公共服務電力與天然氣 (PEG) 2004 Q2 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group's second quarter 2004 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 Friday July 30, 2004, and will be available for telephone replay beginning at 1:00 p.m. eastern today until 1:00 p.m. eastern on Tuesday, August 3, 2004. It will also available as an audio webcast on PSEG's corporate website, at www.pseg.com.

I would now like to 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, and Frank Cassidy, President of PSEG Power, for a review of our second quarter 2004 results and a discussion of PSU. 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. We expect to file our 10-Q with the Securities and Exchange Commission on August 2nd, which will contain additional information.

In today's webcast, Tom and Frank will discuss our future outlook in their remarks, and so I must refer you to our forward-looking disclaimer. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that they will be achieved. Results or events predicted in our statements today may differ materially from actual results or events. The [INAUDIBLE] on any of our businesses is contained in the various reports that we file with the SEC.

Finally, both Tom and Frank will take your questions at the concussion of their prepared remarks. In order to accomplish this effectively, we'd 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.

Thank you. Early this morning, we announced our second quarter results of 50 cents per share. This was about 19 cents per share lower than the comparable period last year, and driven largely by the 26-cent decline in earnings per share for PSEG Power. We also disclosed that we've lowered our '04 guidance to a range $3.15 to $3.35 per share.

I want it say right up front that we're very disappointed with our second quarter results and the need to change our guidance. Frank and I will spend some time today describing what happened during the quarter and the environment in which we will be operating in for the remainder of the year, and in some instances, into next year. Given the significance of Power's second quarter, I asked Frank Cassidy to join me today to go through some of the operational details at Power. Before I turn it over to Frank, I'll spend a couple of minutes on our overall results and some quarterly impacts from PSE&G and PSEG Energy Holdings. After Frank has talked about operations, I'll return to talk about changes in our '04 guidance. After that, we'll turn it over to questions.

PSE&G was up 17 cents from last year's comparable results, largely based on the results of the electric base rate increase that took effect last August. Utility also had a slight earnings pick up and some modest electric low growth in the territory, about 4.4% higher on a weather-adjusted basis than the first 6 months of last year. This was offset by weather impacts, which were unfavorable to '03, by about 3 cents per share. At Holdings, results for the quarter were 8 cents below the second quarter of 2003, due primarily to lower project income at PSEG Global and lower lease income at PSEG Resources.

As for Power, the 26-cent decline in reported earnings for the quarter was heavily influenced by the 14-cent loss of the MTC revenues. The collection of these revenues ended on July 31, 2003, at the conclusion of the restructuring period in New Jersey. Included in the second quarter results for Power is a benefit of about 19 million or 8 cents per share versus last year for the nuclear decommissioning trust fund. This benefit is net of the ongoing accretion expense related to the ultimate decommissioning of the plants. We moved to a yield-based strategy for the non-qualified fund, because of its more predictable earning strength, which triggered the realization of gain we had accumulated.

Non-qualified fund represents about 12% of the 983 million decommissioning fund. The qualified portion, to the order of 88%, had about 150 million of unrealized gains as of June 30. These will create some offside benefits from the MBP investments as the gains are realized. I'll now turn the call over to Frank.

Thanks, Tom. In a nutshell, Power had a difficult quarter. Before giving you the details, I would like to remind you that Power has a stated objective of having at least 75% of our planned generation under contract. We believe this is a prudent way to manage the business; it is not, however, without risk.

This means that when our assets are not operating as planned, we need to enter the market to purchase replacement power. With that in mind, results for the second quarter were driven by several major factors, as follows: Our nuclear units had operational issues that resulted in the a quarterly capacity factor of 77%, versus a planned level of 89%.

At the same time, one of our New Jersey coal plants, the two-unit Mercer station, had extended outages to complete installation of pollution control facilities. In addition, some incremental O&M expense was incurred during the nuclear and fossil outage periods. During the quarter, around the clock PJM [PHONETIC] [INAUDIBLE] prices were running over $42 per megawatt hour, or more than 20% higher than the comparable period last year. Finally, an unfavorable congestion dynamic developed in PJM, due to the de-rating of the Branchburg switching station transformer that is maintained by PSE&G. This congestion dynamic resulted from a 30% de-rating of the transformer.

This is the first time since PJM introduced locational marginal pricing in 1998 that a transformer of Branchburg's size and location has been de-rated. Simply put, the cost to serve load within the Branchburg vicinity increased disproportionately to the revenues derived from generation assets owned by Power in New Jersey. The combination of all of these factors resulted in an impact on second quarter earnings of about 48 million or 19 cents per share. This includes about 12 million or 5 cents per share due specifically to congestion.

Summarizing nuclear's unplanned outages during the second quarter, Hope Creek continued its maintenance outage begun on March 20th until it started its return to service on April 13th. The work done during this period was part of an overall preventive maintenance program to ensure the long term performance of the unit.

The scope of the full Hope Creek refueling outage has been extended to continue work on control drives and valves that were started in the spring. The cost of replacement power, including the higher congestion costs for Hope Creek, was about 14 million or 6 cents during the quarter.

Salem I began its scheduled refueling outage at the end of March. The original work plan included additional days for a steam turbine replacement as part of a 63 megawatt upgrade. Early on, there were weather-related delays, and we also needed several additional days to isolate and conduct non-nuclear valve repairs. In addition, we proactively increased the scope of the outage work to enhance the longer term performance of the unit. Overall, the refueling outage ran 26 days longer than expected, which resulted in 13 million or 5 cents of unplanned replacement power.

