公共服務電力與天然氣 (PEG) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group first quarter 2006 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 one followed by the four on your telephone.

As a reminder, this conference is being recorded Monday, May 1 of 2006 and will be available for telephone replay for 48 hours beginning at 1:00 p.m. eastern time today until 1 p.m. eastern time on May 1, 2006. It will also be 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, for a review of our first quarter 2006 results. Jim Ferland, PSEG's Chairman and Chief Executive Officer will also join us this morning to discuss our pending merger with Exelon and other key events. 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 later today, which will contain additional information.

In today's Webcast, Tom and Jim 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 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 update in guidance will only 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. We've adopted this format to improve the readability of the release and provide the required reconciliations between the GAAP term "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 2006 results to 2005 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.

The attachments to the press release provide the required reconciliation between the GAAP terms "net income" and "income from continuing operations" to the non-GAAP term "operating earnings" for each of our major businesses.

Finally, Tom and Jim will take your questions at the conclusion of the prepared remarks. In order to accomplish this effectively, we would appreciate it if you limit yourself to one question and one follow-up.

Thank you, and I will now turn the call over to Tom.

Thanks, Sue. Good morning, everyone. Thanks for joining. I hope you've had a chance to review our release of this morning.

On this call, I'll briefly go over our results for the first quarter and review our expectations for the remainder of the year and then I'll turn it over to Jim to discuss the current status of our pending merger with Exelon.

Briefly, operating earnings for PSEG were $204 million for the quarter, which excludes $5 million of after-tax merger-related cost, a decrease of $79 million or $0.36 per share from the first quarter of last year. Although these early results are disappointing, they continue to support our 2006 operating earnings guidance of $3.45 to $3.75 a share.

As always, our guidance does not contemplate the impact of any new mark to market accounting issues, positive or negative, or the impact of any asset sales. We have updated our expectations for each of our operating subsidiaries, which all net out to zero. I'll walk through the details as I go through each company's results. Just a remainder that the guidance for PSEG is for the full full year, 2006.

We continue to expect to close our merger with Exelon in the third quarter, and such results post-closing would obviously be integrated into Exelon Electric and Gas.

Power reported operating earnings of $112 million or $0.45 per share for the quarter, just slightly below their 2005 results of $116 million or $0.48 per share.

PSE&G, our utility, reported operating earnings of $78 million or $0.31 for the quarter, but 33% lower than last year's result of $117 million or $0.49 per share.

Finally, Energy Holdings reported operating earnings of $28 million or $0.11 per share for the quarter, a decrease of $37 million or $0.15 from last year.

As I go through our three major businesses, I'll provide more insight into the changes from last year using earnings per share as the measure. As an aside, PSEG had on average about 10 million more shares outstanding for the quarter compared to last year, which will impact the comparable per share results.

At PSEG Power, we continue to see improvements from both our fossil and nuclear fleets. As you know, our three nuclear units in New Jersey are currently being operated by Exelon under the Nuclear Operating Services Agreement. For the quarter, these units had a capacity factor of 101% using a summer rating. This compares to a capacity factor of just over 89% last year, when Hope Creek was offline for most of January. After a very successful 214-day run, Hope Creek entered a refueling outage on April 7th. The unit is currently in the final stages of its outage, and we expect it to return to service shortly.

The improvements on our nuclear operations had a direct impact on the financial results for Power here in the first quarter, with the absence of the replacement power costs incurred last year for Hope Creek adding $0.12 to earnings for the quarter.

We contracting of our positions at higher prices and spot market sales added another $0.13 over comparable results for the first quarter of last year.

By way of comparison, the average realized margins on our portfolio during the first quarter were about $5 per megawatt hour higher than the first quarter of 2005. We anticipate enjoying a similar margin differential for the balance of this year. We also anticipate further expansion of margin in future years, as more of our older, lower-priced contracts roll off.

Offsetting the benefits of the improved operations were mark to market losses of $0.04 for the quarter. When compared to the $0.05 gain reported in the first quarter of last year, the quarter-over-quarter swing is a net reduction of $0.09. We expect the $0.04 loss on the current positions to reverse before the end of the year as transactions come to term.

