nd quarter non GAAP operating earnings were affected by several items that combined lowered results by $0.14 per share below A quarter from a year ago. Recontracting and market impact reduced results by $0.09 per share reflecting seasonal 100% owned Hope Creek nuclear plant.

Speaker 2

PGM capacity revenue added $0.02 per share to the year ago quarterly comparison. For the year ended June 30 for the year to date ended June 30, capacity is $0.05 per share favorable compared to the first half twenty twenty, Reflecting the scheduled higher price of approximately $167 per megawatt day for the majority of the first half of twenty twenty one versus the $16 per megawatt for the same period in 2020. Higher O and M expense reduced results by $0.04 per share compared to last Your second quarter, primarily reflecting the planned Hope Creek refueling outage and higher fossil operating expenses. Lower depreciation expense, Reflecting the sale of SolarSource portfolio and the early retirement of the Bridgeport Harbor Coal Fired Generating Station, combined with lower interest expense To add $0.02 per share versus the year ago quarter. Taxes and other items were $0.03 per share unfavorable, reflecting the absence Multi year tax audit settlement included in the Q2 2020 results.

Speaker 2

Gross margin in the Q2 of $2,048 per megawatt hour compared with $33 per megawatt hour for last year's Q2. The decline quarter over quarter reflects the seasonal price impact of Contracting is anticipated to result in a negative $2 per megawatt hour price decline in the hedge portfolio for the full year. We expect results in the Q3 of 2021 to be similarly negative, and as we mentioned last quarter, will more than offset this $0.03 per share benefit seen In the Q1. Now let's turn to Power's operations. Total generation output declined by 1% to 12 point 6 terawatt hours in the Q2 as the refueling outage at Hill Creek and subsequent forced outage lowered nuclear output versus the Q2 of 2020.

Speaker 2

The nuclear fleet operated at an average capacity factor of 86% for the quarter, producing 7.2 terawatt hours, down 7% versus last year, which represented 57% of total generation. Power's combined cycle fleet produced 5.3 terawatt hours of output, up 8% in response to higher market demand helped by warm weather. Power is forecasting Generation output of 25 terawatt to 27 terawatt hours for the remaining 2 quarters of 2021 and has hedged 95 At an average price of $30 per megawatt hour. Also during the quarter, we're pleased to remind you that Q Power eliminated all coal from its generated mix with the early retirement of Bridgeport Harbor Station 3. Power's quarterly impairment Including consideration of its strategic review of the non nuclear fleet determined that the ISO New England asset grouping showed an impairment As of June 30, 2021.

Speaker 2

As a result, Power recorded a pre tax charge of $519,000,000 PJM and New York ISO asset groupings did not show an impairment as of June 30, 2021. However, a move of these assets to held for sale, which would be effective upon an anticipated sale agreement, would be expected to prompt an additional material impairment to the Fossil Such a move to held for sale would also prompt the cessation of depreciation and amortization expense for the held for sale units, resulting in a favorable In June of 2021, PSEG completed the sale of PSEG SolarSource, which resulted in a pre tax gain of approximately $62,000,000 and income tax expense of approximately 63 $1,000,000 primarily due to the recapture of investment tax credits on units that operated for less than 5 years. For the remainder of the year, depreciation Expense will also decline by approximately $0.03 per share as a result of the Solar Source sale. Forecast of PSEG Power's non GAAP operating earnings for 2020 Has been updated to $295,000,000 to $370,000,000 from $280,000,000 to $370,000,000 While our estimate of non GAAP adjusted EBITDA unchanged at $850,000,000 to $950,000,000 Now let me briefly address operating results from Enterprise and other Provide an update on PSEG Long Island.

