公共服務電力與天然氣 (PEG) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group's fourth quarter 2003 earnings conference call and web cast. At this time, all participants are in a listen only mode. Later, we'll 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 the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, October 22nd, 2003 and will be available for telephone replay for 48 hours beginning at 1:00 p.m. Eastern today until 1:00 p.m. Eastern on October 24th, 2003. It will also be available on 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'll be turning the call over to Tom O'Flynn, PSEG's chief financial officer, for review of our third quarter 2003 results and a discussion of key issues. But first, I need to make a few quick points. We issued our earnings release this morning. In case you have not seen it, a copy is posted on our web site at www.pseg.com.

For those of you listening on-line, there is a table that shows earnings contributions by our three major businesses, Public Service Electric and Gas Company, PSE&G our regulated utility, PSEG Power, our domestic wholesale energy supplier and PSEG Energy Holdings, which is the parent of PSEG Global and PSEG Resources.

In an effort to provide timely and insightful information to investors and analysts, we have also included with the news release a reconciliation of 2003 and 2002 results for both the third quarter and year to date as well as other supporting information for each operating company. Pro forma and GAAP results for 2002 are also reconciled. At the end of this month, we expect to file our 10-Q with the securities and exchange commission which will contain additional information.

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 that they will be achieved. 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 filed with the S.E.C. Finally, we would like to give all of you a chance to participate in the Q&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'll turn the call over to Tom O'Flynn.

Thanks, Brian.

We announce solid third quarter earnings from ongoing operations of 93 cents per share compared to $1 per share last year. As expected, PSE&G, a regulated utility, benefited from the new electric rates that went into effect on August 1st. And power headstrong margins. Offsetting these favorable items were the impact of additional shares issued in late 2002 and costs associated with a couple of storms in late September of this year. I'll talk in more detail shortly about the ins and outs for each operating company. One major event of the third quarter that did not have any material impact on PSEG's earnings was the August 14th blackout.

About 750,000 or 40% of PSE&G's electric customers, lost power at the time of the blackout. Over 40% of these customers had power restored within five hours. And 96% were restored by 7:30 the following morning. The impact on power was also minimal. Fossil units representing about 15% of our generation fleet automatically shut down when the event occurred. All were back in service by the following evening. Because the cascading blackouts stopped in the northern half of New Jersey, our nuclear units in south Jersey were not impacted.

Aside from some minor labor costs to restart the fossil units and ensure stability in the distribution system, there was no financial impact to PSEG. Now for some color on PSEG power's results for the quarter. The impact of hurricane Isabelle was not felt until two days after the eye had passed southern New Jersey. There was no direct damage to our nuclear facilities from the storm, however, heavy salt spray from the lower Delaware Bay created problems on electrical gear in the switchyards at both Salem and Hope Creek.

This was a highly unusual weather event involving high winds without the rinsing effects of rain. All three units were safely shut down but it took over a week to clean the salt deposit from the equipment and bring the units back up to full power. In the interim, Power had to purchase replacement energy. There were also some electrical storms in Pennsylvania that shut down both peach bottom units before the hurricane. The cost differential between running the nuclear plants and purchasing energy in the open market for both of these events amounted to almost $28 million or about 7 cents per share.

On the plus side, gross margins from the BGS New Jersey, our plant in Connecticut and our overall portfolio management added about 8 cents per share over 2002 quarterly results. However, this improvement was offset by higher O & M and other costs, of 11 cents per share. About 1/3 of the increased O & M is attributable to the addition of the Connecticut plants with the balance coming from continuing higher pension costs and the absence of some one-time items recorded in 2002. MTC revenues of $10 million in the third quarter were comparable to last year despite the July 31st expiration date. Looking ahead, MTC revenues for the last three months of '02 were only about $5 million so the impact in the fourth quarter of this year of the expired MTC will only be a penny or two lower than '02. As a result of the unforeseen storm-related costs primarily at Power and the issuance of additional equity in early October, we modified our 2003 guidance downward by 10 to 15 cents per share.

We now expect '03 earnings in the range of 3.60 to 3.75 per share. Power’s 2003 guidance has been lowered by $20 million to a range of $455 to $500 million. This is the only change from the original '03 company specific guidance provided earlier this year. We're continuing to lengthen the term of our book with forward commitments at power. The process for the next BGS auction is currently under review by the BPU. We are strong advocates of the proposed structure that splits the upcoming auction into one and three-year pieces. Creating an ongoing process of bidding out 1/3 of the load every year.

We believe this helps create price stability for customers and revenue predictability for Power. The ground work for the structure was laid out with last year's BGS auction where we termed up a meaningful amount of contracts through May 2006. We have also been successful in hedging other PGM capacity including some fixed price contracts we have already secured. Several other states including Connecticut and Maryland have recently announced RFPs for energy supplies in their states.

Power intends to participate in these and other opportunities to secure long-term contracts outside of BGS. For contractual reasons, we will not be providing specifics on these arrangements. However, we believe it is important for you to recognize that BGS is not the only opportunity for Power. When looking at the press release, you'll notice year to date Power has earned $396 million. Relative to our annual guidance of $455 to $500 this indicates that in the fourth quarter, it will be less than last year’s results of $144 million. There are a couple of reasons for the expected drop-off in the fourth quarter. First, pricing under the initial BGS auction in 2002 was a flat year-round rate.