In our release we mentioned briefly the negative impact moderating gas prices had on Power's results for the quarter. Power supplies all of PSE&G's gas customers under the BGSS contract, using a combination of physical storage, pipeline capacity, and forward hedges.

For residential customers, Power passes through the inventory cost of the gas commodity to PSE&G. Any difference between the tariff and inventory cost for residential customers is deferred on Utility's books for future recovery or refund.

For Commercial and Industrial customers, or C&I customers, a tariff structure is applied that is adjusted monthly based on the current NYMEX prices. Power is also compensated for other services such as the carrying cost of the gas.

The BGSS contract, including the C&I component, has generally provided a steady source of margin to Power.

During the first quarter, market prices were declining while the cost of gas and inventory was relatively stable, decreasing Power's margins. The mild weather also contributed to the decline in earnings, as volumes were lower for all customers. The combined impact for the first quarter of 2006 was about $0.11 per share below the first quarter 2005, which was by contrast a very strong quarter.

O&M expenses at Power were slightly higher than last year during the first quarter, the net result of higher maintenance costs, including labor and benefits, harshly offset by reduced costs at our nuclear site. Nuclear savings are the result of the head count reduction and other efficiencies that have taken place as part of the Nuclear Operating Services Agreement.

A summary of the $0.03 decline quarter over quarter at Power can be found in attachment A of the press release.

As a result of the higher prices for our recontracted nuclear and coal output, partially offset by the lower than expected BGSS margins, we're increasing our 2006 operating earnings expectations for Power by $25 million. The revised range is $500 to $550 million, a significant increase over 2005's actual result of $418 million.

Finally for Power, today we announced commercial operation of our 1220 megawatt Linden facility. This efficient combined-cycle gas plant will provide much-needed capacity to the eastern region of PJM. The unit replaces 430 megawatts of oil-fired capacity at the site.

Now turning to PSE&G. For the quarter, the utility was down over $39 million or, $0.18 per share, compared to first quarter of 2005. Weather was the single largest contributor to this decline, with degree days 20% warmer than the first quarter of '05. This mild weather reduced margins by $0.07 per share.

In addition to the weather impact, residential customers continued to curtail their usage of natural gas, further reducing PSE&G's earnings on the distribution of natural gas. For the quarter, this impact was about $0.02 per share.

As we continue to see reductions in customer usage for gas, absent weather impacts, timely rate relief becomes even more important. Our current rates are insufficient to recover cost increases and infrastructure improvements approved in our 2002 rate case.

As you know, we filed for a 3.8% increase in the gas distribution rates last September to recover costs incurred since 2002. We continue to respond to interrogatories from the BPU staff on this case; however, the schedule for a decision in this case was moved from October to December of this year, further reducing our earnings expectations for 2006.

Continuing on the regulatory front, as part of the settlement of our 2003 electric base rate case, a $64 million excess depreciation credit was established. This credit expired on December 31, 2005. As part of the settlement, PSE&G made a financial filing with the BPU in November of 2005 to compensate for the elimination of this credit. We made that filing, and in early February the BPU denied our request and suggested we file when our first quarter results were available. We'll be making that filing shortly. However, it appears that until the merger is resolved with the BPU, decisions on such filings may be difficult to achieve. For the first quarter, the resulting increase in depreciation expense reduced PSE&G's earnings by $0.04 per share.

Finally, higher wage and benefit costs increased quarter over quarter O&M expense by $0.02 per share. A summary of the various impacts of PSE&G can be found also in attachment 5.

As a result of the regulatory delays in the electric and gas distribution businesses of PSE&G, as well as the unfavorable first quarter weather, we are reducing our operating earnings rage for PSE&G by $45 million. The revised range for the utility is 270 to $290 million for 2006. By way of comparison, 2005 earnings for PSE&G were $347 million.

Now to Energy Holdings. Operating earnings for the first quarter of '06 were down sharply from the comparable period last year. Virtually all the decline came from gains on asset sales that took place during the first quarter of 2005. In January 2005, we received the final payment of $36 million on our withdrawal from the Eagle Point contract. We also reported modest gains on sales of two investments: MPC in China and SEGS in California. The absence of gains from asset sales reduced holdings' comparative results by $0.13 per share.