Speaker 2

For the Q2 of 2021, PSEG Enterprise and Other reported a net loss of $3,000,000 $0.01 per share for the Q2 of 2021, which was flat compared to a net loss of $2,000,000 or $0.01 per share for the Q2 of 2020. The net loss for the Q2 2021 reflects higher interest expense at the parent initially offset partially offset, I should say, by the ongoing In June, PSEG Long Island entered into a non binding term sheet with the Long Island Tower That would resolve all the authorities' claims related to tropical storm, the Cyaneus. The terms will be adopted into amendments to our operation service arraignment or OSA and submitted to New York State authorities for approval later this year. The OSA contract term will continue through 2025 with a mutual option to expand. For 2021, the forecast for TCG Enterprise Another remains unchanged at a net loss of $15,000,000 PSEG's financial position remains strong.

Speaker 2

At June 30th, we had approximately $4,000,000,000 of available liquidity, including cash on hand of about $107,000,000 52% of our consolidated capital. During the first half of twenty twenty one, PSEG entered into 2 364 day variable rate term loan agreements totaling $1,250,000,000 During the Q2, PSEG Cal Retired $950,000,000 of senior notes during June September 2021 and ended June with debt as a percentage of capital 20%. In May, Moody's changed PSE and G's credit rating outlook to negative from stable. Their first mortgage bond rating remains AA3. We still expect to fund PSEG's $14,000,000,000 to $16,000,000,000 capital investment program over the 2020 onetwenty Without the need to issue new equity, while also continuing to offer consistent and sustainable growth in our dividend As Ralph mentioned, we've raised the bottom end of our forecast of non GAAP operating earnings for the full year $3.40 to $3.55 per share, up by $0.05 per share based on the solid results have seen in the first half of the year that give us confidence that we can deliver results at the upper end of our original guidance.

Speaker 2

That concludes my comments and

Operator

The first question comes from the line of Jeremy Tonet with JP Morgan. Please go ahead, Jeremy.

Speaker 3

Just wanted to dig into the Fossil So sales process, a

Speaker 1

little bit more if I could.

Speaker 4

And given the impairment here, just

Speaker 3

want to make sure I'm clear, the one taken in New England, it would seem that that process might Wrap up more near term than the others. And then at the same time, for the other pieces of the sale, it seems like the Process might slip into 'twenty two a little bit, if I saw that right. Just wondering if you could walk through some

Speaker 1

of the drivers on that?

Speaker 2

Sure, Jeremy. With respect to your question on the different asset groupings, when we think about and when we do our Impairment tests, we use those asset groupings. And so there's an asset grouping for New England, one for New York and one for PJM. And so I would not look at The timing of the impairment in the Q2 in New England as being different timing for different components, I think What you would look at is the way that the test is done by looking at both a traditional view of an undiscounted set of future It was such that we did as of the end of the second quarter, see an impairment in New England, but did not see one in New York PJ, as I noted in my remarks that as we continue forward and upon a movement to held for sale, you could see Material impairment incremental to what's there, but it does not have to do with timing per se of the sale. And what we have said all along was somewhere around mid year, we would be moving to agreement.

Speaker 2

We're still in that ballpark, I But I still think year end is about what you would anticipate the path that we're on. But it does not imply Separate sales by virtual what's happened. It's more just based upon the overall accounting and how that test works vis a vis, we'll see it, the balance on the books.

Speaker 1

Got it. That's helpful.

Speaker 3

Thank you for that. And maybe just kind of pivoting towards Offshore wind here and investment timing in transmission. Just wondering how you think about the opportunity post the settlement And then I guess as well, with nuclear, if there's potential federal outcomes here, if that might kind of play into the process In any way at all, and informs how the state goes about the review. Just wondering if you could update us there on that.

Speaker 1

Yes. So Jeremy, it's Ralph. So we're excited about playing in all four parts of the offshore transmission opportunity and we do see that Quite sizable opportunity. Goods are due, if I'm not mistaken, the end of this month, but they've been delayed. They were originally due to the end of this month, but they were delayed now to sometime September, probably end of September.

