公共服務電力與天然氣 (PEG) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group's second quarter 2008 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, Friday, August 1st, 2008, and will be available for telephone replay for 48 hours beginning at 1:00 PM eastern today until 1:00 PM eastern on August 8th, 2008. It will also be available as an audio webcast on PSEG's corporate website at www.pseg.com.

It's now my pleasure to turn the conference over to Ms. Kathleen Lally. Please go ahead, ma'am.

(Due to technical difficulties the following text was not captured on the audio and has been provided by the Company) Good Morning. Thank you for participating in our earnings conference call this morning. I would like to make a few points before we begin.

We released our second quarter 2008 earnings statements this morning. In case you have not received a copy, the release and the attachments are posted on our website www.pseg.com under the investor section. We have also posted a series of slides that detail the operating results for the quarter. We expect to file our Form 10-Q for the period ended June 30, 2008 today. Let me briefly review our disclaimer statement with regard to our earnings guidance before turning the call over to Tom O'Flynn.

Disclaimer Statement. The statements contained in this communication about our and our subsidiaries' future performance, including, without limitation, future revenues, earnings strategies, prospects and all other statements that are not purely historical, are forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. Although we believe that our expectations are based on information currently available and on reasonable assumptions, we can give no assurance they will be achieved. There are a number of risks and uncertainties that would cause actual results to differ materially from the forward-looking statements made herein.

A discussion of some of these risks and uncertainties is contained in our Annual Report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K filed with the Securities and Exchange Commission (SEC), and available on our website: www.pseg.com. These documents address in further detail our business, industry issues and other factors that could cause actual results to differ materially from those indicated in this communication. In addition, any forward-looking statements included herein represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if our estimate changes, unless required by applicable securities laws.

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 to the press release provide the reconciliation to each of our major businesses. Operating earnings excludes the net impact of certain asset sales and lease-related charges during the periods presented. Operating earnings is our standard for comparing results for all of our businesses. We exclude such items so that we can better compare our current period results with prior or future periods.

I would also like to point out that our earnings results for 2007 reflect operations discontinued at year end as well as the two-for-one stock split effective on February 4, 2008.

Thank you. I would now like to turn the call over to Tom O'Flynn, Executive Vice President and Chief Financial Officer. At the conclusion of Tom's remarks, there will be time for your questions. We ask that you limit yourself to one question and one follow-up.

Thank you for joining us today. I first want to pass along Ralph Izzo's regrets at not being able to join us. Schedule permitting, he will normally be available for these quarterly calls. We have very good news to report. Operating earnings for the second quarter were strong at $0.64 per share compared with $0.55 per share reported a year ago; with these (end of Company-provided text) strong results, we are maintaining our full year operating earnings guidance of $2.80-$3.05 per share. Our reported loss for the quarter of $0.32 per share includes a charge of $490 million, or $0.96 per share, which reflects our decision to recognize most of the potential risk associated with our leveraged lease tax position at this time. Although we have taken the charges associated with this issue, we have preserved our option to litigate with the IRS.

As I'll review in greater detail later in the call, our discretionary cash position adjusted for potential tax payments remains robust at $2.5 billion for the 2008 to 2011 period. We received approximately $600 million from the sale of SAESA in July after taking into account tax payments. And with the improved credit outlooks for PSEG, PSE&G and holdings, our credit ratings are in line with our objectives.

Given the strength of our outlook, the board has approved a share repurchase program of up to $750 million to be executed during a period of 18 months. The financial recognition of a substantial percentage of our potential tax risk and the sale of most of our international assets of the past year have allowed us to clarify our business risk and place our focus on our core businesses. The share repurchase authorization is recognition company has a strong has a strong business, financial and liquidity position, and the board's belief that repurchase of our shares may represent the best return for shareholders at this time.

