公共服務電力與天然氣 (PEG) 2007 Q1 法說會逐字稿

Welcome to the Public Service Enterprise Group first quarter 2007 earnings 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. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded Friday, May 4, 2007. And will be available for telephone replay beginning at 1 p.m. Eastern today until 1 p.m. Eastern on May 8, 2007. It will also be available as an audio webcast on PSEG's corporate website at www.PSEG.com.

I would like now to turn the conference over to Kathleen Lally. Please go ahead.

Thank you Marella. Thank you very much and good morning to all of you who are listening in to our conference call today, either by phone or over our website. I will be turning the call over to Ralph Izzo, PSEG's Chairman, CEO, and President for comments on the Company's results and outlook. Also participating in today's call will be Tom O'Flynn, PSEG's Executive Vice President and Chief Financial Officer. Tom will provide a more detailed review of the Company's operating and instruments and our forecast for 2007.

Before we begin, however, I just need to make a few points. We did issue our earnings release this morning. In case you haven't seen it, a copy is posted on our website. We have also posted a series of slides that detail the operating results for the quarter, and allow to you follow along with the comments made by management today. We expect to file our first quarter 10-Q with the SEC later today.

In today's webcast we will discuss our future outlook and I must refer you to our forward-looking disclaimer. Although we believe our forecasts are based on reasonable assumptions, we can give you no assurance that they will be achieved. The results events or forecasts in our statements today may differ materially from actual results or events.

The last word on any of our businesses is contained in the various reports we file with the SEC. As a reminder, our guidance speaks as of the date it is issued. Any confirmation or update in guidance will only be done in the public manner, generally in the form of a press release or webcast such as this. PSEG may or may not confirm or update guidance with every press release.

As a matter of policy we will not comment on guidance during any one-on-one meeting or individual phone call. In the body of our earnings release we provided a table that reconciled net income to operating earnings. We have adopted this format to improve the readability of the release, and to provide the required reconciliation between the GAAP terms, net income and income from continuing operations, and the nonGAAP term, operating earnings. Attachments to the press release provide the reconciliation to each of our major businesses.

Operating earnings exclude merger related costs and the net impact of certain asset sales during the period presented. Operating earnings is our standard for comparing 2001's first quarter results to the first quarter results for 2006 for all of our businesses. We exclude such costs so that we can better compare our current period results with prior or future periods. Finally at the end of our prepared remarks Ralph and Tom will take your questions, and we ask that you limit yourself to one question and one follow up.

I would now like to turn the call over to Ralph.

Thank you, Kathleen. Good morning and let me join Kathleen in thanking you for taking the time to participate in this conference call. I am pleased to report that operating earnings for PSEG for the first quarter of 2007 rose 55% to $1.32 per share, from $0.85 per share in the first quarter of 2006. Our two largest businesses are performing extremely well.

Let me begin with PSEG Power which delivered exceptional results. Our nuclear fleet has sustained top quartile performance operating at a 97% capacity factor during the quarter. Most recently Salem 1 completed its 18th refueling outage in under 24 days, a record for this unit, and that after 383 days of continuous performance.

This exceptional performance, the roll-off of below market contracts, and the return to more normal conditions for the BGSS Supply contract, versus last year's disappointing results for that same contract, have all contributed to the earnings improvement at PSEG Power. Our regulated utility, PSE&G was also an important contributor to the earnings improvement reported for the quarter. The utility was aided by more normal weather conditions versus last year, and the receipt of much needed gas and electric rate relief in the fourth quarter of 2006. PSEG Energy Holdings recorded lower earnings for the quarter, part of the decline in earnings was due to scheduled maintenance at our two 1,000 megawatt gas-fired combined cycle units in Texas.

An even larger share of the decline in the earnings was due to stronger markets, that produced negative mark-to-market effects on the multi-year contract we have on our Texas generation. Elsewhere our international distribution assets are performing at strong levels. Most importantly the markets in which we operate across our system remain very attractive. Power given the diversity of its generating fleet was a successful participant in the BGS auction conducted by the New Jersey Board of Public Utilities this past February. These contracts for about $99 per megawatt hour, will replace contracts for $55 per megawatt hour from the 2004 auction on this June 1st.

