公共服務電力與天然氣 (PEG) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group's second quarter 2003 earnings conference call and web cast. 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 1, followed by 4 on your telephone.

As a reminder, this conference is being recorded, Tuesday, July 22nd, 2003, and will be available for telephone replay for 48 hours beginning at 1 p.m. eastern time today until 1 p.m. eastern time on July 24th, 2003. It will also be available as an audio web cast on PSEG's corporate web site at www.PSEG.com. I would now like to turn the conference over to Brian Smith. Please go ahead.

Thank you, and good morning. We appreciate your listening in today either by telephone or over our web site. I will be turning the call over to Tom O'Flynn, PSEG's chief financial officer for a review of our second quarter 2003 results and a discussion of key issues. First I need to make quick points. We issued our earnings release this morning.

A copy is posted on our web site, www.PSEG.com. For those of you listening online there is a table that shows earnings contributions by our three major businesses, PSEG Power our domestic wholesale energy supplier, PSEG Energy Holdings, which is the parent of PSEG Global and PSEG resources and Public Service Electric and Gas company, PSE&G, our regulated utility in an effort to provide timely and insightful information to investors and analysts, we have included with a news release a reconciliation of 2003 and 2002 results for both the second quarter and year to date as well as other supporting information for each operating company.

Pro Forma and GAAP results for with 2002 are also reconciled in early August we expect to file our 10-Q which will contain additional information with the Security and Exchange Commission. Tom will discuss our future outlook in his remarks so I must refer you to our forward looking disclaimer.

Although we believe that our expectations are based on reasonable assumptions we can give no assurance they will be achieved. The results of the events predicted in our statements today may differ materially from actual results or events. The last word on any of our businesses is contained in the various reports that we file with the SEC. Finally, we would like to give all of you a chance to participate in the Q and A session at the conclusion of Tom's remarks. In order to accomplish this, 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. Good morning.

I hope you have had a chance to review the earnings release we put out this morning. We had a very solid second quarter. On an ongoing basis we were up a dime over quarterly earnings a year ago. There were several drivers that helped us produce better results. Effective management in our energy portfolio under PSEG Power and some favorable weather that boosted PSE and G's gas sales in early spring. PSEG energy holdings benefitted from higher investment income of PSEG resources and helped offset the effect of a timing difference in PSEG global's annual - eagle point payment.

Power was up 8 cents. The primary reasons were increased profits under contracts with third party suppliers of the BGS in New Jersey, strong performance by our generating facilities in a constrained area of southern Connecticut. and higher NPC revenues. On a broader level, We continue to enhance our strong energy portfolio management skills around our generation assets, fuel supplies and power purchases. Our operating system really is in good shape.

Our nuclear plate Cayon, Hulk Creek and Beach Bottom have a combined capacity factor year to date of 92%. A trading business that adds modestly to profits while performing its primary function of reducing portfolio work in volotility. PSE&G was up 6 cents for the quarter, this stemmed in part from higher gas sales due to a cool, early spring. While we were on the subject I want to remind you, that the utility now obtains its gas under a basic gas supply service with BT assets arrangements with BSEG Power.

As part of restructuring, the supply process was shifted to power making PSE&G a pure energy delivery business. On the electric side during the second quarter, sales were down although air conditioners were on full blast for the last couple weeks of June. The major recent new for PSE&G with the resolution of the electric distribution base rate case. We are generally satisfied with the outcome given the complexity of the issues.

The DPU has previously released the details but just to summarize, the agency concluded the case on July 9th with a written order expected very shortly. We will be receiving $159.5 million in additional annual revenues. The increase, along with the end of the mandated discounts to customers, will result in customer rates, including the new BGS prices that are slightly below the prerestructuring levels in 1999. We think customers should be pretty pleased with this given the substantial increases in gas prices since then.