Slides five and six outline the difference between operating earnings and the income from continuation operations as well as net income for second quarter 2008 and the six month period ending June 30th, 2008. As you can see on slide eight, the improvement in operating earnings for second quarter 2008 to $0.64 per share from $0.65 per share was due to the improved performance of PSEG Power which reported operating earnings of $0.47 per share compared to $0.37 per share last year. PSE&G reported operating earnings of $0.10 a decline from $0.12 per share earned in '07 second quarter. Energy holdings reported a slight decline in operating earnings for the second quarter to $0.08 per share versus $0.09 per share of a year ago. A reduction in debt in '07 reduced parent company related expenses in the quarter to $0.01 per share from $0.03 per share of a year ago. We provided you a waterfall chart on slides 10 and 11 which take you through the net changes in year over year operating earnings by major business for the quarter and year-to-date.

I'll now touch on each company in more detail. PSEG Power reported operating earnings for the second quarter of $0.47 per share compared with $0.37 a share a year ago. The improvement in earnings was driven by weak contracting as well as realization of capacity prices under PGM's liability pricing model for the full quarter versus only a month in last year's second quarter. Recall that RPM pricing was implemented on June 1st, 2007. These items added $0.10 per share to Power's earnings, earnings comparisons were also aided by gains related to positions taken in natural gas in the year to hedge our fuel cost exposure. -- $0.08 per share of earnings was expected to roll off during the remainder of the year. Higher pricing was also supported by a 7.6% increase in production.

The nuclear fleet continues to run well, operating at a capacity factor of 90.5% during the second quarter bringing the fleet's year-to-date factor to 92.3%. Salem II, 57% owned and operated by power, completed its refueling and steam generated replacement outage in 58 days, returning to service on May 8th. This ranked as the second shortage steam generated replacement outage in the history of the US nuclear industry. The unit's operating capacity increased by 11MW for our share upon it's return to service. We also completed the Hope Creek extended power upgrade of 125MW.

The combined cycle fleet continues to respond well to market conditions. Output increased 36% in the second quarter. Generation from our coal fleet declined during the quarter. Results versus last year were impacted by scheduled outage work at several fossil stations in particular, Hudson to improve long term reliability. This work resulted in an increase of operating maintenance expense of $0.04 per share. Earnings comparisons were also affected by higher depreciation expense of $0.01, higher interest expense associated with an increase in collateral requirements, also $0.01, and market related decline in the value of some securities held by power's nuclear decommissioning fund, which was also $0.01. Power's margin per megawatt hour represents an important means of evaluating operating results. As you can see on slide 16, gross margins improved in the second quarter to $54 per MW hour from $47 per MW hour in last year's second quarter. Operating margins for the first half of the year to $53 per MW hour, and keeping us on track to achieve an improvement in margins during 2008. Powers EBITDA for the quarter improved for $481 million versus $370 million a year ago, bringing EBITDA for the first six months of '08 to $1.028 billion, also keeping us on track to meet our full year target for EBITDA for $2.05 billion to $2.25 billion.

Higher prices for energy and capacity compared to last year are expected to continue to support our forecasted improvement in Powers '08 margins in operating earnings. This improvement in pricing is expected to be offset somewhat by higher fuel costs as well as an increase in operating and maintenance expenses. For instance, the Mercer station is scheduled to undergo a lengthy outage in late 2008 related to the addition of back-end technology to meet max requirements. Power markets have obviously been extremely volatile. This appears to be the result of a convergence issues affecting the market including very strong commodity prices and uncertain macroeconomic outlook and environmental requirements which have all contributed to a very dynamic market. Natural gas is currently trading slightly in excess of levels seen in March of this year after reaching levels in June that were 25% to 30% higher than where the market has recently traded. Power prices have reacted in a similar fashion. As a reminder, PSEG power currently with hedges covering it's anticipated coal and nuclear generation for the year. Including additional hedges put in place this year, Power currently has hedges in place for 2009, representing approximately 85% to 95% of its anticipated coal and nuclear generation with approximately 45% to 55% of coal and nuclear generation hedged in 2010.

Power largely remains open in the mark in 2011 with hedges in place representing 15% to 25% of anticipated coal and nuclear generation. It has been our practice to hedge our fuel position as we contract our output. Our fuel has hedged modestly longer than our positions on coal and nuclear generation. Nuclear fuel is turned up for 2011, coal is contracted for a period modestly longer than the power of sales I just went through. Our approach to hedging our output has typically provided more stability to our cash and earnings than would depend on short-term market pricing. We continue to feel comfortable with our forecasted open EBITDA for Power from $2.6 billion to $2.8 billion. The last of the transitional RMP capacity auctions was held by PGM in May of 2008. As you may know new generating capacity that Power bid into the auction did not clear. We do however remain committed to building new capacity provided reasonable RPM pricing and expect to bid in the May 2009 auction.