The Pennsylvania, New Jersey, Maryland transmission organization, or PJM as we all refer to it, successfully completed its first capacity auction. The results which were posted on April 13 appear to set prices equivalent to the cost of new entry. There are several auctions scheduled during the next nine months, which will establish capacity prices through the 2010, 2011 planning year. We are carefully watching the price signals in the PJM capacity market.

As we look forward there is not enough capacity to meet reserve margin requirements. If capacity pricing stays consistent PSEG Power will evaluate whether it makes economic sense to pursue building new peaking plants. All of this thought surrounding how to meet reserve requirements is occurring at a time when new supply options may be constrained by environmental policies. In addition to traditional Clear Air Act pollution control, climate change is becoming a more immediate reality. We need fresh thinking if we are to begin to tackle this challenge, and reverse climate change trends.

We have publicly stated and we continue to support a nationwide cap and trade mechanism to achieve greenhouse gas emission reductions. We have also developed an innovative approach that provides new avenues and incentives for investment in renewal energy to help the State of New Jersey meet its targets for renewables. Under our plan PSE&G will invest approximately $100 million over the next two years, to finance up to 50% of the cost of installation associated with about 30 megawatts of solar capacity. This amount of solar capacity would meet 50% of PSEG's renewal portfolio standard goals over a two-year period.

We are also calling for Federal legislation to remove the exception for utilities from eligibility for investment tax credits associated with solar power. We expect this to be the beginning of a broader involvement for us in energy efficiency and other renewable supply technologies. We believe that meeting the states energy goals will require redefining the role of the State's utilities and energy companies. We intend to continue to help shape thinking on this subject.

These policy positions and proposed actions are also beneficial to our shareholders. Our solar initiative recognizes that utilities have ability to make long-term investments that serve the public interest. This should be done as long as there are assurances of earning reasonable returns.

Our commitment to shareholders also encompasses a continuing review of our asset base. We have retained a financial advisor to explore the sale of PSEG Global's 100%-owned investment in Electroandes, giving considerable unsolicited interest in that asset. Sale of Electroandes if accomplished, would reduce our exposure to international generation, improve returns, and move us further along on meeting our capital objectives. We have also accomplished another important objective. I am happy to say that our senior leadership team is now in place with the recent hiring of Richard Lopriore as President of PSEG Fossil.

The results for the quarter reflect the continued strong operating performance of our generating fleet and improved markets. We expect these conditions along with the reduction in financing costs to the Company's improving balance sheet, to support our recently increased full year 2007 operating earnings guidance, of $4.90 to $5.30 per share. The midpoint of our guidance for 2007 represents a 37% increase of our 2006 operating earnings of $3.71 per share.

We believe the conditions that support our 2007 operating earnings guidance could propel further growth in earnings for 2008 of 15%. That would bring us to a range of $5.60 to $6.10 per share. More importantly, we are pleased with the foundation for long-term steady growth that we are building.

I will now turn the call over to Tom O'Flynn to provide a more detailed review of the quarters results.

Thanks, Ralph. Good morning to all. As Ralph said we are very pleased that PSEG reported a 55% increase in operating earnings for the first quarter to $1.32 per share, up $0.85 per share from the first quarter of 2006.

As you can see on slide 13, the improvement was led by an 81% improvement in Power's operating earnings, to $0.87 per share, from $0.48 per share. Followed by a 68% increase in PSE&G's operating earnings, to $0.52 per share from $0.31 per share. Holdings reported operating earnings for the quarter of $0.01 per share, compared with $0.12 per share of a year ago. We are providing you with a waterfall chart, taking you through the net changes in year-over-year earnings by major operating business. I will discuss each in more detail.

PSE&G reported operating earning of $0.52 per share, compared with $0.31 per share from a year ago. The improvement was driven by higher gas and electric margins, facilities aided with the rate settlement implemented in November of '06 of $0.09 per share, and a return to normal weather conditions in 2007, versus the relatively warm conditions from a year ago. PSE&G's results also benefits from increased electric usage and higher transmission revenues. A recent Federal Energy Regulatory Commission ruling supporting a more reasonable allocation of transmission costs across PJM, should provide further support to our transmission business.

