公共服務電力與天然氣 (PEG) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group Fourth Quarter 2005 Earnings Conference Call and webcast. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday, February 2, 2006 and will be available for telephone replay for 24 hours beginning at 1 p.m. Eastern time today until 1 p.m. Eastern time on February 3, 2006. It will also be available as an audio webcast on PSEG's corporate web site at www.pseg.com. I would now like to turn the conference over to Sue Carson, Director of Investor Relations. Please go ahead.

Thank you and good morning. We appreciate your listening today, either by telephone or over our website. I'll be turning the call over to Tom O'Flynn, PSEG's Chief Financial Officer, for a review of our fourth quarter 2005 results and a discussion of key issues but first I need to make a few quick points. We issued our earnings release this morning. In case you have not seen it, a copy is posted on our website, www.pseg.com. We expect to file our 10-K with the Securities and Exchange Commission later this month, which will contain additional information.

In today's webcast, Tom will discuss our future outlook in his 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 they will be achieved. The results or events forecast in our statements today may differ materially from actual results or events. The last word on any of our businesses is contained in the various reports that we file with the SEC.

As a reminder our guidance speaks as of the date it is issued. Any confirmation or updating guidance will only be done in a public manner, generally in the form of a press release, a Webcast such as this, or an 8-K or other SEC filing. PSEG may or may not confirm or update guidance with every press release. As a matter of corporate policy, we will not comment on questions regarding guidance during one-on-one meetings or individual phone calls.

In the body of our earnings release, we provided a table that reconciles net income to operating earnings for both the quarterly and year-to-date results. We've adopted this format to improve the readability of the release and provide the required reconciliations between the GAAP terms net income and income from continuing operations to the non-GAAP term operating earnings. Operating earnings exclude merger related costs. Operating earnings is our standard for comparing 2005 results to 2004 and 2006 for all of our businesses.

We exclude the merger related costs so that we can better compare our current period results with prior and future periods. By excluding the merger related costs, our results and guidance are consistent with the way Exelon is treating their merger related costs. Attachments to the press release provide the required reconciliation between the GAAP terms net income and income from continuing operations to the non-GAAP terms operating earnings for each of our major businesses.

Finally, Tom will take your questions at the conclusion of prepared remarks. In order to accomplish this call effectively, we would appreciate it if you limit yourself to one question and one follow-up. Thank you and I'll now turn the call over to Tom.

Thanks, Sue. Good morning, everyone. Thanks for joining us. I hope you've had a chance to review our release that we put out early this morning. On this call, I'll go briefly over our results for the quarter and the full year 2005. I'll also discuss our expectations for 2006, the overall market environment, and finally the current status for our pending merger with Exelon.

Briefly, operating earnings for PSEG were $226 million for the quarter, which excludes 6 million of after-tax merger related costs, an increase of $116 million or $0.46 per share from the fourth quarter of last year. For the full year, operating earnings also increased by 116 million or $0.41 per share. I'll talk more about the cause of this substantial, what we expect to be sustainable increase in operating earnings in a few minutes.

Power reported operating earnings of $105 million, were $0.42 per share for the quarter, more than 4 times the $23 million or $0.10 per share contribution last year. For the full year, Power contributed $418 million or $1.71 per share to PSEG's results. This was an increase of $76 million or $0.28 per share over 2004.

PSE&G our utility, reported operating earnings of $68 million or $0.27 for the quarter, a $4 million improvement from last year. For the full year, PSE&G reported operating earnings of $347 million or $1.42 per share, a 5 million increase.

And finally, Holdings reported operating earnings of $74 million or $0.30 a share for the quarter, an increase of $34 million from last year. For the year, Holdings had a record year with operating earnings of $196 million, a $61 million increase over 2004.

Summarizing the contribution by business, Power 44%, PSE&G 36%, and Holdings, 20%, a good balance. As I go through the three major businesses, I'll be using earnings per share to describe their various impacts.

At Power, improved nuclear performance was the key to the significant increase in earnings for the quarter and the full year. Overall, the five unit PSEG nuclear fleet had a quarterly capacity factor of 93% versus 64% for the fourth quarter of 2004. For the full year, our five unit fleet operated at a 90% capacity factor, despite Hope Creek being out for most of January. This represented an 8% improvement over the 82% capacity factor for 2004. For 2006, the plan anticipates an overall capacity factor slightly above 91%.