The new rates will become effective next week, on August 1st. We are also pleased that the long path to deregulation in New Jersey is almost at an end and has gone very much according to plan. One remaining component of the restructuring process is the recovery of about $250 million of energy costs incurred over the last 12 months which were in excess of the frozen rates.

PSE&G has filed a petition the BPU to securetize after taxes, approximately $150 million later this year. The $159.5 million increase in rates will improve both our earnings and cash position. The impact of PSE&G of these new rates will actually be somewhat better. In addition to the change in base rates the BPU will approve the establishment of a $155 million excess depreciation reserve to be amortized back to customers over a 29 month period beginning next month and ending in December of '05. On an annualized basis the credit to customers will be $64 million but depreciation expense will decline by the same amount.

Following the 29 month period and subject to the BPU's review of distribution earnings under the new rate structure we expect an annual of $64 million increase in PSE&G's revenues but a corresponding $64 million increase in annual depreciation, so this would effect only cash not earnings at that time. So many other key components to the web case approved by the BPU as follows: The ROE is set at 9 and 3/4%. Remember this number is part of an overall settlement. The depreciation rate will be 2.49%. This is modestly lower than the 2.75% in the stipulation but is reasonable given the lives of our assets. The depreciation rate change accounts for the decline from the original revenue settlement of $170 million. The decrease affects cash not earnings.

Electric customers will no longer pay about $30 million annually in nuclear decommissioning charges. As they anticipated under adoption of Phase 143 in the first quarter, our unregulated business, PSEG Power, and any co-owners will assume responsibility for these costs. Related to this the BPU required PSE&G to refund $30 million. This action was the reason for the extraordinary charge of 8 cents per share. Getting back to my discussion on second quarter. The main offsets to PSEG's overall improved performance will be affected by the $17 million additional shares of common stock and modestly higher financial costs. Holdings income was steady but with additional shares EPS was down 2 cents.

Holdings was affected by the timing difference in the annual payment for global share in the eagle point facility. We received that payment in the second quarter last year but got it in the first quarter this year. The absence of the payment, which represented about 14 cents per share, was offset by a 12 cents improvement in resources KKR portfolio. Holdings had an upbeat story from an operations perspective as well.

Global began commercial operation of two generation projects. One in California. The other in Oman. Later this year, two other global projects in Poland and Taiwan will be placed into service. Global's two projects in Texas, Odessa and Guadeloupe have benefitted from improving market conditions. We hope they will be modestly profitable this year.

You may remember we had projected a modest loss. Resources with improvements in credit quality and liquidity of several lessees of merchant energy facilities which we have discussed with you since late last year. There are a total of eight facilities, six of them low cost cold assets. All rentals are current and by all indications based on contracts and forward energy prices, the lessees will have the ongoing ability to support lease and debt payments. This concludes my general overview of second quarter results.

I would like to touch briefly on a few other subjects. Our ongoing dialogue with Moody's. Our earnings outlook for the balance of '03 and our initial guidance for '04 and finally some thoughts on our dividend. All 2.2 billion of our credit facilities have a maturity of 2004 and beyond. As of June 30th, we had 1.25 billion available under our bank lines, a reduction of about 650, in the end of the first quarter.

One reason for this decrease was a decision by holdings not renew a $200 million facility expired in may. The existing 4 and 90 facility -- the $495 million facility maturing in may of 2004 is sufficient giving holdings' current business direction. Another reason for the decrease is that in May we funded a maturing $150 million maturity at PSE&G with short-term debt. Later this year we may consider a modest level of financings. At the PSEG level consolidated debt to equity at the end of the second quarter was 59% a reduction of 2% since the beginning of the year.

Our target this year has been to reduce the level below 59% so we are nearly there. Regarding the Moody's June 16th announcement to review PSEG Power and hold them for possible downgrade. We were disappointed by the action. We believe we have strong momentum going both on the business and financial sides. We have issued $1.2 billion of equity and our businesses continue to meet their targets. In the last couple of weeks we have had constructive dialogue with Moody's, working hard to convey our story and getting helpful feedback. Our dialogue has been at both the working and senior levels. Our major objective is to help moody's appreciate our mommentum. The effort could last through the summer. As we discuss in the news release, our second quarter results keep us on track to achieve 2003 earnings from continuing operations within our projected range of 3.70 to 3.90 per share.