PSE&G's earnings during the remainder of the year should continue to benefit from the factors that led to improved earnings in the first quarter, a full year of rate relief, and normal weather. PSE&G has begun to implement some of the capital spending associated with these growth initiatives. During the quarter, PSE&G announced that it would proceed with investing 150 to $175 million over a two-year period, to install a new integrated customer service platform. This work is scheduled to be complete in early 2009, and provide the platform for initiatives that we may pursue relating to advanced metering.

As Ralph discussed, PSE&G also filed plans with the BPU to invest approximately $100 million over the next two years, to help finance the installation of 30 megawatts of solar systems on homes, businesses, and municipal buildings throughout our service area. As part of the filing PSE&G has requested approval to amortize the investment over a 15-year timeframe, and earn a modest incentive above our cost of capital for promoting additional investment in solar energy. We expect a response from the BPU by the end of the year. If approved our capital equipment is solar could rise from this $100 million level.

Now turning to PSEG Power. Power's operating earnings grew 81% in the quarter to $0.87 per share from $0.48 per share of a year ago. Drivers for the quarter are outlined in the waterfall chart on page 22. Results for the quarter showed the benefit of recontracting power in the 2006 BGS auction at $102/megawatt hour, which was effective on June 1, '06, compared with power prices of $55/megawatt hour under the old contract.

Power's results also benefited from the exploration of a below market contract in Connecticut. In total we were contracting at a $0.28 per share to earnings. Power's nuclear fleet operated at a 97% capacity factor during the quarter. This continued a high level of performance and allowed Power to benefit from improvement in market prices. The return to more than normal margins for supply under the BGSS contracts, more like what we saw in the 2004/2005 timeframe, added $0.11 per share to the earnings.

We provided a schematic for the past 15 months that provides a picture of the difference between BGSS tariffs and inventory costs. As you can see, we operated in the 2007 first quarter with a more normal relationship between revenue and cost than experienced the past year. We earned most of our margin under the BGSS supply contract during the all-important first quarter of the year.

The combination of strong operations and higher prices led to a 22% improvement in Power's realized gross margin during the quarter, to $44/megawatt hour from $36/megawatt hour. The factors which supported Power's operating earnings during the first quarter are expected to prevail for the remainder of the year. We expect our nuclear fleet to operate closer to a 92% capacity factor for the full year, given three fuel replacement outages scheduled during the last nine months of the year. We should benefit from a full year of higher prices under the 2006 BGS contract, as well as the replacement of power priced under the '04 auction at $55/megawatt hour, the power priced under the February 2007 contract at $99/megawatt hour.

Although energy prices declined by more than 13% during the period between the 2006 BGS auction and the 2007 BGS auction, overall prices in the auction declined only modestly to $99/megawatt hour, from $102/megawatt hour. This 2007 BGS auction incorporated the value of capacity in constrained markets. And the expected implementation of PJM's first auction of capacity under it's reliability pricing model or RPM.

As Ralph said PJM released results on April 13th, from it's first capacity auction under the RPM for the 2007 to 2008 delivery year. Results had $198/megawatt day for Eastern MAAC came in higher than some had expected. There are three auctions scheduled in the next nine months to provide transition to the 2010/'11, delivery year. The auction results for '07/'08 planning years support our earnings guidance, including our estimate of increased capacity margin in 2007 versus 2006, of 125 to 175 million. While there are many variables that may influence future auction results, we expect few further margin improvement in 2008, which is supported by current market prices.

Now on to PSEG Energy Holdings. Holdings reported operating earnings of $0.01 per share, compared with $0.12 per share earned during the 2006 first quarter, with declines at both the holdings subsidiary companies. The Global experienced a decline in earnings as a result of higher maintenance expenses, $0.04 per share, associated with scheduled outages at it's two 1,000 megawatt gas-fired generating units in Texas. This work should prepare the units for sustained operation during the all-important summer period.

Also higher prices in the Texas market resulted in a negative mark-to-market impact to Global's earnings of $0.06 per share. Global's international distribution businesses are performing well, and are experiencing attractive growth and energy demand. Resources reported a decline in earnings of $0.02 per share during the quarter, as a result of the implementation of new accounting standards.