A higher tax rate on the overall earnings of PSEG Global negatively impacted holdings for the quarter by $0.05, with a larger portion of the earnings coming from domestic sources. The result of higher Texas earnings and international asset monetizations, the full U.S. tax rate is applied to the earnings.

Operationally, the first quarter was very strong for holdings. Our Texas plants continued to achieve significant benefits from an attractive market: saw a $0.04 improvement compared to the first quarter of last year. However, although margins in Texas have increased, which improves our business outlook, our forward sales -- contracts that hedge a portion of our output -- resulted in an unrealized mark to market losses for the quarter of $0.02 per share. We expect about half of this $0.02 to reverse during the current year. The strength in the Texas market, as well as improvements in some of our South American operations, should increase the expected operating earnings at Holdings by about $10 million for the year. As a result, we're increasing the range for holdings to 165 to $185 million for 2006.

That pretty much sums up the quarter. I'll now turn it over to Jim Ferland.

Thanks, Tom. And good morning, everyone.

Before getting to the -- on the merger front, I'd like to say just a couple things about our nuclear operations. Tom has already discussed the performance of Salem and Hope Creek in terms of plant output and the financial effects of our improved operations, which are obviously very important.

I'd like to report to you, though, those are not the only indicators we've got of how things are going down at Nuclear. Without exception, the feedback from the Nuclear Regulatory Commission, INPO -- the Institute of Nuclear Power Operation -- special review teams we've employed, our own internal quality assurance folks, all note meaningful improvements across all aspects of our nuclear operations. We're not doing things perfectly and these reports don't say that, we'll always have work to do. However, the trends are extremely positive and they made me feel real good about our being able to look forward to some very strong performance from these facilities in the upcoming years.

Let me hop over now to the merger for a little bit. I suspect many, if not most, of you participated in the Exelon teleconference last Wednesday. And as you heard from John and the Exelon folks, we've only got two key remaining regulatory proceedings we have to deal with: the Department of Justice and then here in New Jersey, the BPU.

The New Jersey hearings concluded some time ago now, at the end of March. The initial briefs were all filed last Wednesday and the final briefs are due by May 10th. That's next Wednesday. So we're reaching the end of that process. We feel very good about the record we've established and we believe that our arguments will be persuasive.

I suspect many of you, but maybe not all of you, are aware that in New Jersey, cases of this nature are almost always settled as opposed to litigated to a final decision, and I suspect that will be the case here as well. It is likely that the settlement demands will be greater than the $120 million in rate credits we have on the table.

We're currently having discussions with New Jersey and the Department of Justice to resolve these proceedings as quickly as we possibly can. This morning, for example, PSE&G's technical staff is meeting with the BPU, trying to sort out and reach agreement on reliability and customer service issues. Now, we've got a lot of issues to deal with here in New Jersey, and while it's always hard to know for sure, you really can't predict these things, I expect by time we get to the end of this month, May, we should have sorted out pretty well what the outcome is going to look like, what we'd be able to work out in the way of a settlement here in this state.

At the same time, we're actively engaged with the Department of Justice to try to make us all come together at roughly the same time -- hopefully, this month. Obviously, we're not going to be discussing the status of our settlement discussions in either jurisdiction, other than to say that they are ongoing.

While the pace and length of the BPU and DOJ processes have been longer than expected, we are now finally actively engaged in discussions with both parties. While the extended nature of these proceedings have been frustrating, I would even say probably extremely frustrating, the developments that have taken place over the time period when we signed this merger agreement back in December of '04 to today have strongly reinforced our judgments regarding the strategic value of this transaction for both companies.

Over this period, since our signing of the merger agreement, both natural gas and electricity absolute prices and volatility have significantly increased, with frequent and substantial swings in forward market prices first in the east and then they go back to the west and then they swing back again, highlighting the risk reduction benefits of a large geographic footprint, which encompasses numerous [HALA] markets.

