公共服務電力與天然氣 (PEG) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group third quarter 2007 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, November 1st, 2007 and will be available for telephone replay beginning at 1:00 P.M. Eastern Time today, until 1:00 P.M. Eastern Time on November 8, 2007. 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 Kathleen Lally. Please go ahead.

Thank you, operator, thank you very much. Thank you all for participating in our call today either by telephone or over our web site.

I'm going to be turning the call over to Ralph Izzo, PSEG's Chairman, CEO and President for comments on the company's third quarter results and outlook. Also participating in today's call will be Tom O'Flynn, PSEG's Executive Vice President and Chief Financial Officer, and President of PSEG Energy Holdings. Tom will provide a more detailed view of the company's operating and financial results and the forecast for 2007.

Before we begin, however, I need to make a few points. We issued our earnings release this morning. In case you have not seen it, a copy is posted on our web site. We have also posted a series of slides that detail the operating results for the quarter. We expect to file our third quarter 10-Q with the SEC today.

On 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 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 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 a public manner, generally in the form of a press release or webcast such as this, today. 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 during any individual phone call. In the body of our earnings release, we provide a table that reconciles net income to operating earnings. We've 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" to the non-GAAP term "operating earnings." The attachments for the press release provide the reconciliation for each of our major businesses. Operating earnings is our standard for comparing the third quarter 2007 results to the third quarter 2006 results for all of our businesses. Operating earnings exclude merger-related costs. They also exclude the net impact of certain asset sales during the period presented. We exclude such costs so that we can better compare our current period results with prior or future periods. Finally, at the end of the prepared remarks, Ralph and Tom will take your questions. We ask that you limit yourself to one question and one follow up. And with that, I'd now like to turn the call over to Ralph.

Thanks, Kathleen. Good morning all and thank you for taking the time to participate in our conference call. As Kathleen has already mentioned, a copy of the earnings announcement with the related financial attachments was released this morning and is posted on our web site. We hope this helps you with your review of our third quarter results.

I'm pleased to report operating earnings for the third quarter of 2007 of $2 per share versus $1.47 per share reported for the third quarter of 2006. The results for the third quarter bring our operating earnings for the nine months, ended September 30, to $4.47 per share and that compares to the $2.99 per share reported for the nine months ended September 30 of last year. Due to the strength of operations for the first nine months of '07 and our expectations for the fourth quarter, we are increasing our full-year operating earnings guidance to $5.15 to $5.45 per share from our previous guidance of $4.90 to $5.30 per share. But based on normal performance from our current businesses in the fourth quarter, I would expect 2007's full-year operating earnings to fall in the upper-half of this increased earnings guidance range. This is the second time this year we've raised our forecast of '07's operating earnings. This latest revision would result in earnings growth for the full year of 40 to 45% over last year's operating earnings of $3.71 per share.

We continue to forecast a further 10% improvement in next year's operating earnings per share, and you can see this depicted on slide 6 of our presentation. The results for the quarter and year-to-date represent success for PSEG on several levels. Operational performance and resulting earnings are stronger than expected. We've announced the sale of three investments in Latin America. We continue to have discussions with the State of New Jersey regarding how to best meet their energy goals and we've started to put definition on our growth initiatives. Allow me to discuss each issue in turn as listed on slide 7.

As you know, energy and capacity markets remain strong. PJM has held three capacity auctions under its reliability-based pricing model, providing values on capacity through the delivery year ending May, 2010. Two more auctions are scheduled for January, 2008, and May, 2008. Those auctions will provide values for capacity for the deliveries through the May 2012 delivery year. RPM, from our perspective, is working as intended. The forced outage rate on our existing capacity is lower, which provides for improved margin on energy and ancillary services. We are seeing more demand side management-related capacity bid into the market and in some ways, it's supported our decision to spend $1 billion to maintain the availability of the Hudson and Mercer coal units beyond 2010.

Next, we've taken advantage of the market's interest in attractive assets in Latin America and we've used the cash generation from asset sales at both Global and Power to strengthen our balance sheet. PSEG Global closed on the sale of Electroandes in October. We announced yesterday that we have an agreement to sell our interests in ChilQuinta and Luz Del Sur. This transaction could be closed by year end. And in Power, as you know, we sold the gas-fired Lawrenceburg station earlier this year.