We continue our active review of holdings asset position, and taking steps to improve returns. We have been very active in the quarter. We engaged a financial advisor for the sale of Electroandes, given strong unsolicited interest in this 160 million Peruvian investment. The process of considering investor interest is under way, and if we move forward the asset could be sold by year end.

We also refinanced our investment in the GWF/QF facilities for 45.5 million, included the sale of our 35 interest in the Tracy Biomass facility for 7 million. We are actively working on the refinancing of our [Ciasa] holding company debt that would yield another $150 million later in the year. the sum of this activity should result in a reduced investment in international assets, improve returns, and should also increase our capacity to return cash to PSEG.

We continue to feel comfortable with our recently increased guidance for 2007 operating earnings of $4.90 to $5.30 per share. As we show on page 32, the midpoint of this estimate represents a 37% increase over 2006 operating earnings of $3.71 per share. These factors that we discussed, in particular strong power markets, should yield further improvement in 2008's operating earnings of 15%, the $5.60 to $6.10 per share.

A minute just on cash flow, cash flow from operations improved during the first period of '07 by almost 50 million, compared to the same period last year. Absent changes in working capital, cash from ops improved by 125 million, consistent with the increase in earnings. PSE&G experienced an increase in working capital requirements during the quarter related to higher accounts receivable balances. Strong cash flow is translating into parent debt reduction. In March, Holdings made a cash distribution to Enterprise of 145 million in the form of return of capital.

In addition, Power paid $125 million dividend to Enterprise. The 425 of million cash proceeds from the sale of Lawrenceburg expected to close during the second quarter, will support the payment of additional dividends by Power to Enterprise. In anticipation of receiving those proceeds we could call 375 million of outstanding floating rate notes at Enterprise which are due in '08, for early redemption in May.

With that, I will now turn it back to Ralph.

Thanks, Tom. In closing, I am extremely pleased with our results for the first quarter. It put us well on our way of meeting our full year objectives, and at the same time we are positioning the Company to meet the challenges which face our industry, and provide the opportunity for your Company's growth.

We are ready for your questions now.

Operator, if you can queue the questions? Thank you.

It is my pleasure. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Greg Gordon from Citigroup.

Thanks, good morning.

Good morning.

The results from BGSS, to what extent did they outperform your expectations, given the uniquely positive market conditions and demand?

I think they were generally within the range of our expectations. Greg, I think last year they were up meaningfully from last year, but last year as we talked about was a very disappointing first quarter.

They were within the band of our expectations, and they are quite consistent with our performance in '04 and '05. The things that helped, is a more normal relationship of inventories versus intra-month prices, those are the prices at which we sell to our commercial and industrial customers, and also just more normal weather because there was there was a demand or a volume component to it.

Thanks, the balance sheet continues to improve as we would expect, perhaps even a little bit faster than forecasted. If you were going to start using the balance sheet more aggressively, where would we see you start to expend some of that core value, is it incremental capacity announcements in PJM, is Texas a growth market for you? Are you becoming more comfortable with the concept of potentially recapitalizing the Power business? Where do you stand in your thinking on those issues?

You just covered -- (laughter)

Let me go over resources and a little uses and Ralph can certainly expand upon that. I think to the extent we have got some leveraged capacity, we are most comfortable tapping that in the near term within Holdings. We mentioned some incremental leverage were putting on one of our Latin American dis cos, with the improvement in markets there, there may be some other things we can do, we could do back levering of about $50 million of the QF. The other big piece within Holdings on increasing on asset based leverage would be Texas.

Texas has two 1,000 Megawatt, I think the debt to kilowatt is about 180, $185 a kilowatt, which I think would you characterize as quite conservative. So we could tap that, and are actively looking at tapping incremental leverage at our Texas generation.

The second part, Dan, if I put the other bucket, how can we use that, clearly we could accelerate debt retirement plans, I think most notably we would look to our core markets that would in the Northeast, especially PJM and Eastern MAAC, but also NEPOOL where we have got 1,000 megawatts doing well. Potentially New York, the southeasterly part of the state, and then Texas. Those are all markets that we have reasonable positions in, that we feel are growing and may have some opportunities.

And I would just add to that, Tom, the investment needs of the utility, both in terms of reliability issues, most of them transmission side, and also the opportunities that are opening up from climate change initiatives that we have started to propose.