Salem II experienced a transformer outage in late May that resulted in an 11-day outage. Replacement power costs totaled about 4 million or 2 cents per share. In addition to these replacement power and congestion numbers for nuclear, which added up to 31 million or 13 cents per share, were O&M costs of about 9 million or 3 cents for the quarter directly related to the outages. In the fall, Power expects to incur additional replacement power costs during the Hope Creek refueling outage and higher O&M at the site.

The outage at Hope Creek will last about two weeks longer than originally anticipated, but will result in a 10 megawatt upgrade. We are also continuing our efforts to improve the safety conscience work environment at our nuclear facilities. We initiated this process last fall with an initial survey of the employees at the site. In late January, the NRC sent Jim Ferland a letter, asking that we conduct a formal assessment of the work environment at the site, and we've done that.

We've had several discussions with the agency. And at a public meeting on June 16th, the senior leadership at the site and I outlined our integrated plan to make improvements. This meeting was constructive, and we expect a written response from the NRC very shortly. It's important to note that during the June 16th meeting, the NRC reaffirmed its view that the inherit safety of the plant is not and never was an area of concern. Following the outages earlier -- earlier this year, our nuclear units have operated safely and reliably. The combined capacity factor for all five units in our fleet for June was almost 94%, and July looks to be about the same.

Switching now to an update on our coal plants. In our first quarter 10-Q, we indicated some delay by the contractor in installation of SCRs at both our Mercer units. The SCRs are in the final stages of construction, and both Mercer units are operating at full capacity. As with our nuclear units, it was necessary for us to purchase replacement power at a cost of 8 million or 3 cents per share.

As a result of the SCR installation, Mercer's operation is more environmentally friendly during the key summer months. As a final note on our coal plants, I want to mention that our coal needs are about 90% committed for 2005, and about 70% for 2006. By the way, all-in commodity and transportation costs for 2005 are about 13% higher than comparable 2004 prices, a very reasonable level, given the current price environment.

The last item I want to discuss is the value created by PSEG Energy Resource and Trade, or ER&T. The number we talked about for this incremental value is north of 150 million per year. In the second quarter 10-Q, one of the CCRO tables will indicate negative 12 million in trading income for the quarter, and negative 9 million year-to-date.

Let me emphasize that the components detected in the CCRO table cover just one element of the overall value provided by ER&T. Namely, the trading that we do on electricity, gas, and other fuels that for accounting purposes are given mark to market treatment. Overall, I expect the ER&T's value in 2004, the combination of mark to market trading, as well as other products such as transmission rights and our gas supply business, to be on a par with last year. That is, in the 150 million range. This is lower than what was included in our initial guidance for the year, perhaps by as much as a dime.

Summing up the second quarter, Power experienced 19 cents per share of unexpected costs, 16 cents for replacement power and congestion, and 3 cents for incremental O&M. For the remainder of the year, we expect incremental impacts of 10-15 cents per share, including the Hope Creek outage, and related market dynamics in the fall. We've already experienced the nickle of this impact in July, due to cooler weather. In addition, our trading results, while on a par with last year, may be as such as 10 cents below our plan for 2004.

Going forward, we expect the improvements of our generation facilities will put Power in a much more solid position for improved profitability. Our focus continues to be on both safety and reliability of our operations. Over the long term, we're striving to move our base-load nuclear capacity factor back to beyond the 90% level.

In addition, we're placing greater emphasis on improving the availability of our fossil stations. The environmental upgrades at Mercer position the two coal-fired load following units there for solid long term service in PJM. That's it for Power. I'll turn it back to Tom.

Thanks, Frank. During our first quarter earnings call, we indicated that despite charges associated with the Collins lease termination and refinancing of the Midwest debt, we were sticking with our original guidance range 3.60 to 3.80 per share 2004. But pressures upon this range were developing; namely, the recovery from those charges, which totaled about 11 cents per share, was highly dependent upon the operation of our low-cost nuclear and coal units throughout the year.

However, as Frank outlined, we have extended outages at Salem I and Hope Creek through May and at Salem II in June. While the outages were very expensive in terms of replacement power and O&M cost, it was not until recently that the impact of a few other issues became more apparent. The scope of the fall Hope Creek outage, the market dynamic associated with the Branchburg transformer de-rating, and July's weather.

July is traditionally a very profitable month for Power. The lack of a typical New Jersey summer weather to date, however, will contribute to the erosion of 2004 profitability. Specifically, THI hours about running about 20% below normal for the month of July. We've updated '04 guidance to a range of 3.15 to 3.35, and expected earnings from each of our companies have been updated. We expect Power to earn in the range of 300 to 350 million. Holdings is on track to meet its original earnings guidance of 130-150 million for the year.

PSE&G, our regulated utility, is now forecasting to be about 20 million higher than originally expected, or in the range of 340 to 360 million, due to slight improvements in low growth for the electric business and more favorable winter weather. We're not going to be providing any specific guidance for '05 at this time, as we're in the midst of our planning process. But I'd like to point out a couple of factors that Frank mentioned that are going to continue into '05. Higher O&M at both our nuclear and fossil facilities are anticipated, as additional upgrades are made to the plants and new plants come online.