We've made very good progress with operational improvements at the site since the start of the Nuclear Operating Services Agreement with Exelon, last January. Our corrected maintenance backlog has been reduced by 75% and is now the best in the Exelon fleet. Upgrades to the facilities and improved communications have improved the work environment for the employees. We've also improved our capital and O&M efficiency. We appreciate that we still have work ahead of us before we achieve the performance level for the Exelon fleet. However we are very pleased with our progress to date and remain firmly committed to achieving this objective.

From a financial perspective, nuclear was a very strong contributor in the fourth quarter. Salem 1 completed their refueling outage and reactor vessel head replacement in a world record 25 days, that's 17 days ahead of our original schedule. Also during the quarter, all three New Jersey units performed well and had a combined capacity factor that was 8% higher than planned. These two improvements provided 483,000 more megawatt hours into the system at a time when prices averaged about $80 per megawatt hour.

The higher energy prices were driven by the onset of cold weather in the region, which increased natural gas prices. This combination of high prices and increased nuclear output, added about $0.09 to operating earnings for the quarter.

The strong fourth quarter we experienced in 2005 is obviously in sharp contrast to the fourth quarter of 2004, when Hope Creek was on an extended outage for most of the quarter. In the release, we indicate a 2005 benefit of $0.22 in the fourth quarter related to replacement power costs in 2004, $0.14 for the extended Hope Creek outage, and $0.08 for replacement power during the oil spill on the Delaware River last December that shut both Salem units for more than a week. As a reminder, Hope Creek will undergo its first refueling outage under the Nuclear Operating Services Agreement with Exelon this spring. In fall of this year, Salem 2 will undergo a refueling outage consistent with the 18 month refueling cycle for all three New Jersey plants.

2005 was also a year of improved operations for our coal fleet. We improved our availability over 9%, from 75% to 82%. We continued execution of our established 36 month plan. We saw an overall reduction of 20% in the total outage days and our capacity factor increased from 66% to 73%. The year also saw record runs at each of our Bridgeport Harbor and Mercer stations.

The absence of O&M costs associated with the Hope Creek outage in the fall of 2004 was somewhat offset by higher O&M costs at [inaudible] during the quarter. The net O&M benefit for the quarter was $0.07 per share. For the full year, O&M was about $0.09 per share lower than 2004. We also saw a year-over-year increase in depreciation and interest with our BEC plant in Albany coming on line mid-year and a full-year impact of Lawrenceburg which came on line in mid-2004.

Turning now to the market environment. In the fourth quarter, the increase in natural gas and energy prices resulted in mark-to-market losses of $0.04 per share for our non-trading, energy related hedge positions. For the full year, mark-to-market accounting reduced margins by $0.05 per share.

The vast majority of transactions we entered into at Power are not subject to mark-to-market accounting. The few contracts that do require this treatment have historically not had a significant impact on our overall results. We recognize that several companies pro forma out the impact of mark-to-market accounting. We've not taken this step but we'll do our best to clearly identify these impacts within Power and potentially Holdings. A summary of the $0.28 improvement from 2004 to 2005 at Power can be found in Attachment 7 of the press release.

Operating income for Power in 2006 is expected to be in the range of $475 to $525 million. The midpoint of this range represents an $80 million increase over our 2005 results. The key drivers to this increase are the higher prices for our nuclear and coal output that are realized because of the rolling nature of our forward hedge positions and continued improvement in operations in both nuclear and fossil.

There are three major items that will mitigate some of this gross margin improvement. Number one, higher depreciation and interest costs associated with the commercial operation of the Linden Facility and full year of BEC. Secondly, increased O&M costs, and finally, lower nuclear decommissioning trust or NDT earnings.

Now turning to PSE&G. For the quarter, the Utility reported a slight improvement in earnings from $64 million to $68 million, an increase of $0.01 per share. For the quarter weather was about normal, but slightly colder than the fourth quarter last year, which accounts for most of the difference. For the full year, PSE&G reported earnings of $347 million, an increase of $5 million from 2004, but a decrease in the earnings per share contribution of $0.02 due to higher shares outstanding. Expected earnings for 2006 in Utility are $315 to 335 million, a reduction of $10 to 30 million. Most of this reduction, about 17 million, is due to the assumption of normal weather for the year.

