公共服務電力與天然氣 (PEG) 2001 Q1 法說會逐字稿

At this time, all participants are in a listen-only mode. Today, we welcome all to the question and answer session for members of the financial community. At that time, if you have a question you will need to press 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded when Monday, April 18, 2001. And will be available for a replay beginning at 12:00 PM Eastern today until 12:00 PM Eastern tomorrow. The speaker for today is Robert C Murray, Chief Financial Officer with PSEG. I now turn the conference over to Mr. Murray. Please go ahead sir.

Good morning. I appreciate your listening today by either by telephone or over our web site www.PSEG.com. My remarks will be brief, since most of you probably have already had a chance by now to review our news release on first quarter results. We issued the release yesterday afternoon, just before the start of our annual meeting of stockholders here in New York. A copy of the release is posted on our web site, in case you have not seen it. In addition, for those you who are listening in over the Internet, we have a graph that shows a breakdown of the results. This morning's conference will be devoted largely to giving members of the financial community, the opportunity to ask questions about the first quarter or any other corporate matter of interest to them. Before going any further, I would like to refer you to the forward-looking statement included at the end of the news release, particularly, since I will be making some reference to our expectations to the year 2001, and beyond. The forward-looking statement invites you to PSEG's financial and business forecast, and my comments about them are based on reasonable assumptions. However, I can get no assurances that our expectations will be achieved. The last word on our various businesses is in the reports that we filed with the SEC. Turning now to our financial results, earnings of the $1.25 per share of common stock for the first quarter, was flat with earnings per share for the same period a year ago, were somewhat better than we anticipated internally. You may recall my remarks from our teleconference in January on year ending fourth quarter 2000 results. I had indicated that the first quarter of this year could be modestly lower than the first quarter of 2000 to enlarge measure to the effects of restructuring on our electric utility business. We were infact affected by restructuring, but this was also in part by solid results in the energy trading operation of PSEG power, or domestic generation business, and from PSEG Global our international generation and distribution business. Here are just a few specifics. PSEG power's trading operation produced six cents more this first quarter than last years. The increased helped make a higher fuel and interest expenses. The higher interest was on various inter company loans needed to complete the acquisition of generation assets from Public Service Electric and Gas Company (PSE&G). I should mention that on Monday, our power closed on a very successful 1.8 billion debt financing. This followed an intense marketing road show in United Kingdom and here in the United States. There is tremendous interest in the offering, and that 1.8 billion was issued at a favorable average cost of 7.9%. With proceeds from the sale, we used to pay off higher cost inter company loans, powers interest cost will now be reduced sharply from the level of about 64 million that was reported in the first quarter to about 36 million per quarter on go forward basis. PSEG Global accounted for nearly all of PSEG Energy holdings 26-cent contribution to the earnings in the first quarter. In the first quarter alone, Global exceeded what it earned in all of last year, which of course proves well for the future with its various projects under construction bill and service. In 2001, we expect Global's earnings to double over last years. Global's higher quarterly results come from improvements in the performance of various projects and from its withdrawal from its interest______00:04:04 point per generation partnership, in exchange for a serious of payments over a five-year period. This legal point transaction will represent an incremental earnings contribution by Global this year of about 10 cents per share, above all, we would have realized from an ongoing interest in the partnership, which has a power purchase contract with PSE&G. Going forward, the transaction will enhance globals earnings by about 79 cents per share in each of the next four years. But, we caution you that these additional amounts will all reflect a gain in the earnings guidance for this year, and beyond that we provided to you in January. So, it is not incremental for what we forecasted at that time. Global were also benefitted by about four cents per share from the effect of the adoption of an accounting standard FAS133 that relates to the fair evaluation of derivatives. These positives were all set partially by lower earnings per share from PSEG resources as a result of the market-to-market evaluation of investments in its ____00:05:12 portfolios stemming from a recent volatility in the financial markets. Finally, earnings by PSE&G the regulated energy delivery business were lower in the first quarter compared to the first quarter of last year, primarily because of the effects of restructuring. Savings achieved in our sale of securitization bonds provided electric customers with an incremental 2% rate reduction beginning in February. This brought total reductions to 7% since August 1999. Electric customers will be getting another 2% this August. In addition, the utilities earnings were affected by cost associated with the insurance in January of securitization bonds related to the recovery of stranded electric generation cost. On the plus side, the utility did benefit from higher gas sales for heating because of colder winter weather, and this helped maintain the impact of restructuring. Overall, PSEG's earnings of $1.25 for the first quarter is in line with our current estimate at 370 for the full year. This estimate for 2001 supports our target 7% component on annual growth rate earnings per share over the next five years. As we have emphasized previously, we anticipate that a number of projects now under development by the Power and Global will be coming on line, and produced an earnings, that will enable us to meet our 7% growth target. The third graphic on the web cash shows our expected earnings contributions by key businesses in our well-balanced portfolio. We envision that power will provide about half of PSEG's projected earnings per share of more than $5 in 2005, the final year of our current plan horizon. We anticipate that holdings, which includes global recourses, and the third company PSEG Energy Technologies will contribute between 25 and 30%, and we projected PSE&G with a steady income stream will contribute between 20 and 25%. Before taking your questions, I want to remind all of you and the financial committee that we will be conducting a strategic seminar in New York City on Friday, April 27. E. James Ferland, our Chairman and CEO and the Presidents of our major businesses, Frank Cassidy, of Power, Robert Dougherty, of Holdings, and all copy of PSE&G will detail the plans and place to achieve our growth strategy as the means of improving share holder value. To register for the event or get more information about it, please call Brian Smith, our Director of Investor Relations. Thank you for listening. I will now take questions from members of the financial community.