Thank you, gentlemen.

Thanks, Greg.

Our next question comes from the line of Ashar Khan from SAC Capital.

Good morning, congratulations on earnings. Could you just elaborate, I know you mentioned you could invest 100 million on 30 megawatts of solar. Could you, if this goes through and is received well, can you just talk about what is the maximum that you could invest under the solar program for PSE&G?

There is a statewide renewable portfolio spend that would call for 1500 megawatts by 2020. We are looking here at a new program that has a two-year horizon, but clearly we are doing it with the expectation that we would be successful and then it expand upon it.

So how fast can this expansion, because that expansion can be huge? How fast can this expansion work from just 30 megawatts, how fast can it move up to say 100 or 200 or 300 megawatts?

A lot depends upon the capacity of the solar industry to meet the project demand. And that is what we intend to learn through the next two years or so.

Okay. Thank you.

Sure.

Our next question comes from the line of Paul Patterson from Glenrock Associates. Please proceed.

Good morning, guys.

Good morning.

I know that you guys are going to wait to see what the results of the remaining RPM auctions are, with respect to new build and what have you. I wondering if you could just give us a little idea of what you're thinking about what reserve margin equilibrium, or market dynamics you think in the long run would play out, in terms of what kind of capacity pricing you would probably have to see, in order to get new CT builds, or something of the sort?

Paul, we are certainly encouraged by the first round of the RPM, as Ralph says it is right at the PJM cost of new entry CONE. So it has certainly got ourselves and presumably others sharpening the pencil on some new builds. I would say we are still cautious and going to take a look at what is going to happen over the next few periods, and we will be giving you a lot more information over the next nine months. In and of itself the CONE new entry is a reasonable number. I would say it's been pressured by some increased costs in the sector, and also just the fact that it's for a relatively short timeframe.

Even when we get all the RPM innings out there, there will only be a three to four-year visibility than at any one point in time. We still say that 72 is on the thin side, but certainly has got us and others looking. I say looking, that's primarily CTs, and we do think about it not just on a specific single asset basis, but on overall portfolio approach. So we may look at it in conjunction with obviously with sights we have got with our longer term strategy, and with some replacement we may do over time with some older capacity.

I would also say that as PJM progresses in their RPM they are going to break into more zones, as we ultimately go into zones the low 20s, some of the areas we are in we would expect to have particularly, we would expect the RPM to indicate some tight constraints.

Okay. So what kind of reserve margin, I mean is this, I don't know if this is a valid way to look at it, what kind of reserve margin, as you mentioned once you get the data points, they are only going to be for a pretty short period of time for a pretty long lived asset. What kind of reserve margin outlook are you guys thinking about, in terms of what would be necessary for the new builds if you follow me?

It's a function of more than just one variable, all right, Paul? It's a function of the transmission transfer capability, it's a function of the reserve margin. And as you said, you want more than one data point, because from one data point you can extrapolate in any direction you feel free to want to do stuff.

We will just have to wait and see, I guess?

Yes, I think that is right. If you are asking for one specific number, the math is never that easy.

I know, I realize that. I appreciate the help. Thanks.

Our next question comes from the line of Shalini Mahajan from UBS.

Thank you. A follow up on the capacity auction prices, the February BGS auction imbedded a capacity price of $11/megawatt hour, and the Eastern MAAC clearing price indicates that on $16.50/megawatt hour. I was curious to know why the results of the two auctions were so different in such a short timeframe?

Well, I would say just a couple things to maybe elaborate. The BGS auction of course does not specifically break out the products. It is a fair point, that at the time of the BGS auction, the one year forward was around that $11.00 range. So that is reasonable.

But what was actually incorporated by bidders, that's all in the combined, in the combineds, too. There was somewhat of a distinction the Eastern MAAC capacity value is 197 but the cost to serve load is 177. So that is call it a $2.50 difference. So there is a slight, the increase was somewhat less than you suggested. I would say that the price did move up meaningfully from the January timeframe, up until the time of the RPM, it has fallen back somewhat. But it is a market that is pricing a lot of capacity with some thin trading, so you can have some movement around in that market.

That is helpful. Then separately on solar, just wanted to clarify if this was going to be a rate based investment, and who keeps the upside of the prices of solar [rec drive]?