Speaker 1

We're expecting PJM or to review that Through the balance of the year and then handing their results over to the BPU for an early decision probably End of Q1 next year, it could slip a little further than that. But there's a sizable opportunity in offshore wind. And It's quite real, just given the fact that we now have over 3,700 megawatts of wind farms that are Due to become operational depending upon the project anywhere from 2024 to 2028. Nuclear is wholly separate from that And we are greatly encouraged by the amount of attention being given to merchant plants in particular By President Biden and his administration, by bipartisan members of the House and the Senate, there's a component of the Infrastructure built in right now allows for a grant program for nuclear. And while that is by no means the preferred Pat for us, just the mere fact that Congress is recognizing the challenge of nuclear plants, I think is important for the nation And could relieve some of the cost pressure on New Jersey customers who are currently bearing the full burden of keeping our 3 units economically Got it.

Speaker 1

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

Operator

Your next question comes from the line of Shahriar Pourreza with Guggenheim Partners.

Speaker 1

Can you just elaborate

Speaker 2

Ralph on the impact of the FERC ROE settlement with the BPU? I mean, do you anticipate that 0 point $0.10 to $0.12 a drag to be perpetual or are there offsets like CapEx pull forwards or maybe the ability to raise the equity ratio at the distribution business, O and M Distribution business, L and M levers, how do we think about that?

Speaker 1

Yes. So the $0.10 to $0.12 is the all in effect of some of the Improvements in the formula rate treatment, some of the benefits realized from an earnings point of view of reducing the depreciation rate, That also includes the most obvious drag of lowering the allowed ROE. Now a couple of things will happen by virtue Changing the depreciation rate, the rate base will decline more slowly. So that's an improvement to earnings in the out Having said that, however, though, as you grow the rate base from new CapEx, the lower ROE is going to be a drag on So we won't break it out in the future, Shar, because there's no sense talking about what it's no longer our ROE, but it won't be factored into any earnings guidance we give for 2022 and beyond.

Speaker 2

Okay, great. And then just can you just give us some thoughts on how you see sort of the business trajectory post Like the power sale, just thinking of like how you bridge the 6.5% to 8% utility rate base growth with the remaining moving pieces like nuclear and Holdings business offshore wind JV. And do you sort of plan to provide longer term EPS Guidance close to sale at the Analyst Day. So how do we sort of think about that?

Speaker 1

Yes. So we're hoping to get together late in September. That's still our current thinking. And we do anticipate being able to give multiyear earnings guidance and revisit of our dividend policy At that point in time. I think multi right now we give you 10 months of earnings guidance.

Speaker 1

So multi year may start out being 3 to 5 years, I don't think it's going to it's certainly not going to be beyond that. It's just so tough to predict longer term in that chart. But Really what we highlighted not that long ago is still in place, we think, after the sale. We'll be Close to 90% regulated. Now that could drop a little bit as we start adding offshore wind, but that we I could be fully contracted.

Speaker 1

And so that was the 80% to 90% range that we had given in prior earnings calls and that's still in place. We are determined to get a longer term treatment of our nuclear plants. We've said And by the fact that the 3 years after is untenable and we're delighted that New Jersey gave us that to be able to enter into this more A thoughtful discussion either at the federal level or if it has to be at the state level to expand that timeframe. But the utility growth Trajectory has only been enhanced, right? Its growth trajectory has always been supported by the We have an aging infrastructure that can A, not meet the needs of a customer base that is increasingly dependent on that infrastructure and D, that infrastructure in addition to its age is confronting More intense weather patterns and storms.

Speaker 1

So the need to replace that aging infrastructure inclusive of greater emphasis on last Mile is more and more people work from home. It's just equally if not growing in prominence. And now we have the ability to add to that the carbon free agenda and the green agenda of New Jersey, which allows this whole opportunity of adding to the And as I've said in the past, it takes a lot of light bulbs to replace the transmission tower in earnings power, but they're equally important to the customer, both from an efficiency point of view and a reliability point. So I'd say that The utility growth prospects remain intact if not are enhanced by what we continue to see in terms of climate And the stress it puts on the infrastructure and the desire to battle that and the opportunity it creates on a customer side of the meter.

