公共服務電力與天然氣 (PEG) 2004 Q1 法說會逐字稿

...Exchange Commission tomorrow which will contain additional information. I'd like to remind you also that our second annual analyst and investor conference will be held on Friday, June 25th with the web cast starting at 8 a.m.. We will be sending out details in a couple of weeks. In today's web cast Tom will discuss our future outlooks in his remarks, and so I must refer to you 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. The results or events predicted in our statements today may differ materially from actual results or events. The last word on any of our business is contained in the various reports that we file with the SEC. Finally, we would like to give all of you a chance to participate in the q and a session at the conclusion of Tom's remarks. In order to accomplish this, we would appreciate it if you would limit yourself to one question and one follow-up. Thank you again and I will now turn the call over to Tom O'Flynn.

Thanks for joining us today. To get us started I'll provide a brief overview of our earnings results for the first quarter of 2004 followed by a review of a couple of key first quarter events. For the first quarter we reported earnings from continuing operations of 271 million. On a per share basis, the results from the first quarter were $1.14. The key positive driver in the quarter was, as they anticipated, the benefit of PSE&G's electric grade case. Weather was basically flat compared to last year. The major negatives, also anticipated, include the loss of NTC revenues lower BGS margins and share dilution from our strengthening of the balance sheet. Other drivers included certain one time costs of power which I will discuss later, and the affect of the Collins lease termination at resources.

Looking at our wholesale energy business first, power earned 109 million or 46 cents per share from continuing operations during the first quarter. A decline of 32 cents per share from the first quarter of 2003. The loss of the NTC revenues at Power during the first quarter accounted for 12 cents of this decline. As we noted during the year-end call, the BGS contracts that went into affect on August 1st of 2003 have a seasonal shape to the rates, higher in the summer months and lower from October through May. Because there was no seasonal shape in the first quarter of 2003 and also because volumes were lower the year over year differences in BGS margins were meaningful, about 5 or 6 cents per share. Also during the first quarter we took advantage of the low interest rates to provide permanent financing on our midwest projects. I'll discuss the specifics of the deal later, but from an earnings perspective, this was about 12 to 15 months ahead of schedule, so there was some unamortized costs that we had to recognize. They totaled about 4 cents.

O&M and depreciation costs at Power were higher in the first quarter this year, with about half the increase due to costs associated with the Waterford plant becoming operational in the second half of 2003. We have also been doing some extensive O&M work on our Mercer facility, something we do about every 10 years. This added about 4 cents to our year over year O&M costs.

Turning to the utility, during the first quarter PSE&G earned 124 million, a 24% increase over the 2003 results of 100 million. This improvement is primarily due to the new electric distribution rates that became effective last August. By the way, the final board order on the rate case was issued last Friday. Weather for the first quarter was colder than normal, about 5 cents, but not as cold as the first quarter of 2003 which provided a 6-cent benefit. Net-net, we are 1 cent down. Electric volumes not related to the weather were also higher this quarter adding about 2 cents. The impact of additional shares outstanding and the 10-cent improvement due to the new electric rates account for the other changes in the first quarter.

On to energy holdings, overall holdings reported earnings from continuing operations of 43 million or 18 cents per share for the first quarter. This is about 7 cents per share lower than the first quarter of 2003. Almost all of the difference can be attributed to the write down of the Collins lease at resources. We closed on the termination of this lease agreement with EME earlier this week in exchange for 184 million in cash, which about 100 million is earmarked to pay taxes. We recognize that some investors have had concerns with respect to our exposure in a few of Resource's leases, arguably, Collins was the most problematic. While we are not happy about the modest loss, this transaction should help put the level of our exposure in perspective. As an added benefit this transaction strengthens the credit quality of our remaining investment in EME. Let me remind that you all our merchant leases continue to be current. Quarterly results for PSEG Global were in line with last year's results with minor benefits from higher revenues at SAESA in Chile and RGE in Brazil. Offset by reduced earnings at ElectroAndes, our hydro plant in Peru.

Now I would like to review a few key events that have taken place so far this year. We continue to mitigate our overall risk. As mentioned, the termination of the Collins lease at Resources reduced our exposure to EME. In February, using cash on hand Energy Holdings retired 267 million of debt. The next maturity at Holdings is in 2007. In the meantime, we are continuing to look at opportunities to monetize assets at Global that no longer fit into our strategy. In the second quarter we expect to close on the sale of a generating facility in Tunisia. Earlier this month the Global sold a portion of its shares in Luz del Sur, a power distribution company in Peru at a small gain. This reduced our ownership by 6% to 38%. We received cash proceeds of 28 million.

Also during the first quarter PSEG closed on a 4-year, $450 million credit facility, believed to be the first 4 year revolver in a power sector in recent years. In addition, we closed on a $600 million joint PSEG slash power facility with a 3-year term. These transactions replace two smaller 364 day facilities and were well over subscribed. Power issued 500 million of 5 and 10 year bonds at attractive rates in March. The proceeds combine with cash on hand we used to eliminate the bank financings on our two midwest projects and put an old 5 maturity behind us. In the near term we expect our Lawrenceburg plant, which should be operational during the second quarter, and the Waterford plant, which began service in the third quarter of last year, to be an earnings drag. Over the longer-term these efficient gas plants are expected to be profitable investments for PSEG Power. Financing activity at PSE&G this year is limited to a 286 million mortgage bond that matures in May and a 200 million credit facility that expires in June.