Ladies and gentlemen, we will now begin the question and answer session for members of the financial community. If you have a question, please press 1 followed by 4 on your telephone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you would like to withdraw your point, we request, you may do so by pressing the 1 followed by 3. If you are on a speakerphone, please take up your handset before entering your request. One moment please, for the first question. Paul Fremont with Jeffery's & Company. Please proceed with your question.

Thank you very much and congratulations on a very strong first quarter. Really, two questions. The first one relates to the spinoff of nonregulated businesses including potentially power and global. Has there been any discussion, and I think the company had indicated that the first thing they wanted to do was complete the securitization transactions before making any type of determination on those businesses. The second question relates to, I guess, the press report that came out during the first quarter of possible combination between Peggy and Synergy, is there any sort of ongoing interest within the company to combine with Synergy or with any other company?

Okay. I will take the first question first. Our position, on potential for spinning off any part of the business really has not changed at all versus what we have been saying previously for. We have consistently said in a remainder of our position today is that at this point we were still committed to operating on an integrated basis we do believe that, that is a pros and benefits from doing that financial and otherwise, and we have also said that we were not going to fight the tape and that is if we do not get that value recognized in the market place of our stock over some reasonable period of time, we will move to unlock that value be a spinoff, or whatever the meanings it takes. I suggest to you that it is a way to early to make that call, we just get the securitization, and in the end of January as I said in my comments only last week, we accomplished the final transaction in our financial and corporate restructuring, which was the sale of the power bonds of 1.8 billion that are referred to, and at this point, I think, we want to take a little opportunity to tell our stories starting with the strategic conference that we are having later this month in New York to see if we can gain some traction from a close story that we do have. So, our position on that one remains unchanged. We are going to wait and see, but we are not going to wait indefinitely. With respect to a merger rumors that occurred during the first quarter this year, for obvious reasons I am not going to comment on that, I am not going to confirm or deny that we are in discussions with synergy or anybody else. I would simply make the statement that, as we go forward we will continue to look on an opportunistic basis for transactions that we think would allow us to grow earnings more rapidly then what we could achieve on our own. And, any sort of transactions that we would answer any two, would be, I would say primarily driven by generation focus. Our goal is to grow the generation business on a regional basis, and we have plans in place to do that organically, but if we can leap frog ahead by entering into some kind of combination on an opportunistic basis, I think we would consider it. I do not think we feel by any means that we must do something that we do not have the scale to compete, or that we do not have a viable standalone strategy, because we think we do. So, I would characterize our position as opportunistic, and we are only going to precede transactions where we really think there is a compelling strategic and financial case that could be made.