Our trading expectations for 2005 are likely to be consistent with our 2004 results. And finally, the market dynamic we've seen as a result of the Branchburg transformer outage is going to continue until that equipment is back into full operation in mid 2005, as indicated on Oasis. In summary, for 2005, we're no longer expecting to be flat to our old 2004 guidance of 360 to 380, as previously indicated.

Keep in mind that since the last PGS auction, PGM West around the clock energy prices have risen into the mid $40 range, an increase of about $7 per megawatt hour. On a longer term basis, this is very good for Power. But, given the prudent nature of our objective to term up more than 75% of our plane generation, we will see virtually none of this benefit in 2004, and only a modest amount in 2005.

However, as existing contracts roll off, Power has the potential for significant upside in 2006 and beyond. Finally, the financing activities during the quarter. We were very successful in extending the term and size of our credit facilities at PSE&G. In June, we closed on a $600 million 5-year credit facility that replaced two existing facilities -- a $200 million, 364 day facility, due to expire in June, and a $200 million, 3 year facility, that would have expired next year.

This transaction increased the total capacity of PSEG's liquidity facilities to 2.6 billion, of which 1.9 billion was available as of June 30th. We have very manageable maturities over the next several years. In 2005, we have 125 million at the utility, and in '06 we have a total of 650 million -- 500 million at Power and 150 at the Utility. The next maturity for Holdings is not until 2007. So far this year, Holdings has returned 300 million to PSEG, through the retirement of some preference units and ordinary dividends.

During the second quarter, Global closed on the sale of its generation facility in [INAUDIBLE], and reduced its ownership interest in [INAUDIBLE], a Caribbean distribution company, with combined proceeds of 75 million. The retirement of 267 million of holdings in February and the 41 million in maturities that had been repurchased during this quarter, are part of our continuing strategy to deleverage Holdings.

In light of our reduced earnings expectations for the year, our initial projections of cash have been modified. We now expect to have cash requirements after dividends in Cap Ex in '04 of around 100 million. This reduction from our prior estimates of 0-200 million positive is a result of lower earnings for the year and the timing of some tax benefits. Remember that these numbers do not include proceeds from any asset sales or holdings that are above 200 million year-to-date.

At the end of the second quarter, our debt level was 58.3%, as measured by our parent lenders. Our year-end debt level is expected to be around 57%, in line with last year's level. You know, because the percentage is not expected to go down from '03 doesn't mean we've not made progress on our deleveraging. We converted 800 million of non-recourse debt at Power, which was not part of the 2003 calculation, to 500 million of 5 and 10-year debt and attractive rates earlier this year, a year ahead of schedule.

Before taking questions, I just want to mention some other key issues. Our financial position is strong, and we increased the dividends earlier this year with the expectation of future modest increases. Nothing that has happened this year has changed that objective. PSE&G, our regulated utility, continues to deliver safe, reliable electric and gas service to our customers. Investments that were made in enhancing the electric infrastructure in recent years are being recovered in the new electric distribution rates that went into effect last August. Modest to low growth in our service [INAUDIBLE] is providing some upside to our forecast for 2004 and perhaps in 2005.

Holdings continues to concentrate on the profitability of its existing investments. The termination of the Collins lease earlier in the year eliminated the most significant credit concerns from our leasing portfolio at Resources. Operations at Global have been strong this year, and we continue to look for opportunities to monetize or otherwise reduce risks associated with the Global assets. On Tuesday, we issued a release announcing our acquisition of TECO's [PHONETIC] 50% interest in its HI [PHONETIC] partnership. The acquisition cost was modest. With 100% ownership of the asset, it will provide us greater flexibility to manage these plants in a manner that takes maximum advantage of opportunities in the Texas energy market.

In closing, I'd like to remind you that in spite of last quarter's difficulties, the fundamental value of Power's assets remain strong. As we look at today's current market conditions, we see substantial upside over the coming years. With that, operator, I'll now open it up for questions.

Ladies and gentlemen, we will now begin the question-and-answer session for members of the financial community. If you have a question, please press the 1 followed by the 4 on your phone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the 1 followed by the 3. If you are on a speaker phone, please pick up your handset before entering you request. One moment, please, for the first question. The first question comes from the line of Greg Gordon with Smith Barney. Please proceed.

Thanks. Hey, guys, good morning.

Good morning.

Good morning.

As I look at this -- the year-to-date performance, it seems like, you know, a lot of stuff I had anticipated, but you've got this incremental 20-25 cents of cost between now and year end that you're telling us to expect. Just to make sure I understand what you're saying, 5 cents of that's already been incurred as a lost opportunity from weather, and the remaining 15 cents or so is from congestion and from the outages, is that right?

I think what we said was, that, we expect for the remainer of the year -- that is the second half -- 10-15 cents related to replacement power, the Hope Creek fall outage and greater O&M, and then we've incurred five cents of that in July.

Okay, that's consistent. I guess, you know, when I look at what -- try to estimate what the cost of the incremental two-week outage is, it doesn't seem like it's even close to 15 cents a share. Is there some sort of negative trading position that you guys got caught in because of this Branchburg de-rate, or you know, some sort of pressure on those margins that you're experiencing that you could explain to us? Are you, like, momentarily below that 150 million-dollar gross margin target?

It's not a negative trading position, Greg. It's incremental O&M in addition to the replacement power for the Hope Creek outage.

