公共服務電力與天然氣 (PEG) 2002 Q2 法說會逐字稿

Please stand by for the PEG conference. Ladies and gentlemen, thank you for standing by.

Welcome to the Public Service Enterprise Group 2nd quarter 2002 earnings conference call and web cast. At this time all participants are in a listen only mode. We will conduct a question and answer session from members of the financial community. At that time if you have a question, you will need to press 1 and then 4 on your telephone. This is Wednesday, July 17, 2002 and will be available for replay for 48 hours beginning at 1 p.m. Eastern time today until 1:00 pm July 19, 2002. It will also be available as an audio web cast on PSEG's corporate website at WWW.PSEG.com.

I would like to turn the conference over to Brian Smith with Investor Relations and Tom O'Flynn, Chief Financial Officer. Please go ahead.

Thank you and good morning everyone. This is Brian Smith. We appreciate you listening today. I will be turning the call over to Tom O'Flynn in a moment. But first a couple quick points.

First, because Tom will cover our future outlook in his remarks, we must refer to the forward-looking disclaimer. Financial and business [INAUDIBLE] PSEG and its subsidiaries are based on reasonable assumptions. We can give no assurances that we will achieve our objectives. The final word on [INAUDIBLE] is contained in the various reports we file with the securities and exchange commission. The second point as in the past we will likely have a very large number of requests to have questions. Because we want to give all of you a chance to participate in these Q and A sessions, we would appreciate it if you would limit yourself to one question and one follow-up. Thank you and now I will turn the call over to Tom O'Flynn.

Thanks, Brian. We issued the earnings release before the market opened this morning. I hope, from your perspective, there was not a lot of new information. The write down was taken as described in that 1st quarter 10Q. We are reaffirming the modest reduction in the 2002 EPS guidance which we indicated to you last week. I would like to spend a few minutes this morning providing some details on these and other subjects and as always, I'll give you plenty of time to ask questions.

My first point in the discuss will be in regard to the various charges we've taken this year which total $2.57 per share and then a brief comment about 2nd quarter earnings, which were [INAUDIBLE] cents a share, exclusive of charges. My final point will cover EPS expectations for 2002 and 2003. Collectively, the charges we recorded were largely consistent with what we disclosed publicly in SEC filings, which amounted to 2.4 per share on a comparable basis. I will not go into the numbers. A good summary of the charges is attached to the release.

In general, however, these charges included a write down of all investments in Argentina which we are exiting. This puts behind us the risks associated with the ongoing economic, political and social turmoil in the country. The charges of 2.57 also include a goodwill related write downs of PSEG global assets in Argentina, Brazil and India. As well as investments in PSEG energy technologies. These resulted from implementation of the new good will accounting standard this year, FAS 142.

Finally, they included write -offs for discontinued operations that largely represent the difference between the 257 we recorded and the 244 reflected in our prior disclosure. These investments are PSEG global's total body generating facility in India and PSEG energy technologies, a New Jersey-based energy services business. [INAUDIBLE] The regulatory environment in the Indian state in which it operates has not been positive.

We have been engaged in a tariff dispute day to day with an entity that buys the power from the facility. We envision no reasonable solution that would support our continued as part of our global strategy. As a result, we decided to exit this project. We have entered into a proposed project of buying our 74% interest. We are currently in discussions and hope to reach a conclusion in the 3rd quarter. With regard to PSEG energy technologies, we no longer see this as a strategic fit. Particularly because prospects are limited.

As a result, efforts are underway to sell the business and we hope to complete the process by the end of the year. As we were arriving at these decisions to take write downs, we had ongoing dialogues with all three rating agencies. We kept them advised of the financial implications of these charges currently and prospectively. A few weeks ago they reaffirmed the ratings of the senior debt of each of our business, PSE and G and PSEG Power and PSEG Energy Holdings. The agencies have also indicated that they have stable outlooks. They're consistent with discussions with the agencies. On another matter, we filed a 1.5 billion shelf registration statement. [INAUDIBLE] as well as our 10K in our July 3, declared or shelf effective. Depending on market conditions we expect to sell approximately 400 to 500 million in mandatory convertibles as early as the 3rd quarter of this year.

Turning now to other 2nd quarter results. PSEG's continuing EPS of 56 cents was 16 cents lower than EPS for the same period last year. There were a couple of key negatives. One was the reduced market activity on the trading business. This costs us about 6 cents. The second involved losses in PSEG resources in the [INAUDIBLE] portfolio which is composed of public and private securities. A revaluation primarily in the private equity portfolio has cost us about a dime in the 2nd quarter. For your information, the total value of the portfolio is now just under 90 million and the public traded is under 21. So future exposure is limited.