I guess, on the generation side, would it matter that the generation is a part of or serving regulated electric utility costumers.

It would matter. Yeah. I think the most attractive things of those would be unregulated generation. The next most attractive things would be perhaps generation that would not be full deregulated, but there was some kind of a reasonable line assigned prospect for getting deregulated, and you could form a view on the economic terms on under which that generation might be freed up from the utility. I am not sure we would be particularly excited about complaining with the company that is right on a track with generation portfolio there was no prospect whatsoever for deregulation in the particular state or states that the company operated in.

Thank you.

The next question is from Kim Sedawood, with DB Alex Brown. Please proceed with your question.

Thanks. My question relates to gig up co-gen, could you, may be, just quantify the contribution made in this quarter, and then sort of give a sense for the allocation on an annual basis? I know you indicated that it would be 10 cents of what you had been expecting previously, but may be there is a better figure for that.

Yeah. We worked on that transaction this year, roughly, 18 cents a share.

Okay.

Which is about a dime higher than we would have bought had we stayed in a partnership as part of the contract that goes through PSE&G.

Okay. And how much would you realize in the first quarter?

Virtually all of that.

Okay. And as I try to think that in future years you will continue to do that in the first quarter or how do you say that?

The way this works we had a partnership with Alpaso, on a 50-50 basis on this facility, and their payments to us in every year are conditioned upon certain availability standards, for the union, which must be met. Once you have met that test for the prior period, you would book the receivable for the entire year. So, it is likely that it needs to the future years Kim, assuming we meet the availabilities, standard which we believe we will, it would continue to be booked in the first quarter of each year.

Got it. Okay.

The full receivable for the year that is no the way necessarily the cash would come in.

Okay. If I could ask you a second question, I noticed again some impact of higher fuel cost.

Right.

Could you give us an answer for that was in the quarter, and then again how you are managing that going forward for this year?

I am going to talk versus last years first quarter, not I always have to re-orient and myself I am used to thinking versus plan, but our fuel cost this quarter were about 14 cents a share higher than they were in the first quarter of last year, and, we were able to more than offset that in two ways. First of all, we have a bit of a natural hedge to the extent that gas is on the margin and PJM, our gas prices mean higher capacity prices in PJM. And infact, in the first quarter this year versus the first quarter of last year our capacity sales yielded us about 11 cents per share more than it did in the first quarter of last year. So, we are able to makeup most of the higher fuel cost to higher capacity sales, and with the bulk of our capacities, this point, you will recall is committed to this PGS contract _____00:17:30 contract. So, we really are only in a very marginal long position. We do not have a whole lot of capacity to sell, but nonetheless we were able to offset most of that fuel cost. Some fuel cost that relates to the PGS contract, we obviously, have no way of passing that through. Secondarily, we through our trading operation as I said in my comments generated incremental profit of about six cents per share in part driven by the higher prices in PJM, that were again driven by the gas prices, to say if you take those two things together, higher trading profits and higher capacity sales that is 17 cents a share more than offsetting the 14 cent a share increase in fuel cost.

Okay.

The other thing I would answer that Kim, the way you ought to think about higher gas prices is that in a short term our gas prices are a marginal negative to us. As long as we are selling under this PGS contract, which we will do through August of next year there is a potential that we would have to eat some higher gas prices, although we will leverage very much the gas prices, it is probably less than 20% of our generation. We got two thirds of our generation last year from nuclear, some increment about that from coal. So, we really do not have a big exposure to gas on the generation side. Longer-term and higher gas prices are a big plus for us. Once we get freed up from this PGS contract and go to market prices, which we do on August of 2002 higher gas prices are good thing from an earnings perspective, because it will drive fuel prices higher and at that point a 100% of our generation including nuclear and coal where fuel prices have moved either not at all in the case of nuclear or somewhat less than gas, and in case of coal, even within the business would be tremendously more profitable in a high gas price scenario.

