公共服務電力與天然氣 (PEG) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group fourth quarter 2003 earnings conference call and webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session for members of the financial community. At that time if you have a question you will need to press the 1 followed by the 4 on your telephone. As a reminder this conference is being recorded, Tuesday January 27, 2004. And it will be available for telephone replay for 48 hours beginning at 1:00 p.m. eastern today until 1:00 p.m. eastern on January 29, 2004.

It will also be available as an audio webcast on PSEG corporate website at WWW.PSEG.com. I will now turn the conference over to Sue Carson. Please go ahead.

Thank you and good morning. We appreciate your listening in today, either by telephone or over our website. I'll be turning the call over to Tom O'Flynn, PSEG's Chief Financial Officer, for review of our 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 website, www.PSEG.com. In an effort to provide timely and insightful information to investors and analysts, we've also included with the news release a reconciliation of 2003 and restated 2002 results for both the fourth quarter and the full year as well as other supporting information for each operating company.

Pro forma and GAAP results for 2002 are also reconciled. At the end of next month we expect to file our 10(K) with the Securities and Exchange Commission which will contain additional information. Tom will discuss our future outlook in his remarks. 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 it will be achieved. The results or 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 we file with the SEC.

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 limit yourself to one question and one follow-up. Thank you and I'll now turn the call over to Tom O'Flynn.

Thanks, Sue. Good morning, all. On today's call, I'll provide a brief overview of our earnings results for 2003, and a couple of key fourth quarter events, followed by a more detailed discussion of earnings drivers and balance sheet improvements. I'll finish up with some discussion about business outlook for 2004 and beyond.

For 2003, we reported record earnings from continuing operations of $852 million. About 10% higher than the comparable 2002 proforma results. On a per share basis, 2003 results were $3.72. At the higher end of our guidance.

Each of our companies met or exceeded expectations for the year. Power earned $474 million. PSE&G earned $243 million. And Energy Holdings finished the year with earnings of $166 million. We're reporting earnings of 69 cents per share for the fourth quarter of 2003, which is consistent with our expectations. As we indicated in our press release this morning, our results reflect a restatement of periods prior to year-end 2003 for Energy Holdings and PSEG. This resulted from an error in the foreign currency accounting at RGE, our Brazilian investment.

Restatement reduced December 31, 2002 equity at Energy Holdings by about $100 million, which includes a reduction in 2002 earnings of 4 cents and 2001 earnings of 3 cents. Since we discovered this mistake, we’ve reviewed all of our foreign currency accounting and concluded this error was limited to RGE.

Last week, our Board of Directors approved a 1 cent increase in the quarterly common stock dividend from 54 to 55 cents per share for the first quarter of 2004. This increase reflects an indicated annual dividend rate of $2.20. Keep in mind that PSEG has paid annual dividends on an uninterrupted basis since 1907. Our objective is to provide honest dividend increases in future years provided we continue to achieve our financial expectations.

The current increase is a good reflection of our enhanced financial stability and of course, our desire to improve shareholder return. Coupled with last year's tax reduction on dividend income, we felt that now was the right time to raise the dividend, especially since our outlook for earnings and cash flow comfortably support this action.

Before discussing our individual business results, I want to remind you that the 2004 BGS auction is scheduled to begin next Monday, February 2. This is an important annual event for PSEG. Since it is less than a week away, I will not be providing any further commentary on the auction process or potential pricing during this call. Shortly after the auction, we expect that the BPU will once again issue a release with relevant details.

Turning now to our businesses. For the full year, Power earned $474 million or $2.07 per share from continuing operations Reflecting a slight improvement on an earnings basis over 2002.

The results include about $28 million to replace some power costs due to the effect of Hurricane Isabel and other storms during the third quarter on our nuclear facilities. Power's year-over-year results were also affected by the introduction of seasonal pricing for BGS revenues that started on August 1, 2003. Because of the change, Power benefited from the two months of higher seasonal rates during August and September. However, three months of lower winter rates offset much of the summer rate benefit. Until August of this year, when we complete a full 12-month cycle with the seasonal BGS pricing, we expect to have some year-over-year swings in our margins at Power. For the fourth quarter, Power reported earning per share of 33 cents compared to 66 cents last year. Several factors combined to create this 33 cent reduction at Power.