As part of the settlement of our 2004 electric base rate case, a $64 million annual depreciation credit was established. This credit expired on December 31, 2005. As part of the settlement, PSE&G was required to make a financial filing with the BPU in November of 2005, to support a corresponding increase in rates to offset the loss of this depreciation credit. This issue was expected to be resolved before the first of the year. However, we now expect the decision to be delayed until after the first quarter. The cost of this delay on both cash and earnings, works out to over $5 million pre-tax per month. Later this month, we expect to file updated financials for our gas base rate case. We're expecting a decision in December 2006, with new rates effective October 1st.

Now to Holdings. Consistent with our strategy to opportunistically monetize the assets of energy holdings, in late December we the sale of our lessor interest in the Seminole plant in Florida, at a gain of $0.18 per share. Earlier this week, we announced the sale of our two plants in Poland, with expected proceeds of about $300 million after tax, which compares with a book value of about 110 million. The gain from Seminole is included in Holdings' quarterly results of $74 million or $0.30 per share.

While the sale is a significant contributor to the $34 million increase in Holdings' results for the quarter, it was not the only driver. Operations at global, primarily Texas and South America, produced strong results, earning $0.08 more in the fourth quarter of 2005 than the same period of 2004.

Offsetting these favorable earnings were costs associated with redemption of 2007 bonds, the premium paid to bondholders along with some costs to unwind swaps, totaled $0.04 per share for the quarter. There was also a $0.04 loss year-over-year in the KKR portfolio due to modest losses in the portfolio and 2004 disposition gains not recurring. Our remaining investment in the portfolio is about $6 million.

Turning back to our Texas investments, we had a $0.01 loss from mark-to-market accounting related to a multi-year contract we signed at year-end. Such contracts provide financial stability, but also increase our exposure to mark-to-market impacts. During the year, holdings also made $400 million of cash distributions to PSEG, in the form of dividends and redemption of preference units. In addition, Holdings called for the redemption of all 309 million outstanding of the 2007 7-3/4% quarter bonds in late December and closed on that a few days ago.

Looking forward to '06, Holdings expects to earn $155 to $175 million, excluding any gain from the sale of the assets at Poland. The $25 to $45 million reduction from '05's record earnings is essentially the absence of the favorable impact from the Seminole sale that we just saw. We expect Holdings to contribute 15 to 20% of PSEG's overall results in 2006.

Now for a view of financing and cash flow. Cash from operations, excluding changes in working capital, was generally consistent with last year. Higher commodity prices will provide meaningful growth for Power, but will result in increased working capital requirements in the form of cash collateral postings and fuel purchases. In the near term, these factors increased working capital requirements by about $500 million at Power during 2005. In support of these higher collateral needs during the fourth quarter, PSEG and Power established an additional 1.125 billion of bilateral credit agreements with various maturities. We are very comfortable with our liquidity position and as of year-end PSEG had total liquidity available of $2.5 billion and the joint PSEG and Power facilities of approximately $1.9 billion available.

Despite the working capital needs I discussed earlier, total excess cash available to pay down debt which includes asset sales, securitization financing and offshore cash activity, was about $150 million positive. In addition to operating cash flow, this includes about $950 million of additional items; namely at Holdings, $525 million of net proceeds from asset sales and offshore cash; Power, net proceeds of $325 million from sale of Waterford; and PSE&G, 100 million of securitization bonds that were issued in September.

As a reminder, last month we announced a $0.01 increase in our quarterly dividend. This was the third consecutive annual dividend increase we've provided to our shareholders and demonstrates the continuing cash and earnings strength of PSEG.

As you're likely aware, the BGS auction will start shortly. The State of New Jersey will auction off one-third of its residential and small commercial load for a three-year period. With this structure, most electric consumers in New Jersey pay an annual price based on the average prices for the past three years. In a rising price environment, this helps to minimize the impact to customers.

Now briefly, the merger. Last week, the Pennsylvania PUC approved our merger with Exelon. In New Jersey, hearings for the merger review have been extended and are now expected to conclude on February 27. This delay is to enable the PJM Market Monitor to complete an analysis for the various alternatives for asset sales we provided in late December. The asset sale alternatives were all consistent with the proposed sale of 4,000 megawatts of fossil generation and the virtual divestiture of 2,600 megawatts of nuclear generation that was approved by FERC last summer.