Several other ins and outs in the quarter. [INAUDIBLE] Major offset for these negatives was an expected benefit at PSEG global related to withdrawal in 2001 to an interest of the Eagle Point cogeneration partnership. This amounted to about 15 cents. Looking at results for the full year, we are now projecting EPS at $3.70 to $3.90 range, excluding charges recorded this year. This is about 5% below our original forecast due largely to the lower valuations [INAUDIBLE] of the KKHR and to a lesser degree the second quarter impacts of lower trading results. The division also reflects the negative impact of the warm weather on gas sales we experienced in the 1st Quarter. That amounts to 15 cents per share. PSEG's success in the BGS option would offset some of the negatives we were experiencing. This is still true. However, the KKR impact essentially pushed us over the edge. So we felt it was prudent to advice EPS guidance downwards by the modest 5%.

For 2002, we expect power to produce earnings in the range of 460-500 million. Over all power is solid and it's the primary growth driver going forward. You may have heard this before, but it's worth repeating that power is a wholesale BGS provider secured contracts on more than 75% or more than 9,000 mega watts of capacity to serve for [INAUDIBLE] and utilities for a one-year period starting August 1. The prices PSEG Power will assume are significantly higher than we receive for directly serving PSE and G. We have an excellent mix of location of assets. It illustrates a strategic objective of expanding into profitable pockets in the Northeastern [INAUDIBLE] region. We expect to close on that transaction in the 4th quarter. We're estimating the generating facilities we are acquiring will be up by several cents in 2003.

One half of the 20 million reduction in the power forecast for 2002 is from the disruption in the energy markets and effects on the trading business. We continue to earn solid profits as we optimize assets in the liquid market and enter into short medium term transactions for cash earnings. Year to date through June 30, net margins were $46 million, including $16 million in the 2nd quarter. There were slow downs during the 2nd quarter, but recently we have seen a step up in trading activity. For 2002, we expected to right the full $170 million implicit in the revised forecast for PSEG Power. However with the commencement of the new BGS contracts, some of this trading value may be reported under energy supply rather than within the trading segment. PSE and G which continues to move smoothly from industry restructuring should earn in the range of $175-185 million in line with the prior forecast. Various cost cutting measures are in place to offset lower gas sales earlier this year. PSEG Energy Holdings, the parent of global and resources, will earn somewhat below expectations due largely to the KKR impact and reduced profits. Holdings projected in the range of 145-155 million, excluding charges recorded this year.

Looking ahead, we continue to target a 7% EPS growth rate over the long-term. For 2003, we are setting initial guidance in the range of $4 to dollars to $4.20 a share. Keep in mind the ability to predict EPS is more difficult as majority of earnings are unregulated businesses. Several key drivers to next year's success. The largest being the next BGS auction, which could move numbers up or down. PSEG Power will continue to benefit from their wholesale BGS provider. It expects to participate in a meaningful way when New Jersey conducts the next auction to cover one or more near in 2003. This runs months this year and seven next year. PSE and G recently filed a $250 million electric rate case with new rates in case on August 1 of next year. The successful outcome of the case, electric rates that have been substantially discounted should approach levels in place prior to the restructuring transition period in mid-1999.

Next year, we stand to benefit from more normal weather in contrast to the extremely mild weather earlier this year for the impact of sales. We also expect modest improvement with performance of both global and resources. Global has limiting spending plan for the next 18 to 24 months and will focus on maximizing profitability to listed assets to various operational efficiencies. Resources will continue to make large investments and should benefit from a reduction of volatility in its KKR portfolio.

In general, 2002 has shaped up as quite a challenge from broadsides from financial and energy markets. Going forward, we have a solid business in place plan in place in support of our EPS target. With strong cash flow and liquidity, we have the financial flexibility to take advantage of other growth opportunities. Thank you, I will open it up for questions.

Ladies and gentlemen, we will now begin the question and answer session for members of the financial community. If you have a question, press 1 and 4 on your telephone. You will hear a prompt acknowledging your request. If you wish to withdraw your request, press 1 and 3. If you are on a speaker phone, pick up your hand set before your request. The first question is from Kit Conly with Morgan Stanley.

Good morning Tom and Brian. A question on your trading numbers and maybe you can give us a little more color on the outlook. As you heard, you said about $170 million in '02 from trading, but there could be some that would move into a different segment. Could you possibly define that a little better. Also, maybe Tom, you could expand on comments that you have seen a pick up in trading. Going into the rest of this year in '03, should we be thinking things have stabilized at a current level or are you looking for things a little better or worse? What are your people saying admittedly in a disrupted market?

Let me take the first one on the over all number and then the general market activity. As you know, original outlook for the year was $180 million in trading. We are about 10 behind our plan. We did well in the 1st quarter and a slower 2nd quarter. About 10 behind our plan. This is about half of the reason for the power numbers going down by 20. We think we will be able to for the most part stay on our plan. It will be hard to catch up and make up for some of the short comings earlier in the year.

With respect to the categorization, keep in mind we trade almost exclusively or completely around our assets. What we think of as trading is optimizing our portfolio of supply generation and the trading portfolio wraps around that. We are getting or arms around that, but in August 1, we report 3rd quarter earnings, we will get that value. [INAUDIBLE] We are giving you all a heads up that it may appear on energy supply as opposed to trading segment. It shouldn't matter a lot to you today, but a heads up.