We are moving ahead with growth initiatives as well. The market's need for capacity and the values placed on capacity by the market support our decision to invest up to $250 to $350 million on 300 to 400 megawatts of new gas-fired peaking capacity that could be bid into the 2008 auctions for supply beginning as early as 2010. This capacity is part of a larger request we have before PJM to perform the necessary feasibility studies to determine our ability to add a total of 1,000 megawatts of new gas-fired capacity to existing facilities. The final decision to proceed with construction will take into account capital and interconnection costs, available siting and the impact of any potential environmental-permitting restrictions.

This new capacity would improve the overall efficiency of the fleet and enhance reliability, in particular for our New Jersey customers, where PJM indicates the supply is needed. In another growth opportunity, this time at the utility, we are proceeding with the permitting required for our $600 million investment in the 500 kilovolt Susquehanna-to-Roseland transmission project scheduled to enter into service in 2012. We've undertaken these initiatives while strengthening our balance sheet. This places us in a position to deploy capital in the future in support of additional growth initiatives.

The release of the energy master plan later this year should provide us with even greater definition around the role we can play in support of New Jersey's clean energy goals. We remain committed to partnering with the state to achieve its goals through our solar initiative and by improving upon the efficiency of our buildings and our delivery equipment. This is another growth area we see available to the utility.

Naturally, we remain focused on maintaining best-in-class operations. PSE&G, for the sixth year in a row, was awarded the ReliabilityOne award for the Mid-Atlantic region. PSEG Power expects to be in a position to resume independent operation of our nuclear fleet at year-end. This represents a major milestone in PSEG Power's operating capability. We will always treat these core business commitments to our customers and to our shareholders as Job One. Now, let me turn the call over to Tom.

Thanks, Ralph. As Ralph said, we are all very pleased to report that we recorded a 36% increase in operating earnings for the 2007 3rd quarter, to $2 per share from $1.47 per share for the third quarter of '06. As you see in slide 9, the improvement was led by a 62% gain in PSEG Power's operating earnings to $1.33 per share from $0.82 per share followed by a 24% increase in PSE&G's operating earnings to $0.42 per share from $0.34. Energy Holdings reported operating earnings for the quarter of $0.29 per share compared to $0.38 of a year ago. For the nine months, ended September 30, Power's earnings were up 79% to $2.93 per share from $1.64 per share. PSE&G's earnings also grew by 49% to $1.18 from $0.79 per share. At the same time, Holdings earnings declined to $0.53 per share from $0.76 per share of the same period a year ago. We provide you with a waterfall chart taking you through the net changes in year-over-year operating earnings by each major business for both the quarter and year-to-date periods.

I'll now go through each company in more detail. As I said, PSE&G reported operating earnings for the third quarter of $0.42 per share compared with $0.34 of a year ago. The improvement in earnings was driven by higher gas and electric margins associated with the rate settlement implemented in November of 2006. This rate increase added $0.06 per share to the year-over-year improvement. On a weather-normalized basis, PSE&G experienced a 1.7% increase in electric sales for the quarter. However, cooler-than-normal weather conditions reduced earnings comparisons by $0.01 a share. PSE&G's earnings continue to benefit from customer response to its supply and service business. Service contract retention and additional calls for repair service added $0.01 per share to earnings for the quarter. Results also benefited from a reduction in financing costs of $0.02 per share.

An important component of PSE&G's earnings has been its commitment to controlling operational expenses as it maintains a strong commitment to reliability. PSE&G was recently recognized as the most reliable utility in the Mid-Atlantic region for the sixth consecutive year. This operational success and the rate relief received in 2006 place PSE&G on track to earn its authorized returns.

We anticipate learning more from the New Jersey Board of Public Utilities by year-end on the $100 million solar initiative proposed by PSE&G in April of '07. Our proposal would help finance the installation of about 30 megawatts of solar systems on homes, businesses and municipal buildings throughout our service area.

