公共服務電力與天然氣 (PEG) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Public Service Enterprise Group third quarter 2002 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. At that time, if you have a question, you will need to press the one followed the four on your telephone.

As a reminder, this conference is being recorded Tuesday, October 29, 2002, and will be available for replay for 48 hours beginning at 1 pm Eastern today until 1 pm Eastern on October 31, 2002.

It will also be available as an audio Webcast on PSEG's corporate Web site at www.pseg.com.

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

Thank you, and good morning to everyone. We appreciate your listening in today. I will be turning the call over to Tom O'Flynn shortly, but I need to make a couple quick points.

Tom will discuss our future outlook in his remarks and so I must refer you to our forward-looking disclaimer. Financial and business forecast for PSEG and its subsidiaries are based on reasonable assumptions. We can give no assurances that we will achieve our objectives. The last word on any of our businesses in contained in the various reports that we file with the Securities and Exchange Commission. We expect to file fourth quarters 10-Q's later this week.

The second point is that we will likely have a large number of requests to ask questions. Because we want to give all of you a chance to participate in the Q&A session, 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 .

We issued our earnings release before the market opened this morning. I hope you've had a chance to review it.

Our EPS of 99 cents was quite strong, up 21 percent over the 82 cents earned in the third quarter last year. Although we do not provide quarterly guidance, 99 cents was well within our internal expectations and keeps us on track to achieve our 2002 operating EPS target at 370 to 390 per share.

We're very comfortable about finishing the year within this range, largely because of PSEG power's role as an indirect provider of basic generation service to New Jersey's electric customers.

Most of you probably know by now that power turned up more than 75 percent of its generation under contracts with direct providers who participated in this state's initial auction.

The option was for a one-year period beginning this past August 1st. contracts are at fixed prices, which accounted for most of PSEG's comparative improvement in the third quarter results.

This benefit is continuing in the fourth quarter and will be the principal driver in PSEG's reaching its EPS target for the year. The will be particularly valuable to us in the fourth quarter, which is a shoulder period for electric demand, enabling us to source power more cost-effectively to serve this load. We expect power in the range of 460 to $500 million this year, which is materially more than it's earned in 2001. We also expect PSE&G to earn 175 to 185 million, and PSEG energy holdings to earn 145 to 155 million.

We've maintained these targets in the midst of a difficult business environment. Overall, our businesses remain fundamentally strong and are performing quite well. Our consolidated EPS outlook for the full year is only about five percent below what our initial guidance was at the start of 2002. We feel this is a good indication that our balance in the energy marketplace is working well.

Looking ahead to 2003, we'll be faced with a variety of challenges. The volatility in both the equity and debt markets and concerns over energy prices in various regions in the country have place considerable pressures on our sector. These pressures include the need to improve balance sheets, and address increased expenses caused by reduction of equity values in pension fund investments.

We've already taken a number of steps to improve our balance sheets. PSEG sold 460 million of mandatory convertible preferred securities in September. The proceeds were used to pay down short-term debt. This transaction reduced our debt level to 65 percent, as calculated by our parent lenders. When you add back the power of basis adjustment associated with the transfer of generation from PSE&G, which we've discussed with you on several occasions, our debt ratio declined to 61 percent.

In addition to selling the mandatory converts, we are issued approximately 80 million annually of new equity through our dividend reinvestment program.

PSEG has reduced its capital expenditure plan by about 500 million from the levels disclosed in the second quarter 10-Q of this year. PSEG Power announced last week that it will delay the completion of three generation projects in order to trim its projected capital costs from 700 million to 500 million next year.

completion schedules are as follows: the 1150 megawatt Lawrenceburg, Indiana plant from the second to fourth quarter of 2003; the 1200 megawatt Linden, New Jersey project from the second quarter of '03 to the first quarter of 2005; and the 750 megawatt Bethlehem Energy Center in New York from the second quarter of 2004 to the second quarter of 2005.

facilities. Besides helping to moderate our construction costs next year, we believe the delays in commercial operation will align better with anticipated market demand in the areas where the plants are located.

In addition to cap ex reductions, PSEG's Energy holdings is reducing proposed capital investments by its two : PSEG Resources, and PSEG Global, saving 300 million in 2003. Global has also consolidated various offices and reduced its payroll, producing additional cash savings of $30 million a year.

I'm also pleased to announce that Global this morning considered the sale of its Tanir Bavi generating facility in India for another 44 million of cash that is being repatriated as we speak.

All told, 2002 marks the end of a period of peak capital expenditures. As a result, total cap ex for the company will drop from 2.2 billion in 2002 to about a billion in 2003. And starting next year our cash generation will significantly exceed our combined capital and dividend requirements. In short, our business and financial profile is strong.

Just this morning PSEG closed on a 245 million private segment debt transaction, which has a five year average life. We were pleased that investors continue have a strong confident in our long-term strategy. Proceeds will be used to reduce short-term debt.

Overall we have excellent cash flow with all our investments funded internally. Our cash flow coverages remain solid, will continue to improve as we reduce our investing activities. Our liquidity position remains strong. We expect to securitize about 250 million of deferred basic generation service cost at PSE&G next year, with proceeds being used to reduce short-term debt. We have modest long-term debt maturities through the end of '03, about 550 million including 300 million at the utility.

Finally I should mention we continue to be committed to our annual dividend of $2.16 per share with out pay out ratio in the mid to high 50-percent range.

Going forward we will continue pursuing opportunities to improve near-term cash flows available to retire debt and to accelerate the strengthening of our balance sheet.