When you compile your own estimates for the full year I want to caution you about relying too much on our trailing 12 month EPS which is well over $4. During the last half of '02 you may recall the BGS contracts had fixed annual rates. Power enjoyed higher margins in shorter months by meeting the fixed rates with energy that cost less because of lower overall demands.

Also please keep in mind that although BGS prices are transparent our profitability is dependent on several factors, please include the number of contracts we have, prices with our counter parties since for the most part we do not directly serve the majority of utility customers and of course the operating performance of our generation fleet and our hedging activities. This morning we also issued our initial guidance for '04, $3.75 to $3.95.

However, please keep in mind that we are in the early stage of our new five year forecast, and that many factors implement our outlook. For example, swings in energy prices for the forward curve would affect the outcome of the next BGS auction and power's performance for the year. In general we see '04 looking a lot like '03. We expect the benefit of the recently concluded rate case and the higher BGS prices that kick in on August first had help offset the elimination of the market transition charge. The MTC will produce about $112 million pretax this year before it expires at the end of the transition period next week.

While it is too early but we're planning to provide business by business '04 guidance at this stage you should be thinking that power's contribution in '04 should be slightly down because of the elimination of the MTC just that you would be thinking PSE&G's contribution would be up somewhat because of the new higher base rates. We expect a modest improvement from holdings. Finally, a few words on the dividend. Over the years the dividend policy has been linked to our strategic plans. Our objective has been to maintain a dividend low of $2.16 a year. We were successful doing so even during some difficult periods when we chose to cut or even eliminate the dividend from the last decade. This year share holders are placing higher value on dividends.

It's understandable in this low interest rate environment now in the wake of the change in the tax laws. As a result we are doing some careful thinking about our dividend policy and the viability of an increase. We have been saying that our objective is to reduce our payout ratio to below 50%. Regardless we need to be sure that any increase, even a modest one is sustainable. We have begun to develop our new five year business plan including an assessment of our current 7% growth target. At this stage it is too early to indicate what we might do with the dividend or our projected growth rate. But as we get toward the end of the year and conclude our business planning we will likely have more to say on this subject.

The last thing I want to mention to you is our five hour investors seminar in New Jersey on July 8th. Many of you attended, and hopefully got some good insights, the program was web cast so you can still listen to a Replay and review at least some of the 105 graphics we used by logging onto our website at www.PSEG.com On that note, I'll be glad to take questions.

Thank you. 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 1 followed by the 4 on your telephone. You will hear a 3 tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the 1 followed by the 3. If you are on a speakerphone, please pick up your handset before entering your request. One moment please for the first question. The first question comes from the line of Dan Eggars with CS First Boston. Please go ahead with your question.

Good morning.

Good morning.

Tom, I have a question although it's a little early to be getting too deep on the '04 guidance but last quarter you indicated that the real earning growth would start beyond '03 and I was wondering what has changed or what you are seeing or assuming to give the '04 guidance?

I think, Dan, as you say it is a little early to get into too much specific range. As you know, we do provide generally at the start of the year ranges, business by business.

Certainly too early to do that at this point. I think in the seminar we had last week we laid out -- and my thoughts would be consistent. We thought PSE&G would pick up, electric base rates, the electric utility ROE is about 4.5% on a trailing 12. Clearly we can move up in the 10% range that's a pretty defined pick up. Holdings should have some mild upgrades. And I think from a power perspective as Frank talked about it, we saw growth meaningful growth in that business out a couple, three years really consistent with some modest improvement in capacity prices and some general improvement in the supply demand balance in a couple of markets.