Now turning to PSEG Power. Power's earnings grew by 62% in the third quarter to $1.33 per share from $0.82 per share of a year ago. The drivers for the quarter are outlined in a waterfall chart on page 15. The results for the quarter showed the benefits of recontracting power in the 2007 BGS auction at about $99 per megawatt hour, which was effective June 1st of this year, compared to power priced at about $55 per megawatt hour under the old contract. Power's results also benefited from the June 1 effective date of PJM's reliability-based pricing model for capacity, as well as the exploration of below-market contracts in Connecticut. In total, recontracting added $0.55 per share to earnings.

Power's results also benefited from continued strong performance of the nuclear fleet. The 2007 capacity factor for Hope Creek and Salem averaged above 98%, in line with last year's very strong performance. In addition to a 1.1% increase in output from our nuclear generating stations for the quarter, output from our fossil fleet advanced 2.4% in response to market signals. The operating results for the quarter are summed up by the improvement in Power's gross margin. During the third quarter of 2007, realized gross margins advanced to $56 per megawatt-hour from $41 per megawatt-hour bringing the year-to-date gross margin realized by PSEG Power to $50 per megawatt-hour versus $38 last year.

The performance demonstrated by the nuclear fleet during the quarter brought the year-to-date capacity factor to 94%. This is in line with expectations for a full-year 2007 capacity factor of 92%. Supporting these expectations Peach Bottom number 3 resumed operations 19 days after entering its refueling outage on September 23. And Hope Creek is scheduled to return to service in early November from a refueling outage which began on October 12. During the outage, Hope Creek personnel will be completing the physical work associated with the planned 125-megawatt upgrade in the unit's capacity. However, the Nuclear Regulatory Commission is not expected to complete their review and approve the work until the second quarter of 2008. This represents a delay from earlier expectations, but is not expected to have a major impact on '08's operating results. PSEG Power is also working toward resuming independent operation of the nuclear fleet by year-end.

PJM, as you're well aware, has been holding capacity auctions under the RPM model through 2007. Results for the third auction provide pricing signals for the June 2009 through May 2010 delivery year and they were released on October 12 of this year. The results have provided a clear signal to the market of the value of capacity in constrained areas. We have been asked a number of times about the conditions necessary to support an investment in new capacity. The return provided by RPM is a part and indeed a major part of that answer. However, our decision is also based on an improvement in margins on energy as well as higher revenues from ancillary services. This margin potential, as well as the opportunity for an improvement in fleet efficiencies, support our investment decisions. PSEG Power has requested that PJM perform the feasibility studies necessary to determine the impact on the system of adding as much 1,000 megawatts of new gas-fired generating capacity at existing sites in the Eastern MAAC reliability region. As Ralph said, Power's intention is to bid about 300 to 400 megawatts of this new capacity into the RPM auctions that will be held in 2008 for delivery as early as 2010.

Now, moving on to PSEG Energy Holdings. Holdings reported a decline in operating earnings for the third quarter to $0.29 per share from $0.38 per share. The decline in earnings was experienced at Energy Holdings' Global subsidiary. The earnings contribution from Global's Texas generating stations was down by $0.07 primarily through a reduction of mark-to-market contribution of $0.06. Holdings international distribution properties primarily SAESA reported a $0.01 per share improvement in operating earnings as a result of economic growth. Higher financing costs associated with new financing at SAESA and the costs associated with repatriation of proceeds reduced earnings by $0.03 per share.

A higher tax rate associated with a larger percentage of earnings generated from Holdings' domestic investments reduced earnings by $0.03 per share also. Holdings' resources subsidiary reported a $0.02 per share improvement in earnings comparisons for the third quarter. Resources received a stock distribution from Northwest Airlines as a result of its bankruptcy proceedings and recorded income of $0.02 per share. A decline in interest expense of $0.02 cents per share offset a like-size reduction in lease income. Holdings' earnings comparisons continue to benefit from a reduction in G&A expenses which added $0.01 per share for the quarter.