The importance of scale is called to our attention every day and becomes more obvious as our competitors continue to grow through mergers and acquisitions. And on the legislative and regulatory front, there's a lot of action going on in a variety of states, including states in which our companies operate. And that highlights again the benefits of diversification of such risks across multiple jurisdictions, and the strategic benefits of combining our nuclear operations have already produced very demonstrable results in the improvement at Salem and Hope Creek. Developments such as these have served to strengthen our resolve to complete this transaction as soon as possible.

This is not to say, however, that we are insensitive to the outcome of the Department of Justice and the BPU proceedings. They are obviously very important.

We remain firmly committed to this transaction and continue to expect to bring it to a successful closure. With reasonable outcomes at the Department of Justice and the BPU, we continue to feel this should occur in the third quarter. I agree totally with John Rowe in his assessment that the resulting new company should be extremely well positioned to be an industry leader.

Final comments: some of you may have noticed in the April 17th issue of Fortune Magazine, they go about the business of rating companies on a variety of parameters, and on electric and gas utilities and on the parameter of total return over a ten-year time period, a compound rate of return, PSEG was ranked second -- actually, I think we had tied with a little company down in the south, [inaudible] company, with a compound rate of return over the ten years, of 14%. It turns out if you look a little higher up in the performance levels, Exelon was number one, with a 10-year return of 18%. Both of these companies have a long history of doing well for investors and I feel very good about what we're going to be able to do on a combined basis.

That concludes my prepared remarks. Tom and I would be pleased to take questions.

Operator, can you provide the instructions for the Q&A?

Thank you [OPERATOR INSTRUCTIONS] The first question is from Gregory Gordon from Citigroup Investment Research. Please proceed.

Thanks. I've got a couple nuts-and-bolts questions on the quarter and then a larger question on the merger.

First, on the new guidance for the Utility, the $270 million to $290 million operating earnings guidance, what type of ROEs at the electric and gas business does that infer?

Greg, it's Tom. We usually don't give specific ROEs for each of our segments, which are Electric, Gas, and, of course, our Transmission business. I will say the gas business is materially under-earning the 10% it got in this last case of 2002. It's materially under-earning. It's currently in the 6, 7% ROE kind of range. So we certainly need a rate increase.

The Electric has been earning on a historical basis somewhat higher than the 9.75 it got back in its August '03 case, so on a rolling basis we will, over the next quarter or so, come down to that level and ultimately below that level if we don't get the kind of credit recognition that we need. The Transmission business does a little better. And then the other question, before I get to the larger strategic issues, is on that Transmission, the BGSS. It appears that you guys are well aware that there's a structural mismatch there that can happen because the pricing is based on NYMEX, but you obviously take positions in terms of storage for gas. So I'd like to -- I want to understand how you wouldn't hedge some of that financial risk of sort of near-term fluctuations in NYMEX versus the gas that you have in storage. The NYMEX is a liquid financial product. To lose $0.11 because the gas price was falling sort of month to month versus the basis you had in storage, it sort of doesn't make any sense to me that you wouldn't have somehow tried to hedge that risk. It's a fair point, Greg. Let me just put it in context here: The $0.11 was versus first quarter of last year, which was a very strong quarter. Versus a normalized year, it was about $0.07 below that. So of the $0.11, about $0.04 was -- of comparing to quite a strong quarter last year. And then $0.07 was a more -- was versus expectations of our internal plan.

Of the 7, about a third of that number is just plain volumes. There is a general volume-based kind of number. So we're talking about $0.04 or $0.05.

Historically, this has been a very solid, stable business. Frankly, we haven't talked about it a lot because it's quite solid and reliable. And generally, we find some -- in normal [inaudible] I guess you'd call a curve that has an upward sloping curve, generally our inventory costs compare reasonably favorably with our costs during the season.

This year, as you know, prices were quite high and then fell off dramatically over a very short period of time. We do do some hedging. It varies from period to period. We do do some hedging -- of course, you can't hedge everything because you don't know what your volumes are going to be. And this year volumes were down materially, but we do do some hedging this year.

In hind sight, we probably wish we would have hedged a little more back in the fall, but I would say over time, over the last number of years, we've done very well. And in fact, the first quarter of '05 would be a testament to that.

Great. Thank you.