Okay. And as I look at all of these things, there's a lot of things that have impacted your operating performance and will through the end of the year, and probably through the middle of next year, because the Branchburg's transformer won't be fixed; but it looks like that the majority of these things are reversible if you guys can get back operating at a normal course of business. I mean, is there anything on this very long list of issues that you're having, that you think is a systemic problem that you're going to have a hard time reversing over the course of an 18-24 month period?

I guess what I'd say, Greg, is the unit -- the operational problems at both the nuclear and fossil units, we expect them to behind us when we get through 2005. I do expect in addition to Branchburg, which you mentioned, that there'll be continuing O&M pressure at nuclear for another year or two, as we are -- as we're getting the units to the condition that they need to be for long term success.

Okay. Thank you, guys.

Your next question from the line of Stephen Fleishman with Merrill Lynch and Company.

High, guys.

Good morning.

Couple questions. I guess, first, with respect to your overall thoughts on lower earnings outlook, back at the first quarter, you noted a little bit of concern of lower margins in the last BGS auction. I mean, how much has the company noted, I guess, specifically in any of the points that you have today. Obviously, you had lower margins because of some of these other issues, but could you just give a little more flavor on how, if at all, that is in your thinking, either '04 or '05 or longer term?

I think, Steve, when you talk about the first quarter, we talked about margins above the market, if you will. That was a new concept and may have been a little confusing to people, but the -- the good news of the auction, was that prices were up. The around the clock prices, a metric for one benchmark you use. I'm pretty sure there's a lot of pieces to the recipe, but around the clock prices, PJM West were 36-37 bucks at that time. That was good and that was about 4 to 5 bucks higher than the year earlier in Feb of '03, when the prior action took place. So that was good. I think what we had seen is in the prior years, we had seen the BGS go for a premium to the sum of the parts, and we did not see that. We saw the BGS auction as highly competitive in '04 -- it was very close to -- it was really right at, in our view, the market. So you take the 36, 37, around the clock price, you add up congestion, load shaping transmission, all the other pieces, and the BGS going price was right around equal to the sum of the parts. Going forward -- I think, [INAUDIBLE], at the end of the first quarter, to the extent we expected any BGS premium -- that's a term we'll use -- that was not there, though at the same time, absolute prices were good, because they had come up in January and early Feb -- those had come up, gas prices had come up a little bit so we were --- we're still in reasonable shape. I think going forward, it's a competitive market out there, and we need to be reasonable and modest in our expectations. Prices are up, and that's the 7 bucks that I was kind of using, 36, 37, plus 7, now about 44-ish. That's good. That's good for Power long term, but our expectation for premium above the market will be quite modest going forward.

Okay. So that -- okay, so obviously, you come to next auction there's this higher price that's out there. But, obviously, there's a higher cost to serve the price as well? But, I guess, in some of your units, particularly nuclear, there's going to be fixed cost, and that's where you upside could really come in?

That's correct, Steve.

Okay.

There isn't a higher cost to serve on two-thirds of the kilowatt hours we produce, which is O and nuclear.

Right. Okay. Secondly, could you just explain a little bit more the weakness in the quarter at Global and Resources? What drove that?

It wasn't material. I think in Global, down a little bit due to the California stuff -- you may remember we did a project fansing back leveraging of that deal late last yea,r so just quarter-to-quarter, that's down, I think, a penny or two for currency changes. And then, the other is -- resource is the primary thing is the absence of the Collins lease. It's good to get it down, but absence of earnings. So no material pieces, just really, small things here and there.

Okay. And then, I guess, finally, if you could provide a little more flavor on these higher nuclear and fossil spending next year, and then the trading operations. Well, particularly, I guess, on the spending, I mean, how much higher do you think that will be than it -- than it was before? Or, is next year going to be anywhere close to this year's spending? On O&M?

Let me cover trading, first. I think as I said in my direct remarks, we expect our trading performance this year to be in line with prior years, and I'd expect that to continue. On the O&M side, while qualifying this to say that we're still in the midst of our planning process, as I mentioned, particularly in our nuclear area, I would -- I'd see some additional O&M over what we've experienced in the past, but not in comparison to what we're spending in 2004.

Okay. And then, finally, just on congestion costs, what do you think the full year impact of the Branchburg issue is? I mean, it was -- I guess it's more or less depending on the time of year?

I think what it did, it did exacerbate the cost of some outages, which is really the key. When we had the outages in the second quarter, it materially increased the power cost.

Okay.

This year, it's in -- you know, we're estimating 10 million -- this may be a little more year-to-date -- and I think when we initially saw this happen we thought that perhaps we'd benefit in the second part of the year. We do not think we'll benefit and it may -- it may take away, actually, a little bit.

Okay. Thank you.

Our next question comes from the line of Oshara Han with SAC Capital.

Good morning, Tom. Most of my questions are answered, but Tom, I just want to clarify one or two comments. You mentioned that you're not providing '05, but you said that '05 would be below the flat guidance, versus '04, I guess, your old '04 -- the old '04 was I guess 360 to 380. So are you saying directionally it's going to be below the 360 or the lower end of that?

That's fair. Yeah. The long way of saying it is that we've previously said 360 to 380 for '04 and we'd be flattish for '05.

Okay.

So that implied a 360 to 380 for '05, and we think that's now too optimistic, and that's the only point we'll say. We're obviously working hard on '05 guidance -- we'll see what we can provide at our October offsite.

Okay. Thank you.