Settlement discussions began in December and are expected to resume after the hearings conclude. Scheduled dates for the administrative law judge's initial decision and final order from the Jersey BPU will be extended as a result but no firm dates have been set. We expect to complete all the regulatory reviews including the DOJ and close the merger late in the second quarter of 2006. It may occur earlier if a settlement is concluded and accepted by the New Jersey BPU. That concludes my remarks and I'll now open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Ashar Khan from SAC Capital. Please proceed with your question.

Good morning.

Good morning.

Tom, could you just mention to us, what is the average in the '06 forecast for Power? What kind of an average BGS implied price is there for the BGS market that you would be serving in New Jersey? Could you share something? Previously you guys had provided as part of your presentations what the average embedded price was in the contracts. Could you share what the average embedded price is right now for 2006? Based on what the power forecast is based on.

Yes, Ashar, I'd say, number one, on any commentary on the BGS, be it price or any Market Data, I think just with the auction, the [FB] auction starting on Monday, I really need to stay away from any market commentary. In general, I think as part of that it'd be difficult for me to quantify or specify what our assumptions were. I'd tell you, that when we put out our guidance it was at the end of 2005. So, it was generally along the lines of the market at that time. Now since that time, there have been some puts and takes, we're generally comfortable with where we are at this point. But it was generally consistent with where we thought the markets were at the end of the year.

Okay. But -- you can't give us a data point as to what is the implied price in your forecast right now? What are you expecting your, the sales -- I guess you have some old contracts, some new contracts and all that. But what is the current embedded price right now in the portfolio? Is this something you can give some measure on?

No, I think all I can say is that there are obviously some BGS contracts that are of a public number that roll off at the end of May of '06. In pulling together our forecast, we use generally year-end market numbers. I'm not trying to duck your question. I just don't want to get into any indicators that at a certain point in time our price from BGS was "X". That's just unfair with the market -- with the auction just days away.

Okay. Could you share with us how much you're hedged in your portfolio for this year and next?

Yes. I'd say late in the year, I think at the third quarter call and at EEI, we talked about general forward hedged percentages. You may remember that we talked about nuclear and coal, nuclear and coal generate about 80% of our megawatt hours. More like 90% of our margin in megawatt hours, if you will. At the end of the year, I think, at November EEI and our earnings call just before that we said for '06 we were about 85 to 90% sold on nuclear and coal. In '07 we're about 65 to 75, in the following year '08 we're about 35 to 50. Those are generally good numbers.

We -- the other thing I think we said, is that we generally look to sell about 75% or more of our output coal for an 18 to 24 month period. I think those themes are still there. I think what with the BGS so close, we'd probably want to stay away from picking and tying those numbers. To the extent there is any meaningful updates in those, I'd expect our K that we'll file in the end of Feb. would have any updates on those.

Okay. And Tom, previously you had indicated that you were based on where you were last year, I guess, there was language that you expected double-digit earnings growth going forward.

Yes.

I'm just trying - is that still reaffirmed, right? You're seeing double-digit earnings growth beyond '06 for the next two or three years going forward? Is that a fair statement?

Yes. What we said is that we put out our guidance for '06 that we're still good with 345 to 375. And then we said that we expected earnings per share growth in each of '07 and '08 to be 10% or more off of that base. Yes, we're still good with that.

Okay. And then can I just ask you, you went to the power guidance of '06. And you said the impacts or positives were the higher prices and the rolling nature and the negatives were the higher depreciation, the higher O&M, and the nuclear NDT. Can you quantify any of these either on the negatives or on the positives so we can do the offsets, what you're facing?

Just a couple things. Then I should toss it to the next questioner. In general, the NDT, the net contribution of that this year is going to be around the $0.15 to $0.17 range. That's about consistent with where it was in '04. But on a normal year, we did some rebalancing and some realignment of some of our funds and in a normal year we expect it to be a few pennies. So, that's, call it $0.14, $0.15 differential or reduction from '05 to '06.

The other plant then is Linden. And we expect that to come on line in April/May. Just ballpark numbers, the cost of that, the asset cost about $1 billion. So, you can fairly easily figure out that we've got depreciation of that over about a 40 year period and we've also got IDC on that of about 7%. So, that's going to cause an increase in depreciation and relevant interest costs. Those are the big pieces. The other pieces, BEC, will be on line for a full year. Obviously, those plants contribute margin, at least the gas fired plant with these kind of gas prices, energy margin is minimal in the early years. The real value of those plants is in capacity and we would expect better profitability as RPM gets more firmly in place.