Also this summer the utility anticipates securitizing the defered BGS costs in the final year of the transition period that ended on July 31st, 2003. The anticipated amount of the securitization is 125 million. We may do some other economic refinancings during the year if interest rates remain attractive.

In terms of business risk mitigation Power's participation in the February 2004 BGS auction was a success. Although Power achieved its objective of revenue assurance, pricing was extremely competitive which could affect our margins later this year. Power continues to indirectly serve the 2003 BGS contracts as well as [Lodin], Connecticut and other locations with contracts with varying expiration dates. All told, Power has contracts for over 75% of the planned output for the next 18 to 24 months.

Looking at 2004, we are maintaining our guidance of earnings from continuing operations of 360 to 380 per share. We have earnings targets reached for our major businesses, power between 400 and 450, PSE&G between 320 and 340 and holdings between 130 and 150 million. Because our first quarter earnings were not as strong as first quarter results in 2003, there will be greater pressure on us to perform well during the rest of the year. This makes it essential for our generating plants, especially our nuclear units, to operate well during the summer.

This spring Hope Creek underwent a planned maintenance outage to help assure summer reliability. The return to full power has taken a little longer than expected because of some additional work, most of it on a nonnuclear side of the plant, that cropped up during testing. Salem 1 is completing its planned refueling outage and the replacement of the low and high pressure turbines of the main turbine generator. The new turbines will result in approximately 27 megawatts of additional capacity. During the outage we performed inspections of the reactor upper and lower heads and found no degradation. Last year we had the same positive inspection results for Salem 2 during its refueling outage. However, we plan to replace both Salem 1 and 2 reactor heads in 2005 as preventative maintenance measures.

In general, the energy industry continues to be in a highly challenging time. We're facing pressures from an over supply capacity, volatile energy prices and demanding capital markets. This could constrain our earnings growth in the near term. Longer term we anticipate a rebound in capacity prices. This would help improve future cash flows, improve our range of business opportunities and bolster our prospects for growth.

Before I take your questions, I would like to convey a few key points that Jim Ferland made at our annual meeting last week. Despite the increasing market pressures, we have continued to generate strong earnings and cash flows from our businesses. We greatly enhanced our financial stability and improved our risk profile. We have contracts in place for most of Power's output and we have put major regulatory issues behind us with the resolution of PSE&G's electric base rate case which completed New Jersey's market restructurings. Now I'll take your questions. Operator, are you there?

Yes, I am. Thank you. Ladies and gentlemen, if you would like to raise a question, please press the 1 followed by the 4. If your question has been answered and you would like to withdraw please press the 1 followed by the 3. If you are using a speaker phone, please lift your hand set before placing the request. One moment please. The first question comes from the line of [Osh Kosh Can] SAC Capital. Please go ahead sir.

Good morning, Tom.

Morning.

Tom can I - As you said, I guess, just wanted to touch base on the comment you just made at the end. If you went to the presentation, you provided to us at the summer meeting last year, I guess there was that part short for earnings growth projections and I guess board charts and I guess the anticipation was that after some flat years of earnings we would have a pick up next year, some measurable pick up next year to achieve your long-term earnings growth rate. Are you saying that is going to be hard to achieve as you said now with, you know, majority of your capacity under contract for the next 18 months, or can we see still certain elements which could show, you know, more lumpier growth next year as was in that chart from 9 months ago?

I would say -- and Jim made some commments at the annual meeting Tom that was picked up in the press and we don't have specific guidance for 05, I think Jim generally characterized earnings outlook for next year as flatish. I haven't got the chart, I remember the one you are talking about, but I haven't got it at my finger tips here. To the extent that there has been a modification since that time, it is probably a little more caution in the capacity price rebound. We still think it is going to happen. I think there was a chart we had shown at a recent presentation six weeks ago, but it may have had -- and it showed reserve margins and capacity prices historically when reserve margins were in the high teens. Capacity prices were in the 25, 30, 35 zone as reserve margins have gone up into the low 20s, capacity prices have fallen down to a very negligible level. So our expectation would be over time things look more like they did two, three years ago.

Okay. Thanks a lot.

Thank you. The second question comes from the line of Steve Fleishman with Meryl and Lynch. Please go ahead, sir.

Hey, Tom.

Hi, Steve.

How are you?

Good.

Just to clarify your statement on the guidance this year, assuming we have normal weather for the rest of the year and your plants run in a normal fashion are you stating that you will be within the 360 to 380?

Yes.

Okay. But you're just warning that you didn't have a great Q 1 although it seemed like that was expected from the factors.

Yeah, it wasn't that far -- I think we were within a couple cents or so of the street.

Okay.

Most of these things we have a lot of visibility on, they are pretty clear to us. Things like NTC, a couple things we did that were more -- I think were very helpful to risk mitigation, but were negative to short-term earnings, 4 cents for the midwest re-fi and 7 cents at Collins. Those are things that are great. Put us in very good position going forward, but its 11 cents out of the first quarter we otherwise hadn't planned.