Okay. And I guess the other question is a little disoriented but the KKR earnings you guys showed this quarter, those were all paper, you didn't have any capitalizations, did you?

That's correct. That's correct. It is -- the uptick was on prime media. We own 3.1 million shares I think it is.

Thank you, guys.

But the Delta is on paper, too.

Our next question comes from the line of Steve Fleishman with Merrill Lynch. Please go ahead with your question.

Hi, Tom.

Hi, Steve.

I may have missed this, but did you provide or can you provide the -- how much the new Connecticut plant you bought made in the quarter or for the first half of the year?

I'm not sure -- our Q will have some imput on revenues and things of that nature. I think we said when we bought it we were looking at something after all expenses and after an allocation of interest, so assuming we capitalized at 50/50 just for internal bookkeeping we thought the net income for the year would be in the mid 20s. We think we will do substantially better than that. 20% or more better than that. It was a good - a lot of that uptick was in the first quarter due to high neutral prices.

Okay. I guess -- okay. I mean, is it -- if you look at the 15 cent benefit quarter to quarter from increased margins, is it fair to say that most of that still comes from the New Jersey business?

Most of it does, Steve. I guess on the backup we have here, if you put your glasses on real tight you can see that 2 cents comes out of new England.

Ok, I guess I missed that backup page. I appreciate that.

Steve, that's actually something internally we've got here.

Okay. That's a good reason.

More detail than you need.

Okay. And then I guess one other general thought process. When you thought about providing this 2004 guidance, obviously one key missing piece is the outcome of the February '04 BGS?

Yes.

Can you provide kind of -- did you just assume it would be the same as it was this year? Or any color on -- just for assumption purposes how you dealt with that. Because it's obviously a pretty important variable.

Sure. I would say because we looked at the past results as indicators. And we have incorporated into those past result and auction dynamics let's say the current forward markets. So incorporating roughly the current forward strip and around the clock and prices within PJM.

So obviously one of the variables is where do you as you noted in your meeting gas prices end up at the time the auction occurs.

That's exactly right.

It is still pretty important.

Yes, that's right. Gas prices go up, that pushes the BGS price up and if they go down, they go down and that directly impacts power.

Okay, thank you.

Our next question is from Jeff Theter with Symons and Company. Please proceed with your question.

Good morning. Can you hear me okay?

Yes.

Looking at your statistical summary from last year it looks like your co-units ran at 55% capacity last year with both on peek and off peek power prices being higher this year. Could you give us what your Coe utilization factor has been in the aggregate and what we should look for in the third quarter?

Yeah, I haven't got those at my fingertips. But the coal utilization -- some of those units are base load and they are just going to run around the clock, providing they are available. Keystone and Conoma and our PJM stuff, half of it roughly is Keystone and Conoma. So that would not change a lot by market prices. I haven't got the Hudson Mercer numbers at my fingertips. I would say our new client in Connecticut, ridge port harbor 75 Megs since December of last year did run at very high levels, higher than our expectations for the first month of the year.

Are there environmental or other factors that limit the use of our coal plants or is it primarily just price related? You are running them when they are dispatched?

Primarily price related, though we did have -- with the knock season four months in the northeast -- knocks prices factored into your dispatch thinking. Even if you had knocks and they were in reasonably good shape for knocks, you still make the decision is it better for me to burn my knocks and run my plant or not run my plant and sell my knocks. So it gets into a complicated algorithem.

Thanks for your comment.

Our next question is from Lesley Rich with Bank of America. Please proceed with your question.

Just a clarification on two numbers that you discussed. The MTC in 2003 you said was $125 million pretax?

No, I'm sorry, 112 pretax.

12.

And that's over the 7 months. So six you have seen, and we get it in July. And then it stops.

Okay.

That's a leftover from the transition back from 99.

So that will be done in '04?

Correct.

And then you talked about recovery of $250 million of excess energy costs?

Yes.

And that you would secure advertise $150 million of that. What happens to the other $100 million of that?.