The issuance of additional equity is also under consideration. Earlier this year we indicated the 2003 EPS target in the range of $4.00 to $4.20 a share. And because of the pressures I have been discussing, that target will likely be reduced. However, even if we were to sell new equity, we expect our 2003 earnings per share to be comparable to this year's results because of our strong business fundamentals.

At this point I'd like to remind you that we've had a five-year period 11 - of 11 percent plus compounded annual growth rates. While we see next year's results as basically flat with this years, for the reasons I just mentioned, thereafter we expect to return to the average seven percent EPS growth rates that we targeted.

Before concluding my opening remarks, I'd like to give you a quick update on two other fronts: the BGS auction and PSE&G's electric rate case.

Plans for the next BGS auction are well underway. We expect the Board of Public Utilities to issue an order covering the rules in early November, with the auction itself anticipated for early February of next year. All four utilities have filed proposals fostering a process under which a third of the combined load would be up for bid each year, which would mean auctions of one, two and three years in February. Utilities also proposed that the new contract periods end in June, ahead of the peak summer season.

It's difficult to speculate where prices will ultimately fall under the next auction. However, current electric and gas forwards indicate that prices will be somewhat higher than they were in the inaugural auction last February.

With regard to PSE&G's 250 million electric base rate request, we expect the case to continue well into the spring of '03, particularly since the rate change would not be effective until August 1st. The case, now in the discovery phase, is moving along as expected. Our electric customers are currently enjoying a discount of nearly 14 percent in the last year of the transition period.

In the forward of Public Utilities consideration of the case there are several factors that should be helpful to both utility and its customers. Any base rate increase would likely be offset by over-recovery of costs to various clauses. These over-recoveries currently amount to about $290 million. In addition, the base rate increase would be further offset by the securitization of the utilities deferred costs. The one-year deferral, which is part of the energy master plan, will amount to about $250 million. Several weeks ago the State Legislature approved a measure allowing securitization, so the combination of returning over-recoveries to electric customers over the next few years and stretching out the recovery of the deferral through securitization will allow us to get a meaningful base rate increase while minimizing the impact on customer bills. The net result of all this should be an increase to customers in the range of only 3 to 5 percent. This outcome should be manageable to customers as well as regulators.

On that note, I'll conclude my formal comments and take your questions.

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 the one, followed by the four on your telephone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the one, followed by the three. If you are on a speakerphone, please pick up your handset before entering your request. One moment please, for the first question.

Our first question is from with McDonald Investments. Please proceed with your question.

I had a real quick question; of the 259 ongoing earnings, could you break that out by segment? I'm having trouble getting it to .

If you look at the schedules, PSE&G's--and this is year-to-date--PSE&G's .62, Power is a buck fifty-seven, and Holdings--you have to add back these, the below-the-line .

Are those all Holdings?

Yes. The loss discounts. If you have the release, we're looking--if you look at attachment one.

Okay, I just wasn't sure that had and Holdings, but I got it now, thank you.

Okay.

Our next question is from with UBS Warburg. Please proceed with your question.

Yes, Tom, two unrelated questions. Number one is, can you break down the billion between Power, PSE&G and Energy Holdings, in terms of cap ex in '03?

Yes, it's basically 500 at Power. a little over 400 at the Utilities, 430, something in that range, 430, 440, and 90 to 100 at Holdings. And that's the Power number excludes Nuclear Fuel.

Okay, and the $245 million private placement, you said, which did that prior placement?

The , PSEG.

It shows just the Holding Company.

Yes, Holding Company. That's a deal we got priced a few weeks ago, and consistent with the private markets, it takes a few weeks to close.

Okay, thank you.

Your next question is from with Janney Montgomery Scott. Please proceed with your question.

Yes, good morning.

Good morning.

Could you give us a little more color about Global and kind of indicate where you saw particularly good results, and where you are concerned about operations going forward?

, in general I think that our investments in our major places are doing quite well. Down in Latin America in particular, Chile, , largest investment down there is doing fine. Peru's doing fine. Brazil, we're, the business is going well, but we're obviously tuned into macro events. The election's over, a new leader down there, didn't appear to affect the currency much, but I think, we have a reasonable level of comfort on the earnings that we'll get out of Brazil and probably have a, there's more concern that we'd have just in terms of the value of that as we bring that back to the U.S.

For '03, I'm sorry, for '02, both Peru and Brazil are hedged. So this is more of an '03, '04 issue.

Elsewhere in the world, things are going fine. It's, offshore, if we look at the Middle East, construction's going well, Poland's going fine. California, I think we told people about a month and a half ago, we did have a successful renegotiation with the DWR and we're building of our third of our three plants is under construction; two are already going.

The biggest profitability issue for us, we talked about before is Texas. The power market in Texas, we're going to lose some money there this year. We've got a lower loss, but still a loss, kind of in our budget for next year, we see some improvement in the market thereafter, '04, and thereafter, I think some of the retirements in the Texas market, we'll bring some more natural efficiency in the market. But on an operating basis, Texas I think is the largest discipline we got at global.

One follow-up question on that. There's been some macro indications that Peru is weakening politically and economically. Is this causing any rethinking about an exit strategy there?

We're not thinking about an exit strategy by any means. There have been some signs that the government's strength isn't perhaps quite as strong as it had been six, eight months ago, but it's reasonably stable and if we look at the currency that's a reflection of the macro view and then the currency is reasonable stable.

Thank you.

It's also in fairly dollarized economy.

Thanks.

Our next question comes from with Jeffries and Company. Please proceed with your question.

Two questions really. One is you've talking in the third quarter earnings press release about increased pension expenses. Can you give us an idea of where that might be coming from and whether there is a necessary cash infusion based on the funded status?