In terms of over all activity in the market, there was some slow down in the 2nd quarter. Some of that may be due to market issues, but also front pages of the newspapers. It distracted people to be honest. Over the last few weeks, we have seen a pick up in activity. That pick up would be consistent EPT with the level we had put in the plan that would have got us to the 171-180 number. In general, there were fewer players in the market, but still sufficient number of credit-worthy players. They dropped out and maybe a couple of exchanges weren't as dominant as before. We think there's some modest improvement opportunity.

Thank you.

The next question is from Neal Stein with CS First Boston. Go ahead.

Yeah, good morning, just one question. It looks like the recourse debt ratio is about 68%. In reading through the release, you note the credit facility debt covenance don't allow it go above 70%. Without the convertible offering, would you still be able to stay below that threshold.

Yes. That is correct. The convertible offering -- we do not need it to stay below 70%. We are running with the good cash flow we've got out of power and PSE and G, we are able to stay on that debt ratio and reduce it overtime. Though it will reduce from cash flow overtime more on the 03-04 period.

And over time, do you have a specific target for where you want the ratio to be?

I think we have a firm commitment to credit ratios to being where they are. A mid-to high triple B. As you look at that, there's credit ratio, there's leverage ratio and cash flow and a whole number of things they look at. The outline overstates the leverage. If you look at the cash flow coverage, I believe the agencies all focus on. They are strong. That's really what drives our financial stability and ratings stability. Overtime though on the 68% that you are looking at, we would like to see the number come down overtime. It will naturally with some of our strong cash flow coming forward and Cap-X reduces modestly in a year or so.

Thank you very much.

The next question is from Andy Levy from Bear Levy.

Hey guys, how ya doin'?. Just two follow-ups, then I have three quick questions. What happens if you go over 70%?

We don't expect to. We would have to make an acquisition or something else.

But what would happen if you were?

It's a covenant with the banks. It's not a covenant with public debt holders. If we thought there was an issue, we would talk to them about it. It's not a covenant that we don't think wouldn't be workable.

If something bad would happen and you went over 70%, what is in that covenant. Is there a payment you would have to make?

No.

Second question is kind of three all together. In the 4-420 number, the guidance for 03 I have three bullet points, I got PSE and G Power, I got the rate case and about stuff on global, is it possible to get more color on what the assumptions are there?

Let me give you thoughts as we think about 03 versus 02. 30 cents year to year if you look at one to another. 15 cents of bad weather we had. Golf in January from the gas business. We expect that to be normal, but 12 cents from the KKR perspective we expect the PSE and G rate case effective in five months. New EGS rates for a full year. We only get for seven months and reasonable expectations that will be better than current BGS. So we've got new BGS for a full year. Global has made material A and G reductions down from 180 to 100 people. We are starting to see full year next year. On top of that there is a meaningful number of new facilities that go into service. Some in global as well as the others in power. You add that all up and I think it's reasonable to think all that stuff adds up to a 30-cent up tick.

In the electric rate case you can't share the amount you are assuming, but a sizable increase?

We filed for 250.

Kind of look at it like we did in past utility cases. I guess that's it. Keep the lights on, Tom. Okay?

Like a couple of weeks ago.

The next question is from Paul Fremont with Jeffreys and Company.

Can you help explain the 7.5% reduction in gross margin at PSE and G and the negative tax rate you had during the quarter?

I think it's PSE and G. Let me say that without getting into specifics on the margin, we said that we are seeing the electric business do the discounts and the pending rate increase that's really required, frankly. We see that business earning a low ROE. The gas business, we got a good rate settlement. I think it was the first week in January this year. Prices were reasonable and volume was not. So I think those combined to some disappointing margins. That's why we have the electric rate case on the table. We think there is very obvious clear reason why it's a reasonable level of request. We are doing what we can. O and M at the utility, we are working towards a 5% O and M reduction this year. That's to help partially offset some of the weather impacts. Certainly not fully, but we are doing what we can for this year.

The negative tax rate?

The negative tax rate is really more one-timers. Last year if you look year to year -- is that what you are referring to?

Yeah.

Some is due to lower margins. If you look year to year, there were a couple of one-time impacts with the PSE and G last year from a tax standpoint. We may need to circle back to you on the specifics.

Okay. Thank you.

The next question is from Tim Shaler with Pimco.

In look at the PSEG energy holdings, we understand there is a test tied to the dividend as well as a debt to cap ratio. The ratings agencies look for. Can you give us color on what the dividends to interest ratio is and can you also discuss how PSEG energy holdings plans on getting back to the 50-50 debt to cap? overtime.

Let me talk about a couple of things. The only material debt covenant we had at holdings is 60% debt to cap. Excluding nonrecourse debt. We are significantly below that number.

I was talking more about the agencies.