And then the larger question is for Jim. It sounds like you're confident that you're making headway now on both fronts, both at the DOJ and at the New Jersey BPU. I guess my question for you is, does the June 20th date in the merger document, after which either company can sort of unilaterally choose to no longer pursue the merger, a significant deadline in your mind in terms of getting these agreements done or not? And can you talk about that a little bit?

Yes. The short answer to your last last question is no. But let me elaborate on it a little bit.

First of all, as far as engagement, it has been frustrating to get everybody engaged. But at this time, the soloist in the process was the Department of Justice, they worked on this for something north of a year and until they were completed with all of their work and their analysis, they simply were not willing to tell us anything. And that was frustrating for such an extended period of time.

Well, now they're willing to talk to us, they have some ideas and thoughts and they are willing to share those with us, and we are actively engaged with them. And the same thing now at the BPU.

On the June 20th thing, let's go back to that for a minute. No, I don't view that as a particularly important date at this time for a variety of reasons. First, just to remind everyone what it is. When we signed this merger agreement back in 2004, we didn't want the merger agreement to be outstanding forever. So we said, let's pick a date out there somewhere where if we can't get all the approvals we can walk away. And I can remember thinking at the time, my gosh, that could never be as late as June of 2006. What did I know? So that's what the date was created for and it does give the parties the ability to walk away.

The reason I don't think that's going to be of any particular relevance is I suspect by the time they get to the end of this month, we're going to have a pretty good idea about what this transaction will look like and what we're going tol be able to achieve at both Justice and with the BPU.

Now, at that time, before we can reach a settlement with either of these parties, both of our respective companies are going to have to agree that these agreements and settlements make sense. Now, if we reach agreement with those parties and they make sense to both companies, the June date becomes of no particular relevance. It is likely that even if we could successfully reach settlement agreements with these two organizations, the papering of those and the various approvals could extend well past that June 20th date. And John and I have talked about that and if we think it was beneficial at that time, we'd probably just move it ahead.

Okay. Thanks, guys.

Thank you. Just to remind everyone, we've got a number of calls queued up, so please limit yourself to one question. Thank you. Next question, please.

Our next question comes from Paul Patterson of Glenrock Associates. Please proceed with your question.

Good morning, guys.

Hi, Paul.

Just to follow up here. I'm not sure I completely understood the answer to the electric ROE that you guys expected to get this year. Could you just elaborate a little bit on that?

And also also on the weather versus normals, I think you said it was $0.07 on the gas side versus 2005. What would have been normal and was there any impact on electric at all?

Yes, Paul. Let me try to do those one at a time. The gas number, I think I said, was in the 6, probably closer to 5% range. The electric -- and I'm comparing these to what our latest allowed was. The electric, the latest allowed was 9.75, which was in the summer of 2003. We're currently a point or two above that on a rolling historical basis. The request we're making for an offset to the depreciation credit on a look-forward basis as well as a historical basis. And as the year progresses, we're going to follow at or through that 9.75 % range without the credit.

You'll fall below the 9.75?

Yes --

Okay. I'm sorry. Go ahead.

-- toward the end of the year. Yes. So in other words, that's something we need and we think is appropriate to be getting.

Just on the rate impacts, PSE&G was down for the -- quarter to quarter, about $0.07. The -- 90% of that was gas. That's at PSE&G.

And the BGSS, the contract between power and PSE&G for gas supply, that was off about $0.07 versus a normal year, or our expectations was up $0.11 versus last year, which was an unusually strong year -- strong quarter.

Okay. But the $0.07 that's at PSE&G versus normal would have been what? Right? I mean, if you look at the first quarter, it says weather, $0.07: that's gas. Is that the same as what it would have been versus a normal year?

Yes, the 7 is versus a strong year last year, so versus normal, it's about 5.

Okay, thanks.

It was a cold winter first quarter 2005, which helped both PSE&G and the BGSS, so PSE&G is off about $0.07 versus the first quarter, about 5 versus normal, and the PSE&G Power is off about $0.07 versus normal but 11 versus last year.

Great. Thank you.

The next question is from Scott Senchak of Bear Wagner Specialists. Please proceed with your question.

Hi. Actually, it's Andy Levi. How are you doing?