This year, the BGS pricing has a shape. Wherein the rates for the four summer months are 14% higher and the remaining eight months are 6% lower than the contract average. The fourth quarter of 2003 will be the first full quarter under this new pricing method. We expect some reductions in margin as a result. We indicated during our year-end earnings call in January that margins at Power in the fourth quarter of 2002 were particularly strong as we were able to source lower cost energy during the shoulder season to serve the fixed price BGS load. As you know, both fuel and energy prices in 2003 are substantially higher than 2002.

Around the clock energy is averaging $12 a megawatt higher and gas prices hit historic highs earlier this year. So we expect some erosion of BGS margin this year compared to 2002. These factors along with the timing of nuclear outages and some variations in volumes from year to year both gas and electric, are likely to result in earnings of Power for the fourth quarter that are measurably lower than last year's fourth quarter. Finally, just a quick word on Power’s construction program. As a reminder, our Waterford, Ohio, facility entered operation on August 8th. Completion of the Lawrenceburg, Indiana plant has been delayed by a couple of months.

We now expect commercial operations sometime in early 2004.

Turning now to our utility, PSE&G. The biggest impact on earnings for the third quarter was the new electric base rates that went into effect on August 1st. This increase added 15cents over the third quarter of 2002. When the deepest customer discounts of the energy master plan were in place. The amount was even a little higher than originally expected because the new tariffs, for the commercial and industrial customers included a seasonal shape to them creating higher revenues in August and September.

There was an increase of 9 cents per share in O & M went at the utility this quarter. Most of which was expected. In addition to higher pension costs this year, you may remember late last year the utility engaged in an aggressive but temporary cost containment program to offset the financial impact of the mild winter in 2002. Most of the cost savings took place in the third and fourth quarter. Absent a penny or two impact from storm-related activities, O & M for the third quarter of this year is in line with what was included in our electric rate case and our expectations going forward. These higher O & M costs as well as normal weather will dampen the favorable impact of the new electric base rates during the fourth quarter of this year.

Energy Holdings had a solid quarter reporting earnings of 19 cents per share, two cents better than 2002. This was the result of stronger performance at Global primarily driven by the GWF expansion in California and improved contributions by our Texas facilities. Offsetting Global’s results were lower earnings at Resources, stemming primarily from the termination of the TXU lease last December. Also during the quarter, Holdings completed the sale of its remaining interests in energy technologies. During the third quarter, Global’s Odessa plant in Texas entered into a one-year capacity contract with a one-year renewal option for 250 megawatts. Combined with the higher capacity factors, we've experienced, since signing a marketing agreement with BP Amoco in March, we're now expecting our Texas plants to contribute a penny or two to earnings this year and next. We had originally anticipated a loss.

I know that many of you continue to follow the EME Midwest generation situation closely with regard to our resources lease on the Collins plant. While we recognize that Midwest has an important refinancing in the fourth quarter, we're pleased that earlier this month, (indiscernible) retained the contract with Midwest for 1,084 of the 2700 megawatts of Collins through 2004. Rental payments for Collins and all our other leases are current. Looking at financing activities, on October 7th, we issued 356 million of common equity after a one-day marketing period. Although it was a difficult decision to issue equity, we were pleased with the response the offering received and the incremental balance sheet strength and financial flexibility we have gained.

The offering was sized to represent about one year of retained earnings and brings leverage as defined by apparent lenders down to around 57% of total capitalization. A 5% reduction from the beginning of the year. As of September 30th, we had about 950 million of consolidated available liquidity. Giving effect to the common offering that closed a few days later, we currently have about 1.3 billion in liquidity. At PSE&G, we're still optimistic that the planned BGS securitization will take place over the next four to five months. Our free cash flow projection of neutral to $200 million favorable for '03 which we've outlined previously, assumes the BGS securitization this year. But if it does slip to next year, then '04 cash flow will be improved by about $130 to $150 million. We're also contemplating a modest-sized intermediate-term financing at Power as we continue the build out of the construction program. While discussing balance sheet matters, I would like to bring your attention to one item on the capitalization schedule attached to the news release.

It deals with the presentation of trust preferred securities. These securities have historically been presented separately as preferred securities on our balance sheet. However, as a result of our adoption of a new accounting standard, the 1.3 billion related to these securities are now reflected as long-term debt. This change which has been expected for some time, does not impact any of our financial covenants nor do we believe it impacts rating agency methodologies. Regarding Holdings financing activities, at the end of September, all cross defaults were successfully removed between Holdings and PSEG. And as a result, Moody's confirmed the P 2 commercial paper rating at PSEG.

Holdings is in the process of final documentation on a three-year, $200 million bank deal to replace the interim facility that was put in place as part of the elimination of the cross defaults. The facility will be used primarily for working capital and letters of credit. I'm pleased to add that we've received commitments and this transaction as modestly oversubscribed and we expect to close within a couple of weeks. During September, GWF Energy successfully issued $226 million in bonds. Global received about $137 million of the proceeds. As of September 30th, Holdings had $166 million of cash on hand.