And those two factors if we look at full year' 04, what are the impacts of -- I mean Collins I guess that's the impact of full year 04 lost earnings and I guess that's a hit and there are lost earnings.

Yeah, the lost earnings - it was - the 7 cents is the one time through some modest -- I think we also took tax issues upon final termination. If you look at the larger conservative way that we use the money, ie. to pay down debt that number would be higher by a few cents. Its probably - makes the 7 cents more like 9 or 10. The midwest at 4 is what we took first quarter though that swap on line is an amortization of costs probably for the year it is about a penny or two negative.

Penny or 2 additional?

No.

Reverse it back?

04 we get half back. And then next year it helps us a penny or 2.

Okay. And I guess secondly with respect to the comment that you, I guess, relayed from Ferland regarding 05, you know, one of the things when you lock into BGS, I know you guys try and lock in as much fuel as possible, and I guess I'm wondering as you look into 05, have you locked in the gas and coal necessary to meet the BGS, particularly obviously a little worried about coal.

Yeah, let me -

And is that incorporated in that kind of thinking that we have had to lock in higher fuel? Or is that still kind of open?

The generation standpoint last year I think we were 87, 88% of the kwh regenerator where nuclear and coal and we'll be in the same zone this year. Maybe a tad lower next year just as we get more gas in the family. From the gas standpoint we had some of that ore but some of that is more on a spark spread basis so we are careful to not edge too much gas because you get some extra picking plants that you want to be careful at how much those run.

Right.

From a coal standpoint we're in good shape this year. We do have some exposure next year as well as some coverage. I think we are in very good shape at Bridgeport. The other plants, Keystone, Hudson and Mercer, we have got partial coverage for 05 and we are working on wrapping that up to get broader coverage. But part of that bottom line, Steve, if we are selling more cautious, by next year part of it is some concern about coal prices.

Okay.

Now I remind you the coal prices, yeah we spend a couple hundred million or so a year on coal, but to the extent coal prices around the area increase around the clock especially off peak prices which we are seeing happen. Then that helps nuclear margin.

Right.

So it's -- we may pay more for coal, but net-net we will have ways to make at least some of that back.

Okay. I guess my last question is just on an adjusted - I guess a rating agency adjusted basis what did the balance sheet look like at the end of the quarter the way you guys look at it and remind us where it was at year-end and where you would like to be at the end of the year.

Yeah, the -- in our Q as you know we give the bank test, the bank test was I think at the end of the year. It was a shade over 57. Now it's it's 57.8, I believe it is. So that's gone up a little bit. However, we have taken the midwest re-fi that was previously was non recourse, ie. not debt for the purposes of calculation and that is now recourse.

Okay.

So as we would look at the rating agency type of calculation I think our number has improved modestly from the end of the year until the end of the first quarter.

Okay.

Thank you. The next question comes from the line of Gregory Gordon with Smith Barney Citigroup. Please go ahead, sir.

Thanks. Tom, is there a specific accounting reason why these one off charges associated with these restructuring are considered operating and not nonoperating?

It is a long discussion.

You know, your first quarter numbers would have been a lot -- these things aren't going to recur Q 1 next year and your first quarter numbers would have looked a lot better.

That's exactly right. From our standpoint the Collins deal is a good example. Why some of these things go up above the line versus below the line. This actually falls in the accounting literature to the extent they meet criteria of putting them below the line. Obviously we do that, but these don't. I just remind people of one thing that makes it even worse from a cash flow perspective. You will not see that this quarter, but you will see it in the second quarter. On Collins, the 184 million dollars that we received in cash flow is in the investment section. Therefore not cash from us. The hundred million of taxes we pay is a negative cash from us. So holdings is going to look quite troubled for cash next quarter. As you look at that, just put those two together. At the end of the day we get $84 million from the termination or sale of our interest in that unit. You can make your own judgments on whether you consider that operating, whether you consider it below the line. But they are twin sisters joined at the hip. We had that a year ago and if you look at kind of our quarter to quarter stuff, holdings cash flow first quarter of 03 was low becuse we were making a TU tax payment - TXU tax payment of about 110 that happened at the end of 02. If I can get any more -

Well, let's simplify it. Holdings, longer term earnings and cash flow profile, I mean, are they going to be in a position -- most investors assume holdings isn't going to be a significant cash flow contributor to the parent anytime. I mean, is there at least a marginal opportunity to get some cash out of holdings this year?

No ,no I think that - no I think we expect that they will be. They did redeem $75 million of prefered stock investments so it is effectively a dividend, ie, through a prefered redeption from holdings up. And we do expect holdings is a good cash flow generator and we expect that they redeem -- or monetize assets going forward and proceeds will be used to pay down some debt, but also to make meaningful cash contributions up.

Okay. Two more questions, the -- there is a comment in the press release that says PEG Power was successful in acchieving its hedging objective for the BGS, but there was a competitive auction and that might put pressure on your margins, you know, the power price in the auction looked like it was relatively flat year over year and my understanding is that you guys are now serving a lot more customers directly rather than giving up sort of a [vig] to the middle man. Why should we be concerned, or why would you guys be concerned then that the margins are going to be tougher to come by?