I guess I've only got one question, so why don't we go with this one: Can you just comment on on John Rowe's -- or actually Exelon's press release relative to earnings and just their comments or their phrase of using the phrase economic sense?

Yes. Jim Ferland. Yes, I can make that same comment. The big remaining uncertainties in this issue -- in this combination are what we're going to have to give up, if anything, at the Department of Justice and BPU. And obviously, those are important outcomes. And if we give away too much, then we could bowl away the economics of the transaction. And that's going to be very important to both of us, and we're both going to be looking at that. But we've got a way we're doing that. We're going to be forced to deal with that in reaching settlements with these various organizations. So once we've done that, obviously we won't get into those agreements unless they produce a satisfactory outcome.

Are you two both on the same page, you two companies, or is there a little differing of opinion on --

I don't think there's an inch of space between John and I. We're talking all the time, we know what's going on. Frankly, people ask how do you guys get along in this kind of a thing. Frankly, if there could be a better person for me to be doing this transaction with than John Rowe, I don't know where you'd find him. This guy has been incredibly flexible, reasonable, we're communicating all the time and I don't think there's a space at all between the two of us as to how we look at this transaction.

Okay. I cheated. I took an extra question. But yes, you're both good guys, I agree. Thank you.

The next question is from Leslie Rich of Columbia Management Advisors. Please proceed.

Hi, I wondered if I could just ask some questions on Attachment 4, which is your cash flow statement. You have a big positive swing in sort of Other cash flow from ops with no breakdown. I assume about $200 million of that is depreciation. Just wondered what else was causing a $500 million positive swing.

And then also, in financing activities, negative $750 million, approximately, I saw you paid down some debt, but just wondered what else was sort of the big drivers in those two buckets.

Okay, Leslie. And we are filing our Q, we expect, by the end of business today, so that will obviously have the full cash flow statements in it. The biggest help was really margining. As prices came off somewhat, and I think we said in our K that our margin posted, collateral posted, came down by about -- we've cut basically in half during February. And we did continue to see that. Now, some of that is in letters of credit, some of that is in cash. Those were the biggest pieces. There were some other pieces in terms of pension and some other pieces, but there was no collateral and -- collateral was the largest.

In terms of debt coming down, the biggest piece at Power had a maturity. I think it was a five-year from the initial deal that was done, $500 million maturity. We paid that off with short-term debt.

Okay, thank you.

The next question is from Ashar Khan of SAC Capital. Please proceed with your question.

Just two short questions. How much did the BGSS make last year? And how much are you expecting to make on that this year? .

Yes, Ashar, I'd rather -- we don't report that as a separate segment. And I think in the past we've shown some large numbers for overall ER&T numbers, so I'd rather get away from specific numbers. That's why I talked all in terms of differentials.

Okay, but Tom, is it fair to say that for the rest of the year, are you expecting further negative variance or the negative variance is the only one in the first quarter?

Well, BGSS just like our PSE&G Gas business, is largely a three, four month season. So certainly January and February are the biggest pieces. That's probably about -- first quarter is probably 60% of our sendout. The rest would be November, some of that, and of course, December.

Okay. And if I can just stand up, you mentioned end of May on both agreements. I can realize New Jersey, but can I just ask, why would it take end of May at Department of Justice? Just trying to get a sense of the timing. Your anticipated timing.

Well, I'd like to think it wouldn't take that long, but it may. Obviously, we're going to make this time period as short as we possibly can and I can say that although it's taken the Department of Justice a long time to be willing to talk to us, they have been very forthcoming and very responsive since they have provided that first feedback to us.

Jim, can I just ask you when that first feedback was provided?

I won't remember the exact date, but it was not that long ago, maybe a week or two ago.

Okay, thank you.

The next question is from Paul Ridzon of KeyBanc Capital Markets. Please proceed.

Good morning. Throughout the balance of the year, is this tax rate at Holdings going to be a headwind, or was this a particularly onerous quarter?

This is a little bit more onerous, but we should have somewhat of a higher tax rate during the year. As we've said, some of that is just an increased percentage of U.S.-based contribution, but that's all cooked into the guidance that we gave you.