Our next question come from the line of Paul Patterson with Glen Rock Associates. Please go ahead.

Hi, can you hear me?

Yes.

I wanted to touch base with you on the Branchburg outage. I think the last time I met with you guys, the meeting here in New York, you guys said that there was about 12 to 14 basis differential other than what the congested -- was higher than what it should be, so to speak. Is that about right -- is that what you guys have been experiencing recently?

When when you say 12 --

I'm talking about megawatt hours [OVERLAPPING SPEAKERS] Yeah, 12 to 14 dollars in megawatt hours. My recollection is that Frank said when you guys were at the Wall Street Utility Group?

Well, that may have been -- are you saying the east/west split?

Yeah, the basis differential between east PGM and west PGM because of this Branchburg outage -- associated with this Branchburg outage.

Certainly at times, because it's hard to put a direct number on it. It's influence heavily by weather and is influenced by plant ops.. So we see a number of, you know, around that 12-ish number year-to-date. We think we will have some further negatives through the rest of the year. It is dependent, though, as we've said, on plant ops and also on weather. For us, because we've got a lot of plants in the north, there can actually be mitigating factors to it when we get better weather.

[INAUDIBLE] weather. Right. I guess what I'm sort of wondering here is that, I mean, with the plants coming back online, it would seem that this basis differential should actually help you guys? Right? I mean, that's what I read in the press release as well, that ordinarily these -- this congestion probably would have helped you except for the fact you guys had plants that were out and headed by Power. Is that accurate?

I think that's a good assumption, however, it's turned out to be a little more complicated than that. Your memory for the Wall Street Utility Group presentation I think is right. We said that from a historical basis, 5-7 dollars traditional difference between the east and the west, that we were seeing numbers that were going to be higher than that. I think what we found is that -- and you can see this if you take a look at some of the statistics on the PGEM website -- what we've found is that there has been a divergence of the traditional relationships between various buses in the east, and that's caused from some deltas between prices we're receiving at the generation buses and those that we're paying at the load buses. So that while generally, you're correct, that it ought to be a help, there are offsetting factors.

Okay. But I mean would it be net-net a help once these plants are back up and running in 2005?

With normal weather.

Okay, with normal weather. And then I guess --

It can't be -- it's been -- we've had some losses in July. It -- because, with Scottish weather we're having here, the Branchburg issue becomes a tougher one for us.

Okay. I'll follow up on -- offline on that. Let me ask you about trading. What were the -- what are the earnings associated with your training operation, if you could remind us, for 2003; and am I right to understand that you expect them to be flat for '04 versus '03 and for '05?

Hang on one second, Paul. Yeah, just on a -- oh, oh, I'll hit the CCOL tables and then Frank can comment on the broader things. The CCOL tables for the 6-month ended basis last year were about 41 million?

41 million is what you have.

41 million positive '03 -- 6 months.

That's mark to market?

I'm sorry. That's mark to market -- that's mark to market trading per the CCOL tables that Frank gave some comment to -- and we want to reiterate that's just a part of the overall ER&T business -- or activities. So, '04, that was about negative 9.

Okay. So it's a differential of about $50 million.

Yes. Though we are, as Frank commented on, the ER&T activities are really part of a broader piece here -- of the mark to market pieces here. There are other pieces that are not mark to market, for various accounting specifics, including things like transmission rights, and of course with the BGSS, that's all a part of that.

Do you expect those--

For 2003, that number was $140 million, and as I mentioned earlier, we expect that to be comparable this year.

Okay. So it's the mark to market element that seems to be the big fluctuation, is that right?

That's exactly right. I think the point of Frank's call is that to the extent you see or don't see the CCOO mark to market tables, as inclusive of all of the activities of the RFT. The piece you see is down, some other pieces are up. Net/net we expect to be about the same in '04 as we were in '03.

And '05 would be the same as well?

We haven't put our plan together, but that's a reasonable expectation.

Now can I ask you what caused the change in outlook? I mean, you're saying that you basically expected to be sort of flat. What changed your outlook in terms of the trading operations from what your previous guidance was?

What -- if you go back to what we've been able to do in past years, we've had increases in performance in every year since we've formed the unit. Further, we entered the year with more free net generation than we have in prior years; which all things being equal, should allow us to create more -- more value by trading around the assets. As it's turned out, with some of the declining liquidity in the markets and other factors, we have not been able to achieve that. And that's where the delta comes from.

Okay. Then, finally, the 8 cents would be NDT, the nuclear decommissioning?

Yes.

Well, what's the outlook going forward? I mean, you mentioned that you were switching to the yield net and that you had gains, and it sounds like there might be some more gains that we might be seeing. You know, how much more -- how should the outlook going forward for that NDT look and when would it end, if you know what I mean?

Yeah, I think this was a single move -- the non-qualified fund is about 12% of the business, so it's relatively modest to make a move in investment philosophy, if you will. I don't think we foresee by a move of the other 88% on a one-time bases. That being said, 150 million of net unrealized gains generally bleed in as securities turn over. Now, I should say that these are managed by outside trustees as subject to NRC restrictions and everything else, and we are in largely in control of outside managers.

I think it's reasonable to think that the NDT fund could generate a few cents a share of earnings, is the -- if you -- you see a normal turnover period for that 150 combined with our forecast for accretion expense, a few cents as share on annual basis of NDT contribution is reasonable. In a better market -- Okay, so two cents on an annual basis. Next year --

Two to four.