And the second question relates to global. You talk about 300 million of target spending reductions. Does that impact at all the schedule or either the or the plant?

OK. , take pension expenses, this year pension expenses corporate wide at all our practices is about 75 to 80 million. We do already have and have for some period of time forecasted a meaningful increase next year that's, you know well in excess of 100. I think we point that out in our release, that that's just something that's outside of our control. It's obviously market dominated as opposed to things that we run. But we've got a meaningful increase, but markets are volatile, which you know better than I do.

Longer-term cash -- yes -- or, will it require cash infusions? Nothing near-term, but yes over the longer-term -- more cash infusions into the pension is something we have to consider if the markets continue to go in the directions that they've been going.

We obviously have in our plan cash infusions on a fairly regular basis into the pension, but then we have to -- as we look out, would be more than had previously though.

And would you say the largest driver in the pension expense is the expected return component? Or, is it something else?

I think the largest driver right now is the return -- the realized return to date in the market -- just, what has our asset balance done year to date. So, effectively, market to market.

Did I tell you point out here? Well, I should mention about two thirds of our pension costs -- our total pension liabilities are utility related -- related to utility workers. So, that gives us comfort that these are costs that we'll ultimately be able to recover on a reasonable and timely basis.

And on Global -- the 300 million in targeted spending cuts -- is that ...

That 300 million -- some of those are things we already communicated. 300 -- what we're trying to do we hope to do it by the end of the week. And just to make people aware of differentials, if you will, we had about 400 million in there in the second quarter for holdings next year. That number's gonna be about 100. It does not affect . So, we're still on track, and our investment in there next year is in the 25, $30 million range.

The largest -- , the largest reduction is an expectation of no new investments in resources for '03. That's something that we already had talked about, but just to be clear -- .

You may have also added -- the other construction project we have going on is in Poland. That's going fine, too. And the third one is project number three in California that's moving along. So, this doesn't affect any of our construction projects. Just, anything that was discretionary is now effectively to zero.

OK. Thank you.

You bet.

Our next question is from with UBS Warburg. Please proceed with your question.

blanco|Laura|Blanco||UBS Warburg|f?: Hi. Good morning.

I'd like to know a little bit about trading this quarter, and what are your expectations for in the fourth quarter, I guess, and then forward.

Yeah. Trading did reasonably well this quarter. One thing I should say is that as we file our Q this quarter, we do not expect to have trading as a separate segment within Power within PSEG. With the new , as you look at our energy resources and trades, they effectively managed three things collectively. They managed load, they managed generation, and they managed the bundle of trading positions, if you will, that are around that.

I think in an older world, there was perhaps a little more of a differentiation between what would be or utility supply book, versus what the trading book. In this world, they run the business, manage , manage risk -- everything about it is run for the big number, i.e. let's maximize to 460 to 500 coming out of power.

So, we are not going to have specific numbers on trading because to be honest, it's not the way we run the business.

I think that being said, we have said - we gave people a little indication of this the last quarter call that we would still get the value that we think - we started out the year at 180 we dropped it to 170. I think we've been consistent that we will get that value. Much more of it is on - it is based on settlement account, is wrapped around our BGS positions and strategy.

So implicit in our continued guidance of 460 to 500 for power - that was the underpins apparent - we will get that value. It's just, frankly, muddier on what is trading and what is the overall portfolio because we're running the company for the big number.

We will still, of course, disclose in our - in our Q's and K's and everything else our mark-to-market positions. And - but that's not really the trading segment as we've talked about it in the past.

OK. Thank you.

Our next question is from with Morgan Stanley. Please proceed with your question.

Hey, Tom, how are you doing?

Hi, .

Just two couple quick questions - first off, can you give your expectations for cash from operations for '03 and '04? And if possible, can you break down the '04 cap ex by segment?

Yes. '03 we're basically - it's about a billion nine of cap ex. And we should apply the EEI last week. We had some green bars and red bars. It's basically about 850 for PSE&G. And in that I am including securitization of about 250. Once again, that's money that will be raised let's say the middle of next year. It will all go to pay down debt at the utility and then some at the parent. And that debt is off credit, so let's call it 850. It's about 700ish at the - at power and this is cash generation. And holding business 370-400 range. So the numbers generally speaking that we showed in our green and red bars at the EEI last week - and I think it was on our Web site, too, from Mike , are generally still good numbers.

In terms of cap ex, I think I went through for this year. I'll give you about five for power, 100ish for holdings, and E&G about 440. So the Q would be about 1040 for '03.

For '04 it's looking like power's going to be a little bit up, 675. Holdings will be down 50. You know, 50, I believe is all discretionary. And E&G stays pretty much a flat 440. So it's 1165 and you take off the discretionary 50 it's 1110.

OK.

Power if it goes up with the deferral of some projects ...

Sure.

A couple of these are actually higher in '04 but we thought that would be the wiser thing to do.

OK. One other quick question, do you have any assessment of how FAS 143 may effect you from a balance sheet and I guess also an income statement?

Yes. Our Q will have a discussion on FAS 143. The simple part is the fossil business. We have basically created a liability - booked a liability - to salvage and decommission, if you will, fossil plants. And that's a pretax number of around 140-145. So it's pretty clear to us that FAS-143, the asset retirement obligation FAS, if you will, would cause us to reverse that liability, ergo a gain--a one-time gain for the second quarter next year of about 85 million bucks, and that would go--that would be a increase of equity aftertax 85 at Power. The other issue then, and the larger one, is Nuclear--the Nuclear decommissioning, also at Power. We have asked the BPU to clarify whether ultimate decommissioning costs, or costs--the over-under, if you will, of decommissioning versus the decommissioning fund, whether that is a responsibility, or whether that is a Power shareholder stakeholder responsibility, and that's something that we've asked them to think through. If it is clearly a responsibility in the sort of classic regulator's world, then we would stay on FAS-71, and there would be no bottom line impact. There may be some moving around of the numbers, but there--but because we're on FAS-71, it would--sure not--there would be no P&L or impact from a shareholder standpoint. If they believe it is a shareholder Power responsibility, then we would adopt FAS-143. As we look at it now, there--that could be a material write up, i.e., as we do the FAS-143 , we would look at a material--potentially material accounting balance sheet benefit to Power of as much as few hundred million dollars.