An additional $42 million was held as collateral that will be returned to Holdings upon closing of the new bank facility. I want to remind you that Holdings has only one maturity before 2007. A $267 million maturity in February of 2004. With more than $200 million in cash, we're very comfortable meeting this maturity. One final comment before we take your questions. We've mentioned this previously.

We're in the midst of our five-year business planning process. One of the points of discussion is the dividend. Given the change in tax law, the continuing lower interest rate environment, we're considering the possibility of a modest increase which would be effective in the first quarter of 2004. We should Have more to say about a potential dividend increase during our year end call in January. This concludes my comments and I'll now open it up to questions.

Thank you, ladies and gentlemen. We'll 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'll hear a three tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your request, you may do by pressing the 1 followed by the 3. If you are using a speakerphone, please pick up your handset before entering your request. One moment please for the first question. The first question will come from the line of line of Daniel Eggers from Credit Suisse First Boston. Please go ahead.

Good morning.

Good morning, Dan.

Global had a really good quarter this quarter. If wonder if you could actually share with us what's going on in the international operations and how returns are shaping up and any highlights there particularly in light of some recent favorable contract negotiations.

Yeah, I think Dan -- I outlined a couple of things on the financing side. Obviously, the California financing we've been working on was very attractive for us. We got that done at, Actually quite attractive rates in the low 6s. Texas is stabilizing. I mentioned that we were initially looking at a loss for this year. We'll make a penny or two. We were happy to get a 250 Meg contract for the year with a one-year renewal. Other places, I think down in Latin America, the businesses are running well. You may remember earlier this year, I think it was the second quarter.

We had a Brazil rate case. We asked for something, a shade over 40%. We got something in the mid to high 30s. We were pleased with that. that's a de minimus level of earnings. [indiscernible] were doing fine to be honest, if you look at one thing that's helping us modestly are the currencies in both -- especially Chile. That currency is improved probably 15%, 20% this year. Maybe 15%. In the low to mid 7s.

Through the mid 6s. My math isn't as quick as it used to be. That helps us both on an EPS standpoint as well as it helps our OCI. We've got about $300 million effectively negative equity. OCI. Split between Chile and Brazil. And with the improvement in both the Brazilian and Chilean currencies, OCI is less so equity is more.

How are the Polish operations going as those ramp up?

Those are fine.

Ok. One more question. On the holdings side, going down to the resources side. What -– there’s a Bit of slippage on the earnings side. Was there any loss in the portfolio this quarter? Or is this all slippage from the TXU lease?

It is all really TXU. The resources did better this year than comparable last year because last year, there was a loss in the effort, I believe it was the private. So the absence of the loss is helpful on a year to date basis. But everything is current. Those leases are highly predictable. The difference this year versus last is the absence of the TXU money. But we've got paid a big chunk of cash in December. So, we came out whole on that. Going back to Poland. We are ahead of schedule on our plant, it's under construction.

Great. Thank you, guys.

I don't know if I'm saying that right.

The next question is from Asher Kahn with Foresight Investment Solutions.

I wonder if you could emphasize on the dividend policy. I know you mentioned there will be a modest increase next year. Can we expect increases to come every year going forward? Or is this just one increase and then, you know, flat versus what you've been doing in the past?

Yeah, just to be clear, we've been saying this now for perhaps three months. We said we will seriously look at a dividend increase. We've had the same dividend of $2.16 a share for 10 years or more, but we said we'll seriously look. In looking at a dividend increase and we would do that with the board in conjunction with our five-year plan in mid December, we will look at cash flow earnings and payout ratio. We’re Currently in the high 50s kind of range. And we'll look at a range of financial variables as you might expect as you look at your capital structure over the next five years. We do think it is reasonable for us to strongly consider but no decision has been made at this time. Whatever dividend increase we look at, we would look at it as an increase that is affordable today and that that increase is sustainable as an annual increase.

Ok.

If that answers your question. So, we would not look for a major jump that was a one-time and then a -- back to a hiatus, if you will. As we talked to with the board in December, we would look at a modest level increase and consider whether we can do it now i.e. '04 and whether that increase would be sustainable on an annual basis.

Thank you.

Next question will come from the line of Kit Konolidge with Morgan Stanley.

I guess that's me. Hi Tom.

Your alias.

Sometimes I need an alias. Couple of somewhat related questions. First of all, we were looking at the utility on a trailing 12basis, we're coming up with something in the neighborhood of $240 million or so and your guidance for the full year is $210 to $230. Is that correct that you're running ahead on a trailing 12 basis and if so, you know, what are we looking at in the fourth quarter to bring it down?

I would say that's right. Remember that the trailing 12, we did have quite a strong weather in the first quarter. Year to date, I think we're up 16 cents year to year on weather, on a nine-months basis. But it is about half. We're about 8 cents above normal this year on weather, if you will. So, that's $25 million or something like that. On a pretax basis, let's say.

Also, fourth quarter, last year, the weather was also modestly good, too. So, it’s largely -- largely weather, I would say. We're very comfortable in terms of our 210 to 230 range this year. We're very comfortable with that. I would rather not get into ranges within a range. But we're very comfortable with that. And obviously we expect to do better in '04 as we get 12 months not just five months of reasonable electric rates.