The focal point for the quarter for Holdings has been the repositioning of the portfolio. As Ralph said, Global closed on the sale of Electroandes for $390 million on October 17. Global just recently announced that it was in agreement to sell Chilquinta and Luz del Sur for $685 million, including Global's proportionate share of net debt on these transactions, the transaction has a total value of $885 million. Our partner in Chilquinta and Luz del Sur, Sempra, retains the right of first refusal for a period of time. We believe the transaction can close by year-end. We also recognized a $7 million after-tax impairment of our small investment in Turboven in Venezuela, which reduced net income for the quarter by $0.03 per share. These transactions and asset impairment have sharply refined our international portfolio. We are left with a $500 million investment in SAESA and smaller investments in generation assets in Italy, India and Venezuela, amounting to $128 million. Finally, from a financial perspective, during the third quarter the subsidiary companies provided $350 million of dividends to enterprise. These distributions, as well as the proceeds from our asset sales, should allow enterprise to call or redeem approximately $675 to $700 million of debt in the fourth quarter. We are extremely pleased with our year-to-date results. We have increased confidence in our ability to deliver on 2008 and beyond. Finally Ralph, Kathleen and I look forward to seeing all of you shortly at the E.I. in Florida. With that, we will now take

(OPERATOR INSTRUCTIONS) And our first question comes from the line of Ashar Khan from A -- Sorry, from SAC Capital Management. Please proceed with your question.

Good morning. Tom, could you just elaborate what debt targets are, especially in line with the proceeds expected from the Latin sales by the end of the year, that -- Based on your budgets, when do you meet them?

I think, Ashar, the targets are still quite consistent with what we've communicated. I believe we've laid it out a couple of times. I think the initial time was at our investor conference in the Spring. At the time, we said that we thought we would achieve those debt targets by mid-'08 and that was not including sales of Latin American businesses. Obviously as we've done that, that would allow us to achieve those debt targets earlier than mid-'08. I think we've said that once we achieve those debt targets, we are then in a position to have cash flow that's incremental to our normal business and capital investment program, such that we could have incremental growth and, or share repurchases.

But can you achieve them by the end of this year?

I think the end of this year, we are closing in on that. I think I wouldn't want to refine it that much but we are getting quite close. Obviously, I don't want to get ahead of ourselves in terms of the transaction we just announced. We have to move through the process and we're hopeful to get it closed by year-end. But if not by the end of this year, I think, reasonably shortly thereafter.

Okay. And the second question, Tom, just going back -- I know the guidance has been increased for this year but no guidance change for next year. But the realized margin on the Power side of $56 for the last quarter is what was anticipated for the full year 2008 in your spring conference, around $55. So it would be fair to assume that the margin should increase going into next year. Is that a fair point?

Yes, we do expect to see margin increases year-over-year. The one thing I'd remind you of is remember there is some seasonality to our margin. The BGS is shaped, so there is a -- just even with a fixed price contract, the $99 would reflect an average of the 12 months but there is some seasonal summer premium.

Okay. Okay. Thank you, sir.

Yes. But yes, we do expect margin improvement in '08 versus '07.

Next question.

Our next question comes from the line of Shalini Mahajan from UBS Securities. Please proceed with your questions.

Good morning, a question for you, Ralph. With regards to the energy master plan currently being formulated in New Jersey, is there any discussion around the structure of electric industry in the state? We've seen some comments by the governor proposing a state-sponsored authority to build new power plants? Would you want to comment on that?

Yes, I think that, in general the state is quite satisfied with the BGS auction and the way in which energy is procured for customers. There has been some concern over whether or not there is adequate long-term supply, that being base load generation out into the distant future, especially given the environmental constraints. But I think you'll see a great emphasis that the state will continue to make on energy efficiency and renewables expansion as a way to meet both the supply-demand balance as well as the carbon constraints it's imposed upon itself and we are active, active participants in that dialogue.

And as you're proposing to look at 1,000 megawatts of newbuild in the Eastern MAAC region, are you getting a sense that there would be, probably, other significant capacity also getting bid into the '08 auction?