Write up to the equity account?

Write up to the equity account, yes, increase of equity of Power.

Any idea on planning for their response?

But--and that's the last thing I'd say, , it's ongoing as we look at it, if we do adopt the second option, which would have a 143 impact, we don't foresee, based on forecasted returns and market returns, etc., inflation, we don't see any meaningful year-to-year income statement effect for Power. There could be more volatility at Power because you--you effectively have more near-terms marks on your decommissioning fund, but as we projected, if the fund behaves as you expect the fund to behave, and inflation behaves as you expect it to behave, we see ourselves as pretty flat from an annual earnings standpoint. When they would expect to think about that, it's over the next three to six months. It's hard to say.

Okay, great, thanks a lot.

All right.

Your next question is from with . Please proceed with your question.

Hi Tom, it's , can you hear me?

Yes.

Tom, I was just wondering if you could sort of elaborate on your comments about, sort of what current forward prices could indicate in terms of the next BGS auction, sort of where are forward prices in PJM as you see them, in Western PJM, what is the sort of the normal, sort of basis differential between the East and West, does that basic differential still hold? Has it been consistent over the last year? And if you can just sort of drill down a little bit deeper into where we are procedurally, in Jersey, with respect to the(BPU and what kind of orders we ought to be expecting to see in terms of the rules and the structure of the auction?

Okay, , the way we--the telling benchmark for us is just looking at where forward prices were, both gas and power, in of this year versus where they are now, and as you know, there's a number of components for BGS, it is much more complex and a more valuable product than just the straightforward curve, but at least the forward curve is one telling number that you can track day to day.

And at least as we look at it, gas prices have come up materially. If you think about really February of this year, it was, I'm looking at a chart here, I think we had this, I think showed this in his stuff, or at least we've shown it before. February was really a low point over the last couple years, in both forwards and gas price forwards. And gas prices were in the mid $2 at that time, and they're not up into the $4 range. And the western hub forward and this would be I think the number we track a lot around here is around the clock, one year forward. And that number has gone up, it was in the 30ish range back there and it's well up into the mid to high 30's, as we're looking at things now.

So those are both, those are both looking at just the raw commodity prices, that would suggest that numbers could be higher than the new than they were in February.

Generally speaking, just on the gas side, it's, if gas goes up, that will push up presumably, push up the prices. For us it does go into our cost a little bit, but we've, we win more from the margin net-net, because about 75 percent of what we generate is base load, i.e., nuclear and coal. So we got three-quarters insulations from gas prices. So if prices go up, yes, our expenses go up, but not as much as it would frankly for some others.

The other thing you asked about was west versus east. Most of our stuff as you know is in the east, across some transmission constraints, which is quite helpful. It's difficult to get a consistent delta on west versus east. We use three to $5 as a general number. That's not on all of our megawatts. It's only the constrained megawatts, but it's a material amount of money.

As far as your megawatt hours, what portion do you think falls in the bucket of being constrained megawatt hours, 80,000?

Probably look at it, I mean, yes, I mean as we look at it, you can get, you know, getting to, it's hard to look at actual hours.

Can we do it by just taking sort of the capacity and allocating some load factor to it? What portion of the 9,000 megawatts are, sort of fall into that bucket?

Yes, I hear what you're saying . Why don't we circle back with you, great. It's a hard one to cuff, let's say. But it's real money for us.

And then as far as just the process at the ?

Yes, that's ongoing, ourselves and the other three utilities in the state are having discussions. As we said we are urging the to consider a multi-year purchasing strategy and that's really just, none of us are smart enough to predict the markets, whether it's commodity markets or whether it's energy markets of whatever it is. So our view really from a consumer perspective is this is better to do some dollar cost averaging, have a one-year piece, two-year piece, three-year piece. We'll see. Generally we should get a response from them within the month. I think the earlier part of November was a target. It can't be a lot later than that, because there would just have to be a lot of wheels that go into motion to get the suppliers teed up, to get all the things put together. So, I'd say mid-November is a reasonable estimate.

I think the beneficial thing is that the was seen as a success, as it should be, from the BPU, from consumers and all those kind of constituents. So, we're not talking about re-writing anything. We're basically gonna use the same structure, us the same kind of construct and rules. The most material thing that we're discussing is, is it all one-year, or is it a multi-year?

I think the one thing that I mentioned -- to have the period end in June as opposed to August -- I think that's something that's highly likely. That just makes sense to have -- so, when we say, "one-year," "two-year," "three-year," more specifically, it would be a 10-month, a 22-month, and a 34-month.

Has there been any push-back from any sort of constituency on this one-year, two-year, three-year thing? It makes sense to me to sort of taking a step back and thinking about it. But, is there anyone who for some reason doesn't like it?

It's -- there's significant dialog about it. I suppose if someone were to be able to use a crystal ball and say the markets will be lower a year from now, then they would say that, perhaps, it's better to go short. But, it's a hard thing.