BGS margins were lower in '03 due to the seasonality of the rate structure, something we talked about during our third quarter call. BGSS margins declined due to the warmer year-over-year weather in the fourth quarter. And finally, more new nuclear outage days resulted in higher purchase power requirements in the fourth quarter. The good news about the nuclear outages is that we added a total of 24 megawatts to Salem Two and Peachbottom Three during the outages as part of our upgrading activities. We now have 3,450 megawatts of nuclear power in our generation fleet. The remaining variance stemmed from an increase in O & M expenses, primarily pension costs, partially offset by the ongoing benefit from our Connecticut acquisition in late 2002, and the recognition of revenues associated with the favorable ruling on the Old Dominion Electric Cooperative contract from the FERC and the courts.

Turning to PSE&G, during 2003, PSE&G earned $243 million, a substantial increase over the 2002 results of $201 million. These results were above our expectations of $210 to $230 million for the year, which is based on normal weather. The big weather driver was the prolonged cold spell in the first quarter, which was partially offset by more moderate weather in the fourth quarter. All told, weather was about $27 million, or 8 cents better than normal in 2003 and $44 million or 14 cents better than '02.

Another big driver was the benefit of five months of the $160 million annual base rate relief that was granted by the BPU in July as the final step in the restructuring of the industry in New Jersey.

For 2003, the effects of the rate case added about 25 cents to earnings. The August 1 increase in base rates allows for more reasonable returns on our electric distribution business.

For the fourth quarter, PSE&G reported earnings of 23 cents a share compared to the '02 results of 34 cents. Key drivers during the fourth quarter were higher O & M expenses of 12 cents, primarily driven by labor and benefit costs,. A 4 cent per share unfavorable weather impact partially offset by the higher electric distribution rates.

On to holdings. For 2003, holdings reported earning from continuing operations of $166 million. Excluded from these results are losses on discontinued operations totaling approximately $38 million that stems from our sale of Energy Technologies which was completed in the late summer and the impending sale of our facility in Rades, Tunisia. On December 31 we entered into an asset sale agreement for the sale of our ownership interest in the Rades facility.

We expect the sale to be completed sometime this summer. We'll continue to look at opportunities to selectively monetize assets at PSEG Global.

For the fourth quarter, holding earnings from continuing operations were 16 cents per share. The 2002 results of 20 cents per share included a one-time restructuring benefit of 10 cents per share at resources. Absent this benefit, holding’s fourth quarter results were 6 cents higher year-over-year due to improved operations in Texas and Chile and reduced earnings from a leveraged lease portfolio.

Now on to the balance sheet. During the year, we made meaningful balance sheet improvements.

Total equity increased by about $1.6 billion. We began 2003 with a debt ratio of about (ph) 61% as defined by our parent lenders with a targeted ratio of below 59% at year-end. I'm pleased to say we surpassed that objective. As of December 31, our comparable debt ratio was down to 57%. We also ended the year with cash balance of over $500 million, an increase of more than $350 million over year-end 2002. Much of this additional cash is held by Holdings for its $267 million maturity in February of this year. If we calculate our leverage ratio net of this cash balance, we drop below 56%. The higher equity was the result of about $670 million of increased retained earnings, $439 million of common stock issued through a public offering in October through our (indiscernible) during the year and favorable changes in other comprehensive income due to improved pension funding in 2003 foreign currency improvements.

The rebound in the equity markets helped our pension fund, which earned a return of almost 25% during 2003. This performance, coupled with just over $200 million in pension funding was sufficient to eliminate the $292 million equity reduction that occurred at year-end '02. At year-end our ABO-funded status was 102%, and our PBO status was 85%. An added benefit to the increased pension fund value will be lower pension expense in 2004. The expected reduction of about $50 million in pension expense from the 2003 level of $140 million has been included in our '04 guidance.

During the fourth quarter, both PSE&G and Power issued long-term debt.

PSE&G had $150 maturity in June that needed to be termed up. And we called $155 million of MIPS and QUIPS in December. These activities as well as some increased working capital needs were financed with MTN issuances in September and November at the utility.

Power also took advantage of the favorable interest rate environment during the fourth quarter and issued $300 million of 12-year notes at a coupon of 5.5% on November 24. Our liquidity continues to be strong. As of year end, we had $1.7 billion in liquidity available. During 2004, we'll be renewing three credit facilities. The $250 million Joint Power Enterprise facility.

And the $350 million enterprise (indiscerbible) facility both in March. And the $200 PSE&G facility in June.

The only mandatory long term financing requirements for the year other than the holdings maturity in February I just mentioned are at PSE&G. There's a $286 million maturity in May and a couple of refinancings possible later in the year.

We continue to be very focused on cash flow. The cash flow that we use to manage the business is cash available to pay down recourse debt. As we've indicated in the past, PSEG's Capital program will decrease substantially after 2005 when the construction program at Power is completed.