And then, just back on this BGSS, because it is kind of the first time we've heard about it, is there a kind of a sense to stay the course and kind of try to almost outguess the market? Or do you want to put more -- maybe just ride the market more?

Yes, I just -- this has been a very good business for us. It continues to be a good business. It is doing something that we've done for many, many years, which is procure gas on behalf of customers for PSE&G. Obviously, the residential costs are a passthrough. I think it was in our third quarter earnings call where we talked about the inventory cost that the BGSS had, based upon our 80 Bs or so of storage, and it was about 30% below the market. So it's obviously doing good things for customers. This is one year when there was a dramatic decline in prices and that took about $0.04 or $0.05 off of the margin just on that price decline, if you will.

Keep in mind, also, when we look at this, we look at this in the context of Power's overall risk return relative to Gas. So just because -- we have to look at this as part of the overall portfolio, so I wouldn't want to suggest that we were overly exposed to Gas. A.) There were some hedges on. Difficult to hedge given volumes with complete certainty, but also we look at this on a portfolio basis for Power.

Given the uncertainty on volumes, is this inventory mark to market, or do you think it qualifies for hedge accounting?

It's largely normal. Anyway --

Okay, Paul.

Next question.

The next question comes from John Alley of Zimmer Lucas Partners. Please proceed with your question.

Good morning. Just a quick question on the utility guidance. You said weather is about $0.07, which is like $17 million of that $45 million: how much are you now, including guidance of the $64 million depreciation credit, and then how much, if any, of the gas rate increase?

Yes, I don't want to go into specifics on outcome of rate increases. I think on the gas side, we said that the decision on that has been put off until December, so obviously we're not -- that's a reasonable expectation.

For the 64, which is really now 68, technically, on the electric side, we expect to get that during the year. But obviously we didn't get it last quarter. But we think that as the year goes along, we should get some reasonable piece of that.

Okay, great. Thank you very much.

The next question is from Daniele Seitz of Dahman Rose and Company. Please proceed with your question.

Actually, it's just a follow up on the one before. I was wondering -- you can never recover that $0.04, so whatever the cost of the delay is going to be on the depreciation issue.

That's fair, Daniele. It's behind us.

Okay, so -- and -- okay, I'll speak to that question, I'll come back later.

Therefore, our next question comes from the line of Viswana [inaudible] from [inaudible] Investment Management. Please proceed.

Thank you. Question for Jim regarding the two discussions you are having with New Jersey and DOJ. Is the public benefit is the primary criteria for Department -- for the New Jersey as well as how does the DOJ defer from FERC's review of the same issues?

Well, first of all on New Jersey, the BPU, they have a set criteria that describes what it is they're supposed to consider when they look at a merge like this. You have to demonstrate positive benefits to the State of New Jersey and to customers, and then you've got -- there's a group of other parties that have got to be held at least indifferent that can't suffer any losses, a significant number of those.

With regard to the DOJ, I think maybe some people might have thought at one time that the DOJ would simply defer to FERC on this issue, since FERC reached a conclusion quite soon. And they chose not to. And they have been working this issue in enormous detail for an extended period of time. The last numbers I saw, we had produced something in the order of 10 million documents their review, and dozens and dozens of interviews and so forth, so they really went at this in a very, very thorough way. And they're obviously not simply going to take whatever FERC said. So we're trying to work that out with them and we hope we can work something out here as we work our way through the rest of this month.

Okay, thank you.

That will conclude the Q&A session. Mr. O'Flynn, I will turn the call back to you. Please continue.

Well, I think -- just one thing: Leslie, I was a little confused on the debt maturity, the one we had was after the quarter. The biggest piece of the large debt decrease was the call we announced a few days before the end of 2005 at holdings for about 309, $310 million and some other odds and ends. So that was the biggest chunk. It was a little at E&G and at the [parent]. But the Power maturity happened the first few weeks in the second quarter.

Anyway, folks, thanks all for joining. We had a little softer quarter than we expected but continue to see ourselves getting to guidance and see some good improvements, especially in the latter part of the year at Power. We continue to like our business model, think we've got a good balance of earnings growth and prudent risk management. And thanks all, again, for joining.

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