In the meantime, we believe the [bauer] groups of RPM released on June 30th will serve as a vehicle for PGM's review of the capacity auction process. The report recommended the basic design elements of RPM to be maintained but made some recommendations to enhance effectiveness. Now turning to PSE&G. PSE&G reported operating earnings for the second quarter of $0.10 per share compared with $0.12 per share of a year ago, the results of the quarter were effected by a number of factors. A decline in demand for gas reduced earnings by $0.01 per share, a lower peak due to a cooler summer in 2007, resulted in an expected decline in revenues also $0.01 per share. Operating and maintenance expenses increased 1.8% this quarter, less than the rate of inflation, this increase also reduced earnings by $0.01 a share. These items were partially offset by lower amortization expense and other items which improved earnings comparisons by $0.01. PSE&G guidance already reflects a modest decline in transmission revenues due to lower prior peaks. Results will also reflect an increase in financing costs associated with higher capital outlays and higher operating maintenance expenses associated with programs that maintain PSE&G's high level of liability. In May PSE&G filed for a 20% increase is base prices for gas commodity supply. Our increase is consistent with requests made by other at this utilities in the state.

This is a significant increase and we continue to monitor the impact of commodity price increases and economic conditions on our sale in both electricity and natural gas. Year-to-date, on a weather normalized basis, we've experienced a decline in .6% in residential electric sales, residential gas sales have declined by more than 1.5%. In July, PSE&G positions the formula road treatment on its existing and future transmission of investments to be effect on October 1st of this year. The request was based on a proposed ROE of 11.68% and provides for a forward-looking rate design that is similar to what the FERC has approved for other utility companies. The first rate year will be October 1st, 2008, through December 2008, with subsequent rate years running on a calendar basis. The mechanisms and protocols approved the annual reset and true-up of rates will take effect on January 1st of each year.

Looking to PSEG energy holdings, holdings reported operating earnings of $37 million, $0.08 per share for the second quarter 2008, versus operating earnings of $47 million of $0.09 per share during the second quarter 2007. Operating earnings exclude the lease related charges as well as the financial results of SAESA. Holdings operations for the quarter are largely influenced by the performance of holdings global subsidiary. For Texas generating units, particular Guadalupe are benefiting from strong demand and higher prices. Higher prices and stronger prices added $0.06 per share to earnings, the increase in sparks spread in 2008 second quarter compared to the decline posted in the year ago period led to mark to market losses in the second quarter which reduced earnings comparisons by $0.05 per share, globals earnings comparisons were also affected by international assets sales which closed in 2007. The absence of this income in 2008 reduced earnings comparisons by $0.03 a share. The availability of bioenergy in 2008 improved earnings comparisons by $0.02 per share in the second quarter, lower financing cost added $0.02 . A higher tax rate partially offset these gains reducing globals earnings comparison by $0.03 . Holdings resources subsidiaries reported a $0.01per share improvement. The improvement was a result of a lower tax rate, $0.02 per share, which offset the leasing of $0.01 share.

PSEG energy holdings operating income is expected to decline in 2008 versus 2007. The outlook however is stronger than forecast earlier in the year given the strength of the Texas power markets on global's profitability, which is expected to more than offset the reduction in estimated lease income from resources. We now forecast an improvement in EBITDA for the Texas assets in 2008 to $125 million to $145 million. This compares to the prior forecast of 2008 EBITDA of $85 million to $105 million. Higher natural gas prices demand are leading to stronger spark spreads which is more than offsetting the impact of added wind resources in west Texas on the dispatch of natural gas fire generating assets. Over the long term, a generating asset could benefit from the recent approval of scenario II under the transmission buildup program by the Public Utility of Texas. The additional transmission capability envisioned under this program would improve the dispatch of our facility. The 2008 outlook for holdings global subsidiary also reflects the loss of earnings for the full year from the sale of Chilquinta and Luz Del Sur which was sold in December of last year.