Two to four, and then next year, we should detain the 8 cents of net/net and we should be going down a little bit in '05 versus '04?

That's correct.

Okay, thanks a lot, guys.

Okay.

Our next question comes from the line of Paul Ridzon with Key McDonald. Please proceed.

Can you hear me?

Yes.

Is there any recourse to liquidated damages on the SCR delays?

That's a matter that's in litigation currently and I'd rather not answer it.

Are these SCRs currently operating?

Yes, they are, and they're operating to -- pretty much to spec.

You're not having any problems with synergy when [INAUDIBLE] fired theirs up?

No. I can add that the contract does specify liquidated damages for delays and service.

What was the impact for those delays, again?

The impact was -- give me one second -- the impact was approximately three cents a share, $8 million.

It appears as though, perhaps, you're playing some catch-up on reliability spending. Could that spill into '06 as well?

We're playing some catch-up. I'm not sure I'd phrase it quite that way, but we are -- we have -- we are doing some work at our nuclear units on a more rapid basis than we expected, and that could spill to '06 to some extent.

When does the Eagle Point contract drop off?

In '06. Okay, thank you very much.

Our next question from the line of Michael Goldenburg with Luminous Management. Please proceed.

Good morning, guys.

Good morning.

Hi, when I add up your individual net income numbers and I aggregate them and divide, it seems I'm getting a range of about 310 to 350. Does that mean that the numbers you're providing are closer to the bottom end of the range?

No, if you add them up, we'll be in the 300 to 350 and 340 --

Yeah, yeah, yeah. There's apparent expense number that's not in there. It's in --

No--

[INAUDIBLE]

Negative 35 mill, something like that.

35-40, so if you add up the numbers and strip out 35-40, I think the, at least by my calculator gave me a pretty even distribution and I think the distribution of those three pieces is wider than the 315 to 335, as as you would expect.

Yeah. I'm getting about 310 to 350. So --

Yeah, if you do it again, put those numbers in. I think it gets you about 7 or 8 cents beyond those two ranges on either side.

And as far as the negative cash flow impact, you've stated that cash flow projections have moved somewhere between 100 to 300 million in the negative direction over your previous guidance. Is there any intention to plug that hole with either debt or equity or are you planning to just, you know, shift your liquidity balance downwards and keep going?

Yeah. I -- the -- I mean, the implicitly does get plugged with debt [INAUDIBLE] and debt being retired, it would just be a modest amount of short-term debt outstanding. We still think we have a very strong cash flow debt retirement improvement story. I would -- as I said, it's about 100-ish negative, after Cap Ex, after dividends this year, after sales bring it back back up positive, which you know is about 200, so that brings you up in the positive number of 200 year-to-date. To the extent we do more asset sales -- and I think we've consistently said we consider monetizations in various products, especially in Holdings, that would be reasonable and to do, that would obviously help meaningfully with that retirement. Last thing I'd say is the going forward, Cap Ex improves quite materially '04 to '05. So our deleveraging fundamentals continue to be there.

Then no equity plans whatsoever?

No, not at this time.

Okay. And final question, in dealing with the NRC, they -- they obviously stated that there is no safety concerns or anything like that, but should your plants encounter one or two more, let's say, small outages, what would you expect NRC to do? Would you expect them to step up there kind of aggressive stance, or do you think they would just let you fix those? You know, if one or two more problems occur?

That is -- before Frank hits that -- don't forget that from an equity standpoint, we have a $460 million convertible preferred that's currently outstanding. It does mandatory convert -- it does convert into common equity fall of next year. So we've already got, you know, 12 months from now, whatever -- 12, 13 months from now -- a big chunk of common already coming in on a mandatory basis.

Uh-huh.

The NRC has consistently given us feedback that the units are safe to operate and that they see no issues with the plans that we've laid out for improving the safety conscience work environment and the general reliability going forward. So, I do not expect, you know, based on another incremental outage or two, if that were to occur, that there would be any increase in their oversight from what they currently have planned.

They would not ask for an extended outage or anything like that?

I see no probability of that at this point.

Okay. Well, thank you and good luck in the future.

Thank you.

Our next question comes from the line of Jeff Truvanowski [PHONETIC] with George Weiss and Associates. Please proceed.

Hi guys, it's Greg Donovan, actually. Could you elaborate a little bit on your coal position? You said 90% committed to in '04 and 70, '05. Have you experienced any rail problems that have been publicized?

I think the years are-- What I said was,that we are 90% hedged in '05, and 70% in '06.

Okay, are there any exposures in '04?

No.

Have you experienced any rail problems getting coal delivered? And can you talk about what the stockpile level is in terms of days?

As you know, since you're asking the question, rail chipping is tight, and we've had some tightness; but our stockpiles are fine, and we've been able to work through those -- the tightness in the rail shipments.

Okay, great. Thank you very much, guys.

All right.

Your next question comes from the line of Leslie Rich with Columbia Management Advisors. Please proceed.

Hi. If I look at your chart for committed power that you've provided historically, it looks like only 10% of your supply is really going to be determined by the 2005 BGS auction. Does that sound about right?

Uh, 2005, auction -- yeah, I think that's about right. Yes.

Yes.

Leslie, when I said the upswing in power prices was great, it really doesn't help us in '04 -- only modest help in '05, that's obviously part of the equation. We have -- that's the way we manage the business. But, as -- but there's a huge upside there as current contracts roll off, perhaps as much as 75 cent to a dollar per share longer term.