Okay. Thank you.

Sure.

Thank you. Our next question comes from the line of Paul Fremont from Jefferies. Please proceed with your question.

Thanks. Just quickly, can you go through the guidance for each of the segments again? I guess I heard Power is 475 to 525; Holdings is 165 to 175? So PSE&G and other would be what?

You said for Holdings, you said 155 to 175?

I thought I heard 165 to 175?

Yes, let me go through them. Power, you're right 475 to 525. E&G is 315 to 335 and then Holdings is 155 to 175.

155 to 175

155 to 175 and then we've got an offset at the parent. If you add those up and divide by average shares outstanding, you need to put in an offset for the parent. It's in the 70 to 80 offset negative range, which is expenses and financing costs.

Okay, and --

It's laid out in the press release on the second or third page.

Okay. And in terms of potentially reaching a settlement in New Jersey, I guess in the past both Public Service and Exelon has indicated that they were optimistic about potentially being able to reach a settlement rather than having it go to a litigated decision. Would that sort of remain the case today as well?

Yes, we still think that's a reasonable expectation, Paul. And it's consistent with how we've managed things in the past. You look at the '04 rate case we had or the major restructuring we had, back now five or six years ago. That's consistent. I'd say that for the next few weeks Dr. Bowering, the market monitor for PJM is scheduled to put some information forward to the BPU and I believe it will be public too with PJM. That will be over the next few days. He's on the - he'll be providing some testimony next week. And then he'll be back late in February.

During that process, we'll obviously be adhering to the schedule. After that point in time, there'd be an opportunity, we've had some discussions in December. But obviously since the start of the year there have been very active and productive hearing schedule. But after that point in time, there'd be an opportunity, we're going to try to achieve a reasonable outcome, if it's possible.

Last question for me is, any update on DOJ from the conversation in the Exelon conference call?

No. We continue to have a dialogue. I think no material updates. Obviously, we continue to have interaction and dialogue with those folks. It is taking longer than we had initially potentially anticipated, but we continue to have fruitful dialogue. I think we're making progress. Other than that, I should stay away from any specific play-by-play, Paul.

Thanks.

Thank you. Our next question comes from the line of Stephen Huang from Citigroup. Please proceed with your question.

Good morning. I had a question here on -- in Q4 for the Power segment. You guys reported $41 million in other income. How much of that was NDT related or was it something else there?

Yes, I'd say the lion's share of that would be the NDT. Of the $0.15 or$0.17 that I mentioned, I think to Ashar, that was largely third quarter and fourth quarter.

Largely in the third and fourth quarter?

Yes.

Okay. Now when you guys gave out your 2006 guidance, you talked about PJM capacity pricing at $3 per kilowatt year. Has that changed much since you guys came out with that late last year? I mean, that seems to be even below what you guys talked about in 2005, going into 2005. Any new indications there, Tom?

No, we've not seen meaningful changes in '06 capacity prices. The real discussion on capacity prices would be in the development of the RPM that would impact '07 and '08 and obviously thereafter. There hasn't been material changes to '06.

In regards to the Energy Holdings on the repatriation, how much money do you guys bring back because of the Jobs Act? And did any of that booked as a gain in earnings that we might to look to strip out?

No, it was 242 but we paid taxes on it that I think cost us $11 million. That was actually an offset because we paid a modest 5% tax on it. So, it was 242, I think it's in our press release.

Okay. And then depreciation. Can you just remind us on the BEC side, how much more additional depreciation would you expect there? What was the total cost of the plant?

It's a $500 million plant and it came in roughly the middle of the year. So, you would have a full year as opposed to a half year.

Okay. And the last question I had was on that $64 million depreciation. What you guys are saying is that you guys won't be able to deal with this until least the end of the first quarter. So, that's more less implying that there is $15 million that's pre-tax that's going away. Is that embedded in that guidance you gave or this is sort of everything is going to be incremental?

No, it is not. I think the guidance that we put out last October/November contemplated that we would get reasonable resolution of that, effective January 1. That's obviously a headwind, as I call it. There's puts and takes throughout the organization.