We secure ties after tax. We get it all, we just securatize the aftertax amount.

Okay.

In other words. It is a cost so you are getting that tax benefit. So the net cost is an after tax cost and that is what we securitize.

And you would expect proceeds when?

We expect to do that fourth quarter. We haven't got the final BPU order but we'd be targeting the fourth quarter. And that would be done at PSE&G, and that money would be used, probably as collateral to the capital structure of PSE&G to pay down debt and contribute -- [inaudible].

Okay. Thank you.

Our next question is from Paul Fremont with Jeffries and company. Please proceed with your question.

Thanks. I just want to follow up on the trailing 12 month comment that you made with a rate increase at PSE&G, the negative comparison on third and fourth quarter I presume would come from, primarily from PEG Power and I was just hoping to get a better understanding as to what the driver would be given that you are looking at at least a similar price in terms of the BGS auctions.

Yeah, Paul it goes into the -- as we said, it goes into the mix of the number of contracts, prices with our counter parties, availability that we are projecting on various plants, hedging, etcetera, so there is a number of things. I mean, keep in mind that our practice here is around the time of the BGS, shortly thereafter we hedge our outputs. So clearly just hedging gaps or hedging around the clock energy was a more expensive -- in February of '03 than in February of '02. That by itself is probably the biggest piece.

The fourth quarter for power last year was a very good fourth quarter. Keep in mind the new BGS starting in a week and a half or whatever, the prices are an average price for the year. They are not a cost in price for the year. So during the four months in the peak in the summer, June through September, prices are somewhat higher and the other 8 months they are somewhat lower. So at the end of the day, at the end of the 12 month period you still get same amount of money but it does affect the seasonality of the profitability. Fourth quarter for power this year the numbers will be - the BGS will be about 5% lower than the sticker price just to reflect that seasonality. So that may be a fourth quarter Delta.

Thank you.

The next question is from Paul Patterson with Glen Rock Associates. Please proceed with your question.

Hi, how are you?

Good.

I want to touch base with you on KKR. That seemed to be a big swing factor this quarter. I was wondering what your expectations were for the second half of '03 and '04 with respect to that.

Paul, it's really -- from an ongoing standpoint we have got 85, $90 million bucks invested in KKR. From time to time there are marks. Last year the 12 cents is really 2 cents of improvement, but it is the absence of a 10 cent loss in '02 we had a $26 million writedown the second quarter. That was a writedown in our private portfolio. And then in this quarter we had 2 cent uptick as prime media was up a buck or so. So the 12 cents looks big, but it's really up 2 versus down 10. And going forward, we don't see any meaningful contributions to our business plan.

Okay. So -- okay. That sort of explains it. Okay. Thank you.

Okay.

The next question is from Paul Ridzon with McDonald investments. Please proceed with your question.

Just clarification. I missed a lot of what you said about the policy a 50% payout ratio. Try and keep the low 50% payout ratio?

Just to replay, last year we were saying consistently that we would assess a dividend increase once our earnings got to a point where we could consider a dividend increase and have our payout ratio be at or below 50%. That would say with the kind of earnings that we got this year and our initial guidance for next year that the dividend increase wouldn't be forthcoming for at least a year or two.

I think in the wake of tax law changes it makes dividends worth more to our shareholders. And obviously, some -- I think as I also said, low interest rates make dividends look more attractive, we are assessing we are going through careful thinking about our dividend. We will do it in conjunction with a very rigorous five year planning process that we do. We are in the middle of that five year planning process. It really culminates at the end of the year with a late year board meeting, at which time we will assess the viability and sustainibility of an increase, if it does make sense in conjunction with that we will also discuss the appropriateness of our 7% target growth rate.

Have you -- you have ongoing dialog with Moody's. Have you discussed this dividend increase idea with them?