But that wouldn't be until '06, '07?

As the contracts roll off, that's right.

Okay. And then, in conjunction with the incremental purchase of TECO's interest in the Texas plants, are there incremental earnings drags from depreciation or interest extense associated with those?

No. In fact, we expect it to be modestly accretive, as I think we said in our press release -- some had some modifications in some of the accounting policies, but we expect it to be as much as a couple of cents accretive. We will see that debt, but 440 million dollars of debt for 2000 megs that will come on to our balance sheet in the next quarter. But -- assuming the deal closes the next quarter, that is all non-recourse project financing.

Okay, and then finally, with the converts, you've seen a lot of other companies talk about potentially, you know, buying back some of the stock in conjunction with the converts. Is that something you might think about doing?

No. Not at this time. I think the converts is going to convert, it's going to be real equity. We're very sensitive and focused on maintaining good credit quality. We have some good in cash flow story maybe longer term than maybe opportunities for stock or purchases, but certainly not in any way conjunction with the convert.

Okay. Thank you.

We also have a direct -- about 80 million a year, and that's in '04 and that's likely to continue in '05.

Okay.

Your next question comes from the line of David Reynolds with Banc of America Securities. Please proceed.

Mine's been asked and answered, thank you.

Thanks.

The next question comes from the line of Gerald Sensor with Institutional Capital. Please proceed.

Thank you. Just wanted to know, given the performance of Power, whether the management and the Board would consider taking more radical steps, like thinking of outsourcing the operations there or doing something else to ensure the performance improves?

That is -- we already have our partner in nuclear operations, Exalon [PHONETIC], who is the largest operator of nuclear generation in the U.S. assisting us with the turn around at Salem and Hope Creek, that's through substantial employee rotations, as well as other forms of assistance. Longer term, we have a lot of confidence in the team we in place now and in the program we have in place. As of the NRC, if we continue to see problems, there's nothing that's not on the table.

The next question from the line of Sean Burke with HSBC, please proceed.

Hi. I think the difference between the first quarter call and this call, it's become pretty clear that the NRC's oversight of your operations has played a major role in the extended outages and the higher costs that you have at your nuclear plants?

We've stated that publicly, yes.

Yeah. If the NRC has yet to issue a final report, on how they'll review the operations going forward as a result of the safety conscience work environment plan, I mean, how -- how -- how realistic is your 90% capacity factor goals and estimates going forward?

Oh, just prior to this call, I got off the phone with Hub Miller, who's the region I administrator, and he just faxed me their letter closing out their investigation. And this will be on the NRC's website, I think typically a couple of day delay, so you'll see that soon. They said that we've identified no -- no serious safety violations, they agree with our assessment of the issues at the plant. They say that there's no issues or events that have put the plant or the public at risk -- and the staff -- that raises with the staff any significant safety concerns. They said our plant appears to address the key findings of both of the NRC and PSEG. As I mentioned earlier, they've been completely supportive throughout, and we expect that to continue.

But there still seems to be quite a few smaller problems that continue to crop up, and I think those are the surprises. I believe most recently on the July 19th action report, that there was a problem at Hope Creek with the high pressure cooling and ejection system, that the plant failed a safety test. That was supposed to be fixed by today -- do you have an update on that?

That is fixed and we're out of the 14-day limited condition of operation. Mention again, we've had June and July capacity factors, but 94% of the five-units as a whole.

Thank you.

The next question comes from the line of Jeffrey Gilderstein with Millennium Partners. Please proceed.

Thanks, good morning.

Good morning, Jeff.

Just want to make sure I understand the last paragraph in the release. You talk about the higher nuclear and fossil O&M expenses. Are you seeing the continuation of what we're seeing in '04 at the same level? Or are we expected to see a year-over-year increase in '05?

Recognizing, again, that we're not in a point where we're going to give you detailed answers on all of this, I -- on the nuclear side, I expect -- I expect O&M to be on a comparable kind of range to where we are this year. On the fossil side, recall that we'll have the first full year of our Launchburg [PHONETIC] facility in there and half a year of our Bethlehem Energy Center facility, so that's going to provide -- that's going to cause some incremental O&M there.

Okay. And, is the nuclear outage schedule -- is that similar to this year?

Yeah. We're setup in a fashion where we do two outages every year. I would not expect them to be as long next year.

Okay. So -- but you still expect the O&M on nuclear to be comparable, even though the outages won't be as long?

Yes.

Okay. And, then, the next two items you point out -- and you went over this, I just want to be clear -- that the more modest revenues from trading, the continuation of that have being year year-over-year should be fairly comparable?

Yes.

Okay, and the Branchburg de-rating, if plants are up and running, as planned, I would think that would ease, no?

Very much so. It's the combination of the two factors that gets you in trouble.

The combination of?

Outages and the Branchburg transformer.

Okay.

As well as -- as well as the Oasis site, at that branch we're posting it's coming back on at the end of June.

Okay. Thanks, guys.

Your next question comes from the line of Margaret Jones with [INAUDIBLE]. Please go ahead.

The first question I had, I just wanted to be sure I understood on what you just said, Frank, about a letter from the NRC. Have they officially approved the plan that you filed with them, is that what you were saying?

Yes.

Oh, that's great news. So what that means, is that on an ongoing bases you'll monitoring those metrics that you mentioned, and obviously, working on the issues at the plants?