I'm sorry. From an agency perspective, we basically run that business with two credit ratios in mind. One is a three-time cash coverage over interest. Is excluding nonrecourse, project related debt and the other is 50-50, 50% debt to cap. We are generally in those ranges. We have been through thorough reviews with the agencies on an enterprise level and spent time on holdings. We used write off, slash impairment cases consistent with the numbers we are announcing here today. We have talked to the agencies, gave them a heads up on what we communicated here this morning. We are generally in line with the financial targets. In terms of dividend restrictions up, I'm not aware of those.

You are meeting the three-time coverage that you guys have set for yourself [INAUDIBLE]?

Yes. That's the way the business is running.

Okay. Thank you.

The next question is from Jim Voneesman -- from JP Morgan.

I had. Morning. I have a couple of accounting questions. One on stock options, is that reflected in the 2003 guidance for expected options, are they gonna be granted to the executives? Last year it would have been a drag of about 5 cents?

It is not reflected in our guidance.

Okay so any changes to options would be negative to the earnings guidance, correct?

It would be. I think a couple of cents last year and more next year.

One other accounting question is with respect to pensions, should we expect the same discount rate going forward or are we going to have to think about a potential pension? You had a 9% expected return on those assets over the last several years during a bull market. How should we think about the pension in more of a bearish market? And the impact of our earnings?

Pension spent was about $75-80 million in this year. That included the 9% assumption on the asset growth side. There is pressure on that number. We think it's not unreasonable to see it go up a little bit. 9% is a number that we are looking at to see if it continues to be reasonable. It's really dependent upon recent market activity. A couple years ago it's looking like a low number, no it's looking and now it's looking like a somewhat higher number. In general I think the bottom line pension is about 75-80 this year and there may be some upward pressure on it depending on how the market does.

Thank you.

The next question is from Tim Doddman with Solomon Smith Barney. Go ahead.

Morning. Just to clarify a couple of things. On the trading when you talk about $170 million, you are talking gross margin?

Correct.

The BGS or period beginning August '03, are you assuming that rate are even above what that current rate is, in the latest [auction]?

Yeah. I think we are going to continue to be a little bit sketchy on BGS assumptions. I think as you know, we went into this BGS with assumptions that we exceeded both on price and volume basis. The assumptions we are using guidance for next year on the five-year plan are reasonable. They are how we have done this year and sensitive to the markets and sensitive to more entry into the market. They are reasonable, but it's going to be tough to be quantifying price and volume assumptions.

Do you think they'll try to turn that out a little bit more, instead of doing the one-year auctions?

They are in discussions right now. It's run by the BPU and the other three and the wholesale providers are discussing it. We think there is logic to turning out multiyear or maybe even tranching it out to the one-year piece or two-year piece or even up to three-year piece. There is thought about changing the start date so it doesn't -- so it starts two months earlier and makes it easier for the conventions in the market to start it first of June rather than first of August. There is discussion about terming that out. It gives more stability and price assurance from a PSE and G perspective and allows more stability and certainty from a provider standpoint. We'll see.

The last thing on another subject, second quarter, due to outages, what was that about?

It's really just plant management. The one thing that was in there was Hope Creek was down for about six or seven unexpectedly. Normally it wouldn't be a big deal. The latter part of June about 95 degrees or 100 degrees. It was a fairly simple thing. There was a electronic signal that tripped a pump that impacted a tank and took five days to start off. I hope no engineers are on the phone. There was the one meaningful piece. Other than that, it was minor bits and bytes that just affected margin. We tried, so you know the page that you are reading from, I'm glad some of you have the attachments. We tried to -- rather than inundating you in the script process with a bunch of numbers of ups and downs, we tried to summarize them. In some ways there is bundling and approximation of these numbers.

Thank you.

That's probably where there is more stuff bundles there.

Thanks.

The next question is from Jay Dobson from Deutsch Bank.

I know you wrote off the whole of Argentina and you wouldn't expense the operating loss, but what was the operating loss compared with 4 cents a year ago?

The 4 cents was probably debt-related. I think you are looking at the number that was a loss, Jay. It would have been a mark to market -- no. Anyway, those businesses if we focus on the business we run, it's essentially earnings and cash flow neutral. We took 15 cents that was above the line in the 1st quarter. That was mark to market on the debt. In terms of loss for last year, I would have to look at it. Essentially cash flow and earnings neutral. That said, there is clearly pressure on the numbers, but we were able to manage them reasonably flat. We were getting a fair amount of currency, about 75% of the currency we are getting is provisional. We were as efficient at paying people as getting paid. I'm not aware of an operating loss in Argentina.

Fair enough. Switching gears, a second question. You said there was a 16-cent dealt. If I remember from the first quarter call, you talked about earning about 18 cents this year, but the timings would be different focusing largely on the second and the 3rd quarter. Is 16 cents the delta and hence the contribution is lower or did we earn 16 of the expected 18 in the 2nd quarter so the 3rd quarter expectation ought to be much lower?

3rd quarter expectations should be virtually nothing. [INAUDIBLE] It was having it be a July or June number. It was booked in June and we received the money a few days ago. Going back to the point about Argentina last year, if you look at the exhibit that shows restatement and reclassification of things, there were ET numbers. That's getting bundled in with Argentina.