And, final question on this, Tom. You said that the BPU and all of the relevant constituencies were happy with how the first auction went. Has it been -- I recall there was some sort of study that was being done -- a sort of post-mortem on the first . Was there -- has there been any document released by the BPU, or any statements made by the BPU that, yes, the first auction and the structure that was used in the first auction was a success?

I'm not aware of any document. I mean, there's comments that I've made. There was a press release that I think was put out by the BPU shortly after to -- in announcing the results, consultant did certify the results, and they're in the middle of the thinking of where we go forward. So, is pretty much on board.

Thanks so much.

OK.

Our next question is from with Merrill Lynch. Please proceed with your question.

Hi. Can you hear me?

Yes.

Hey, Steve. How are you?

Good.

In your comments on planned or potential equity issuance in next year's numbers, how much equity are you considering potentially issuing?

Yeah. I should say that we've not made any formal plans on equity. I think we are sensitive to the desire to accelerate the de-leveraging of our balance sheet. I think we have strong cash flow. We've -- you know, our balance sheet naturally decelerates over a couple of year period. The question is should we be doing it quicker? We've taken some steps to reduce cap ex that we've talked about, looking to effectively bring cash forward. Even things of more modest size, such as the Tanir Bavi piece -- all those things are helpful, and they essentially accelerate the de-leveraging.

As we think about , Steve, the size of the potential equity deal -- if you ask in the kind of numbers that we're considering, it's in the sort of three to 400 million range.

OK. And I guess my other question would be with respect to the utility . Hadn't you gotten some recommendations in the case, or...?

The did come out and give their viewpoint, and they had recommended a $71 -- I believe it is -- million increase. And they had also said that our depreciation should be reduced by $100 million or in that kind of zone. There was some - that was largely based upon a difference in ROE. That was, I think, the depreciation change may give us some flexibility to think through non-cash charges in an effort to get an reasonable outcome of things that are more cash muted for the . Yes, that did come up, Steve, a little over a week ago.

Well apples-to-apples that would be like 171 million?

Yes, if you were to make a full adjustment for the depreciation, yes.

OK.

But that's probably over simplifying.

OK, thank you.

OK.

Our next question is from Craig Albert with Osprey Fund. Please proceed with your question.

Hi, good morning.

Morning.

I had a couple questions. Can you elaborate a little more on the deferral you referred to and the associate component of the rate case? I'm trying to just better understand how much cash comes in from this rate case if you get what you asked for and how much are you deferring and sort of what is the net change to cash from operations if everything goes as you expect it to go?

Yes, without going through all soup in the kitchen, let me just say that this year - or next year in '03, our cash from ops at the utility is sort of 600 to 650, in that kind of zone. In '04, after we get the full rate case - because the rate case is only effective in the electric part of the business for five months of next year. But out cash from ops goes up into the mid 800's. So 6-650 up to 850 is sort of the net result.

The BGS this year, pursuant to the energy master plan, the utility PSE&G is paying 5.1 cents per kilowatt hour to BGS providers, and they're collecting the equivalent of 4.4 cents from customers. So that's where the 250 million deferral comes in. That is the number we expect to securitize next summer, let's say, and collect that over say a 15-year period. I think that's helpful from our capital structure standpoint because the 250 is off credit just as is the securitization we did a couple years ago. But the - but the proceeds will be used to pay down short-term - or to pay down debt at the utility and then some at the parent as well.

Right.

The two-nine - there's kind of two - there's two - the 290 is actually money that we're ahead on, if you will. Those are - those are monies that we have collected from rate payers that's an over-collection - over-recovery of certain societal clauses, the clause and a couple other clauses. And so that's - so I suppose we're ahead on that money.

OK.

And that's money that we'll be giving back to rate payers over a few years.

So the - so you're saying the cash from ops at the utility still goes up that 250 million even though you're going to be giving that money back to rate payers?

Yes.

OK. And that 290 is an annual amount ...

No. That's ...

... that you over-collect or is it a cumulative amount?

Cumulative.

OK.

So next year, as I look at it, the cash flows I got asked about at the outset of the call when we showed EEI, this year the utility is 6-650; next year it's about 850. That includes the securitization for next year. And then in '04 it is all just cash from ops.

Got it. OK. And your cap ex for '04, I miss heard the number. Did you say it was 1,100 - 1.1 billion for '04 ...

Yes.

... total company?

Yes.

OK. And you had mentioned something about maturities on '03 being something around $550 million, but just looking at your balance sheet, there's $2.2 billion in debt and short term, can you just go through that and elaborate on that a little bit more please?

By maturities, I mean maturities of long-term debt. The 550 is about 300 at PSE&G, and 250 at Holdings; the 250 at Holdings is in--is to do with a, what's called PSEG that matures in April or May of next year. The other debt, we've go a little over $1 billion of short-term debt, CP, bank debt, other stuff that's divided between the parent, Holdings and Utility. We've got total lines of about $2.3 billion, I believe it is, so our total liquidity as we're sitting on it today, or our excess liquidity is comfortably in excess of a billion.

Got it. And my last question, how much, when all that stuff rolls off, what do you think that will do? How much should we expect your consolidated interest rate to go up as the cost of capital is moved up?

If I could predict cost of capital going forward, I would be on a beach.

Okay, let me ask it in another way.

Sorry to be flippant, no, I mean I think--no, I'm sorry to be flippant, but we have manageable amounts. I think, the way I think about it, we have manageable amounts of new financing required. We will--as we bring cash forward, and let's say with the proceeds of the 245 private that I mentioned that we closed this morning, we'll use that money to pay down short-term debt. Some of that will be net debt reduction; some may be some opportunistic refinancing of stuff in the intermediate term paper. But we don't have meaningful--there will be some increase that's included in the kind of guidance that we're talking about here, some increase in rates, but we're not--we're quite well insulated from new money rates.