We have worked through a whole lot of financial issues with moody's, obviously, a number of different variables and sensitivities. At this point, there hasn't been material discussions on dividend increase. So we have got -- we have got continued issuance under our drift expectations. We have this year and probably next year. That's about $80 million of incremental stock that goes out for retail investors who take new stock in lieu of dividends. There is a lot of different moving parts. This is a -- I would think a modest issue relative to some other things that we are talking with them about.

Give more flavor about kind of changing the outlook for Odessa and Guadeloupe. Just extreme weather or other factors?

It is a combination. Improvement in spark spreads, clearly. We have got a JD with BP that's helping a lot. They are helping to get gas to the plant and they are doing a good job in getting gas to the plant and distributing energy in Texas. We have got some contracts for a reasonable amount through '03. So it's realbly blocking and tackling the way through where we started the year with a concerning market and now it seems to be turning.

Do you ever consider increasing your ownership stake in those plants?

Not in a meaningful way. We are aware of that our partners have different thoughts, so wouldn't rule it out. But it is not a primary driver of our thinking right now.

Thank you very much.

The next question is from Zach Schreiber with Ukane Capital. Please proceed with your question.

Hey, Tom.

Hey, Zach.

Congratulations on a good quarter.

Thanks.

Just on the coal plant capacity factor, I was just wondering if you could talk about if this whole knocks season -- I thought you guys were totally in compliance on the knocks. Which I still think you have what maybe the changes the economic system, when you run them and so forth, what kind of capacity factors you are thinking about for the full year?

Zach, on the capacity factor I think they are in the mid 50s but we will have to circle back on you. Just on the knocks we are generally well balanced for Knox. That still doesn't say that if knocks are worth a lot you might not run your coal plant and sell the knocks. We are just trying to make money here.

So if it is better to use the knocks, burn the plant -- run the plant and make money on power, that's fine. If it is better to not run the plant and sell Knox, that's just another variable. We have got a lot of good smart people up on the 19th floor. We generally don't get into forecasts on dispatch-type things. I will say, though, that generally that just in response to the earlier question of power prices are up, does that mean you run your coal plants a lot harder.

Not materially. Keystone and Conoma, you run those all day long provided they are available. Those are the cheapest best plants on the eastern seaboard and Hudson and Mercer may be modestly up, but I am not aware of it being up materially. The good thing we have had -- that would be better than our forecast I think would be the New England stuff, the 375 Megs that did run quite a bit, especially in the first quarter.

And, Tom, you spoke about, in terms of your kind of a strategic planning and looking at the dividend and looking at the appropriateness of the 7% growth rate -- you know, we just had this very detailed analyst meeting out in New Jersey. Is there anything that makes you think right now that the 7% growth rate over time is inappropriate?

No. I think our thoughts would be very much in line with what we said at the as you said very detail session.

Right.

The annual planning process here is quite rigorous and has been in place for a number of years. And we spend quite a bit of time on it. In fact,, a bunch of us are going on site for a couple of days to get some early looks at some of the stuff later this week. I think it would, you know, clearly -- we are in a plateau period here. '02 was $3.76. We are in that same range this year.

And we are saying maybe up a nickel or so moving our range up next year. But we're only in the 5 cents period from '02 to '04. I think in the time period, at the off site we did say we expected some improvements in power prices over the longer term. We would still be there. But we will take a step back and see what is a reasonable growth rate. Obviously the dividend may impact that somewhat to the extent that we pay out more cash. That does constrain your growth rate somewhat. I think we will think through it as a package and give you a more thoughtful update later in the year or early next year.

Great. Congratulations on a good quarter, Tom.

Thanks.

The next question is from Carrie Stevens with Morgan Stanley. Please proceed with your question.

Hi, Tom. Good morning.

Hi.

I guess I just wanted to follow up, one question on the dividend, and then I had a question about your gas plans and assumptions there. Just looking at the company, I'm just trying to get an understanding kind of long -- trying to get an understanding kinds of longer term about where you see the balance sheet going. And I look at the yield on the stock and see that you have got an above average dividend yield. So looking at the benefits of increasing the dividend versus kind of, you know, taking down the debt ratio, just kind of like the current thinking on how those two kind of interplay.