Okay. And Tom, one more thing. In the old days, you guys in 2004, you used to talk about the trading in the BGSS items in your Power division to generating about $150, maybe $200 million of gross margin. Now, with everything you have going on, is that still the case or is that a number that's now sort of changed?

It's still the case. I believe it's come down. If you look year-over-year, it has probably come down about 30 million-ish, if you look at overall activity, which would include PGSS. It would include other asset backed activities that we'd have like FTRs and ARs. It would also include a modest amount of trading that we do. I'd say that our trading, '05 to '04 has not been a substantial part of the business, but it was a lower number. Some of that is some market activity and also we have had some attrition of folks, to be honest. As the merger is pending, it is not easy on people, frankly, as there is anxiety. And we have had some attrition that has caused us to dial down activities.

So when we're thinking of the modeling aspect, at least for now, we should think of a run rate for the lower end of that, like 150? And then, but going forward, with the merger with Exelon, do you anticipate that ramping back up to more of that 200 range?

I think that's a strategic discussion with ourselves and Exelon. We have not done joint business planning, if you will. We need to be careful with DOJ and other things out there. But having some modest increase is not unreasonable.

Okay, great. Thank you.

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

Good morning guys.

Good morning.

Just wanted to ask a couple of questions, a couple of confirmations. Now I know Oyster Creek is run by Exelon, but could you give us an update on what's happening there lately. I know there's been a couple of reports about Oyster Creek. I just wanted --?

Yes. I should stay away from that. That is not our plant. It would be speculation. I am sure the Exelon people would be happy to address any questions.

But given that you jointly operate most of the plants now, wouldn't you be privy to what's happening there?

No. In fact, we need to be very careful about information sharing from a regulatory standpoint. So, no. They're obviously doing a great job, [Bill Levitz] and his team down at the island where our three plants, our two Salems and Hope Creek, they're obviously doing a great job for us. But that's really all that I'd want to comment on.

Secondly, I wanted to ask you about the 6/30 projected merger closing date. Could you outline the top two things or maybe top one thing that could delay the merger and also the top one or two things that could speed up the merger?

I think the major piece, the two outstanding things are DOJ and BPU. I think that we have talked -- generally thought that the BPU would be the critical path. That schedule the month of January was productive in terms of we had a lot of witnesses up and got through the schedule. Dr. Bowering who is the market monitor for PJM is a very important person. We, in late December, filed two scenarios on the 4,000 megawatt divestiture that we think is consistent with our FERC approval and consistent with all the themes that we've had to date. We did put more -- we put the two scenarios out there. Dr. Bowering has and is evaluating those, he'll make that information available and then there will be some additional hearings at the BPU, where he will have an opportunity to talk about those and have some Q& A.

So, that's going to be February, he's gone next week and then he'll come back in late February. After than then there would be -- the proceedings would still go along, but there would be an opportunity to have settlement discussions. The current date for the BPU to reach a settlement is May 15. As I think my prepared remarks said, we would expect that to be delayed, there's been no specific time line but Dr. Bowering's schedule pushes things out four or five weeks. So, that could cause a delay of as much of that period of time in the formal schedule. But, as we said before, we'd hope to have an opportunity to have some reasonable settlement discussions and I think that is going to be the major determinant of timing.

Got you.. Would you say the probability of your closedown time is greater than, let's say, 70%?

Yes, I'd rather stay away from that as well as bets on the Super bowl.

Got you. Understood, thanks a lot.

[Operator Instructions] Your next question comes from the line of Clark Orsky from KDP Asset Management. Please proceed with your question.

I had a couple questions on Holdings. The proceeds from the Polish plants sales, what's the plan there? Are you going to take out more debt at Holdings hold co?

We have not made any firm determinations at this point. If you look at '05, we paid up about 400 million up to PSEG and paid off 320 million or so including the premium in terms of debt retirement. As is our general practice, we look at general FFO and coverage ratios. We look to provide some fairness for the PSEG bondholders but also look to provide some cash upstairs. So the Holdings is not expected for a number of months. I was just announced a couple of days ago definitive agreements, we do not expect it for a number of months. We will assess that as we go along. But no firm plans at this time.

Okay. Can you tell us what the total debt at Holdings was at the end of the year?

I believe it was about 1.7 billion. That was before the 300, so the 300 got redeemed a couple days ago. So, 1.4 billion, in that range.