I can't really predict what others will do. They are seeing the same pricing as we are. We have some site advantages, clearly. And we have some experience advantages in terms of knowing how the markets around here work, but I wouldn't want to use our earnings call to predict the behavior of competitors, so.

Okay. Fair enough. Separately, Tom, just a quick question on PEG Power. We've seen the O&M cost be increased last year-to-date versus last year. Any timing factors associated with this, or is this a kind of a trend that you think you can maintain going forward?

In general, the O&M can move around a little bit due to the timing of outages. In general, I think Ralph and Bill Levis run a tight ship on operating expenses so we try to keep those in check. As we look out in the future, we do expect some modest increase in O&M just consistent with inflation and normal business environment escalation.

Okay. Thank you so much.

Our next question comes from the line of Gregg Orrill from Lehman Brothers. Please proceed with your question.

Thanks, my questions have been asked and answered. Congratulations on the quarter.

Thank you.

Next question, operator.

Our next question comes from the line of Rudy Tolentino from Morgan Stanley and Co.

Hi, given the adjustment that PJM made to the 2010, and 2011 demand curve, bringing in the parameters lower, how does that impact your decision to move forward with your peaker expansion? And, also, I think that these are brownfield expansions and, as part of it, do you intend to do any retirement as part of the process?

There was some changes that did move the net cone number down a little bit. I think some of that movement down was that there is -- As they look back -- And you picked up some of this in a report that I saw. As they look back over three years about margin contribution from peakers, they saw some higher contribution and to be honest we would agree with that. That's one of the comments I made, one of the underpinnings we see in supporting economics would be RPM and also some improved margins so I think there was an adjustment in net CONE. Other than that, they're obviously moving to more load centers but we still see the fundamentals to be largely the same.

Okay. So I take it, you are expecting the higher ancillary services revenues for the project to make up for any changes in load capacity pricing?

Yes. I think I wouldn't want to be predicting where the RPM was going to come out. I would say that we are seeing higher capacity, I'm sorry-- Higher energy margins and that would be consistent with a reduction, a modest reduction in the net CONE number. Once again, we'll bid in the auction. We'll obviously bid what we think is a competitive -- But a value that would support a reasonable return on our investments.

And these projects are brownfield projects, is that correct?

They're all brownfields, that's correct. There's three sites. It's three sites where we have existing plants -- I'm sorry, the other question about retirements, we would not expect retirements specifically to be associated with these bids that we're making. That being said, we do have some older facilities. We do have facilities, especially Hudson. An older peaking facility is on an RMR. That goes until the Fall of 2010.

Okay. Thank you very much, and we look forward to seeing you next week.

Next question, operator.

Our next question comes from the line of Timothy Shaler from Pacific Investment Management. Please proceed with your question.

Hi, guys. Ashar Khan has already asked about debt targets, but I wanted to understand your understanding of how you are going to be affecting debt at PSEG&G holdings since most the asset sales -- Or all of the asset sales at that subsidiary so there is going to be less interest coverage there going forward? Can you just speak to that, please?

Tim, I think as you've seen us sell some assets over time, we've generally used the proceeds to both dividend money up to PSEG as well as reduce debt. I think we continue to do that. We talked about a three times FFO coverage ratio that I think we'd still be expecting to maintain, be at or above that number. In terms of debt retirement at Holdings we of course have a maturity, I believe in Feb, for a little over $200 million. So, obviously that's going to have some debt retirement. And to the extent we have other money, I expect we will use it as we have in the past -- Both too reduce debt as well as up strength capital.

Thank you. Just a quick follow on. Going forward, as there are less assets to sell, how would you expect to meet the maturities in '09 and 2011?

I think it's through a combination of, potentially, some early debt pay down. I don't want to get obviously the debts, debt value and debt trading markets can be influenced by expectation of early redemption. So I don't want to get ahead of ourselves. But to the extent we shrink the portfolio, we would expect to have some early redemptions of maturities. We got the big maturities in '09 and '11. To the extent we shrink the portfolio, we may have some early redemptions of those, as well as some refinancing. We still have good cash flow, the Texas assets in particular, some of the smaller ITPs we've got in the U.S. And then, of course, resources that's a cash flow generator. There is still a fair amount of debt capacity in the business.