In 2003, we hit targeted excess cash in the range of 0 to $200 million. We fell short this objective and ended the year at approximately negative $200 million. This is due to increased working capital requirements of about $200 million at PSE&G and Power, largely because of increases in gas prices. It is also due to the delay of securitization financing at PSE&G.

For 2004 we expect our excess cash to be in the range of 0 to $200 million. We expect this amount to be supplemented by another $125 million or so from securitization which is now targeted for sometime this spring. Looking at 2004, we are maintaining our guidance of earnings from continuing operations of $3.60 to $3.80 per share.

Let me say again that the New Jersey BGS auction starts this coming Monday. We're also looking at other near-term auction opportunities, such as Maryland, which is happening a few weeks later. In line with our past practice, we expect to provide business by business earning ranges later in the quarter.

Longer term, our outlook incorporates a realistic view of the domestic energy markets given the ongoing generation overbuild. Beginning in the '06 to '07 timeframe, we are expecting an improvement in PGM capacity prices as energy demands begin to outpace energy supply. This could provide a noteworthy improvement in earnings thereafter. That concludes my remarks. I will now 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 one followed by the four on your telephone. You will hear a three tone prompt to acknowledge your request. If you question has been answered, and you wish to withdraw your holding request, you may do so by pressing the 1 followed by the 3. If you're on a speaker phone, please lift your hand set before entering your request. One moment, please, for the first question. Our first question comes from the line of Dan Eggers from Credit Suisse First Boston. Please proceed with your question.

Good morning.

Good morning.

I know you guys gave some pretty good disclosure in your 10 Q. I was wondering if you could give us an update on where you stand in Poland as far as negotiating with the government, the talks of them cancelling a long-term contract and what those implications would be? I think you guys said they would not be very positive. Give us a rundown on what is going on there.

There are discussions that we disclosed in our Q and they have been going on about the Polish government buying out the IPPs, including ourself. I believe they'll do this through a securitization mechanism. There have been meaningful discussions on value. Those are ongoing. Really nothing new to report. Generally the concept is fine. But in terms of the specifics of the dollar amount, there is really nothing new to report, versus what was in the Q.

I guess the other one, you're remaining capital kind of is in global. Are you guys just down to China in '05? Is that correct?

Yes. There is nothing material in global for '05. The number’s less than $50 bucks.

Great. Thanks.

And Dan, that would all be funded internally. China would fund with its own sources.

Okay. Thanks, guys.

The next question is from the line of Paul Fremont from Jefferies & Company.

Thank you. If I look at the $360 to $380, has that been updated to take into consideration current forwards for electric and gas prices and whatever your expectations would be as to how they would play out in the BGS auction? Or what could we use to try to figure out your baseline assumptions for the outcome of BGS relative to the $360 to $380 that you've given us?

I would say, Paul, the $360, $380 is a good range, given the current forward market. The market hasn't moved around that much over the last few months. Look at the gas market, for instance. Obviously the BGS is a key variable in that number. That's coming up next week. You'll get a BPU release to the extent we think there is a need to update those, that guidance range following the BGS, we'll do that at the time. But generally the range is good given the current forward markets.

Thank you.

The next question is from the line of Andy Levy (ph) from Veer Wagner (ph). Please proceed with your question.

Hey Tom.

Hey Andy.

One quick question on collectibles. I just noticed you had some in the fourth quarter. Can you quantify that? And how much was it year-to-date? Is there anything built in for 2004?

Year-to-date was about a nickel. Four or five cents at E&G. And it's largely as prices have come up, both gas and electric, we have a standard process of collecting amounts. And to the extent we need to write some off or make reserves, the percentages haven't changed that much but they're on larger absolute dollars.

That’s basically about the same amount as last year, you had in '02 or was it five cents worse?

No, I believe it was a little higher '03 than '02.

And do you have anything built in for '04 or is that kind of as you go?

No, we have, as part of our ongoing forecast, we expect to have some loss. I think the '03 number was higher than our general expectation.

Any opportunity to mitigate those costs at all?

We're working on it. So, you better pay on time.

All right, dude. Okay. Thank you, Tom.

The next question is from the line of Ashar Khan from Foresight Investment. Please proceed with your question.

Good morning, Tom.

Good morning.

Tom, if I look at power, if I heard you correct, you said if you were at 90% on the nuclear and if those costs were not for the replacement costs that would have added $28 million in earnings? Is that correct?