Great. Thanks.

The next question is from Elizabeth Noble with Vanguard.

I have a couple questions. I wondered if you had an assumed price in the market place that would get you to the $170 million in trading for the year or whatever the price might be for the remainder of the year. Whatever way you have it calculated.

I think trade suggest more volume-driven than absolute price driven. It assumes we will get a return to some reasonable level of activity. Maybe I should have mentioned this when Kit asked the question. Of the 170 million, a large portion of that may not be what is classically considered trading. A considerable portion is management around the BGS contract and related generation.

It's commoditing the assets so that generation that's not committed otherwise is going to the market place somehow?

Yes, we have a BGS series of contracts with BGS-type contracts around the state of New Jersey. We have a lot of generation, but they work to optimize generation, fuel, transmission and a bundle of stuff to maximize margin. The margin is focused and the traders are focused not on what is in trading. They are not focused on whether the trading numbers are 170, 150, or 250 but focused on the 480. They are focused on the big number which is where we want them to be.

Stepping back, the 170 value regardless of the BGS contract optimization is in trading or just in general sales. We have a meaningful number in there for the gas supply package that went over from PSE and G [INAUDIBLE] in the spring of this year. That's a meaningful number. Much more contract management and management of a supply and customer basket as opposed to what may be considered classic trading.

I appreciate a lot of you folks being concerned about trading and other trading numbers are coming down off other people's estimates, but a large portion of what we do is more appropriately classified as contract optimization rather than open trading.

I wondered if you could describe why the KKR portfolio will do better and why you think the losses are contained and what's the basis for that.

We believe they have been marked to what is thought to be a fair value and a reasonably conservative value today. For planning purpose, we assume those numbers are zero in terms of earnings and losses. They have taken a fair amount out of the private securities. Expectation would be that that number is stable going forward.

Then finally, I wondered if you could comment on the book value of assets left in Latin America.

It's about $1.5 billion. We had about 2 billion, 2 billion 1 Argentina is about 6. We have about a billion 5 left. We have been through this discussion. The biggest number there is . -- Chile. They are about 550. Brazil's about 450 and Peru is about 400. They are all doing quite well, particularly Chile.

Thank you very much.

Our next question is from Greg Gordon with Goldman Sachs. Go ahead.

Pretty much all questions have been answered so I want a point of clarification. The 11 cents associated with outages , how much of that is sort of money out the door? You were down when it was hot versus timing differences versus last year.

About half. Half or maybe a tad more is permanent, if that's what you're asking. Permanent versus timing. [INAUDIBLE].

Great. Thanks a lot.

The next question is from Paul Ho with Luminous Management.

I have a question on power. My understanding is a large part of power's spending growth for next year is the contribution from your Connecticut assets and the 1500 megawatts that will come on 90 E Car. My question is, are the two projects still on time to come online in May of next year?

Those original schedules that may slip a little bit with the way we are looking at prices. We don't expect there is slippage, we don't expect, there will be foregoing material margin.

You don't expect any significant contributions with those 1500 megawatts?

We have cost assumptions from E car projects for the next couple of years, yes.

The last question is, what kind of ROE did your past gas rate take that was approved in January of this year.

The ROE that was in the case was 10%. Keep in mind we filed a number, I believe 165 after adjusted. We ended up with 90. We settled it and then the 10% was put into the record. I would say the 10% was the number that came into the record. It was in the record of the settlement. It wasn't necessarily the driving financial statistic, if you will.

Thanks a lot.

I think we asked for 11 and three quarters in our electric case.

Thanks.

The next question is from Jeff Gildersleeve.

Good morning. In looking at the 2nd quarter release and attachments, previously you broke out generation and trading revenue for power and also the energy and trading cost. I believe you said the trading margin this quarter was $16 million. Can you confirm that and then is this how you are going to report numbers in the future?

Yeah, Jeff. You're right. The number was 16 in the 2nd quarter. Total year to date was 46. It will be in our queue. In the past in our brief information we sent out to you, it has been in there. It will be in the key. We look to have ur key filed by the end of the month.

Great. It will be broken now.

It's more of a question of how much information we have. We added stuff here. We have a balance sheet and a couple of tables in and attachments on ins and outs and one timers. It's a question of how good people's eyesight is really.

I think it's great the disclosure. Can you remind me quickly the 2nd quarter last year of the trading margin then.

The 6 cents on the attachment is about the delta. I think that's what it is. Multiplied by 3 and add 16.

Thanks a lot.

The next question is from Paul Ridson with McDonald Investments.

You can give us flavor on the timing of the electric rate case and what was the 2nd quarter weather relative to normal. Trading margins in the 3rd quarter of '01 and lastly -- what is going to happen in Eagle Point in '03?

Rate case. Filed. There is a thorough process in New Jersey that's underway. These rates will go into effect on August 1, 2003. That's part of the energy master plan. No chance that they can go into effect beforehand. We don't believe there is any reason why they should be delayed. We have 13 months and probably use most of that.

Before August of next year?