The customer and/or the developer. The owner of the asset.

But you would get paid in solar energy in certificates or in cash, now if the market prices of these rise, you are not going to keep the upside on that?

No, we would not. That stays with the equity holder of the asset.

Okay. Great. Thank you.

Next question, Paul Ridzon from KeyBanc.

Could you, you talked about leveraging up some of the international assets. What is your latest thinking on just disposition of assets beyond Electroandes, and when do you think you could finalize that decision?

It is something we continue to review, we have no further, nothing further to add than what we discussed in the past. Clearly we are mindful that the markets in Latin America are doing well, in terms of our distribution businesses, about three-quarters of those investments are in Chile, the rest in Peru, but Chili and Peru are both doing well, multiples are doing well, currencies are doing fine, and the Electro process is indicative that we are aware of some unsolicited interest, but we have certainly been aware of much more as we have gotten outer there. So I would say those are factors that we are certainly aware of, but it is something we continue to noodle on internally.

What returns are you earning on Electro at this point?

Yes, on an ROE basis, high single digits, 8, 9, I think our earnings for the year, I think I said our book investment of equity is about 160. I think our expectations for earnings this year were in the low teens.

Thank you.

Next question from the line of Rudy Valentino from Morgan Stanley.

Good morning. Can you remind me what your plans are for leveraged lease investments, and also just an update on what's going on with the tax issue?

The leveraged lease investments are ones we have had in our portfolio for some period of time. We don't unlike the question on some of the global assets, to sell those is generally difficult to just do as a cash recapture issue, so that being said, we haven't made new investments of material amounts since, for about five years, maybe a little more. Our Q will disclose similar to prior language, the amount of tax benefits we have taken to date, what our total exposure is, it is in the $800 million range. We have as a prior FIN 48 and FAS 13.2, we will record a reserve effective 1/1 of this year I guess, and combined amount will be in the Q., it's over 100, or in the range of 100.

In terms of next steps, we continue to be comfortable with our position, in terms of the legal basis under which we did them. They are largely energy related facilities that is close to our business, obviously. And we generally would expect it to be a long process for that to go forward, and some of the indicators may be what happens in other, other cases that come before us.

So, okay, so internally you intend to hold them, and you don't expect to try to sell them or monetize them?

That is generally hard to do. I won't say we won't keep our eyes open, but that's generally quite hard to do.

Okay. Thank you very much.

Next question comes from the line of Paul Fremont from Jefferies and Company. Please proceed.

Thanks. With respect to the $0.10 to $0.15 of upside that you see at the utility, would that also be potentially upside on your annual guidance for 2007, assuming that the other businesses come in at the high-end of their ranges?

Paul, we are trying to decide for the specific reference you are making, the $0.10 to $0.15.

I'm sorry, in the press release I guess there is a discussion in the PSE&G section. Where --

Paul, that's the impact of last year is below normal weather on the gas company, and that reserving itself out, assuming normal weather this year.

All that is baked into the guidance.

I just wanted to make sure. Okay. Then in terms of the Texas contracts, it looks like the contracts currently are out of the money. Can you give us a sense of when those contracts ultimately come off in Texas?

Paul, it's a 5-year contract with 3.75 years left. But the negative mark-to-market is actually a good thing. The market has moved up. They moved up about six, eight weeks ago.

One of the moves was the withdrawal of the expectation of a number of coal plants associated with another transaction, so that did have a positive longer term market move. So despite the $0.06 for the quarter it is actually quite a bullish sign for the state and our investments longer term. It is 350 megawatts.

We have two, 350 of the two is under contract for the next, through 2010, I guess it is.

Thank you.

(OPERATOR INSTRUCTIONS) Next question, David Frank from Catapult Partners.

It is actually Steve Fleishman. Can you hear me? I know I saw you about a week ago, but I think you had talked about the '08, '09 RPM currently trading in the 120 area, is that still roughly where it is? And then I think we are going to check if the '09, '10 is trading at all at this point, I don't know if that's trading?

Yes, Steve. It's a relatively thin market but the range of 120, maybe a shade less is still reasonable. Our understanding is it would be next year with that '09, '10, is still quotes available in that zone. And that is also roughly the zone it was at at around the time of the BGS.