And can you ...

Our next question is from with . Please proceed with your question.

Great, thank you. You touched on prices that, in the BGS upcoming auction, I wonder if you could also comment on, I know in the past auction, you contracted over 75 percent of Power's capacity, what's the sensitivity, possibly the maybe opportunity upside to that, or risk? I mean, is there a sense that you'll be able to sell the same amount of power?

Yeah, I think generally, our objective would still be to do more than 75 percent, and we're still reasonably comfortable that we'll be able to achieve that objective.

Okay, what--what are the factors that you know may allow you to maybe increase that amount, or decrease it? Does it have--is it a lot to do with, I mean, plants coming on over the past year will that, I mean, from other entities, would that affect it, or will--what should we look for, maybe as far as an opportunity there?

I think on one side, there's a little more generation in PJM, not but a little more. On the other side, there's reduced number of competitors, and some of the competitors that are still here have some credit issues they'll have to manage, they'll either impair their ability to compete or potential increase the cost of them competing.

So then at the end of the day, we feel, you know, if you compare us to where we were last year, at least I feel more comfortable, a little more hardware, but the playing field has been , and I think there's more prudency and caution in the playing field.

So and it's also kind of been there, done that, done good. So looking forward, we've got as much or more comfort certainly than we did a year ago at this time.

OK. Great. And finally if you could comment, the recent election in Brazil. I know you said a few things about that. I know there's, you know, some thought that may impact neighboring countries. What's your read on that, and do you think it will affect the business materially?

I think it was largely factored into the, to the macro view of the economy. If you look at how the bond has traded, if you look at the traded, it's obviously degraded relative to the U.S. dollar. A fair amount of the last few months, if you look at what it's done, it's been fairly stable, since the election. So I think most of they election results were baked into the market. Once gets in, I think we and others, will be watching what exactly he does.

As I said, our business continues to operate reasonably well down there. We did hedge the currency this year, which is helpful, you know, all told, our expectations from an earnings perspective in Brazil are still in the sort of six, seven cents range.

So it's something we watch, but it's not, it's still manageable, it's a fairly modest number for us at the end of the day.

In terms of Chile, I think Chile has gone a long, long history of standing on its own feet, on a economic and political basis away from other issues in Latin America. Its currency has widened somewhat this year, but it has come back a little bit here in the last couple weeks, and that's helpful.

OK. Thank you.

Our next question is from with . Please proceed with your question.

Yes. My questions were in regards to the project financing. I was wondering first if you could kind of go through the tolling arrangement, as far as the structure of that, when you know, you basically have to start making payments and if that was changed with the , you know, extension of the capital expenditure and pushing the start date out on that?

And then secondly, I just wondered if you could go through the cash flow effects of that tolling arrangement, you know, I can do some run rates on the actual plants and the forward- curve, but I was wondering if you could give us a little insight into how that would affect you know, cash flows in '03 and beyond.

Yes. Let me think about it . The toll way arrangement essentially a five-year toll from the in-service date, where as we've stretched out for six months or so. We're still in discussions with the banks on exactly how it gets done, but the expectation here is that the toll continues to be from five years of commercial off-state.

In terms of our, in terms of the numbers that we look, we're effectively, our guidance is ooking at -- or incorporates fairly cautious numbers out in the Midwest. We're looking at -- energy forwards looking at a very modest year for capacity, and that's all -- we're basically looking at that number and servicing about 800 in project debt. And at the end of the day, that's where you -- that's what drives our -- the earnings guidance that we say is gonna be essentially flat for next year.

If you're a lender -- if you're bank lender into and Lawrenceburg, you get a little more comfort that the for the five-year period can be supportive of to the extent that's necessary.

What is the -- I know the contracts are the money, but what kind of run rate do you have for that contract? I mean, are you buying that power at $40 a megawatt, at 35? I mean, can you give us some type of estimate as to, you know, how to evaluate that contract?

Yeah. I'd rather not get into all the specifics of it. I mean, the of it is in the 100 million plus range, let's say, but still fairly small relative to the 800 of debt.

OK. Thank you. The other question I had was just if you could give us some numbers as far as cash flow from operations for the nine months for each of the three entities -- PSE&G, Power, and ?

I trying to see. I think I'm on a full-year basis, and essentially for the full year we're gonna be about 600, 700, and about 375 -- something like that. I think it will be in that kind of general range, and that's for six, 650 of E&G, 700-ish for Power in holdings 375, 400.

I think E&G -- you know, most of them are pretty level -- or cash follows earnings. We don't have a lot of differentials, so I would expect the E&G number would be fairly constant through the year. Power will be better in the fourth quarter just for the reason we talked about -- the increased profitability of the .

Our holdings cash flow do tend to be a little bit more fourth quarter driven, so third quarter -- my guess is that number is more like kind of of that number. If you want more detail, we can call back.

OK. I'll do that, then. Thank you.

Thanks.

Our next question is from with Vanguard. Please proceed with your question.

Hi. I was wondering if you could just go over the basics uses of funds, including debt maturities, or, you know, commercial paper pay-down. And then, you talked about your bank lines, but if you could discuss when they expire and whether they term out, that would be terrific.

Yeah. I think, , I've done some of that already.

Yeah.

I've got the numbers in the back of my head sort of on a quarter by quarter basis. I think I'm on an annual basis.

Annual is fine.