Speaker 2

So should we as we're thinking about that 3 to 5 year growth rate, should we think about it as the rate base That you guide currently at the utility level and when offshore wind starts to become more material, you kind of rebase That year higher and then grow off of that or as you're thinking about that 3 to 5 year growth rate, are you going Revert back to your traditional the way you guide, which is looking at your CapEx and probabilistic scenarios, right? And And I guess the bookends of that growth rate off of the rate base growth would really be based on, I guess, The CapEx visibility you have, right, that would dictate a lot of them top end. Is that the way to think about it?

Speaker 5

So I don't want to

Speaker 1

give that long Today, but you ought to think about, Shar, is I mean, we have given a 5 year K growing rate base So that will form the template of how we think about our long term earnings growth. Got it. It will be off the end of last year until we get to the New Year and then it will build off of that. Now, offshore wind It's a little bit more difficult at this point in time, obviously, because we only have one project that's in the bank, so to speak, that's Ocean Win But we have lots of opportunities that are in the discussion phase. And to your point, yes, we will Still suffer from the fact that the capital program is not as well known in years 45 and that They embed a little bit of potential conservatism in the rate base growth, which we've tended to be able to make up for in And we'll think that through and give you further clarity about what we're assuming in terms of unfiled programs or We'll make that abundantly clear on how the earnings growth has been

Operator

Your next question comes from the line of Julien Dumoulin Smith with Bank of America.

Speaker 5

Hey, good morning, everyone. Thanks for taking the time. I appreciate it. If I can hey, thank you. So I want to come back to the guidance increase just on 'twenty one here.

Speaker 5

I just want to understand a little bit more of the confidence And the confidence in raising now with Q2, I mean, obviously, the ROE impact is known, but you also have the solar and fossil headwinds, obviously, not Fully reflected expectations here. Just what gave you the confidence to raise at this point? It's notable.

Speaker 2

Julien, I think It's a couple of things. First off, we have solar that has been sold and that was in what we had going forward. And as we Today, what we have still assumes that fossil continues on. So that's more status quo than anything The other thing that I would think is probably worth mentioning though is just the if you think about the utility, if you think about on the electric side, That SIP program which has a levelizing effect is in effect for electric in June. It's in effect in October For gas and if you think about going through the summer period, gas usage is low during that period.

Speaker 2

So that will take some volatility out of the balance So just seeing where we are with the events that we know and with the effect of some volatility I think that it made sense right now to do what we did do and we'll see what happens from here.

Speaker 5

Excellent. Perhaps I can preface that I know the rating agencies are already acting in some respects. But can you elaborate on the increased Flexibility, right? I know you use that word very specifically here. As you mentioned at the top end of the Analyst Day, what kind of financial metrics are you thinking about with respect

Speaker 2

It is an acknowledgment that as we step forward, the company will have a more stable business mix on top of the aspect that I just talked about with respect To the ship having a stabilizing effect. I think Analyst Day is the right time to put that out. But if you think about just That change in business mix is going to put us in a position where we have some more flexibility. So I think for more details on that, stay tuned. But I think the direction of it is obviously favorable given the business mix.

Speaker 5

But just to clarify this, should we still broadly be thinking about use of proceeds? Is this entirely

Speaker 2

Ours debt pay down, you've seen some of that happen already. But also the continued ability to invest in the business, if you think about Investment opportunities that Ralph just talked about with respect to PSE and G and certainly within some of the out years as well as offshore wind and the potential for a return capital to shareholders. So those are the buckets that we've talked about. And probably with respect to the first use, I would think about the power debt being

Speaker 5

Got it. Understood. I appreciate it. So buyback, dividend And CapEx, all there.

Speaker 1

You were nodding your head, Dan, but then you couldn't see that.