And using some round numbers, and as we said we were using at least into our planning assumption as we talked in our investor conference a few weeks ago, we were using that around the zone on a $/kilowatt year in the low to mid-$40 range.

Okay. And on the energy master plan, which I guess will address both the solar and broader initiatives, when will that likely be kind of pinned down to more detail, is it just some time later this year?

The plan itself is scheduled to be published in October of this year. There are drafts that working groups that we are participating in have already been exchanged. The solar initiative while it's perfectly consistent with goals and objectives of the plan, we have already submitted a filing on that, Steve, and we are trying to operate ahead of the plan, quite candidly. And we are going to speak about some other initiatives later in the year, that we won't feel constrained by the timing of the energy master plan either, as long as there is complete clarity and consistency with the goals and objectives of the plan, and the filings we intend to make.

Thank you.

Next question, Zachary Schreiber from Duquesne Capital Management, please proceed.

Duquesne, thanks. Just a question on RPM and CONE structure, and given that the prices at least for the first auction came out either at or slightly above the CONE. Is the cost of new entrant calculation in the RPM regime, is it a stale number, and how can it be updated? I understand it can be updated, once a year, even more often? Will it be updated given increased yield cost, increased component cost, pricing power from the E&Cs, and so sort of, first question is just on the RPM structure, will the CONE be updated, and then generally what do you see given all the things I just mentioned? I mean, are those right? Are there offsetting factors there? What is the cost of new entrant, and given all that the markets which you are in, when are they going to see scarcity, and what kind of pricing signals if they are to function appropriately need to be sent to incentivize new builds. And the last part of this question, is will the value of that be captured in the heat rate, or will it be captured in capacity price? I.e., is there some, anyway, I will stop there. Sorry.

You went to Greg's school of asking one question.

Generally the whole issue is the RPM

cost of new entrant whether the value flows through the heat rate or the capacity?

I think in general since the CONE was developed we think there is more numbers that have pressured that upwards rather than downwards, and the most notable thing you mentioned is just cost of new entry, pure construction building, whether it's steel, whether it's pressure on the resources to get stuff done, pricing power, whatever, but there have been pressures in that number which would suggest that the CONE could be reassessed potentially. In terms of total--

$600 a kilowatt now. $600 a kilowatt, the CONE now?

Well, it is $72/kilowatt year, I believe the number that they use, but it's a levelized $72/kilowatt year for 20 years, in terms of the reference plant that they used, it was a peaker, that sounds a little bit higher than the number that you, but it's all detailed in the PJM specs.

In terms of what the process is to review that, there is one, I am not sure how formally it has been communicated. I would have to talk to our market people to really understand the specifics, but there are some other things in it during the development. We had suggested a somewhat more gradual decline, a ramp, let's say, so we will see over time, and after this is done a few times, I am sure PJM will listen to participants and assess whether there should be some modifications.

A more gradual ramping in which component?

In terms of the ramp down between the 1.5 times CONE, we had thought there was some merits to having a more gradual ramp, to reduce volatility in prices from one auction to the next.

That is why the RPM was created, right? This is essentially a reliability pricing model, it is an attempt to incent somebody to build a combustion turbine, or some sort of peaking unit. So it's not intended to incent the next load fall unit or base load unit, and you would have to look beyond capacity margins there to energy margins, to look for the right pricing. We do, it's just that your broader question though, that we can address.

Yes, if the CONE alone does not incent new builds certainly as Ralph said, it would be a meaningful distance from incenting new builds on a more base load facility, than you would look to heat rate expansion. We do see some heat rate expansion, especially off peak longer term. Some of that may be partially due to some pressure in coal, may be due to a gradually tightening market, and could even be partly due to carbon.

Which years, is it beyond 2010 that you are seeing, that or are you seeing that more and more--?

It is more sort of '10 and out a couple years.

Got it. Thanks so much, congratulations.

Thanks.

Thanks. Are there any other questions, operator?

There are no further questions at this time. Please continue with your presentation or closing remarks.

Well with that, we want to thank you for joining us and, again, we are delighted with the first quarter results, and even more delighted with the platform for the future. Thanks for your attention. We will see you all soon.

Thank you.

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