But, in terms of our bank lines, it's pretty consistent. If you look at our 10 quarter Q -- I'm sorry -- our second quarter Q -- if you look at our 2.3 billion as bank lines -- it's on one of the pages, there -- they're all fairly consistent. The only thing we've added is we've got a at Power for another 50 million bucks, which helps with some of our trading database stuff. It's on page 44 of the old Q.

In terms of -- which is basically, you know, a billion one, a billion two at the parent -- about 700 at holdings, and about 400 at E&G -- something like that. And then, 50 at power.

In terms of renewals of these, they're generally spaced out during the year. We've got a 150 renewal at the parent to draw on facility at the end of the year. There is 720 of CP-backed stuff with the banks that's up for renewal next March. I think in this day and age our strategy would be discussion some started well in advance of that.

And once again as I said, there's - we've got about 2.3 billion of overall liquidity. Adjusting for the deal we just closed - I haven't seen the most recent number - but our overall number's probably in the billion zone. So we've got well in excess of a billion of excess liquidity to manage our way through these things.

And in our - in our 10-Q we'll have meaningful discussion which should be out in, you know, hopefully by the end of the week.

And the sources and uses cash flow from operations, dividends, so on, what was that?

If you - you think about it '02 basis - let's get here of active - it's kind of the end of our large cap ex build out. Sources are about a billion - six-billion-seven - I think I've gone through those pieces and parts. Cap ex was about 2.1 billion. So net-net the line that we track a lot around here is the cash before dividends and financing - common dividends at the parent. That number was a negative this year in the four to $500 million range. And this is all consistent with the slide we showed EEI last week.

Next year the sources goes up to a billion-nine; uses goes to about a billion - billion-one, depending if you include nuclear fuel. So we've got about 7,800 available before dividends and financing. The net dividend we pay out is about 375 - that's after taking into consideration the . So we've got three-$400 million of cash available to retire debt in '03, which is what we've been actively working on.

Thank you.

OK.

Our next question is from with ABN-AMRO Asset Management. Please proceed with your question.

Hello. I'm trying to get my arms around the grand total sensitivity or leverage, if you will, to a BBB- minimum rating at both subs. I know PEG Power is that you don't have a lot of or possibly no collateral figures, but I wonder if you have, you know, any?

In addition, you've got the construction guarantees possible and also I don't know if there's any puts of any of the private placements or any particular debt?

And finally, in the lease portfolio are there any bonds - I know you've said you could, if the project were economic, assume the lease and operate it with the help of PEG Power. Are there any leases, though, that would require you to buy out the bondholders at par if you were rated below BBB- at that moment?

I'm sorry, you're asking if we're rated BBB- or is we're rated below BBB- ?

Below BBB-.

OK. At power - it's a long way from where you are to BBB at S&P and BAA1 at Moody's. So that's a long way from where we are. Nevertheless, with any trading business, if we expect assurance from our counter-parties and they look for the same from us on generally a reciprocal basis. If we were downgraded below investment grade, which is a long way down, it's a manageable amount - couple three - couple three hundred million at any one point in time. But it's a manageable ...

OK.

It's not a - it's a manageable amount. Once again, our--most of our business, 80, 85 percent, is within a couple years, so our trading philosophy strategy helps us there. On the lease portfolio, there are no leases. No leases that we would have to assume. That is all a--at our option, not our obligation, under any conditions.

No, not an obligation, but if you were to--you say you have this option, to take over the lease yourself, if there's a default on the lease, but is there any problem with the actual bondholders, you know, if you're rated below investment grade at that point, can you simply take over the lease, or do you have ...

Yeah, I know, it's a fair point, and without going through it lease-by-lease, many of them contain a provision that for us to assume the lease , if you will, the sale lease back obligation bonds.

Yeah.

The bonds at the end of the day have to be rated investment grade. So if we had that opportunity, if there was a default and there was an opportunity for us to step in, we would expect to have discussions with the bondholders, they'd obviously have a rating materially lower than investment grade, we would expect to have a reasonable discussion with them in terms of what was a fair credit profile for them, have a dialog with the agencies as to what it was--our impact was on us, and like a lot of things in life, it wouldn't be simple, but it would be--we would have the option to step in, and these are generally things that from an operating perspective, would fit into Power's portfolio.

Okay, and finally, any construction guarantees, do they have any credit language in them?

Holdings, I think it's in and have about 80 million bucks of--if they were to be downgraded, they have the $80, $85 million of businesses. Going back to Power, the same for them, and we'd probably have the--I think we're going to put in about 400 of equity into those , we've probably already done about 2/3 of that, so it's a relatively modest amount of incremental equity.

Very good. Thank you.

Our next question is from with . Please proceed with your question.

Good morning.

Good morning.

Can you update us on the expected timing of closing and the funding plans for the , Connecticut asset purchase?

It's probably the next two months. We still have, to my knowledge, have not been formally put on a agenda, but when that happens, then there's a 30-day clock, it's subject to other interveners and appeals during that 30-day period, so it's no sooner than a, kind of, month and a half. I think the quickest it could happen would be a month and a half to two months, and it could be longer, depending upon agendas, and also potential interveners once the were to make a ruling.

And that ruling is just the approval?

Yes, I believe that's--it's a standard approval, yes.

Thank you. Can you give us an update on your current thoughts on your bidding strategy for the next BGS auction? In the last auction, you had decided to sell directly to two bidders, and chose not to bid yourself.

I think it's likely--we haven't made a final determination, but it's likely that that would still be our tactic.

Is there any concern with some of the market participants falling below investment grade, that there would be a thinning of the pool of potential bidders?

Some. I think some have fallen away, but some new folks have come in.

And just as a follow-up on the last question about steeping into some of these sale lease back transactions. In the cases where you would step in, would you be required to replace the guarantee that the prior, that the lessee was providing?