Speaker 4

Okay. All right.

Speaker 5

There we go. I like the nonverbal cues. I appreciate it. I'll leave it there. Thank you, guys, and best of luck in the preparation.

Speaker 1

Thanks, Julian.

Operator

Your next question comes from the line of Durgesh Chopra with Evercore ISI.

Speaker 6

Hey, good morning team. Thanks for taking my question. Hey, Des, just quickly on 2021. Can you quantify how much Benefit was weather in the second quarter. I'm just trying to reconcile your move up in guidance, given sort of the ROE headwinds and the combination of other things including sort of demand recovery, load recovery year over year?

Speaker 1

Yes. We didn't have a penny provided

Speaker 2

on weather, but modest. It's kind of in a penny or 2 now

Speaker 6

Got it. Okay. So small. And then just maybe all my questions have been answered. But Ralph, is there a way to size the transmission investment like what could be the upside?

Speaker 6

I mean you have a what $16,000,000,000 5 year CapEx

Speaker 1

Yes. I'm glad you asked that question, right, because what we have been telling folks is that we expect it to be a 9 figure investment opportunity. But I think we've understated it. Looking at the breadth of what New Jersey wants to see happen, we may need to add a 0 to that. That does Like a more of a 10 figure investment opportunity at this point.

Speaker 6

Got it. So very large and presumably sort of Infrastructure.

Speaker 1

Yes, it's a lot of infrastructure.

Speaker 6

Right. And over sort of a 5, 10 year timeline, is that the right way to think about it? I appreciate our

Speaker 1

Yes. No, I think that that's right, because it's supposed to be if New Jersey goes ahead with it, the intent is to be able to manage The 2,035 target of 7.5 gigawatts. But it's not necessarily all going to be regulated, right? Some of the On land stuff probably will be, but the components that are landing sites on Sure. And the backbone out in the ocean and the pieces that are connected to the ocean more than likely would be unregulated, But supported by a contract for a Board order.

Speaker 1

And suggest, the nature of

Speaker 2

it, we talked a little bit about it in the prepared There's a lot of options as to what actually can end up coming forward. And so I think what you're likely to see It's a submission that would include multiple alternatives that some may or may not be mutually exclusive Depending upon the way that the decision is ultimately made. So you may see kind of bigger number going forward from the standpoint of all alternatives, which may distill down to a smaller number that we end up It all obviously would end up being FERC regulated, but you may not see that embedded within our PSE and G regulated

Speaker 6

Understood. Thanks guys. We'll be closely watching. Thank you.

Operator

Your next question comes from the line of Jonathan Arnold with Vertical.

Speaker 7

Good morning, Jonathan. Just quickly on Ocean Wind 2 and your potential interest And becoming involved there, any sense of how soon we might learn about that? Are you already talking Got it. Or anything you could share there?

Speaker 1

Yes. I don't think we want to get into details on that, Johnson. I mean, we have a range of conversations Of course, several projects that are in the Mid Atlantic region underway with Orsted. And Yes. I think that's probably as far as I want to go.

Speaker 1

I do want to make sure that we that Dan's Comments a second ago, it's best understood right. So when we say it's not regularly, what we mean is it's not going to be part of the transmission, it's not going to be part of But all transmission is FERC regulated. So it would still get that kind of treatment. But in terms of Ocean Wind 2. It is obviously safe to conclude that we will have some conversations I was fortunate about that as well as some other opportunities in the region.

Speaker 7

All right. Thank you. And just on You said that you're hoping to announce the have things to tell us in the I think the very near future on fossil and The Analyst Day still targeting September. So you did it does look

Speaker 2

like you put Q1 of 'twenty 2 sort of in the official statement

Speaker 7

on when we might when closing might happen. So can you Statement on when we might talk when closing might happen. So can you just close the loop for us there a little bit? Did things shift back a bit or

Speaker 5

Yes. No, no, no.