The outlook for '08 will also be affected by resources decision to recognize the substantial charge in the second quarter related to the IRS challenges certain leverage leases. This will result in a $30 million decline in resources income during this second half of the year versus prior expectations. Holdings closed on a sale of SAESA on July 24th of this year. After tax proceeds from the sale, amount to approximately $600 million, with this sale holdings international portfolio is limited to three small investments with an equity value of approximately $120 million.

Now more detail on the leases. There are several pending tax cases involving other taxpayers with leverage lease investments similar to ours that are being challenged by the IRS. To date, two cases have been decided at the trial court level in favor of the government. In the third case, involves a jury decision that is currently being contested. An appeal in one of these decisions was recently affirmed. Based on these developments and the status of the discussions with the IRS, we have taken the following actions in the second quarter. We have increased our interest reserve by $135 million. This is an after tax charge reflecting the income taxes. We've recalculated the return on assumed on our lease investments to take into account new assumptions on the timing of cash flow to be received from the leases. This adjustment resulted in an after tax charge of $355 million, consisting in a reduction of revenue of $485 million offset by a reduction in taxes of $130 million.

The net effect of these two items is a charge to the income in the quarter of $490 million or $0.96 per share. The $355 million reduction in income associated with a lower return on the lease investment portfolio will be recognized as income over the remaining lives of the leases as total income received on the leverage is unaffected by changes in cash flow timing. Slide 28 provides a view of the timing on this income recognition. As you can see we expect approximately 75% of this income to be recognized over the period 2013 to 2022. Our decision anticipates that we'll pay $300 million to $350 million in 2008, in taxes, interest and penalties claimed by the IRS for the 1997 to 2000 audit cycle and subsequently commence litigation to recover a refund. Our reserve levels assume a total cash outflow of $900 million to $950 million over the next two to three years, this includes the $300 million to $350 million we anticipate paying in 2008.

At the end of June our deferred tax liability in interests related to the deficiency amounted to $957 million and $209 million respectively, totaling $1.16 billion. In addition, penalties related to deficiency were $147 million. We believe holdings is in a position to meet its financial requirements from internal sources of cash.

It is important to say that PSEG believes that its lease investments are fully consistent with resources long standing business model and its focus on energy related assets on the type which PSEG has traditionally owned and operated. PSEG currently forecasts $2.5 billion of discretionary cash over the 2008 to 2011 period versus our prior forecast of $3 billion. This figure assumes a higher than originally forecast payment that is now $900 million to $950 million in lease-related taxes during this time frame. A revised figure in discretionary cash also reflects an increase in funds from asset sales. Keep in mind the major influences on our forecasts of discretionary cash are commodity prices and capital expenditures. Our forecast of capital spending includes growth-related spending on areas that may not materialize, for example, spending on renewables and holdings and PSEG spending plans related to such items as AMI. On the other hand although we expect to be conservative in our view of commodity prices, the dramatic decline in prices would have a negative impact on cash.

We saw a substantial increase in commodity prices during the second quarter, which required power to post additional margins given its hedge positions on the forecasted energy sales. We entered this period with substantial liquidity. We however reinforced our capital position with increases to our credit facilities amounting to $350 million. At the end of June we had $1.55 billion of liquidity available to PSEG group of companies. Since the end of the second quarter, our collateral postings at power have declined by $1.3 billion to $800 billion with a decline in commodity prices. With this decline, available liquidity for the PSEG group of companies is approximately $3.1 billion.

Lastly, we're obviously pleased to announce that the Board of Directors has improved a share purchase program of up to $750 million. This approval provides for the repurchase to occur during the 18 month period. Our business risk profile has improved over the past year. We sold the majority of our international assets at very good values, we recognize most of the risks associated with our lease related issue. We paid down debt to our parent company and our credit ratings are in line with our objectives. Our share repurchase program represents our commitment to making investments that provide the best available return to shareholders, taking into account opportunities to grow the business. We feel very confident about our financial and operating position. Our lease charge has clarified our financial risk, strong operations in our approach to hedging support our cash position, and our balance sheet's strong and we're focused on improving our returns to shareholders. With all that I'll

Operator, Elizabeth, we're available for questions at this time.