Well it depends. In some case if the lessee does not provide a guarantee, let's say the Deal, the Reliant Energy Mid-Atlantic that's a pure project, Reliant owns the stock, but there's no, let's say parent guarantee on that. That's really a pure project.

OK.

In something else like the Dynagy at least where there is a parent guarantee. I've got to go back to the dialogue where I said that in most of the releases, there's a proviso that if we assume the lease, the lease debt would be investment grade though. In the real world, I think if there's, if there is a default, you'd expect at least that to be materially below investment grade and we'd tried to have a constructive dialogue with those folks.

Makes sense. Thank you very much.

Our next question is from with Cobalt Investments. Please proceed with your question.

Hi. I have a question in regards to margins. I was looking the, it seems as those there's margin expansion at and there's also pretty strong margins at Energy Holdings, and I was just curious if you could give some guidance, where that's exactly coming from.

The margins at are really a reflection of the new . The New started on August 1st, so two of the three months in the third quarter are under the new , and just to refresh everybody's memory, the old was at 4.4 cents. The new is at different prices for different of the Jersey utilities, but rates if 5.1 cents. Power's selling not to direct to the utilities, but they're selling to parties who are selling on and net-net power's margin goes up. That's true.

The old 4.4 cents, I'd say is a rate that's pretty old. It was discussed as part of the energy master plan back in '98, '99. So that's the power answer.

At holdings, it's, there's more pieces and parts. I think just off the top of my head, got improved profitability, California is good, especially we got two of our three plants under the new contract working. And a couple of things that we had that were marked to market, non-cash, but marked to market net or did not occur in the third quarter. One is the Brazilian debt, last year our Brazilian debt that's non-recourse, but it's at was not FAS 133 compliant, so we were doing mark to market on it. We've now swapped that into a local equivalent. So we don't face that issue anymore. And we did, to my recollection, have some mark to market at resources, in the portfolio. I think it was the stock last third quarter, and that's not there.

So the essence to goods, say it's a California in two mark to markets that are not there.

And then one other clarification as far as merchant trading, since that is being reduced, basically I guess is this contact really, I guess doing well enough that you basically can offset the reduction coming from merchant trading with that?

Yes, the short answer is yes. I wouldn't say that our, the way we run the trading business is still essentially the same. I would say that, though, the way in the past we have reported it as a separate segment. With the new starting August 1st -- as we take a closer look at how we run the business, manage it, manage it for profits, manage it to minimize risk -- all that is done as part of the big basket. As I said, once again, we've got the load, we've got the assets, we've got the trading stuff that wraps around it. And that is one business to us. If you asked us, "what's in trading and what's in generation?" -- we frankly look to maximize the 460 to 500.

So, we're doing a lot of the same kind of things. You'll see in the Q the basic kind of 133 kind of stuff. But, we did not report it in a separate segment, because that's, frankly, not how we run the business day to day.

OK. Thank you.

I just want to mention that we'll take about one or two more questions so that all of you can get back on your schedules. Any other questions?

Our next question is from William with Atlantis . Please proceed with your question.

Hi. Thanks.

The private placement that you said you closed on 245 million -- was there any equity there, and can you tell us how long that maturity was and at what kind of rate?

Yeah. It was 245. It was a seven-year final, five-year average life, so it 20 percent a year from years three through seven. It's -- the rate is -- because it's the private deal, I'm not quite sure exactly how many details I should give you -- but the rates were -- it was something -- it was priced a few weeks ago. It was priced in mid-September, so it was reflected at the time, .

OK. And just to follow-up -- on Brazil, did you say the earnings to you were six or seven cents a share? I wasn't sure what you said.

Yes.

OK. Six or seven cents ...

It was six to eight cents as you look at it. And that's the equity in earnings. We look at it -- we get equity in earnings that goes into Global before Global G&A, and before holdings -- or, at Global allocated holding level debt.

Right.

That's what kind of goes into the top of the funnel, if you will.

How much exposure do you have in Brazil -- asset exposure?

Our asset exposure is a couple of hundred.

And with the substantial drop in the versus the dollar over the last 12 to 18 months, there's no concern about impairment charges?

Well when I say a couple of hundred, the asset is about 410 -- I believe in that range -- 424.30 on our balance sheet. Through , which is a contract equity account, we are marking the value down on our balance sheet already. So, the decrease in the relative to the dollar has basically cut the value of that asset in half on our balance sheet. If you look for when our Q comes out, you'll see a number in the 350, 400 million range. And of that, about 200 -- a little over 200 is from the , and the little under 100, I believe, is from Chile. So, when I say the number's a little over 200 -- say, 210, 220, something like that -- that's basically taking the 430 less about 210, and getting to about 220.

Right.

So, when you do an impairment test with the loss in value to -- you do an impairment test against 220. We've already done it. We're effectively impairing ourselves as we speak. It's done.

Right. Thank you.

Our next question is from . Please proceed with your follow-up.

My questions have been asked and answered. Thank you.

Thanks, .

Our next question is from Craig Albert. Please proceed with your follow-up.

Hi. My question's been answered. Thanks.

OK.

We'll do one more.

Mr. O'Flynn, there are no further questions at this time.

OK.

Please continue with your presentation or closing remarks.

OK. Well, thanks everybody here for listening here.

Just a couple of comments in closing. We'd like you to remember that in today's uncertain environment, just a couple things that we've got to balance: diverse portfolio, we have a stable wholesale energy business in the model region that serves as our key growth driver. We have strong cash generation. We've got a proven track record of success in the industry.

Thanks very much.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your line.

Mr. O'Flynn?