Speaker 1

Look, so from my perspective, we've been running a 12 month process that's been phenomenally It's been extremely robust. And I just don't want to sacrifice value for an arbitrary deadline. So We think in the near future we'll be able to give you more detail and we're still holding out for end of September Analyst Day. But I'm not going to sacrifice value for, As I said, an arbitrary deadline. The Q1 of 'twenty two is just if you look at FERC approval time Frames for similar sized deals in terms of when things were filed and when things were finally blessed and you tack it on to where we are at the moment that it could Lead into next year is all we're saying.

Speaker 1

It could still happen by the end of this year, but it could also just look at the range of dates leading to next Again, I think the process has been incredibly robust and I don't want to diminish How well it's gone by just forcing an expedited closing of The final stages. Just as

Speaker 2

Ralph mentioned, Jonathan, so that I mean the initial announcement was this time last So, we talked about 12 months. We literally are to the event at least about to the exact day at 12 months. And the deferred process does not have a firm timeline on it. So that's as we think about timing, it's a little bit of an uncertain target, but that's an approximate timeframe.

Speaker 7

I'm just curious because it would look like a slight change in language, but that's great. Dan, might I just ask one Other quick thing on the CIP and implementing that. Does that because I guess that sort of would pull out any Yes, over or under performance on weather through the balance of the year. Does it Help or hurt you relative to guidance, having the CIP sort of come into effect? I realize it makes it less volatile going forward.

Speaker 7

But I'm just curious as you sort of pull out what you had in the base. Yes. Honestly, Jonathan, it will depend a

Speaker 2

little bit What the weather the economic activity is, right? We will be back to a more neutralized outcome. And as you mentioned embedded within Your question is more stability to that. But I think it's probably a question better answered as we get to our year end And where it is now.

Speaker 7

I thought it might be a question of what weather was because that was and we chose then as we think about sort of Year to year costs that will fall away and then it becomes normal.

Speaker 2

Yes, I mean we would be thinking about it prospectively as being normal. So

Operator

Your next question comes from the line of Michael Lapides with Goldman Sachs.

Speaker 4

Hey, guys. A couple of questions. Thank you for taking them. First one, I just need a little help here. The net revenue change tied

Speaker 2

to the

Speaker 1

FERC ROE adjustment is $100,000,000 if I back out

Speaker 4

the $42,000,000 I'm just There's $100,000,000 if I back out the $42,000,000 I'm just struggling to get to how it's only $0.10 to $0.12 of an impact. I would think just That $100,000,000 tax effect is a bigger impact than $0.10 to 0 point 12

Speaker 2

I'm sorry, Michael, say again.

Speaker 4

Well, I'm just the total revenue reduction is $142,000,000 but there There's a $42,000,000 reduction in D and A. So kind of down to the EBIT line or operating income line, it's $100,000,000 adjustment. That If that tax affected that, that would imply a bigger impact than cents per share you've disclosed when you first announced it. Can you just help me bridge the gap there?

Speaker 2

Yes, Michael. If you think about the other things that we kind of talked about within the overall settlement, so the way we've described So folks, probably the easiest thing to think about is just if we spend a dollar on G and A, the imperfective tongue and groove State and federal regulation might have us receiving $0.49 back from state and $0.49 back from federal. And so there's not Full recovery. And so it seemed like the right time as we were talking through all this to be able to just make sure that we were able to recover And so something like that that would get us back in my example about $0.02 of that dollar is additive as well. And so it's that kind of thing Nick went into the overall settlement which helped a little bit beyond just the headline math of ROE delta times rate based on math.

Speaker 2

So It's those kind of things around the edges that were a little bit helpful that we cleaned up as we went through the call.

Speaker 4

Got it. And then Ralph, just a question for you and this is thinking multi years out and really long term. What is a better business from a risk profile and return standpoint, owning minority stakes in offshore winds, the generating facility itself We're owning and developing and building either contracted or FERC regulated transmission to serve that win?