It's more if you look at prices in Feb of 02 versus Feb -- sorry, Feb of 03 versus Feb of 04. If you look at just the GAAP prices and PJM prices, the market prices went up by more than BGS prices went up. That's a simple way of saying it.

So you would have --.

So the overall extent that was -- and by market prices I mean if you just looking at simple basis say PJM West 12 months stripped forward. If you look at that and say, well, there saw lot of other things in the BGS stew, nevertheless, that's a good parameter and if you look at the PJM West price, Feb 03 versus Feb 02, you look at that delta versus BGS delta you'll find the prices went up less than around the clock prices. From a PSE&G perspective I think that's good. From a DPU perspective running the auction, I think applause for them, I think it shows that the auction works. It is a competitive, very fair process. I think our only point was from a power margin perspective, the auction was quite competitive and it places some more pressure on margins.

Okay. And then can you give us a little bit more meat around the bones on your coal issues for 2005? Just a piggyback on Steve's question. How much, you know, - how many tons of coal are you unhedged? What percentage of your coal needs are you unhedged?

Yeah, I would rather not go into the specifics on that and we are clearly in the middle of some discussions on some tradeoffs on some things, but I would just say we've got - at Bridgeport where we are best covered we have got a longer term contract there for the coal and it is international coal so for at least for 05 we need to think about transportation. Other places we have on going -- we have some coverage we have active dialogue and we may have more to say at a later point in time. I wouldn't want to front run our guys on discussions that we are having. There will be an impact on us, but as I said, we do expect it to be increasing around the clock prices, and we have seen that already which obviously benefits nuclear which is about 57, 58% of our overall kwh generation.

Okay. Thanks.

Thank you. The next question comes from the line of Carrie Steven with Morgan Stanley. Please go ahead, sir.

Carrie?

I just wanted to delve a little more into the comments regarding longer term earnings growth and some of the challenges that may be ahead. I know that Ferland kind of mentioned intermediate term kind of flatish earnings growth and I know people discussed 05 and you've kind of referred to that as flat, but looking out into 06, I believe you get quite a bit of dilution from your converts as well as the fall off of the Eagle Point income and I'm really kind of trying to understand, you know, how many, you know, what is kind of the longer term earnings outlook, you know, at the company for 06 to even stay flat it would appear to me that you would need some significant increases and capacity prices in that time frame. Am I on track for that thinking and how should we kind of -- how long is this flat earnings outlook going to kind of stay in place?

Carrie, I think it is in the environment in that we are careful not to be forecasting out too long. The two things you mentioned are certainly things that will impact EPS both the last year of our Eagle money is Jan of next year and the convert does come in in the fall of 05. It obviously helps our balance sheet, but is tougher from an earnings perspective. I think cash flow generation does begin to pick up quite meaningfully that helps us to delever, albeit that takes a little bit longer, but the deleveraging does pays down debt which saves us some money. I think from an overall capacity price standpoint its tough to put a pin on is it gonig to be 06 or 07. But you are right. We would hope for some improvement. There are only three places in our overall markets where we are getting very little value. One is capacity in PJM. Two is margins in the midwest and three is value in Texas. And those are just three commodity markets if you look at those places. We are getting very little value and I believe the upside is a little harder to put our finger on and commit exactly when that's going to be.

I guess when he says flat, I mean, he is assuming somewhat of a pick up in 06, is kind of what you alluded to.

Well, I think what you said is we have a couple of head winds that are going to impact us in 06 and you're right.

Okay. Can you maybe discuss just kind of a broader picture, you know, with the inclusion of AEP and Exalon and into the PJM market and what is your sense of the current thinking of what impact that's going to have on both just overall market pricing and PJM and then maybe look forward to how it might impact BGS on an on a going forward basis.

We generally think that's positive. We are strong supporters in PJM and we have been from a policy standpoint have thought the PJM methodologys, policies, pricing systems et cetera, the extent those can be spread to other regions makes a lot of sense. In terms of inclusion of other parties into PJM, that's something we have supported. I think in general, yes it may bring some other people into the BGS, though the playing field in the BJF is more constrained, or not constrained,by physical nature of plants, people and lives. So the extent that PJM broadens things, it doesn't change either the first three things which are obviously tougher things to change. The one up tick that we get I think is Waterford and Launchburg. Those are being dispatched, we expect on quite a modest basis to the extent that they get access to the PJM in a more open number of options for sale of power. We think that's an up tick.

You think that is more of an up tick than potentially some pressure on the wholesale prices in the current PJM market?

It is hard to estimate, but that's our general view. We don't see a material impact as we see it on BGS competitive pressures.

Not necessarily BGS, but whatever you sell into the wholesale market.

The same statement would hold true. And most of our plants are in PJM East which does have more constraints so the price I'm -- the index that I mentioned earlier PJM West, I just mention that not because that's a direct impact to us, but that's just the most readily quoted PJM number.

Can you just remind us how much Eagle Point income falls off in 06?

About 40.

Pretax?

yes.

Okay.

Yeah, this year we got 51 and next we get 40 pretax.

Great, thank you.