The $28 million is really all from the hurricane. Remember, going back to September with Hurricane Isabel, we had an outage where the island was out for essentially a week. And at that point, it was close to $1million a day a plant. Maybe a little shy but in that general range. And then Peach Bottom was also out for a few days in some other weather-related storms right around that time period. So the $28 was the number we put out right before we did our equity deal and that was related to nuclear outages within a concentrated period in two weeks.

What can the higher nuclear capactiy factor in '04? What will that improvement be? Can you tell us in terms of the higher megawatt as well as the higher capacity factor going into '04?

I haven't done it here in terms of days. We were 88 last year. We were about 91 in '02. In general, you have to work through the math. And that can be anywhere a day from half a million to a million bucks depending upon where you are in the season and what kind of volatility you've got in the markets. The Isabel case was a good example where the number was about $1 million a day a plant.

Okay. And can you just help us? I know you're going to give us a breakup later in the quarter. Can you just tell us directionally as you look at the global and resources for '04 versus ‘03, where do you find them in terms of earnings contribution?

Generally in the same range. As I think I mentioned, we'll do subsidiary specific guidance. Usually we do it March or April. And that would still be our intention. But because holdings is not adding material businesses, resources is obviously not adding businesses. Global is adding some. At the same time, we're monetizing some assets on a selective basis. In general, those earnings will be flattish.

I appreciate it. Thank you.

The one thing I'll say, we do continue to see strong cash flow out of holdings that will pay down debt. That obviously helps on the earnings side. Andy, I'll just clarify one thing you mentioned on the receivible that I forgot to state. On the gas side – the write-off we took was all gas receivibles, electric is fine. It flows through our SBC. It is part of our overall rate structure.

The next question comes from the line of Leslie Rich from Banc of America. Please proceed with your question.

Looking at 2004, will you still be getting the payments on the Eagle Point contract?

Yes. Yeah, we got about $50 million the first week of January of this year. And we get about high $30s same time next year. And then that's it.

Okay. And then looking at the expense drag in 2003, a lot of that was pension related, I realize and also additional plants on-line. But, as you look forward, are there any sort of corporate-wide cost cutting initiatives that you could potentially benefit from? You mentioned your pension expenses will be lower in '04. Are there any other initiatives that are planned?

The answer is yes, we look at them on a regular basis. We tend to do them ongoing as opposed to a big bang methodology, if you will. But we do look at increased efficiencies. We're obviously very mindful of service, reliability and safety. But we continue to look at those things all around the business and also look at ways to increase efficiency. In fact, just as an example, we're on a procurement side. We're doing a much more concentrated centralized (ph) look at leveraging buying power.

How about in terms of labor and the union? Do you have any increased cost pressures there in '04?

No. That's really more business as usual.

Okay. Thank you.

The next question comes from the line of Michael Goldenberg from Luminous Management. Please proceed with your question.

Good morning, guys. Just a couple of questions. Can you remind us what percent of load is up for this BGS auction?

Essentially two thirds.

Two thirds.

I think last year, they got -- two thirds went for 10 months and then one-third went for 34 months. So 10 months is up. That's going to get done in two pieces. Half of that two thirds, if you will is going to be for one year. And the other half of the two thirds will be for three years. So you end up with a stair step of each year, setting up, (indiscernible) deciding on an annual basis. You're setting up each year as an option a third of the capacity for a three-year period.

And just along these lines, can you compare nuclear outage schedules in '03 and '04?

Usually we've got one outage a year, which I believe is still our case in '04.

So there should be no difference? No upside or downside from nuclear outages year-over-year?

No. The way I think about it is capacity factor at the end of the day. That obviously goes in. We have planned and unplanned. At the end of the day, our capacity factor was 88%. In '03, it was 91. 90, 91. And we're expecting it to be this year 90% or a little bit better.

So you expect more or less similar performance out of your plants year-over-year?

We expected -- we expect '04 to be better than '03.

'03 was 88? I thought --

Actually, '02 was a little higher. That was more like 93. That is higher than our target.

What was 93? '02 or '03.

'02 was 93, '03 was 88. And '04, our expectations are 90% or a tad better.

Perfect. Just two quick questions on your report. In your breakdown where it says weather, 14 cents, that's the benefit from weather?

That's the benefit versus last year.

Right.

Because '02 was quite warm, especially January '02 was quite warm. So it is 14 over '02. 8 over a normal season.

And one final question. It says KTR performance was positively effective -- positively affected earnings by 9 cents. Does that include the $11 million writedown you took early in the year?

Tom O’Flynn: I couldn't quite hear what you said, what was impacted by 11 cents.

The KTR performance says positive 9 cents. And I remember you took an $11 million writedown early in the year. Is that $11 million included in the 9 cents or not?