Yep. When you see the letter, Peggy, you'll see that there are a couple -- beyond what we originally filed, there are a couple of other things we agreed to in a conference call a couple of days ago. They relate to additional performance metrics and meetings. Nothing serious. I should note this is -- this closes their findings. They have reserved, and we expect in a week or two to get confirmation as part of their mid-cycle assessment letter on what the nature of their inspection activities will be. But the investigation is closed out.

Great. And what will actually be the agenda during the Hope Creek outage? If that's a relevant question to ask? Are there specific things that you have indicated that you plan to accomplish during the outage?

Yeah. In addition to refueling and normal maintenance that we do in the these, the primary thing that we're doing in that outage and what leads to the extension, is an extension over -- extensive overhaul of control rod drive mechanisms, which have been an operational problem for some years, and should really put the unit in a much stronger operational position going forward.

And how long do you expect the outage to last?

52 days.

Okay. And the last question I had, was -- do you have any update on the tax bill, and the issues with regard to cross border leasing for Energy Holdings?

No. And the House is still supportive of -- but there's no new news. We still think, as we talked about before, there's no -- very, very little evidence of retroactive punitive tax legislation, and the -- in the fall, I think we may hear something more to close that out. But we still think that it's likely that that piece of legislation does not remain in the bill.

Okay. Good, thank you.

The next question comes from the line of Rick [INAUDIBLE] with Cheyenne Capital. Please proceed.

Hi, good morning. Apologize if this was covered already. Can you give us your thoughts on the rating agencies giving you a revised cash flow and earnings guidance, and what impact that could have on the dividend going forward if they were to take action? Sounds like you guys are relying -- potentially relying too heavily on asset sales going forward? Thanks.

Well, no, I think we're a little -- well, first of all, the agencies we have obviously communicated this to the agencies, giving a head's up. I wouldn't want to speak for them, but we've obviously communicated. I think what gives us our strength going forward is strong improving cash flow. And don't forget, Power's Cap Ex goes from about 700 this year to about 300 next year is in our K, and then falls off a little bit thereafter, and that with some -- with some cash flow is quite helpful. One of the biggest piece of the change from '04 -- of the reduction in '04 -- part of it is reduced earnings, but the other is the timing of some expectations on tax side. There were some tax benefits we thought we'd get this year -- now it's probably more likely we'll get it in '05. So, that's not a material differential. In terms of the -- so I think we have operating cash flow, as well as complemented by asset sales. From a dividend standpoint, we think our cash generation and deleveraging fully supports a dividend, so even if these kind of levels or pay-out ratio is in mid 60s or something, we just -- quite reasonable, given the norms in the industry.

Thanks.

The next question comes from the line of Greg Gordon with Smith Barney. Please proceed.

Okay, just a follow-up question on that point. Do you expect an upward revision in your Cap Ex budgets coming out of reevaluation of what the spending ought to be at the nuclear plants, and the potential Cap Ex you might do to keep one of your coal plants running? I forget the name of it. But could you remind us what that sort of decision tree looks like on that coal upgrade?

We don't expect any substantial differences in our Cap Ex budget from what we've shown in the recent Ks and Qs. There may be ins and outs here and there. What are you referring to, Greg, is the potential Hudson upgrade, which we've -- traditionally, we have left that out of our Cap Ex for the K and Q because we have not concluded that that's an appropriate investment as yet. If we chose not to do that, the unit won't operate after the end of the 2006.

Thank you.

The next question comes from the line of Steven Fleishman with Merrill Lynch, please proceed.

Yeah. Can you hear me?

Yep.

Yep.

Okay. Just a couple of clarifying points. For 2004, the nuclear O&M, how much will it be higher than what you thought in your initial plan?

In the 50 million range.

Okay. Secondly, for the trading business, you said it's now going be flatish with '03. How much lower is it than what you thought in the initial plan?

I think I said 10 cents a share, Steve.

Okay, so 10 cents lower than you thought, but flattish with '03?

Correct.

Okay. And just a clarify on the fossil costs, I mean, the Lawrenceburg and Bethlehem, I mean, those plants were expected to be factors in '05 before any of this happened, so I don't think that's new.

No, I agree with that.

Is there other higher fossil costs?

No.

Okay.

It's comparable levels otherwise. Yeah, I think -- the way the question was phrased previously, I had mentioned those incremental numbers, but that's not new information.

It's not actually the way the question was phrased, it's more the way it's mentioned on the release on '05 factors, as being, you know, as being ongoing issues.

Well --

Uh --

I think the way we meant that is year-over-year and year-over-year comparisons.

Okay, but just to clarify, in the old '05 guidance of flattish, you already had those costs in there?

We certainly had that Bethlehem and Lawrenceburg in there, sure.

Okay, so the difference is, it might be for '05, is that nuclear is staying at higher costs than you had previously thought, and that -- and the tradings at a lower level than you had previously thought? And then--

Hello?

I'm afraid we have lost Mr. Fleishman. As a reminder, ladies and gentlemen, if there are any additional questions, please press the 1 followed by the 4 at this time. Please continue to standby. One moment, please.

I think we're all -- if that's it, thanks all for listening. We'll be having our analyst meeting in Short Hills, New Jersey, on October 8th, which will be webcast for those of you that can't make it out. But we hope a number of you can, and we can provide more details on some of the issues we've been taking about here. So thanks all for tuning in.

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