Yeah, they both clearly -- they both clearly impact against each other. Part of the -- that's why we are careful to say that we are going to carefully think through the dividend. But it needs to be done conjunction with the whole five-year financial plan to be honest. It's got earnings, cash flow, Cap Ex, cap structures. Really all the things interrelate so you can't pick out one and make a judgment on them.

We do have good cash flow. I think we have said that the slide we showed at the -- a couple of weeks ago is consistent with what we have been saying. We think we will have cash available to pay down debt from 10 -- from 0 to 200 in '03 and '04 and quite meaningfully above that, 4 to $500 million a year in 05, 06, and 07. So that would give us natural deleveraging.

Do you know kinds of what you may have as an initial like target for debt ratio over that time?

Well, I would say it is what we have for credit stat sticks. I mean, number one, we are very mindful of our credit and the value of maintaining reasonable strong credit ratings around the organization. Debt to cap wouldn't, of course, be a reasonable target in and of itself because I think the agencies look -- yeah, they look at that, but I think they look to be honest more at taxable coverages and those kinds of things.

So we would want our numbers to be consistent with their ratings and show some improvement above their ratings over a reasonable period of time. I think the -- we look at consolidated numbers, but it is also important to look at the credit ratios of each of the subs because after all 95% of the financing we do is at the sub level. So PSE&G has got strong ratio that's a little higher levered than some other utilities but that's a function of regulatory capital structure. We got, I mean 41 and a half percent equity in every direct case and that what we expect to run the business.

Power is about 50/50 with its add back of the billion dollar contract with the basis adjustment. I will spare you the explanation and then holding is under 50 and coming down, excluding the nonrecourse stuff. Those seem like the reasonable numbers. And we can bring the debt to cap that's around 59% on a consolidated basis, bring it down one or two% a year.

And then just towards what you are seeing for your gas fired plants in the Midwest, capacity factors and spark spreads and maybe in your guidance for next year, what level of contribution are you assuming from those plants?

On the timing on those, Waterford is just at the end of the stages of testing. We haven't fully synched it where from an accounting perspective we are starting to book that. But that's going to happen shortly. In Lawrenceberg, we are estimating around the end of the year. So this year won't meaningful contributors. Next year we are cautious about the Midwest markets and we would expect those to have earnings contributions that could be a modest loss of a few cents.

As I said we are working through those but we are not expecting positive contribution for those next year. And the case we are looking at would show a few cents on the downside. Capacity factors, it is a little early because Waterford is still in the testing stage, and Lawrenceberg isn't a hit really until '04 period of time. But they are fairly modest right now probably in the 20 percentage kind of range. I would have to check but that's my gut.

Great. Thank you.

The next question is from Rosalyn Armstrong with SAC Capital. Please proceed with your question.

Actually it's Dill Emerge. How are you.

Hey, Adbul.

A couple of things, when you were talking about the second half comparison and you indicated that the MTC collections run out at the end of the July, so it would appear to me that in the last four months of 2003 there will be no MTC collection versus a period where there was MTC collection last year. Can you tell us how much -- you know, what that variance would be, say, for the last four months of the year, if I understand things properly?

Yeah, just checking a cheat sheet I have got here. Last year the last six months of last year I believe MTC from an earnings prospective was about 11 cents. I think it was 4 and 7 from the third and fourth quarter respectively.

Okay. So basically then, that will compare to an effective zero this year?

Well, no, we have got July.

Okay.

So we have got 112 total spread over 7 months. Take 1/7th of 112 after tax, divided by 225 and that's what we get in July.

Okay.

Maybe it is a penny or two.