Yes, it is.

So even with $11 million, it is still 9 cents better?

Yes.

Thank you very much.

The next question comes from the line of Paul Patterson from [INAUDIBLE] Associates. Please proceed with your question.

I wanted to ask you, sort of bigger picture question in terms of the BGS auction. I realize next year is not going to be as big a number as this year. But, there does seem to be a considerable amount of focus on the BGS auction. I'm wondering how you might feel about the potential of perhaps mitigating the impact of the BGS auction. You mentioned selling in Maryland. I don't know if that would be an example of that or not. But basically, sort of contracting your capacity going forward, you know, outside of the BGS auction, so there isn't this big sort of event issue that comes up each year. What are your thoughts about that?

That's fair. Number one, the BGS auction is doing that. The BPU and their consultants have looked -- I think they realize that to have less come up in any one year. And some longer term tranches -- that decreases the risk for consumers and decreases the risk for suppliers. That seems to be good from both sides of the fence.

We do as part of our overall course of business look at risk and look at trade-offs between hedging versus keeping open positions. If you use the Connecticut example from last fall, we're now starting to serve UI for a three-year period. So I think that indicates desire for us if we can lock up, load at reasonable prices that makes sense.

In terms of hedges, be it hedges or offsystem sales, hedges of electric product, gas product, basis differentials, those are all things we look at in an effort to cut the tails on outcomes while maintaining profitibility. I think going into this – one thing I'll say going into this, we have, as you said, there is meaningfully less at play today than there was a year ago from our standpoint. A lot of that is through the -- through the three-year that is already out there. But through some other efforts that we've done. I think the Maryland auction is just another way that we can -- another venue that we can play in.

But does your capacity have to be made available? Does that one-third capacity have to be made available each year for BGS? Or can you get somebody else to sort of take that risk from you? Do you see a what I'm saying?

Yeah. I see where you're going. But in terms of tactics and other things, I really shouldn't get into it. But there is nothing -- no, there is no specific legislative requirements what we have to do with our capacity.

Okay. Okay. Okay. Thanks.

The next question comes from the line of Steve Fleishman from Merrill Lynch. Please proceed with your question.

Yeah, this is Steve. Tom?

Hey, Steve, how are you?

Good. How are you?

Good.

With respect to your global business, how much are you -- how much would you say that business is sensitive to emerging markets, growth turning and what kind of assumption do you have in your guidance on the health of the market you're in in global?

I think we have fairly conservative assumptions. If you look at the -- for '04 and the numbers, the currency numbers that we have in those markets, the current levels are meaningfully better. Than those markets. In fact, we may do some option hedging to lock in some currency numbers in our business plan. The options are pretty reasonable. At this point, they are reasonably (indiscernible) money. So the bottom line is, especially in Chile, we've got meaningful earnings. We continue to do well from an earnings basis. EBITDA (ph), and that continues to grow, and the currency has done very well over the last six, nine months. So that's been quite supportive. And I think I mentioned that Chile and Texas were really the two big tailwinds at Global. Texas was a meaningful negative number, you know, that basically got to break even in '03. Chile, the profitibility there increased over 50%. I'm sorry. (indiscernible – increased over 50 percent. We've got two businesses down there.

And secondly, have you provided -- I may have missed this. A kind of targeted long-term growth rate again? Or are you not giving that anymore?

I think -- we have, Steve, in the past talked about 4 to 6%. I think that's a range that we think is still a reasonable objective for us. I think we're also appreciative and sensitive that it is, to be honest, harder to make longer- term predictions in this business. A lot of this gets into forecasting longer-term commodity prices. Gas, electric and capacity. So we believe that as we look at it over a five-year time horizon, 4 to 6% is a reasonable target for us. I think we may be somewhat less definitive on that, just given the uncertainties on predicting forward markets.

And finally in your overall kind of guidance that you provided, are you assuming that you are able to win some new load in non-BGS auctions? Is that a critical piece? Or is that just kind of a marginal piece of your viewpoint? It would seem like it would be kind of incremental – with respect to that power may otherwise have been just sold wholesale spot.

Yeah, I think that is less dramatic -- I’d see it, Steve, more as a potential risk, risk mitigant, risk diversifier, if you will. Yes, we expect the BGS will be helpful. But to the extent that there are other ways to supplement profitability or further manage risk as we talked about in one of the earlier questions, that's just another tool in the tool box, which I think can be quite helpful to us. But we do not have any explicit numbers in there, if you will.

Okay. Thank you very much.