Okay. Thanks a lot.

You are welcome.

Fredulla Murdy with SAC capital. Please go ahead with your question.

Good morning Rob.

Good morning Fredulla.

Couple of questions to you. Retouching on the fuel obligations back to to PGS. Can you sometime right now after the new acquisitions you made last year etc., where you stand right now, you think in terms of your low first capacity versus your obligation?

We expect to be marginally long this summer. That is if there is a couple of moving currency that, you know, we are pretty comfortable on the capacity side well for over half of the summer barring, you know, major equipment problems, but our equipment's been running extraordinarily well, so we do not have a lot of concerns on that front. The other moving part is the load migration, where the amount of load that is migrating away from us to third party market has continued to fall short of our forecast. So, as we speak a load migration is about 8%, we do expect a fair amount of that 8% to come back to us for the summer because of the late shift of prices in the market place, currently, through our PGS price. So, that is just a bit of a moving target and we do not get a whole lot to notice on that. There is something like six weeks notice before they come back to us. But, what we reasonably foresee for the summer in terms of reverse migration, I used to say, costumers coming back to us we still expect to be marginally long this summer.

Okay. And I am wondering you referenced the gas cost, and the inability to pass that through that right now under the current direct plan in New Jersey, I am wondering, if you take a look through the rest of 2001, how do you locked in gas costs or hedged that off such that you could possibly quantify for us through the rest of the year, how much higher gas costs might be that would then need to be offset through another trading and power sales?

We have not locked in a very much in the way of gas cost, but really the reasons that I described are number 1 we have got a natural hedge built in because of higher gas prices effect on PJM fuel prices and, there is a premium new patent to do that, and we have given the small exposure we have to gas, we have not found it economic to do that. But, our earnings guidance is reflecting the, you know, our expectation of these higher gas prices that prevail in the market place. So, I do not think we have a huge amount of exposure at all.

Okay. I am wondering, going to resources and the obvious from difficult market offset, so it would be taken in our partnerships, and if the equity markets were simply to kind of tread water for the rest of the year here, can you give us the fact as to how much ground needs to be made up in order to reach the target that you laid out at the beginning of the year for resources?

Let me give you, I do not have all the numbers in my head to go. But, I believe that when we model out resources, obviously, that component of its earnings is the hardest to protect. Because it does not move in a straight line and it is being very volatile in recent years. If a small number of holding is not a well diversified portfolio, and in particular the big mark down we had in the first quarter related to one stock, of a total of four or five. But, in general, I believe the way we forecast that business we assume on an annual basis that the publicly traded securities, and resources will have on average stock price appreciation of on the order of 10% per anum. The total amount of stock of appreciation that is built into a plan is on the order of 12 million bucks. But, we do think we can make that up in other parts of portfolio whether it is resources portfolio or global portfolio in particular. So, I do not think there is a lot of exposure there in terms of our earnings guidance as well.

Okay. Thank you.

Okay. Now, to Michael ___ 00:25:23 Gemcor Capitals. Please proceed with your question.

Good morning Rob.

Good morning.

Just a quick clarification. Looking at the 10K, it looks like about 7% of your recourses last year came from in terms of megawatt per hour output from natural gas. Is that the mid upper single digit the kind of number we should be thinking of?

Yes. It is. We are adding some capacity, mostly, for the summer mostly peak or so, which burn gas, but it should not be dramatically different than that this year.

Okay. Great. Thanks.

Ladies and gentlemen. If there are any additional questions please 1 followed by 4 at this time. Mr. Murray there are no other questions. At this time, please continue with your presentation or closing remarks.

That does conclude our conference call. I thank you for spending time with us this morning. Goodbye, I will talk to soon, and I hope you are all present on the 27th.

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