Ok, and secondly in terms of looking at the dividend. In past you have talked a lot about the very strong cash flow you see particularly in the out years. Even with a fairly aggressive dividend growth -- I am going to make up a number, 8 cents a year over the next five years. We are talking about a dollar commitment, that would be over $100 million, $120 million a year by the fifth year in terms of an increased dividend level. Does that really change given the amount of free cash flow you would see by that period of time your potential capital investments and things of that nature with respect to you know, your growth outlook?

No, I mean -- Abdul, you bring up a good point. We need to -- both you and Carrie bring up got points on this, that we need to assess our cash flow over the five-year period.

We have some modest level of cash available to pay on debt in the first couple of years. But it gets very strong thereafter. If we were to do something on the dividend, it is a fairly modest number, given, you know, $2b, 2.7 billion of cash from offset we got on the starting side. So it is quite a modest number. That being said, I really -- I don't want to get ahead of ourselves here. We need to look at it in conjunction with a lot of things and look at it just not what do we do for '04 but what it does on a continuing basis.

And one last thing with regards to the potential reassessment of the outlook over the next five years, at the conferencing you indicated that when you had upped performing assets you would expect to probably expect it to pick up over that time frame. As well as, you know, a general kind of upward trending in power prices and things of that nature. I think you have been somewhat, you know, positively oriented with gas prices -- as well as - you know investments that you would be looking to make such as the Connecticut assetts, those kinds of things, are you indicating that maybe perhaps the lift from underperforming assets, you know going over that period may -- you know, may not be as forthcoming as you thought or that potentially asset acquisitions like Connecticut, you know, might not be as readily available as you may have previously thought? I'm a just trying to get a little color.

I don't think -- my comments were not meant to be changing anything that we said or the very material amount of discussion that we had and you heard directly from people who run the business. So my comments were not meant to be contrary to any of those things. I think we just really wanted to say that we will be assessing dividends at the end of the year and redoing our financial plan. Clearly we have got to as we put out guidance for '04, it is not 7% above '03 so we have got to be honest with you all. So that's why we bring it up, in the context of doing something with the dividend that may have some modest impact on growth rates, look at '04, saying we are not getting the 7% target. We need to take a serious look at it and say what is a reasonable target. On the three points you brought out we still think all of those are very reasonable. I think Texas is actually a good example. At the start of the year we were actually pretty concerned about Texas. We thought over time there would be a return to reasonable spark spreads.

Our plants, which are very low cost, great heat rates, which start to make money, and frankly that looks like it may well turn around quicker than we might have thought six months ago. Those are the kinds of comments we said Waterford and Lawrenceberg were going to be diluted a few cents in '04. That's what we were saying about Texas in January regarding '03 if I am not confusing people too much. So there is -- we would continue to believe there will be improvement in the markets over time. Especially capacity prices, capacity prices and PJM. If you take your home field, they are really still very modest. And we don't collect capacity payments directly.

Obviously, though, those are a buildup in the BGS process. So we think it is quite reasonable if you look at the modest capacity prices we have got today, and some reasonable capacity prices in the not too distant history we think it's possible to see capacity price improvement in PJM, ergo BGS over the next two years. New investments, we like what we did the more we run Connecticut, the more we like it. Will there be a lot more like that? We will certainly turn over a lot of rocks and look. We don't see a rush to the door of very attractive assets being sold cheap, but we are still looking carefully at things and will opportunistically look at thing that can be immediate contributors.

Thank you very much.

Ladies and gentlemen, if there are any additional questions, please press the 1 followed by the 4 at this time.

Okay, if there are no further questions, thanks all. Thanks again for folks who came out to our seminar. We had good attendance at the seminar. Good at dinner.

Had some fun playing golf the day before. That stuff is still available on the web. And there are a lot of charts and graphs that I think are good details of some of the things we said. The key points I would leave people with consistent with what we have said in the past, we feel good about where we are, a record of delivering on earnings, a balanced business, low cost coal and nuclear goodness environmental financial stability with good cash flow and high liquidity and solid utility with restructuring and rate case behind us. So thanks, all.

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