Steve, the other thing, just to elaborate on the growth issue, we have spent a lot of time over the last year -- I'm sure you appreciate taking risks off the table. Be it rate case. Be it at power. Be it capital. And also a number of meaningful improvements within holdings. That's been a major focus of us. I think our growth rate is still an objective we're focused on. We're also sensitive it is a little harder to be as definitive in this environment.

The next question comes from the line of Paul Ridzon from McDonald Investments. Please proceed with your question.

I just had two quick questions. One, if you could just characterize the formal dvidend policy. And secondly, how can we think about first quarter earnings with regards to weather, market performance, Eagle Point timing and BGS seasonality and any other relevant factors?

Full dividend policy we tried to lay it out in our release last month. But this is the first time obviously we've raised our dividend in some period of time. Bringing it up by it up by a penny a quarter indicated rate to 20. Our payout ratio last year was 58, 59%. I think our objective is to provide regular annual increases through our shareholders, provided our business and financial fundamentals support it. As we look at it, we look out at our five-year plan, there is reasonable expectations that are in financial fundamentals would support a continued increase of that level. Obviously that's something that the board takes into consideration on a regular basis. An increase, we'll take into consideration, on an annual basis. '04 versus '03, the first quarter, I think you said.

Yes.

'03, first quarter, was quite strong, $1.42 I see here. And was helped quite a bit at Power. 78 cents. I think, keep in mind, we talked about the seasonality. But going back in '03, the seasonality feature had not yet been baked in. So, margins were quite attractive at Power in that period of time.

The other thing, then, is the first quarter of '03 from an E&G standpoint, gas was extremely strong. They were up about six cents versus normal first quarter of '03. So those two factors would lead one to say, all other things being equal, that the first quarter of '04 will not be as strong as the first quarter of '03.

When did Eagle Point flow in during 2003?

First quarter.

How big was that?

Same size, within a few million bucks. I think it was mid $40s instead of closer to $50 or something like that.

I guess the overall market was down in the first quarter. So depending on where things finish up, how big of a driver could that be?

Overall market, you mean from Power prices?

With regards to pension and private portfolios.

You really set your pension once a year. You do all your math, you do all your actuarial work, discount rates and everything else. (multiple speakers) So that's not a variable number. That was set sometime in January, February, at that $140 million number and sprinkled throughout our businesses. We're fairly close to setting that again. We set $50 million down. So call it $90 instead of $140. That's a reasonable number. That will once again -- of course that is spread out through the year. That's not a quarter-to-quarter issue.

That's probably a $12 million pickup? In the quarter?

Yes.

Yes. Thank you very much.

The next question comes from the line of Daniele Seitz with Maxcor Financial.

Hi, most of my questions have been answered. How much was the seasonality in the fourth quarter and Power was down to about 21 cents would you say a third of that?

I'm sorry, Daniele. I missed the first part. The speaker phone doesn't work very well.

Seasonality in the fourth quarter.

The reduction of fourth quarter?

Yes. In the fourth quarter, you had 21 cents decline in Power. And some of it had to do with seasonality. Would you say half of that or --

I haven't got the breakout, Daniele, but it is really two things. Part of it is the seasonality. And the other thing, back in the fourth quarter of '02, the market was quite soft. So we were able to source energy quite cost effectively and supply the fixed price BGS. The margins were quite strong. And margins went up in the earlier part of last year. And as we locked in prices around the time of the BGS, we're locking in some lower margins in some cases, but doing it -- keeping in mind risk management activities quite carefully.

Since there has been a lot of write-off already in global, do you anticipate some adjustment to assets, further adjustments, or do you feel you're almost there?

No. We're fine. We look at these assets on a regular basis. We went through a full goodwill analysis at the end of the year. We're comfortable. The reduction that we mentioned in the RGE business does reduce that business by another $100 million effectively. It brings our net investment in Brazil, if you look at factoring in OCI and everything else going to flow through, about the $170 million range.

Oh, okay. Okay. Thank a lot. Appreciate it.

The next question comes from the line of Andy Levy from Bear Wagner. Please proceed with your question.

The question was asked. Thank you very much.

The next question comes from the line of Zach Triber (ph) from Duquesne Capital. Please proceed with your question.

Hi, Tom.

Hi, Zach.

Just the question -- it could be my notes aren't very good anymore. HIstorically, I think you said you wanted to have 75% of your Power sold or contracted under the BGS structure, at least that's what you said, if I recall in '01 or '02. Have you made similar comments or goals about that for this upcoming BGS, or not?