Do you have debt against the Texas assets now?

We do. We have, it's 2000 megs. We have 185 a kilowatt, it's 370, we have said that we believe those assets are under levered and we may look to restructure that financing, both to make it easier to market those assets and post collateral with those assets and also to have some increased debt capacity. If we did that, then the same answer that I gave you -- If we increase the debt capacity on the Texas assets then we would look to that increased cash in the same proportional way -- In terms of potential holdings pay down as well as dividends up.

Thank you. That's very helpful.

Next question, operator, please.

Our next question comes from the line of Paul Fremont from Jeffries and Company. Please proceed with your question.

I guess the most recent PJM statistics indicated that Eastern MAAC is no longer a constrained area by their definition. Can you sort of help clarify what it was that created or that eliminated the constraint there? And do you see potential constraints in the New Jersey market in future auctions to come in 2008?

Yes, Paul, we will have to see what happens at the next auction. You may well see the MAAC could be the binding constraint, we'll see if it's consistent with some of PJMs recent comments. There wasn't to my knowledge, at least, any one element that changed that. I think as they look out at supply demand, transmission, retirements, the whole series of detailed calculations that they do that those are the signals that they sent.

And with respect to New Jersey in future period auction?

We continue to see our service territories especially the Northern part -- What we think of as PS North as an area where supply and demand is quite tight and that's where we are focused our peaking, potential peaking bids on that area. So we continue to see that as being a constrained zone where existing capacity is valuable and new capacity will be needed.

Thank you.

Next question.

(Operator Instructions) Our next question comes from the line of Paul Patterson from Glen Rock Associates.

Good morning. Can you hear me?

Yes, Paul.

Just wanted to follow up on these, the new power plant. The fact that they are brownfield, I would assume that gives you guys a cost advantage in terms of building. And I was wondering if you could give us a little bit of an idea, a little bit of a flavor, as to what that benefit might be. I mean, I'd think interconnection, things like siting, environmental stuff would be a little bit easier and perhaps a little bit cheaper and I was just wondering if could you just give us a flavor for that would be vis-a-vis somebody who was coming in and doing it on a greenfield basis?

And the second question I have, it's sort of follow up to Paul Fremont's, is where do you expect the reserve margin to be with this additional capacity? Let's just use the 400 megawatts, for 2010, 2011 for E.MAAC?

Well, Paul, I think you're right in terms of the competitive advantage of using existing sites in terms of infrastructure that one can leverage, be that a switch yard or various ancillary buildings surrounding a facility. There is no leverage in terms of environmental permits. One of the challenges the state will have to grapple with here is the fact that we will be increasing reliability of the system and we will be improving the efficiency of units that constitute the available supply. But we will be in there for a set of environmental permits to do so and we are eager to be able to provide this to our customers in the northern part of the state. But there is no implicit advantage in brownfields when it comes to air emissions permits. In terms of the actual reserve margin, I don't have that number handy.

And it also depends, Paul, as you know, as the region -- Where it breaks over time. One of the things that makes it, as we said a couple times, one of the things that makes us a little more comfortable with this is we are getting some energy margin both in terms of pure energy margin as well as ancillary. That's a little more, that's a little easier thing to predict because it's very much based upon the fundamentals of the hourly market. But, I think, we generally see that the reserve margin will be consistent with what we've seen in the first three rounds of the RPM.

So, in other words the addition of this will keep reserve margins pretty much flat, keep reserve margins from changing, from going down, is that pretty much how you see it? Because ,ordinarily, I guess, I would assume that as time goes on reserve margins would fall without the addition of new capacity because of the --

That is correct.

So the three to 400 megawatts which I see as being about a percent of E.MAAC, that would be pretty much what it would be -- That would pretty much, do you think, would pretty much hold it sort of flat vis-a-vis the last auction?

We are still seeing strong demand growth in the region, Paul, that's correct.

Keep in mind Paul, as I mentioned with Hudson one we don't know what the loaner term approximately is going to be after the RMR, but there are some older plants that may come to retirements at different points in time.