Your next question comes from the line of Leslie Rich, Banc of America. Please go ahead.

Hi, I apologize if you already touched on this in your opening comments, but could you talk about at PEG Power you had lower operating margins were negative 18 cents and you say that's from the MGC and BGS seasonality and I understand the MGC falling away year over year, but I just wondered if you could talk about, sort of, the BGS seasonality aspect of that.

The BGS that went into affect in August of last year, the prices that are -- the sticker prices, if you will, the same price is not paid for every kilowatt for every month of the year. That was the case with the prior BGS, in other words the BGS that started in the middle of 02 and ended in the middle of 03 and the one that would have been effective for us in the Q 1 03 period. With the seasonality effectively what the BPU thought, which makes sense, is that you are in the four summer months and prices are higher, so customers ought to pay a higher price. I think the BGS we are serving under - I believe its up about 14% in the summer months and down 6 in the winter months. So if the sticker price is 50, you know, if the quote of BGS price is 50 then it is 14% up in the summer and 6% down in the 8 shoulder months. This is one of the 8 shoulder months so that seasonality does impact us on a quarter to quarter basis. Over the year it doesn't make a difference, but we just point it out from a quarter to quarter standpoint. We would expect that to flip around and we expect it to be a meaningful assistance in the third quarter.

The other piece is volumes. We had a little less volume as you can see from the revenue on one of the attachments that impacted us also. Those two were about 5 or 6 cents. The biggest piece was the MTC, market transition charge that was a nice 12 cents first quarter of 03, but that ended end of July of last year.

Okay. So then if I could circle back to your comment about BGS margins might come down later this year I guess it doesn't make sense in June and July because your margins are actually going to be probably higher in June and July, so I guess you are talking about sort of the latter part of the year?

I think what was trying to refer to is the BGS auction that just took place in early February two months ago that goes into affect June 1st of this year. We did see -- and that was for 1 and 3 year durations. We did see the stronger competitive pressures. The number of participants, it was a very active market and so as that goes into affect from June going forward those margins are more competitive than what we have seen in the past. So it is still profitable and still very much the bread and butter of our business. But that is something we did see more competition. As I said, that is good for rate fares and good for PSE&G customers, but it just puts more pressure on PSEG Power markets.

Is that reflective of the absolute Power price was relatively flat, but coal prices have risen, so is that part of the factor? Maybe becuse you are not really setting your marginal cost of production on the price of gas.

Well what we would look at is more just -- if you look at on peak PJM prices or around the clock PJM prices at each of the auction dates, if you look at the amount by which those changed they went up by a greater amount, ie, cost for energy went up by a greater amount than the BGS delta. Now in the cost for energy that incorporates a lot of things. That incorporates gas prices that were higher. I think gas prices were in the mid 5's and they were 490 or something the prior year. It does incorporate capacity prices. They have been low and low. That's a consistent number in the two years it. It does incorporate coal prices that were higher this year than prior years. So all those get reflected if you look at a PJM West number.

Thank you.

Thank you. The next question comes from the line of Paul Ridzon with Key McDonald. Please go ahead, sir.

Your guidance of 360 to 380 includes the negative impact of Colins?

yes.

Okay. And then, now you certainly sound a lot more cautious on guidance than you did last quarter. I'm kind of wondering, you know, we knew about the MTC, we knew about a lot of these issues. Which of the issues are specifically most troubling?

Which of the issues are new? Collins is new. We are pleased. It mitigates risk, but it is, you know, close to a dime in dilution for the overall year. 7 cents on the one timer and then just on the on going earnings for the rest of the year, a couple more cents. So that's new.

If the street were to add that back, that Collins, how much better would you feel?

I would feel about 9 cents better. I'm sorry to be flip. I mean, it is an operating earnings and that's not going to cause us to change our range, but it does create some head wind that we have got to peddle a little harder through.

Bridgeport you said that you were mostly contracted on the coal. It still sounds like the transport is open?

Transport is open 05.

Past 04 it is open?

Yeah. Transport is fine for this year. We are in good shape for coal this year its really a longer term question.

And you don't give any head ratios on the coal?

No.

Okay. Thank you very much.

Thank you. The next question comes from the line of Paul Patterson with [Glen Rock] Associates. Please go ahead, sir.

Hi, guys.

Hi, Paul.

Most of my questions have been answered, but just if you could briefly once again -- Collins, I see here 7 cents and just to describe the ongoing impact of the Collins lease outside the 7 cents we see in the earnings variance you guys have -- sorry to make you go through it. It just seems a little complicated here. I see the 7 cents for this quarter and then on an on going basis, what is the impact?

It is a couple cents. It is 2 to 3 cents. It depends on use of proceeds assumptions. I think it was going to generate about 5 cents on an annual basis for earnings. It generates some. We will call that 4 cents of earnings we'll lose, we will pay down some interest. So I'm spliting it in half.

So you are saying a couple pennies, two or three pennys?

Yeah.

And that's on an annual basis going forward?

Yes.

Okay, for the length of the lease essentially.

Yes.

Okay. And then I think you've answered the other questions. I think you have answered all my other questions. Thanks a lot.

Thanks.