We have not made similar comments. We have -- I think, Zach, the way we say it, we want to have 75% of our Power termed up. BGS being an obvious avenue to do that with, but it wouldn't be an exclusive avenue. So that's still a reasonable objective for us, yes.

Okay. So basically what you're saying is that your goal historically has been 75% of your Power termed up. BGS in the past has been the only tool in your tool box to do that, and now we've got an increasing amount of tools given, using the markets themselves, gas, power and some of these other options. (multiple speakers)

-- other options and some op (ph) system sales. Yes, well said.

And I guess the missing piece of the puzzle which we haven't spoken about or danced around is that we have some degree of hedges in place on the (indiscernible) sales. And with gas and power, that's higher on a year-over-year basis, but we're not saying specifically what the magnitude is. Is that true?

That's true. We're not going to open up -- there are no tours of our book, if you will. We're trying to give you an appreciation that we're trying to narrow the wingspan of outcomes. As you said, there are more avenues for us to do that. But then the markets are fine. And liquid. And we also use those to once again manage risk away.

And just a final question, Tom. In Latin America, have you been able to take advantage of this more receptive capital markets environment to repay debts down there? After some of the slow cast capitals effectively lever up some of the returns on investment capital you've got down there with the same cash flow streams?

Yeah, we have. We’ve done some transfers. There's been a couple of nice financings in Peru, in the 6% range. I think even the last one was close to 5.5%. This time last year, we had, I think, over the end of the year -- this is from the '02 to '03 bridge if you will, we were carrying effectively a bridge down in our (indiscernible) business. We refinanced that quite effectively. So, yes, we've capitalized on some and we continue to look for other opportunities to improve costs and/or improve our leverage somewhat.

Is it substantial enough to kind of say that it today is $5 million or $10 million versus (inaudible) inconsequential --.

Zach, I didn't get those numbers at my fingertips. I'm thinking that it is certainly in the multiple millions.

Okay.

I haven't got the numbers at my fingertips.

Thanks so much. Good luck.

Ladies and gentlemen, if there are any additional questions, please press the one followed by the four at this time. The next question comes from the line of Paul Fremont from Jeffries and Company. Please proceed with your question.

I just wanted to doublecheck the pension numbers -- $140. So, are there other benefits in the range where they had been historically in '02, in the range of like $85 million?

The $140 is definitely the case corporate-wide for pension. And we will call it $90 for '04. I have to double check. I believe there are some general escalation in benefits. But nothing out of the ordinary. But, as you know there is general escalation in medical and benefits.

Thank you.

The next question comes from the line of Leslie Rich from Banc of America. Please proceed with your question.

Tom, could you talk about the outlook for the domestic merchant plants in the midwest and Texas for 2004? Was your break-even results in '04 in Texas -- I mean in '03 a result of stock market sales? Or have you entered into contracts down there?

We do have a modest-size contract in Texas that was essentially for one year with a one-year renewal. That’s about 25% of what we got down there, so that was helpful. We essentially got to break even in Texas. In '03, which was a material improvement from '02. At least in terms of business, we're forecasting to be in the same range. There are indications that things could be somewhat better. But we haven't incorporated that into our forecast from a formal basis at this point.

The midwest, we had Waterford come on. In the late summer, I believe it was. And Lawrenceburg will be sometime probably over the next couple of months. The midwest market continues to be by far the most disappointing market to us. Both in terms of other capacity out there, in terms of capacity prices that are really negligible.

So at this point we're seeing very -- I'd say for '04, we'll see negligible margin in the two midwest facilities and when you layer on depreciation and interest, it will definitely be a drag.

The thing that is good that we're pleased about obviously, it would empower really the only two assets that -- if we need to take a longer term view on – our PGM assets are doing well. Connecticut expansion is doing real well. We're able to get certainty on load for the next three years. The business is doing well. But the midwest is something we need to take a longer term view of. We're obviously working actively out there to see if there is ways through off-system sales or power marketing to try to enhance those results.

If AEP gets into PGM and PGM sort of extends west, would that improve the outlook for those plants?

I believe it would. In general, yeah, the accessibility of those plants for the markets is not as liquid as we'd like. But it is a little hard to answer questions like that from -- in a succinct fashion. Generally, yes, we're supporters of our PGM and liquid markets.

Okay. Thank you.

I think the bottom lines, we think it will be a more well functioning market which obviously helps liquidity, helps our access to markets.

Thank you.

The next question comes from the line of Tim Shaler from Pimco.

Good morning. Can you speak to your intentions regarding energy holdings as far as setting up a dividend to the parent and can you also speak to what kind of cash flow you got out of resources at Global this year and last year?