August first of next year. We are having significant dialogue and testimony in discussion. We have a good regulatory process here, but it is a thorough one. That gets all the issues. It has people more comfortable about the ultimate solution when it's there. The weather was basically flat in the second quarter. May have been a penny up on the electric side.

Normal versus 01.

I'm sorry, it was Flat versus normal. Versus '01, let us come back to you on that.

Sure.

I may need to circle back to you on trading of 3rd quarter of '01. Once again, we need to be careful in terms of a value standpoint. We think we will get the kind of value we were talking about. In terms of whether it appears and sales are general or trading volumes. We'll see.

In Eagle Point, an outlook for '03?

It's about 16 cents. I think the weather for 2nd quarter was basically flat to '01.

The slight drag for '03 about 2 cents?

Versus this year, yes.

The next question is from Darryl Erhoft with Millennium Partners.

Hello?

Your line is now open. Go ahead.

I'm sorry. My question was answered.

The next question is from Dale Murphy with SAC Capital. Go ahead.

Good morning. Most of my questions have been answered. Just a couple of things. One, with regards to the 2003 range that you provided, are you in a position to provide net income numbers comparable to the break down that you have for 2002?

No. Good question. We will do that when we feel comfortable doing it. We were careful to tell you to the extent we were bringing guidance down 20 cents. It will be helpful coming from an '02. I think I would be ahead of myself if I did that now.

My last question is when you talked about financing for the remainder of this year, you referenced market conditions with the discussing the expectation of sellings and the convertibles, given the volatility in the market. Can you elaborate as to what you mean by market conditions and talk about flexibility with respect to the agencies or any other things you are thinking about with respect to issuance given on uncertainties in the markets?

I would say the market conditions wasn't anything specific. The last few days has been exciting is one way to put. I think we will do as we said a $400-500 million mandatory convert by the end of this year. Market conditions are sufficient to be able to do that kind of security. It's clearly been well in the number of folks ahead of us. I think the higher yield of securities offer -- our understanding is it allows you to issue that statement in some choppier markets. It is something we will do. There is no date certain that we have here internally. Discussions with the agencies don't have a date certain, but we had an expectation of doing it this year.

Because as I recall it was originally contemplated to be an '03 issuance. You chose to push it forward. If there is no date certain and things of that nature, is there contemplation given to current market conditions to push it back to '03 as part of the original plan?

Your memory is good, but the '03 expectation was where we were say last year. I think it is a solid enough part of our plan at this point of financial plan that I would be surprised if we didn't do it this year.

Thank you very much.

The next question is from Jessica.

Hey you guys. I'm just gonna throw a couple quick questions at you real fast. What exactly does it mean to exit out of Argentina? Are you locking the doors and walking out of the country?

It's a controlled departure. We have committed to sell or otherwise dispose of the businesses. Keep in mind, it's a regulated business. There a number of customers down there. We need to be sensitive to our social responsibility down there, so it is on a managed basis. We have a plan in place with various alternatives to effectively sell or otherwise dispose of the stock.

Can we assume it means you are defaulting on the nonrecourse debt?

We have been in the discussions with the banks, but yes, that's a fair assumption.

Okay.

That's why it's nonrecourse.

Exactly.

We paid up for it. We had discussions with the banks and the most recent interest payment at [EDEERSA], we did pay the PRI, the private insurance they got. I think it was Lloyd's. We with held the coupon payment directly to them. It's still for the lender's benefit, ultimately. It's the 76 of a nonrecourse debt from [Edeersa]. That's not something we would be responsible for.

Changing gears completely, what were the noncash mark to market earnings this quarter, if any?

The KKR was all noncash. That's 10 cents. The -- there was nothing else from currency related pieces. That's all swapped into local currency.

Anything at power?

Power of the -- the number on the recognized, but not realized went up a few million. I think in the high 40s. As you know, there is ins and outs of realized and unrealized. Of the 16 on a net basis, about three quarters of that would be cash and the other would be mark to market.

Okay.

Without tracing specific trades if you know what I mean.

Sure.

The way I look at it, I look at the total asset at the end of the quarter. See whether it went up or down. You made 16 and it went up by about a quarter.

Excellent. Back to the operating and maintenance change at power, I wanted one more clarification.

I may want to clarify too.

It sounded like half of that was essentially nonrecurring and half of it was a permanent step down and I was wondering if we can get more color on what are the drivers of that.

We have to plan versus last year. The 11 cents is versus last year.

Right.

Last year there was a nickel in there for a sale on stuff. That's really a one-timer that happened last year that will not happen this year. Like one-timers do. But a nickel, in terms of how much and what was more permanent, about a nickel was for outages and timing. There was the one nuclear piece about 2-3 cents. I probably talked about it more than I needed to. Those pieces, if you think about it, we brought power down $20 million. [INAUDIBLE] About half of that was trading and about the other half was some of the outages and other operations issues. It's enough about the world going forward, but not comfortable enough to say we will get what we didn't get last quarter.

But looking into '03 the half that was outage and timing related goes away?