Speaker 1

Well, it depends on the skill sets that you contain, right? So for us, it's clearly the transmission But we're fortunate to have a partner that's the world leader in operating those offshore wind Farms. So by virtue of that skill set that we can candidly lean on, we're Economically indifferent in that regard. But it's pretty clear we've not been shy about it in the case of building the wind farms We're the passenger on the bus, but we have a very good bus driver that we trust. And in the case of the transmission, we're more than happy to be the bus driver.

Speaker 1

But in both cases, we look at risk adjusted returns and the risk component is a function of One of the skill sets that you have or that your partner has.

Speaker 4

Got it. And can you remind me just we're in an environment right now where a Topic for conversation is inflation, especially on commodity cost inputs. If the price or the cost to build the offshore wind plants Rises above kind of the original expectation. How does that get shared between you and

Speaker 1

Well, so The projects are shared according to our equity percentages, right? So you're 25% owner of the project, there's 75% owner of the project. And that's

Operator

Your next question comes from the line of Paul Patterson with Glenrock Associates.

Speaker 8

So just on the asset sale, could you with the write down and everything, where is the book value or the asset value on the books Of the fossil portfolio at this point?

Speaker 2

Yes. So we've laid out within our SEC docs, Paul, that the fossil That's about 4.5 today.

Speaker 8

Okay. And then just on the transmission build out, Which you guys went over and sounds like a great opportunity with offshore wind and everything. But how would it work? I mean, it sounds like it's competitive. Would there be AFUDC if you guys were to win a substantial portion of Would that be would the VA and CDC that would be associated with the construction of that or would it basically be the situation You get the earnings impact when the project is complete?

Speaker 2

No, there's the ability for a PTC recovery plan.

Speaker 8

There is. Okay. And then just finally to sort of, you mentioned that any component can be bid on, But it would seem to me that how would that work, I guess, if there was a sort of a comprehensive bid, somebody can sophisticated like you can do a comprehensive bid. Is it really the ability of somebody to say, hey, there's a substation or something I want to build. How could somebody sort of modularize it, if you follow what I'm saying?

Speaker 8

Is that really a possible event where you would have A project that would be put out there, but they would say, we'll take part of your project and split it up or really would it be pretty much, Do you follow what I'm saying?

Speaker 1

I do. And actually that's been done successfully in the past. Paul, if you think about Q3 1,000 solicitation took place called the artificial island project. We're basically when you were given part of the project and someone else was given another part of the That were considered complementary to each other and mutually reinforcing of the voltage instability I do think your question points in a direction that I would agree with that it is probably Easier to optimize the whole by putting in all 4 components and a specialist that just wants to do one component They or may not fit as naturally into the other components. But they could have just such a low cost Solution on land or out in the ocean that PGM figures out a way to ensure the technical Requirements of the project are achieved and then leave it to the computer to decide whether or not they want to have bifurcated ownership of what will

Operator

Ladies and gentlemen, that is all the time we have for questions. And now I will turn the call back over to management for closing remarks.

Speaker 1

Great. Thank you. So Look, I hope you agree, we've made tremendous progress on multiple fronts, operational, regulatory and legislative. I'm particularly optimistic and encouraged by the amount of federal attention being given to a nuclear production tax credit and The clearing of the deck, so to speak of some of our own state issues that are now behind us, both in terms of the ROE settlement and the second round of We're going to continue to make progress, I'm sure on the fossil asset sale to get us to that fully regulated or contracted position that We have targeted for the better part of the year. And we're looking forward to speaking with many of you at some of the upcoming virtual conferences over the next several weeks and Our Investor Day in the fall.

Speaker 1

So with that, stay safe, stay healthy, and thank you for joining us, everyone.

Operator

Ladies and gentlemen, that does

Powered by Quartr
Earnings Conference Call
Public Service Enterprise Group Q2 2021
00:00 / 00:00