On the first one, Tim, as cash flow continues to be good. It could be enhanced by some asset monetizations. In terms of our expectations, how we distribute, use that cash, I think we'll use it through a balance of dividends up to the parent, which could take the form of either common dividends or preferred retirement or debt reduction. In general, I think we'll do it to maintain a reasonable credit profile consistent with some of the credit metrics that we've given out before as targets. The biggest ones probably being three time FFOs.

Okay. Sorry. Can you speak to the cash flow that came out? I mean, you gave earnings. But how do we tie that to cash?

You're saying holding specifically?

Yeah, within earnings on resources went down. Did cash go down? And earnings at Global went up. Did cash go up?

Cash was -- cash and holdings was generally on target. The one thing that is a little -- as you know, we've walked you through it before. At least if you look at our financial statement, the first quarter of '03, we did have a tax payment of about $110 million that was a settlement up for the termination of the TXE lease from December of the year before. That makes our cash numbers look lower for '02 with holdings. If you think about those two transactions together, then you can be more comfortable. So the general number for holdings is in the range of $293 hundred adding back the $110 for TXE or normalizing for that, if you will. Because effectively think about that as an '02 transaction. That gets you up in the $394 range.

Thank you.

The next question comes from Jeff Gildersleeve with Millennium Partners. Please proceed with your question.

Good morning.

Good morning, Jeff.

I just wanted to clarify on the press release and the commentary on the call it mentions the outlook for '04 as far as earnings guidance and then refers to the outcome of auctions in other states, besides the BGS auction. And I just want to clarify such as the auction in Maryland this spring, are you expecting anything embedded in your guidance? Or would additional business coming out of those auctions be additive to the '04 forecast?

I think what I would say, Jeff, without ducking it. I would say that our guidance incorporates current forward markets. We would like to have opportunities to bring those forward markets and the profitibility of potential full service requirement contracts. Bring them in and get revenue certainty. We've got the BGS coming up. It is obviously very important. We've got Maryland coming up afterwards. So I think the Maryland comment was really made to say we've got more bites at the apple to be honest. So prices are consistent with our range. And we've got more tools in the tool box, as I think someone else said, in terms of bringing those home and giving greater revenue certainty. (multiple speakers) But there is nothing specific, let’s say, from the Maryland stand (ph).

Right -- there’s no, like, 10 cents in there. Typically the full service requirement contracts would be some premium, obviously the current forward market. So to the extent you're successful in those auctions, then that would be I guess above your assumption of current forward market prices.

Yeah, in general, there is a full service requirement contract does have a greater degree of difficulty, if you will. And with it, can come greater profitibility. With the BGS, we feel we're well positioned. So that can be helpful. But if you've got assets in the right places, then you can accept those greater issues or uncertainty, if you will. And still be comfortable with your risk profile.

Okay.

And then -- that's a general comment, if you will, Jeff, that I would state for any full service requirement’s contract.

I appreciate that. One question, just longer term. Another caller mentioned the opportunity to expand or get access to other utilities. We saw something on the wires recently, regarding a power line that was approved from New Jersey to Long Island. I know it is further out. But would this type of investment allow you to trade out of your region into potentially higher-priced regions?

Yeah. It is tough for me to comment on how -- what the status is. I know that came across a while ago. Yeah, I would say generally, if you move if there's greater access to the higher priced regions, which certainly Long Island would be, that would increase the opportunities for us. We're obviously familiar with the idea of underwater cables. We continue to look at the Cross Hudson project. Though, I think at this time, we continue to look for ways for greater revenue certainty on that. To make a final decision on the Cross Hudson.

Okay.

Shorter, but similar theory, let's say.

Right. Okay. Thank you very much.

The next question comes from the line of Mike Ridinger (ph) from Satellite Asset Management. Please proceed with your question.

Good morning. I don't know if this was already asked. I was off the call for a second. Could you refresh my memory what the forward 12 month strip was for gas at the time of the last BGS auction?

Yeah. It was around the five buck range.

So just over $5, right?

Yeah.

Okay. Thank you.

Mr. O’Flynn, there are no further questions at this time. Please continue with your presentation or closing remarks.

Okay. Thanks all, for listening in. Once again, we're pleased with where we are. And with our year-end results. I feel we've got a good record delivering on earnings, proven ability to provide modest dividend increases, also comfortable with the balance business mix. Low-cost nuclear and coal, which, collectively, are about 87% of our generation last year on megawatt hours basis. Financial stability which has improved materially over the last 12 months. Solid utility restructuring done and over the longer term, prospects for improvement in capacity prices. So thanks all, for listening.

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