Ok. And looking ahead to the BGS and the potential pricing there, what are you seeing in gas and power pricing compared to what it looked like last -- this past February when you know the last auction was held?

Yeah, we look at the 12 month forward strip and we keep track of it on a rolling basis. As we sit here today. If I look at -- focus on Power, PJM west on peak is about where it was in February. I'm now looking at it in about the mid 40s. That's PJM west. Remember a lot of the BGS is east and east has a premium over west. But the east is not a -- a regularly quoted market. So, at least if you look at your Bloomberg screens, you can look at forwards off of PJM west. So I'm looking at that, now in the mid 40s. Once again, that's on peak, so that’sAbout half the time. As I go back to February of last year, it was around that range, maybe it was that range in January. May have climbed up a couple of bucks higher in late January as gas prices started to go up. Gas, something on the forward strip is 5.25 or something like that. Certainly well over $5. That's about where it was in late Jan and February when I think the BJS auction last year was Feb 3. So it looks a lot alike. I think the real thing is winter weather. If Winter weather gets cold, then that tends to push up gas prices which tends to push up power prices. That's really what happened last year as you look from December to the early February gas did come up quite a bit because we were all shoveling snow.

Ok. Thank you.

The next question is from Andrew Levi with Bear Rheiner (ph.) Specialists, go ahead.

Just a Couple of quick questions. Can you go over the trust preferred again and just give me the math? I missed that. And what that does as far as total debt to total cap. And it seems that you may be more comfortable toward the high end of your range for this year?

Let me do preferred. We've got $1.3 billion. It is -- there's two accounting rules without getting into too much technicality. There's FIN 46 which doesn't become effective until the fourth quarter. Also FAS 150. It is effective now.

And for both of those, preferred is now classified as debt. You can see we've got a special line. Debt supporting trust preferred securities. We've actually adopted this as FIN 46 which is within 3% of the FAS 150 impact would be. But we expect FIN 46 to be effective at the end of the year and so we don't need to make any more changes. This isn't a big event for us. This has been talked about by [indiscernible], by the financial community for certainly a lot over last year. I think it has been around for a couple years. So, all of our covenants including all of the bank LCs and everything we've got, the renewals, were done in anticipation of this happening. Also, as you well know, the rating agencies have all their own methodology for relative equity credit. Of preferred -- from a coverage and a balance sheet perspective.

obviously you need to hear directly from them but I believe they're saying this will not impact the methodology. They already do some haircuts on preferred. So, it does increase our debt ratio and to be honest, I haven't done the math. I think if you look at the debt balance as it is here, on our sheet, if you load in securitization debt that's 2.3, you load in non-recourse debt that's 2.1 and you load this in, debts over 70%. That's not a number. Both these preferred and particularly the securitization debt is not deemed to be on credit and the non-recourse debt especially at Global. I think is not considered on credit.

On your balance sheet that you published, what amount additional has to be added?

$1.3 billion.

That's not reflective of third quarter's numbers; I need to understand that.

It is on the balance sheet for the third quarter. Transferred on the balance sheet for the third quarter.

You transferred it in the third quarter?

Yeah, we just changed the geography. Third quarter for the statements that we -- you may not have had a chance to get near a computer but the financials this morning in attachment four. We show the preferred has gone to $80 million.

Do you feel more comfortable now toward the higher end of your range?

Yeah; I’d rather stay -- We changed our range right before we announced the common deal. I think, Just as Kit asked me range within a range, I would rather stay clear of that. We continue to be comfortable with our ranges. That's where I would like to leave it.

The next question is from Jeffrey Gildersley with Millenium Partners. Please proceed with your question.

Good morning.

Good morning.

You talked about the currency impact. Could you quantify that? For the quarter?

Yeah, I think it's a few million for the quarter. Couple million. Just on a one-quarter basis.

Ok. And you know, you talked previously --

For the year, Jeff, it is more encouraging to us because obviously we look at fourth quarter and we look at on ongoing basis.

Sure. Absolutely. Then, looking at -- you talked about the fourth quarter this year and the various variables that would bring it down versus the fourth quarter last year. It seems like your implied guidance for the fourth quarter, if I take your midpoint for the year would be 82 cents. I think you earned about $1.16 last year. In the fourth quarter. It seems like there are some positive things happening. Would you be leaning at this point to the upper end of the '03 range or is it too early to tell?

Yeah, it is too early to tell. I think we're – that is what Andy asked or what Kit asked about the utility is where are we within the range. I think 15 cents -- we did in conjunction with our equity deal, we did slim the range from 20 cents to 15 for this year. So, but, I would rather just leave it at that.

Ok. And finally, I forget. I know we've been through this before. But on the BGS, you know, given sensitivities to obviously gas and power prices, is there a way to -- that you can financially take some spin off that as far as using the trading operation to structure some range going into that?

We've been working -- Jeff, in my prepared remarks, I talked a little bit about us -- I need to be careful for confidentiality but we are looking at more non-BGS marketing sales, et cetera. I mentioned we got some contracts in place. Some sales to third parties. And we do -- the PGM market and the gas market are reasonable so that we can narrow the net outcomes for ourselves, if you will. Do some hedging of the foreign markets to narrow the range of forward impacts and the impact that BGS has on us.