Yes. Those are not recurring. We think we have -- given that we squeeze things to try to make up for the weather in the 1st quarter, we had fewer triggers to pull. When these happen, we thought those were difficult to make up for and in conjunction with the KKR dime, we thought it was prudent to move the guidance down.

Can you give us color on the price sensitivity at this point?

For '02 it's not a lot. At least from the revenue standpoint, we have got our BGS arrangements in place. I will say that we have revenue in place, but we have margin sensitivity. For instance in the 4th quarter, when prices are lower, you have been able to secure a better margin on the BGSP contracts and on the fixed price contract. So if you want margin sensitivity as opposed to price sensitivity. Moving forward, we have a meaningful consideration. The new BGS. The BGS that took place in February, commodities were part of it, but there was a meaningful package, but the full BGS price reflective of volatility as opposed to straight spot prices. I'm thinking out broader. We have facilities coming out in the Midwest. Middle of next year and in New York. That's in '04. Generally we pay a lot of attention to the forward curve and some realistic numbers in terms of incorporating the numbers into the business plan.

Okay. One last question for you. Sorry for the long list. If we can get back to the taxes this quarter, are you able to give color on how you built up to your tax savings in the aggregate this quarter?

I think it's more a function of losses, that is what we've got here. That's one side to making less money, you pay less taxes. It may be that more than anything else.

We will circle back with that then. Thank you.

The next question is from Teren Miller with UBS Warburg.

Good morning for another minute or so. In the 10-K for global, you talked about doing a $400 million equity infusion during 2002. I was wondering where you stand and if you haven't done it already, what the timing might be.

Yeah, Teren we did two in the 1st quarter. We believe we will do two by end of the year. No specific plans, but that's consistent with the financial plan and the dialogue with the agencies that enterprise will make an equity contribution of $200 million in holdings by the end of this year.

Is that contingent on you doing the mandatory convert?

No. We still have meaningful access to capital from the debt and fixed income side, certainly in the short-term side. It's not a quid pro quo. We just had to space it out to tell you the truth. We did two and haven't defined specific plans.

Thank you.

The next question is from Craig Lucas with Zimmer Lucas Partners.

A couple of quick questions. You gave out earnings for 03. Is the 170 million in trading included in that earnings guidance? Is it included in the earnings guidance for 03? Is that what you're calling contract optimization?

I would say -- someone was asking for segment contribution. I will stray away from specific segments. I would say our view at least as we define trade and what's in the 170, that's contract optimization around BGS and general side contracts. It's the gas contracts and other trading. As we look at that, I think 170 is a sustainable reasonable number. That's the guidance for 02. I can extrapolate that as a 53 cent contribution in 03, that stable contract optimization.

That's fair. My second question, not to drag this out, but Eagle Point, is that cash or noncash?

Cash and earnings.

No, but the 16 cents that you booked, that's real cash.

We booked it in June and got the real check money a few days ago.

Will you book this every 2nd quarter?

Each year that timing moves around. More likely in the. -- 1st quarter. It was 1st quarter last year and I think it'll be 1st quarter in these last couple years.

Is there any additional amounts of cash that come in or just the 16 cents?

That's about it.

In terms -- so that's it? No other lumpy --.

No.

Okay. My other question is about Argentina. Argentina is a discontinues op?

Yes. No, no, no. From a business perspective it is, but we have an accountant in the room who is shaking his head. The way we run the business is to exit Argentina. We have a plan in place for reasons I won't get into.

So it's not considered to be discontinued operations.

From an accounting perspective, yes.

Are we stripping that out from operating [earnings]?

Yes. From our standpoint, we clearly talked about that. Scaling back here and talked about it not being in the earnings guidance. We signaled here pretty hard our changing q and the street communication.

So it's not discontinued, but what are we excluding from Argentina this year that we are knowingly excluding from the operating earnings?

About 370-390. I excluded all of Argentina.

You guys are making that decision about the amount that we are excluding. What is the amount that we are excluding.

If you go to attachment 5 on the press release, for the charge that is add up to $2.57 a share. I'm not looking at the big one-time items. I'm looking at the operating expense that's ongoing and ultimately becomes a discontinued op. I'm just curious what that amount is.

The question was asked earlier, where are we on a cash and earnings basis. They were essentially zero. Are we carving out operating earnings or losses from Argentina?

No, we are not doing that. Because they are essentially zero.

Oh, so there is nothing there.

I will say the 1st quarter, there was 15 cents on a mark to market. So there was a mark to market above the line. We are getting into more of the accounting.

Thank you. This was very helpful. Thank you very much.

The next question from Peggy Jones with AB and M.

Could you talk a little about upcoming events in Brazil and having an impact on your situation there. Timelines for us to keep in mind about the regulatory developments there.

From a macro standpoint or more from a regulatory stand point?

I felt that I really couldn't ask you about the election.

Thank you. It was more meaningful in terms of concrete information to talk about specifics that affect the utility itself. I think there's no issues from a regulatory operating stand point. We did hedge the bulk of our expected earnings from '02, but there no material regulatory operating issues down there.