Okay. And I guess just on the Texas plants. I think you said you entered into some contracts or what have you. I was wondering what the hedge position for '06 is.

We're generally with our project finance - we have project financings down there on both Odessa and Guadeloupe and we're generally 50 or more, likely 75% hedged on a one-year basis. If you look, we're generally around the 50% range.

Okay, got you. And you're seeing stronger pricing there?

Yes. We have -- in Holding; Texas was a good pick up from '05 to '04. We are seeing a good pick up in [inaudible] spreads. In the contract I talked about, we did sign a multi-year contract. Generally, multiyear contracts we're able to get normal or hedge accounting on. For a variety of accounting reasons, we were not able to get it -- that hedge accounting to make sense to us. And it's only a $0.01 now. The reason I bring it up is just that it may increase the likelihood of getting mark-to-market issues going up, going forward.

Okay. I appreciate it. Thanks.

Thank you. Our next question comes from the line of [Greg Schultz] from SAB Capital. Please proceed with your question.

Hi. Just a couple questions. How much power did you generate for the year? And what do you expect under your guidance, what are you assuming. I know you gave me the --

I think our generation was about 49 or 50 gigawatt hours. If I've got my zeros right.

Yes, 50 gigs and then next year what are you looking at?

The same kind of range.

Okay. And then you're guiding if I look at this right for PSE&G, you are guiding operating earnings down a little bit.

Yes. Mostly weather.

Yes, that's largely weather?

I would say it's down 10 to 30 and weather was 17.

And then last question is how much debt you had at the end of the year at the parent, please?

Unconsolidated -- I may have to circle back and get that number. It's probably about 1.5 billion but we may have to circle back on that.

Okay. Thanks.

It's around that range including tax deductible preferreds and things of that nature.

Okay.

Thank you. We have a follow-up question from the line of Stephen Huang from Citigroup. Please proceed with your question.

Thanks. Tom, on parent and looking out to '07 or '08, are we still going to see 70 to 80 a year?

For this year, we will. It should come down over time with cash generation that pays down debt over a few years.

Okay. And then, what have you guys talked about in terms of your stated strategy to do with Connecticut once the contract ends at the end of this year. Would the power prices that you are getting out there right now, the step up is quite significant depending on what you guys plan to do with it.

Yes. We haven't specifically addressed our market strategy. We're obviously aware of what's out there in the markets. There are liquid markets up there. So, we do not give hedge ratios market by market. But, there's obviously opportunities for us to use the market to look at opportunities beyond the expiration of our contract at the end of this year. Just in terms of LICAP, we've been involved in LICAP discussions. The recent settlement, we have not signed onto it. We think there are some improvements that could be done, but we continue to be an active participant in that process and think there's a number of constructive pieces of it.

Okay. Was there any environmental issues with Bridgeport? I thought there was something there that you needed to look at?

There are some. And that would be some CapEx, it would be consistent with our -- generally consistent with the CapEx that we provide on a five-year basis. I think it's 2007/2008. Generally in the plan, we provide a CapEx 5-year look forward every K. We would be doing that in our K that we'd file at the end of the month.

And then was there anything done about, I believe is it Hudson, that you guys were looking at? Any update on that?

No, no update on that from what was in our Q. With our settlement, there are issues with us running that after the end of this year. It is a very valuable plant for PJM. And we have been having some discussions as outlined in our Q. With the environmental authorities, largely the New Jersey authorities thinking of a managed way to continue to have that plant available. But there's no material updates from our Q. I think it's pretty well outlined.

Okay. But the CapEx is also not embedded in there right?

That's correct. At this point, it's unclear the life cycle of Hudson. It's very clear in our minds that Bridgeport is an extremely valuable plant. It's here to stay. There is some CapEx we need to do that's generally consistent with our table. Hudson is more subject to discussion.

Okay, great. Thank you.

Thank you. We have another follow-up question from the line of Ashar Khan from SAC Capital. Please --

Tom, could you provide -- I believe there's some upgrades on the nuclear coming up. Could you just provide a timeline of those upgrades? Or have they been done. I thought there was an '07 timeframe.

It's more '07/'08. It has been -- the nuclear industry has had some other issues with a couple of other plants that have upgrades and that's slowed down the approval process.

Could you remind us the amount and timing now, in the planning?

We believe it's 170 megawatts and it's in the '07/'08 timeframe.