The Next question is from Peggy Jones from [indiscernible].

Could you talk about your plans for Energy Holdings going forward? How you see it fitting into the company and under what circumstances you would see yourselves monetizing things there and paying down debt.

Peggy, Holdings continues to be a meaningful part of our business. The elimination of the cross defaults was really about optimizing the financial structure, if you will. And that was really just to go back to a year ago when it was a tough time for all of us in the markets.

We thought those cross defaults were doing us more harm than good. We thought it was simpler to eliminate those and Holdings is certainly a strong cash and earnings procedure. So, it doesn't need the support that those cross defaults had. The Holdings continues to be a strong cash and earnings producer. Resources, if you think about that first of all, those are very long-lived transactions. 15 to 25 years. They're very helpful in terms of optimizing our overall cash and tax position.

I would expect although we do not expect to put -- to make new investments at Resources, I would expect to run out the majority of the leases to be honest. At Global, those businesses are doing just fine. We will look to selectively monetize certain assets. I think in our Q, we've talked about something in Italy we've looked at. There are other opportunities that we look at. Effectively, what we're looking at is -- is can we sell the asset business to somebody that imputes more value to it than we believe it is worth to us. We'll do that on an opportunistic basis. We certainly don't need to rush into things or sell things on sub-optimal price or terms. But you should expect to look -- to have us look for those opportunities and to be honest, I think we'll probably disclose those when we have a firm deal in hand as opposed to thoughts about things that may happen in the future.

Can you talk about what commitments you've made to the rating agencies about debt reduction at Energy Holdings?

I think what we've said to the agencies as well as to the street is that to the extent we monetize things, if that's what you're asking about, we'll use the proceeds to pay down debt and also pay up the dividend to the parent, the coverage ratios and financial picture of the business will be similar.

Thank you.

Next question is from Paul Fremont with Jeffries & Co. Please proceed with your question.

Thanks. It strikes me that the only way that you can get to your annual guidance would be sort of at the -- if PEG Power were to be at the very low end of the guidance range you're giving which is 455 to 500. Otherwise, is there any other factor we should be aware of in the fourth quarter that would be sort of a drag on or a potential drag on the fourth quarter results? And then the second question that I have is it looks like the improvement in BGSS in trading represents roughly sort of a quarter of your annual guidance in terms of what that should be contributing. So, can you give us a sense as to what BGS and trading has contributed so far this year. And whether it's just lumpy in terms of the way it hits.

Paul, your second part, the delta comparison, I was a little confused by that.

I think -- the improvement versus something. I was a little confused. I'm sorry.

In your meeting in New Jersey, I think you were talking about $1 off million or so of gross margin which works out to about 40 cents of annual contribution. It looks like there was just a -- according to your press release today, it looks like an 8-cent improvement for the third quarter.

Ok. One thing without going into ranges within ranges, I think what we're trying to do is say we've had obviously a strong first three months. We're very much on our way to where we expect to be at the end of the year. Alerting people that both at the utility as well as Power, there were seasonality benefits we've had that we aren't going to have in the fourth quarter and that at the utility, we had some -- we obviously had a rate increase. We had some meaningful seasonality price tail wind, if you will in the third quarter. So, in the fourth quarter, we lose that price advantage as well as we have lower volumes.

The fourth quarter is traditionally the lowest for PSE&G from an electric side and gas is not as strong in the fourth as it is in the first. And I think I went through at Power some of the differentials. Part of it is that yes, the BGS was good in February but it was good because prices are higher. As we hedged ourself and locked things up, margins were impacted by that as well as [indiscernible] issues, outages in the fourth quarter -- I think we have three major outages. Two nuke and a coal. Those are all contributing to -- we want to give you some early warning where we'll be. But that all gets us to still within well within guidance.

But that makes the high end of the PEG Power guidance very unlikely, right?

I'll have to leave the math to you, Paul.

Ok. And on BGSS and trading, can you give us a sense of what the contribution is year to date?

The best (indiscernible) trading -- Steve, at the Short Hills event in July, he did mention that trading as a whole is around 150 margin. He mentioned that was including BGSS and some other things. I think the one thing I would say is part of the CCRO, the community chief risk officer tables, we are now putting in trading numbers into our -- into our Q. You saw them in the second quarter Q and they'll appear once again in the third quarter Q. Trading, I believe is going to be in the high 50s year to date on margin. That's -- that excludes BGSS which is a meaningful part of what Steve might include in that 150.

It also excludes a couple other things that are really used, maybe characterized as trading some but [indiscernible]. At least that number is a number that you can look at and as we said before, trading is used as a business that's going to focus on the overall power risk management and profitability. Not really trading for trading sake but we do make some incremental money there. It is 657 divided about 4 or 5%. It is a relatively modest number but you can now -- that's not segment reporting the way we used to look at it before because as we told you, from a business segment standpoint, we don't have the trading segment to put people on the trading floor optimize power portfolio as a whole. From an accounting perspective, from a mark-to-market perspective, you can see where the number is.

BGSS based on your guidance in July was going to be in the range of 60, I think you said?