Thank you. The next question comes from the line of Paul Fremont with Jeffreys. Please go ahead, sir.

Two questions, really one is, in terms of the other EME lease investments that you have which are Powerton and Joliet, should we expect any type of reset of the terms in those obligations, or is there any discussion? And the second question relates to your uranium contracts. Can you give us a sense as to when those contracts come due, and whether you would anticipate any escalation in the commodity cost when you reset those contracts?.

EME Powerton Joliet, that was part of the overall discussion. Bottom line is no, we do not expect any changes there. I think we did get comforted that the Powerton Joliet leases, as I mentioned in my remarks, they have improved credit quality. Essentially EME has obviously done a very good job of doing a long term financing, stabling that credit very much. That helps the overall EME position. The EMEs are leasing and we also have a backstop from Mission that's also in a stronger financial position than they were last year. But there were no material change -- I think there were a couple small things that we picked up through a large stack of document closings. But no major changes and we feel better about those to be very honest. What we got is we own 2/3 of the lessor interest in Powerton Joliet to low cost low fire plants. Uranium contracts they are long-term and its discussed in our -- its discussed in our K. We do not expect any material issues there Paul. It is not on my radar screen at all.

Okay. And so the step ups in the lease payments that are currently due on Powerton and Joliet, we should expect that those will actually take place I think it is next year and the year after?

I'm not aware of major step ups in the Powerton Joliet lease payments. But certainly with the financial profile of the leases that was all set at the closing is something we very much expect to happen.

Okay. Thank you.

Thank you. The next question comes from the line of Rick [Bendezine] with [Chien] Capital. Please go ahead.

I think someone touch on this earlier. You mentioned volatile energy prices and market conditions throughout the quarter. Can you guys comment on the trading, hedging operations? Thanks.

Yeah. You will see in our Q that we did have lower margins reported on the mark to market basis on the trading side from the 3 to 5 million range which would have been lower than what we had last year. I think in general that's not consistent. That's on a mark to market basis and I think we have said before some of our overall objectives in the portfolio management we do some things that are not mark to market so they get bundled up on a normal purchase to sales. But I tell you, the trading environment was a little softer in the first quarter than we have seen it before. Some of the direction of it was -- wasn't quite as clear, so we frankly were careful to manage our risk quite tightly.

I'm sorry --

also, and also with the first quarter the BGS very much of our focus is on portfolio risk versus trading.

So we can expect a 3 to 5 million dollar loss or 3 to 5 million less than what is record.

I'm trying to give you a little preview of what you will see in the Q we will have out on the street in a few days. You will see mark to market margins in the trading in that kind of range. Those are positive margins. I'm saying those are less than you will have seen in other periods in the past. In the past, I think the first time we started reporting these CCRO tables was the second quarter of last year, and that number was in the 45, 50 zone for the first half.

Thanks.

Thank you. The next question comes from the line of [Sean Burke], HSBC Securities. Please go ahead.

Yes, hi. Can you comment and give us an update on the nuclear regulatory commission's oversight of your operations at Hope Creek and Salem, and specifically can you give us some idea at the March 18th meeting, the NRC pledged to have close scrutiny of your operations and I'm wondering if that has played a role in how the Hope Creek outage has gone from a 7-10 day outage to a 5-week situation.

Yeah, just to cover some of it, from the letter we got from NRC in late January, I'll remind you that they addressed some safety concerns, but I think the language of the letter said quite specifically that there were not any serious safety violations, but they were bringing to the fore ground some concern over station's work environment. We had actually commissioned a survey late last year on some employees that involved a number of interviews with employees. And we had -- some of the same issues were being brought up a few weeks before we got the letter. So bottom line we were in agreement and those are things we already had well under -- well under way. Since that time we have hired a -- an independent assessment team with some former senior industry executives. They have interviewed a very broad number of people, heve given us some feedback, and we expect a report from them over the next few weeks. We have taken a number of actions on training, on communication, on making sure that we have very much in the fore ground and a top, top focused safety conscious work environment. I think to your question on Hope Creek --

yes, I mean they promised to have close scrutiny of the operation. So, you know, Hope Creek according to Mr. [Bokin] on the 18th was supposed to be a 7-10 day issue, and now it is in week 5. It has not out, but it has had great difficulty getting up to 100% power and I was wondering if you might comment.

Just to run out the NRC issue, we -- we are very focused on it at all levels including Mr. Ferland, a number of things that we have under way on communication, on safety conscious environment, on the organization and clarity within the organization and we expect to work our way through those and have them as a high focus. We expect to be able to work our way through those in a reasonable period of time. In terms of Hope Creek, it has been out for longer. Some of that is to make -- I think one of my comments is to make extra sure the nukes run in the summer which is critical for us. Some of it was a little longer to be cautious on summer readiness. It has been at 75% power and we expect it to run up to 100% power in the next few days. I don't think there is a schedule currently out, but we expect it to be up to 100% in the near term.

Just a quick follow-up. I understand Salem might be running a couple days on refueling behind schedule because of some issues in the switch heart. I wonder if you might comment on that and whether or not the - I understand that the next NRC meeting may 19th has been put off until June. I was wonder figure there was a firm date on that yet?