Can you give us a sense of how much those '02 earnings were and what are you doing about 03?

Let me step back a little bit and the way I think about our earnings at global and holdings. Generally I gave you the 145-155 number. About 60% of those earnings this year are global. The other 40 being resources. That's more global-weighted balance. They reduce the resources contribution. 60% of 145-155 is global. Of the global piece, if I can round, about 40% of that is U.S..-based. About 30% is from international, but countries that invest in great ratings, Chile being the dominant piece. The other 30% is from foreign, investment-grade countries. It's a modest piece. Brazil is a reasonable piece of that. My guess is in the high single digits cents per share. That's a ballpark number. Sorry for the long answer.

Thank you.

The next question from Fred Schultz.

I had a question relating back, I think it was Neil's question on the credit facilities and the debt covenance at .68 versus .7. Do you have a year ago number or where it was at at year end.

I believe 64.

64 in sort of the write downs.

64 or 65.

In a very short period of time, it seems like we are maybe another write down or charge away from tripping that. You characterized these covenants as having no teeth?

No, number one, we took material write downs that we have been talking about for a long period of time. We are not aware of anything else out there. These are comprehensive review of the assets on the balance sheet and the new good will accounting standard. I wouldn't want people to think this was a quarterly event. This was a -- an unhappy write down, but we hope it was something we talked about for the last six months. And I think our disclosure shows that. We don't foresee other things.

That's frankly a part of us looking hard with the goodwill standard. There was a higher threshhold to do the analysis to see if the good sell justified on the books. At 68%, the numbers got off around the 65 level at the end of the year. It went up and we took a step back on equity and keep in mind that that was in the 50s. We have good equity to earnings [INAUDIBLE]. What I meant to say on the leverage ratio, we do not see that as an issue and we run more numbers here than we need to. In terms of scenarios, we don't see any things out there that would cause us to jeopardize that number.

That being said, it is a covenant with the banks and we have a lot of work with. We think we could to the exact the present time that there is some. I would have to think a while to see if it would be workable. We just gone through a couple bank facility, we just upped our PSGC facility for $400 million. We upped the PSEG facility at the end of the year. Both were over subscribed. The PSEG facility that we upped at the billion dollar level, if I'm right. About 30% over subscribe. When we talk to those folks, they were fully aware of all these numbers. This wasn't news to anybody.

You ballooned out and worked down from here.

That's a better way to say it.

Then so Moody's S&P,can you cover one more time, you are going back comfortable at these levels and things kind of improve from that angle? Is that fair?

Yeah. When you say going back in, I was confused on what you meant.

For Moody's and S&P, they're gonna wanna look talk and get comfortable.

This is all stuff that once again, the number we had, the 257 comparable basis is very close to the 244 in the queue. We spent a fair amount of time with the agencies and want them to be comfortable with us. These are the kind of numbers we showed them. They came out and you saw Moody's came out two months ago and S&P a month ago. They are confirming the senior debt ratings and giving us stable ratings. We did a $600 million debt ratio at power. We did it at T + 195 2.5 times over subscribe. The fixed income market is in a lot of company. All that stuff was after going throughout agencies with these numbers. We talked to the agencies in the last 24 hours. This is consistent with the stuff you showed us.

All my other questions --.

I think we are done there. We think this is in line with the dialogue.

Thank you.

Can we take the last question?

The last question is from Tim Doddman from Solomon Smith Barney.

Actually this is Danielle. I was wondering if you can give color to your 7% growth rate or distribution or do you visualize it given the disability of trading as well as the power prices.

Yeah. 7% is the growth target. It continues to be a reasonable number. The vast majority of businesses are unregulated and more moving parts in the business and it is more difficult to forecast the numbers. I think I went through some of the things within the next 12 months of what gives us comfort and that hopefully returned the normal weather of 15 cents. Absence of ET that has been a drag. Absence of EP, that's been a drag this year, but costs $17 million last year. The utility rate case a full year. Global A and G with full year impact and a bunch of new plants and mega watts. That gives us enough of a tail wind.

It's not just located in power and global, but across-the-board?

I would say it's across-the-board. We will work on giving you more definition. We don't want to get ahead of ourselves.

I was curious.

We will give you pieces and parts blocking and tackling from $4-4.20. Each of the businesses has reasonable growth abilities.

Thanks.

There no further questions at this time. Please continue your presentation or closing remarks.

I will make a couple of final remarks, let people go out to lunch. We have been thoroughly tested on several fronts. The financial marketplace and energy marketplace and international arena, we made difficult and necessary decisions over the last months. We continue to benefit from a number of strengths.

The portfolio of businesses and investments are diverse and balanced. Utilities continue with successful restructuring of excellent relationships. Merchant energy business is well positioned with powerful advantages. That will be our key growth driver. Our financial profile is solid, giving the advantage of taking advantage of growth opportunities.

Thanks, all, for listening and we will be available for separate Q and A.

That concludes the conference call for today. You may disconnect and thank you for participating.