Yeah. In that range. Maybe a little better. Yeah. It was quite strong in the fourth quarter last year when the December deliverabilities were up with weather. But I think Steve gave a range of 60 to 75 or something like that, which is reasonable.

The 50s year to date is that through the first half Q or is that through the first nine months?

The Q you'll see in a week.

Thank you.

The next question is from David Schanzer with Janney Montgomery Scott.

Good morning. Trying to nail down a little bit more about the fourth quarter. Were there any -- do you expect any extraordinary either storm damage costs or even pension costs to carry into the fourth quarter?

Yeah. Dave, pension would keep going. Pensions about 135 enterprise wide for the year. It is basically split over -- it is spread out ratably.

Ok. There's nothing beyond that.

No, nothing beyond that. Storm, no. Unless you know something we don't know.

I know nothing.

About hurricanes.

Speaking of weather, could you give us an idea of what the performance was versus normal? Just for the quarter? I was a little confused when you were doing the full year there.

Sorry. For the quarter, it was net one penny better than normal. Now, it is virtually all from -- it was all from electric.

Ok. And then last thing, although we don't have the Q yet, can you give us a rough idea on a percentage basis, O & M -- I know it costs about 20 cents more systemwide. On a percentage basis, what was that increase like for the quarter?

Quarter to quarter?

Yeah. Year over year, quarter to quarter.

Bear with me here.

Sure.

Yeah, we may have to get back to you.

That's fine.

It is probably more in the 10% range.

Ok, great. Thanks.

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

All right. I wanted to ask you a few questions. With respect to the 19 cents in increased O & M at Power. How much of that is coming from pension?

Pension as a whole, let me answer it. Pension was about 75, 80 in '02. It’s about 135 in '03. The split, about 60%, a little more than that is utility-related. And Power gets about 20%, 25%.

Ok. So, then going into 2004, what are your expectations or your guidance for 2004, what are your expectations for pension as a whole?

I'm sorry. Continuing with my math, It is a couple of cents for the quarter. Probably about -- year to date, probably five, six cents. Going forward for next year, we expect the 130 to be materially lower. Just how much lower is dependent on market returns on both the earnings and the discount rates used at the end of the year.

You see it pretty much going back to where it was before?

No. That's overly bullish. But somewhere in between. Somewhere between is a good estimate.

Ok. The second thing I wanted to ask you is in terms of that -- the realized gains from the NDT portfolio I guess is what it is you guys call it --

Yep.

Now, that was a positive 3 cents -- I mean I saw there were dividends and interest in there as well but that was a positive 3 cents this quarter and 10 cents for the year to date, is that correct?

That's correct.

What do you guys see that doing in 2004?

We budget for that to be zero to be honest.

Ok.

Budget is an incorrect word. That's really managed as a trust for the nuclear decommissioning. What drives that -- you can have a pretty good handle on dividend flows. It’s Maybe 3% or something like that. But the -- the interest and dividends is around $25 million a year. That offsets the accretion of the liability without getting into too much detail.

We can bring the number up in a rising market. Income is recognized as gains are realized. And there is a reasonable net unrealized gain position in that portfolio just because it has been a good year in the market. So, there is a chance that could happen but we don't -- it is tough to look forward and expect that, if you will.

But you expect the pension to do better but you expect this to pretty much do worse. It was 10 cents positive for this year but you don't expect there to be that benefit?

From a technical standpoint, we don't budget -- have realized gains in this. This is really managed by outside trustees for the benefit of the nuclear decommissioning trust. We have to be a little careful -- actually a lot careful about overmanaging this.

It has to be managed by third party trustees for the benefit of the commissioning (indiscernible)-- but gains do come about as they realize -- as they take their net realized position. Pension is more -- pension is a lot more math and it is something we watch quite closely and also I’ll say on the pension side, while we're there, at the end of last year, we were below the ABO and if you work through all of the math, we had about a $300 million contraequity in our OCI. There is some good signs. I don't like to predict the future of markets or rates but there is some reasonable chance that that number could be materially reduced or in some cases, eliminated. We'll see. That would obviously help our debt ratios.

To understand this, that that 10 cents, we should expect a decrease of 10 cents –- we should just expect basically zero increased contributions, is that correct? In terms of what you're budgeting.

If you look at it in terms of '04, we're certainly not expecting 10 cents in 2004. We’re looking at that being zero to a modest number.

The KKR portfolio?

Yeah, can I -- last question then we'll have to -- we have to show some adherence to our one question rule here.

What are your expectations for '04 versus this year for the KKR portfolio?

No earnings. About $85 million in total.

Ok. Versus about 10 cents this year?

No. This year, the improvement in KKR is the absence of a loss.

Ok. That explains it. Thank you very much.

The next question comes from the line of Michael Goldenberg with [indiscernible]. Please proceed with your question.

Good morning, guys.

Good morning.

Wanted to ask you two questions. One was I know you talked about decreasing your leverage to BGS by doing longer term deals as you go. I was wondering since you guys are pretty much long [indiscernible] to some extent, has trading group outright hedged gas by going short or anything like that to you know, secure margins into BGS?