Just on Salem, it is generally on schedule and it is a 30 plus day outage. If it is a couple days, that's not unusual for us to be plus or minus a couple days as scheduled. Once again we are going into the summer. It is very critical that if while we have the plant down we can polish it up a little more, that makes a ton of sense. In terms of a specific day for the next NRC meeting, we can get back to you on that.

Okay. Thank you.

The next question comes from the line of Daniele Seitz with Maxcor, please go ahead.

Thank you. Most of my questions have been answered. I was just was wondering, how do you visualize the interest rates -- interest expense trends? Do you see that declining eventually to 05, 06 or pretty much on the holding pattern? I thought that with a new cash flow in reduction of -- and asset sales, that actually might decline over time?

Danielle I think we do expect it to decline over time. It is more in the latter part of 05, 06 time frame as we complete our construction program at power and then free cash flow generation becomes quite strong. I think debt to cap it is now in the high 50s. We expect it to go to the low 50s so without looking at specific [inaudible]-- if that's a 10% reduction and that's -- and that will -- that would obviously help interest expense.

Uh-huh. And looking at trends at holdings, the Tunisian deal, is that meaningful in terms of cash? The Tunisian power plant?

Oh, the sales in the 40 to 45 million dollar range.

Okay. Okay. Thanks. Great. Thank you.

Yeah what I said - and actually Danielle I probably overstated interest expense reduction becuse the debt to cap goes down, but some of that is through debt reduction and some of that is through more equity. But we do expect the interest expenses to be going down more in the 06,07 time frame as free cash. It really helps that go down.

Okay. Okay. Thanks.

Thank you. The next question comes from the line of [Zach Shribel] from Dukane Capital. Please go ahead.

Hi, Tom, how are you?

Hi, Zach.

Just a question on the Powerton Joliet leases, we see on the Edison side that the lease expenses go up. Are you saying that your less income doesn't go up because you guys are effectively - the equity in that lease and the equity does not go up and it is the debt holders that go up?

Have I to look through it, Zach. I haven't got the schedules in front of me. The lease expense may go up. The question is, it may go up -- there is allocation of cash between debt and equity and then of course it may go up partly because Powerton Joliet [slavs] have some principal refi. Just because their lease goes up -- there's different people -

that are structured in that lease.

In general, most of the value we have for that lease, who I believe about 07 is, so we get very modest amounts of cash and the value we get is largely tax benefits. And as those tax benefits start to get less then the lease trusty, lessor trusty pays us more cash over time.

So your benefit stream is relatively fixed between a combination of tax benefits and cash over time with the composition changing?

That's exactly right. Yeah, you are on a fixed return. You hope to -- you booked a lease at the outset, you are on a fixed return over your net investment. Your net investment changes a little bit. But, yes, you are right, the first few years are all tax benefits and I think it is about 07, 08 we start to get actual cash.

Got it.

But of course tax benefits to resources are cash to holdings and cash to PSEG.

Got it. And just on, this I don't want to beat a dead horse here, a dead dog here in terms of the BGS margins, is the major difference that even though the prices are relatively similar from the cost to goods sold side, are we paying - you know, to Greg Gordon's question - a middle man? I thought this year we were paying less spread to a middle man and keeping it more for ourselves. I just want to understand from a modeling perspective if the prices are the same or similar, what really accounts for this sort of discussion around compressed margins?

Yeah, as you said the middle man, the vague that Greg is talking about, it is helpful to be a direct supplier. I think the comment is focused on this BGS that its really just the simplest thing that the price of BGS went up less than the cost. So as we talked about it at the end of the year in our Jan earnings call and talked about guidance for the year we talk looked at the forward market, we looked at what a reasonable price was of the BGS and the kind of margins we got. That was generally consistent thinking. But the prices were more -- the auction was a little more comepetitive. Once again still a very profitable business, still the bread and butter of power, but it places some modest pressure on Power's markets.

Will we still expect to see higher BGS margins in the summer of 04 versus the summer of 03 when we take the fact that we now have the seasonal pricing, we should be at increase versus the shoulders. Will the impact of the higher seasonal pricing for the summer of 04 more than offset the margin compression year over year? Are we still in for positive comps for the BGS margin for PEG Power in the third quarter?

Yeah, the seasonality is still very -- it is still a very material issue if that's what you are saying.

Right, but last year in the third quarter '03 we didn't have the seasonality, did we?

Seasonality started on -- yeah --

it was only for part of the traunches.

It was only for part of them. We have a greater percentage of seasonality. I believe the BGS is a little bigger dif on the seasonality. I believe the up is up instead of 14 and 6 I think it is 17 and 7 or something like that. The band is a little bit bigger going forward. So the seasonality will be a bit little stronger. And the comment on the BGS margins I think was not meant to -- we're getting a lot of questions on it here -- it wasn't meant to create a large stir. I think the BGS is very much of a process that you all watch. You ask about it both when it happens, before it happens. It is very important to us and it has been very profitable for us and we also think we have a very strong competitive position in it. I think the comment was just as a general matter we set up being a little more competitive. We are still a very good business.