'07/'08 timeframe. Okay. Just going back to what you said. You said it was -- the output was about 50,000, and if I heard, you said the same output in '06. And n the beginning the beginning part of the call you said nuclear and coal is about 80%, correct?

Yes.

Okay. Thank you.

Yes. It's in one of our tables. Nuclear and coal is about --

It's about 40,000.

Yes, it's a little over -- I think it was about 84 or 85% this year.

Okay. Is that what you're expecting next year in 2006?

Yes.

So 84 - 85% of the 50?

Yes.

Okay.

Yes, it's actually 86% - I'm sorry. Nuclear is 55% and coal is 31%.

And that's what you're expecting again in 2006?

Yes. That's an indication that our facilities are running well and we expect that to continue.

Okay. Thank you.

Thank you. The next follow-up question comes from the line of Greg Schultz from SAB Capital. Please proceed.

Hi. A couple of follow-ups. The fuel costs. Are those expected to go - are those going to sort of grow next year? I don't know how your coal, how you were hedged on coal, just in general.

Yes, in general, we did see fuel costs -- we asked the question before but fuel costs pound for pound per ton we thought was going to be in the 13 to 15% increase. '04 to '05 we were probably more like a 20% increase. There were some deliverability issues and other things be it rails or --

Are you paying full market on that at this point?

Yes, we'd expect this year to be more -- the increase pound for pound would probably be more about 10%.

And then just back on --

Now, that doesn't -- when I say 20%, that's ton for ton you find us the total amount of coal is larger, good news because the plants will win more.

Sure, and then just on the sales that you make and at the prices. You hedged -- when the BGS comes up whatever price you get is the price you get. And so all your hedge sales are just on what you don't sell to the BGS, is that how it works? Like, when you were at 85% --

The numbers that I threw out, I think Ashar asked me that. I threw out the hedge ratio and they were in our EEI presentation.85-90, 65-75, 35-50 that's on our expected total coal and nuclear output, which is the lion's share obviously of the margin. A large - we've shown pieces in our IR stuff in the past. We obviously have BGS contracts that roll through that. But to the extent that that doesn't do all the forward hedging that we want, then we look at other contracts. They may be contracts with specific counterparties; they may be just general contracts within PJM or various liquid markets

But you don't -- I'm just confused -- you don't hedge the BGS piece beforehand, do you?

We generally -- I don't want to go into BGS capacity. But we generally have capacity here. We have facilities that are in New Jersey generally situated in good spots relative to the load. We generally have BGS contracts coming off and then would have generation available that could be used --

To replace those.

Yes.

So you generate 50 gigs, a large chunk - a portion of that will go to BGS at some price that we'll find out. And then a large -- then the remaining stuff you sold at some point last year -- I don't know at what point but throughout the year you sort of hedged out the remaining piece? Is that how it --

Generally. If you think about the hedge ratios that I tossed out, as time progresses, then things roll off. Other the things are added. Sometimes they're BGS contracts. Sometimes they do general market contracts. We generally think that kind of forward look is a roll forward that we want to maintain. Sometimes a little more hedged, sometimes a little less hedged, depending on a variety of factors.

I guess the problem that I'm having is -- and maybe you guys are just being very conservative, but on the guidance -- if I sort of to take a swag at what I think the BGS is going to look like and what prices were last year that you hedged at. It is sort of hard to get the numbers you are talking about.

Remember that to the extent that you are looking at '06 prices, the '06 prices are quite good. But we said in November we're 85 or 90% hedged.

No, but I mean even taking those lower sort of mid-'05 prices and then throwing in something for the BGS. I feel like I'm missing something.

You mean like -- that there should be more margin?

Yes. That's right.

Well, as I said there should be 80 million of after tax incremental margin through prices and a modest amount of output. But then, there are offsets. As I said -- so, you're right, there are some forward benefits and then there's offsets, let me mention three, O&M, the NDT then Linden, a little bit BEC depreciation and IDC. So I'd be happy to go through it off line and talk about it.

Okay. Thank you for the detail.

Okay.

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

Okay. Thanks everybody, for joining in. We're obviously very pleased with our year-end results. We think we've got a business model that balances earnings growth and prudent risk management. And we're pleased that we had some very good numbers coming out of all our businesses. We also look forward to continued progress in consummating our merger with Exelon. Thanks.

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