Yeah. I would say -- I would rather not get into our specific position. I think if you're an owner of our securities, it is not helpful for us to get into specific positions long or short, power, gas, emissions, whatever. But I just say higher gas helps us, clearly, via the BGS. And to the extent that we want to reduce the bandwidth of outcomes, we do look at hedging forward commodities. Be it gas, power, and other products.

Ok. I'm sorry if my question was too intrusive. What I was trying to understand is besides just doing one-off, structured deals that may be plant specific, you will from your trading group just take general commodity positions.

It is a portfolio. We look at the portfolio.

Ok.

When you ask the question you ask, we look at gas to supply our plants. That’s for the BGSS but we also look at our overall commodity position.

Ok. And my second question is --

And I'll say we do that. We're not trying to speculate, as I say. We're trying to do it in an effort to reduce bandwidth.

Yeah, that makes sense. My other question would be just on debt. The raw debt amount still keeps creeping up. The only way you've kept the ratios at a good level was by issuing equity. Is there a specific point at which you’re planning to turn that debt number, start making it go the other way. Is there any time frame at which you can say we'll start reducing our debt load?

Yeah, I think our debt level is going down. At least we can talk about any kind of benchmark. But if you look at the bank test, if I pick one definition and stick with that, that was about 62% at the end of the year. It is now 57% after the equity deal. So, that is getting better.

That's what I said. Raw number is still higher versus 12/31/02, and the only reason the percentages look better is because you did equity.

No, but We issued -- the equity deal brought it down from 59 to 57. We go from 62 to 59 on the bank test on an apparent lender coverage definition. Based on retained earnings or based on retained earnings and cash generation so we think we're making improvements on our -- on our own. Just as a snapshot, be all set to look at each of the businesses. PSE&G is really running at or below the debt to cap for the regulatory capital structure. Running equities in the low 40s there. Holdings is about 50/50. Recourse debt to cap is lower. More like the mid 40s if you give them credit for net debt, because they’ve got almost $200 million in the bank. And Power is below 50 including the basis adjustment that will spare you the repetition of the definition. So, as we said, it was a tough decision to issue equity that did accelerate our deleveraging. The real thing that is going to give us some very meaningful deleveraging, in '04, we expect to have some deleveraging through some modest net cash flow generation and some retained earnings retention. Then in '05 when construction goes down quite meaningfully, particularly at Power, then net cash flow is very strong and debt goes down in a very attractive fashion.

That's exactly what I was looking for. So, in '05, the 14 -- the number should decrease significantly.

As well as the convert we did last September, converts in September of 2005. It is a mandatory equity convert. We think we've been -- done up quite a bit on the equity side here. And certainly no expectations at this point that we need anymore and as I said, strong cash flow as well as our convert kicking in. Should put us in quite good position.

Thanks.

If we could also -- if we get a little bit of benefits from the pension. If we get fortunate enough with markets both debt discount rates and markets have been good to us, been good to all of us in the last six months, if we get rid of the ABO and the pension that brings the 57 down another percent.

Thank you. Good luck.

Next question comes from the line of Leslie Rich with Bank of America Capital Management. Please proceed with your question.

I wondered if you could talk about sales of electricity and what sort of trends you're seeing there. In terms of industrial sales, commercial, residential. Total sales were down 2.7% in the quarter and just -- you know, you said weather was not that much of a factor, I believe. Just wondering what's going on there?

Yeah, I think what I said -- weather was not much of a factor. Weather was normal. Let's say. In terms of our overall growth of sales, we're about the 1.5% range. On the electric basis. We're seeing some signs of pick up in the economy. But nothing material. I think our growth rate, I think the 1.5 may be a modest amount higher than it was a year ago.

So, why was residential sales down so much? In the quarter? Was it because last summer was particularly hot?

Yes.

Ok. And then separately, if you could just give me a brief summation of what happens in the event Edison Mission Midwest does file chapter 11 by year end. If you talk about the three leases in aggregate, what the earnings impact would be in '04.

The -- the Powerton.

I think -- Powerton and Joliet may be twin leases from a structure point. I think of them as one. Looking just on the weather question. Last summer was very hot. I think we had in August in particular, there were about half the days were over 90 as I recall.

So that was quite strong. So That's the sales number. On Midwest -- I think A, each of the Collins lease is about three to four cents annual contribution of earnings in the Powerton Joliet leases are about the same amount. So, worse case, that's the kind of number that we're talking about. If I step back for a second though, clearly, EME and Mission have some meaningful refinancing issues. There is a $900 million maturity at Midwest in December. Powerton Joliet are two coal assets.

They're very attractive plants the break even cost on those is in the low $20 per megawatt hour number. Aside from what's going on at Powerton, within Midwest generation, aside from the guarantee we have from Mission, just on a raw asset basis, those are attractive assets at their current lease capitalization rate. If you look at the bonds, for somebody who may own the (indiscernible) there, those are trading in the mid 90s. At times, I've seen them up closer to 100 so the debt market is -- would support that also. On Collins, we're pleased that Excelon re-upped their 1100 megawatts or 1084, I think, of the 2600 megawatts, for ‘04. The capacity payments on that PPA for '04 should be enough to cover the Collins lease rent.