But in terms of answering the question, and just trying to understand what you are seeing on sort of margin changes from the BGS, should we expect third quarter '04 ace business from PEG Power to be up or down versus the third quarter '03 given all the things we have spoken about?

We would expect, without geting into quarter to quarter guidance, I think I did say earlier, that the seasonal piece will -- while it makes things a little thinner in the shoulder quarter such as the first quarter, it will help us in the summer quarters. So by and large we expect the third quarter of this year --

got it.

-- to be a strong quarter. Stronger than last year and power would be a contributer in our view to that strength.

Perfect. And then -- and then we said equal point was the 40 million and that was pretax or after tax?

It is pre. Its 50 this year and 40 next year and zero thereafter.

And that's pretax?

Yes.

And to just put some of these nuclear issues in context, I mean, nothing's changed relative to how you expect these plants to operate this year, this summer, next year and so forth, is that correct?

That's exactly correct. Extent the plant's been down a little more, we just, as we said, it is critical that they are up, running during the peak times. So, I think we're -- in fact, the factor was 88% last year and we still expect it to be in that zone or potentially a couple ticks better.

Great thanks so much, Tom.

Thank you. The next question comes from the line of Andrew Brown, Citigroup Investments. Please go ahead.

My question is I guess after the Collins lease termination, I was just wonder if going forward you're happy with your portfolio or could we expect to see more of these types of deals, if you could talk a little bit about that.

I think we're happy with our portfolio within resources. From time to time there are monitizations. The KKR portfolio continues to get redeemed, if you will. But these are long, long assets. I think 2/3 or more of our lesses have single-a, double-a ratings. So we are comfortable with the portfolio. They continue to be a very stable source of cash flow and income and they have some good tax attributes that are helpful from an over all corporate perspective. This was something that we're pleased that this deal happened. I think heretofore we had four merchant lesses and now there's three. This was the one that I think people on that end of the phone and ourselves watch the most closely and thought was the most problematic, so while 7 cents isn't a good number, we are pleased that's the one that had the highest risk to it. I think that's a demonstration that the credit risk of these is quite manageable. But the bottom line, we have no intentions of broad monetizations, if you will within the resources portfolio.

You just took advantage of the situation in front of you, I guess.

Yes.

Okay, thank you.

Thank you. The next question comes from the line of Peggy Jones with ABN AMRO. Please go ahead.

A couple of questions. Back on the increased competitiveness of the BGS auction I just wondered if there's been any change in availability of transmission into your service territory in New Jersey and if there had been a compression in pricing between PJM West and the native service territory, and the other question I had -- I'm sorry that I missed what you said about the use of the Collins proceeds. Could you just repeat that?

Sure. On a transmission side, on a broad scale basis, no there has not been any material changes. As I think Carrie or somebody asked, maybe that was answer on the PJM question, the locational value of Power is largely based on people, plants and lines. And that has not changed. The one thing that has got a little clarified since the BGS auction is the Branchburg transformers on Oasis which is the transmission notification site within PJM, PSE&G transmission folks said that there is a potential for derating at the Branchburg facility. That was in early January. But it is about a thousand megawatts and derating about 30%. They just said that was a possibility. Since that time, in late March I think it was, it was clarified that it would be derated through early 05. So that does risk congestion in some of our areas. By in large I think we were asked when this came up we thought it was a general neutral for us. The congestion can be quite spotty I mean its not $2 a day it can be either 0 or 10, so it is a little hard to forecast. By in large it does create some congestion there. To the extent that you are short and the congestion's active then it hurts to you the extent that your long on those congestion -- then it helps you. By in large we see ourselves reasonably balanced over the year and so we think it will be generally neutral to us. But that has for some of the BGS suppliers who's may not be fully hedged it may have some impact on them, but thats more their business, I suppose, than ours.

Collins -- Peggy, I didn't mention it. I think I did just say that it was part of what we thought was dividend capacity, or cash contribution capacity upstairs to PSEG there is good cash flow there, but Collins obviously helps that. I think we'll keep saying what we have said is that as we get cash both from ops and one time events, we'll reduce debt, but also pay up dividends or payoff the prefered. Same thing in my mind. We'll look to generally keep the PSEG holdings credit profile consistent with what we have talked to people in the past. Three times FFO's is as good a number as any. It is just something we look like, not as a rule, but that's a general guideline we have talked about in the past. I think it will say in the Q that we have bought back about 20 million of holdings bonds since the last SEC filing.

One last question, what did you say that capacity pricing was now in your area? You mentioned it a couple of times and I just didn't hear it properly.

It's in the 6,8 dollar per kilowatt year kind of zone.

6-8 dollars?

Maybe -- that may be too tight a range. It is modest amounts.

Thanks very much.

Thank you. And now I'm showing a follow-up question from the line of Paul Ridzon with Key McDonald. Please go ahead.

Actually my question was answered. Thank you.

Okay. Must be lunchtime. If that's all --.

Okay thats all sir.

Just as a couple concluding remarks, thanks all for listening. We think we've got a good record for living on earnings, a good business balance, low cost coal and nuclear as we've talked about here, financial stability with good cash flow and reduced risk, and solid dividend that we ticked up a tad a few months ago. We hope to see some of you at our conference in late June and thanks for joining.

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