Could you give us also a little flavor in terms of when you mention that there's -- Because of the constraints and what have you and higher energy margins, how much those might add in either peakers so we can sort of figure out the RPM numbers, but how much the energy margin might add to that?

Yes, I'd rather not go through too much of that because then we get into, then you can kind of back into the next question of what's your RPM bid? Let's just say it's a reasonable amount that provides a meaningful addition to the pure RPM number. RPM is still the meat of the diet here, but it is a good supplement to it.

Just in general when you mentioned the interconnection and the siting advantage, et cetera, can you give us a flavor as to how much that lowers cost in terms of building the plant? You mentioned environmental is not really any different but those other two things -- How much does having a switch yard and all that stuff, how much of an advantage percentage-wise, roughly speaking would you say that that gives you?

Yes, I would say -- There's advantages more broadly I think in term of sharing some staff, sharing some of the base facilities, having some of the transmission places there. The major advantage, to be honest, from a transmission standpoint is that you've got a site where you can hook into the grid and the feasibility that comes back from PJM says the grid does not need to be reinforced. That's the real thing that you've got -- A place on the grid where PJM has the ability to take the power without reinforcements for the grid. Such reinforcements could be very material and in some cases make new construction prohibitive.

Great. Thanks a lot, guys.

Thanks, Paul. Next question.

Our next question comes from the line of [Jara Tong] from Banc of America Securities.

Hi, guys. Can you hear me?

Yes.

Okay, I don't think -- PSEG Power is partnering Cross Hudson project any more but I heard that somebody else is. Can you remind us again if that project is continuing? And also, Hess announced that they will be building transmission lines connecting Bayonne, New Jersey to somewhere in Brooklyn, just wondering how that would change the dynamics of the market in the constrained area that you mentioned.

Well, Jara, as you know, we do not own the rights to the Cross Hudson project, we sold those rights a few years ago and the status of our knowledge is the same as anyone else in the public domain. There was an RFP issue. It's got to be a couple of years now and the announced winner was an organization known as HTP, I believe. And they are connecting to a facility in Sayreville called the Red Oak facility and that's the solution that's in play. Now there have been all sorts of newspaper accounts of New York City having a greater need for energy and capacity. We are not engaged in any bilateral discussions with the city but we certainly would look to that market if there are any future RFPs or auctions that come out, just as we would in any other market that we have the potential to supply.

Okay. The additional megawatts that you guys are looking to add, does that factor in any of these potential projects that could draw power out of New Jersey into New York?

No, no. Again I'm not as intimate with the knowledge of New York City markets, but the issue there is both energy and capacity. And clearly, the peaking units we are building here are reliability based-peaking units.

Okay. Thank you.

So these are not meant to supply the city but clearly as we look at building, we look to the supply demand fundamentals. And we continue to see the need for additional capacity that's based on demand growth, and it's also based on potential competitive moves of generation where generation could go towards the East.

Well, congratulations on a good quarter.

Our next question comes from the line of Neil Kalton from Wachovia. Please proceed with your question.

Yes. Just a question on your coal fleet. I think you mentioned that it was operating at a capacity factor of about 55 to 60% and you saw room for improvement over the next few years. Could you elaborate on where we might see those capacity factors heading?

The real improvements will come after -- And its Hudson and Mercer, the two main ones where there will be improvement. The real improvement will come after we put the back ends on them that I believe are in '10 and '11 respective, Mercer being the earlier one. You're right, they're in that 50 zone. I think they will go up into the 70% zone would be our expectation.

Okay.

(multiple speakers) that we're minority owner in already run up in the 80s or higher.

Okay. So, we should think sort of in the 70% zone by 2011 time frame.

70, 75.

Okay. Thanks.

We will also have some -- Will run more and also have some increased flexibility with coal. So, Hudson where we're -- we have some quite narrow requirements in terms of coal, which can -- Which has somewhat higher coal expense. We would have some greater flexibility which may provide some economic benefit.

Okay.

Any other questions, operator?

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

Thanks, everyone for joining us and we look forward to seeing you at EEI.

Thank you.

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

Thanks.