As we see it, if there was drastic action let's say taken by EME, if they were not able to look at -- at refinancing, we do have on both units, we do have rights to other collateral in the Midwest package. It is shared with other Midwest [indiscernible] lenders so it would be a very complicated proceeding but in the event something happened, we may need to stop accruing earnings but in terms of the ultimate outcome, that would be a much longer process in terms of the workout of that situation and once again from Powerton Joliet standpoint, those are quite attractive assets and from the Collins perspective, that asset is not as attractive on a standalone basis but it does have rights to other collateral albeit with other people at the table. That would be a long process before I would expect before we would do anything from a balance sheet perspective.

What is the length of the leases?

20 years or so. 20, 25. I'm sorry. 30 years.

Short term then, huh? [ LAUGHTER ]

I think it’s usually done for 80% of the life of the asset.

Next question will come from the line of Victoria Blonski with [indiscernible].

I wanted to ask about PSE&G if you look at the regulatory asset base and just apply the authorized equity component in the allowed ROE, you get numbers that are somewhat below $220 million in earnings a year and yet you're guiding to 220, 230 with the implication of higher earnings next year, when rates fully kick in. How does that work that you'll be able to overearn?

Well, remember, there's three different components in there. There is electric. There's gas. Electric is about 50, 55 and there's gas and then there's transmission that's about 16%, 18%, something like that, of the overall rate base. The -- if you're looking at just the equity on the electric or are you looking at the overall equity for the business?

I'm looking at the rate base that you gave in the -- I think in one of your presentations, you broke down piece by piece.

Ok.

Yeah, the one thing we don't -- it is a little harder because it is FERC regulators -- is the transmission business.

I'm sorry.

The thing that's a little hard to follow from an ROE basis is the transmission business, which is FERC regulated. We don't break out an ROE specifically on transmission.

So, if you -- I don't remember what the total rate base numbers were but if you -- and I don't obviously also know what the equity component is on transmission or the ROE but would you -- you're going 230 or so. Are you overearning on those from a regulatory point of view or what's the --

No.

What can we expect?

No. As I said, we don’t --We've been through rate cases in the electric business and the gas business. The transmission business is FERC regulated. We don't break that out on an ROE basis but I think the best way to look at it is to look at we're getting 210 to 230 this year. We're comfortable with that range. We earned about -– think about earning about 4.5% or 5% for seven of the ten months on about half or more of the business which is the electric business. If you take that number as an increase on an ongoing basis, then that can give you a sense of where we might be in 2004 and thereafter.

Ok. Ok. Thank you.

The next question is from Tim Shaler with Pemco. Please proceed with your question.

You guys have made a lot of progress at a number of Global subsidiaries this year. If we ignore the effects of one-time financings such as the GWF financings and any potential asset sales, what should we expect for sustainable cash dividends from Global at the PSEG Energy Holdings this year?

Holdings this year, nothing. You're saying from Holdings up to PSEG or from Global up? --

No, from Global up to Holdings.

Oh. Just looking at something. The overall cash generation of the business is in the sort of 350, 400-ish range. Resources is probably in the mid 2s on that. That puts Global in the 100 to 150 range ballpark.

Ok.

That's actually -- that's cash generation. We don't focus as much to tell you the truth on dividends. We do from a planning perspective. At least from an outside perspective. We don't focus much on dividends, Global Resources holdings. Because that's all one credit package. So we focus a lot on dividends up from Holdings to the parent. Power to the parent and EMG to the parent. Because those are obviously different filing entities. But Global and Resources and Holdings is all one filing entity. So we don't focus as much on it to tell you the truth.

Maybe as a ballpark, you can give it so that we can ballpark the cash generation maybe you can provide what the Cap Ex is at Global?

Cap Ex at Global for this year, as you know, we're not putting new money in, we do have some consolidated investments like at (indiscernible) where they have their own Cap Ex, so that from a financial standpoint gets consolidated up. It is probably about $160 million, something like that year to date.

Ok.

Yeah. In fact, I’d say that our equity is about 160. If you consolidate Cap Ex which is Cap Ex at nonrecourse business that is self funded by those non-recourse entities like a (indiscernible). It would be over 200.

Ok. And '03 is a fairly typical year it sounds like?

'03 from a Cap Ex standpoint is atypical for Global. We're finishing the build-out of both California and Poland and we probably have a little bit of our [indiscernible] plant in there, too, from earlier in the year. Cap Ex we expect to be going down. There will be no more contributions from Global into their subsidiaries. After this year there may be Cap Ex within the businesses. It’s consolidated on our balance sheet, but from a cash flow perspective, we do not expect Global to be contributing money down into any of the businesses going forward.

Ok.

Thank you. Getting close to lunchtime?

One moment. I'm showing there is no time for further questions at this time.

Ok. I’ll just close. Thanks, everybody. We'll see you down at the EEI. We have a breakfast Sunday morning at the rock n' roll something. I understand suits and ties are not allowed and jeans and leather pants are. But just to close, just a few points from my people. We think that we got a good record delivering on earnings. Balanced business mix, low cost nuke and coal which is good in this environment. Financial stability which continues to improve and a solid utility with restructuring complete. So, once again, look forward to seeing you and go Yankees! Thanks.

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