Thank you. Ladies and gentlemen, we will now begin the question and answer session for members of the financial community (OPERATOR INSTRUCTIONS) One moment please for our first question. Our first question comes from the line of Paul Fremont from Jefferies. Please go ahead.

Thank you, go ahead Paul, good morning.

Good morning, thank you very much. Just to sort of understand the charge that you took relates only to a portion of the leases that are in dispute. That would be for the cycle '97 through 2000. So should we assume that as you go through the audits, that you're going to have to make this decision again with respect to any possible disputes relating to other audit years?

No, Paul. There are a lot of moving parts in it. I think from an overall cash position, if you think about -- we took a charge that represents the vast majority of the risk associated. If you think about the $900 million or so that we expect to pay, we also have got a deposit that we made last December, a voluntarily deposit of $100 million. So we -- this charge represents a number that would be a very high ratio, the ratio would look like over $1 billion of $1.16 billion. In other words, $1.16 billion is our current exposure charge. Our cash is in line with our accounting charge, and that total cast charge is about $1 billion. So you want to divide $1 billion by $1.16 billion, you get up with a pretty high percentage number.

In terms of then -- so that the $490 million is the accounting impact, the $900 million to $950 million plus the $100 million is the cash impact. That is how we're giving them both to you. Then the question is, well how might the $900 million to $950 million be paid out? We believe that in a litigated scenario, it would be paid out over a two to three year period, it might also look like that over a settled scenario. The first payment might be $300 million to $350 million that would represent the '97 to 2000 audit. There would be a subsequent payment for the '01 to '03 audit that could be in '09 and then another piece in '10 or '11. So that may be more detailed. But that's -- we just broke out the audit because that would be -- the $300 million to $350 million is the first of the $900 million to $950 million. But all of that money has been recognized in the accounting statements, that is the $490 million, and in our cash forecast. Our cash forecast between now and '11, assume a very conservative $900 million to $950 million cash cost will go out.

And then just sort of as a follow up. Should we assume at this point that a settlement with the IRS is unlikely, and that the more likely path is that you proceed to litigation, or is there still a possibility here of a settlement?

I wouldn't want to rule it out. But our expectations that litigation is more likely.

Thank you.

Thank you, our next question comes from the line of Paul Patterson from Glenrock Associates. Please go ahead.

Hi guys. Just to make sure, I understand, the $490 million is the earnings impact, the $900 million to $950 million is the cash flow impact going forward?

That is exactly right, Paul.

Okay, and the $490 million -- other than the cash flow impact of the lack of cash as a result of these payment, the earnings, the -- has been the expected earnings impact has pretty much been taken care of by this write-off, right?

Well, there is a one-time event, the $490 million.

Right.

We did -- there is about $0.10 to $0.12 a year of earnings drained for the next -- for '08, '09 and '10. So it is going to be about half of that this year. That is about $0.06, I know you said $30 million which is about $0.06. And it will be about $0.10 to $0.12 in '09 or '10, that number will get cut about half in '11 and '12, and that is a combination of you re-run the leases and the earnings changed around, it's also cost of money.

Okay.

And then, Paul -- then as I said cuts down it's probably a few cents as we look out four or five years and then it starts to reverse. Because as I tried to explain it is a complicated issue. I may not have done a good job. The majority of the $490 million write-off is from a timely cash flow. So it's an interest piece. The other majority, the $355 million is an after-tax charge. And ultimately those come back over the next 10 to 20 years.

Okay, and that is on slide 28. Is that the way to think of it?

Yes. Yes.

And then I guess when you were talking about the discretionary cash flow, what is sort of offsetting this tax payout is greater than expected asset sales. Is that correct?

That is the biggest piece. I would say when we talked -- when we provided our $3 billion number back in March, we did have a number in there for some tax, for some tax risk. And it was consistent with our FIN 48 position at that time. So there was a number in there. It was obviously not nearly as large as the number that we have now got in there. So it was a number -- it obviously got bigger up to the $900 million to $950 million, was offset by some better proceed on asset sales, so net-net we're moving the cash from $3 billion to $2.5 billion.

Okay and the asset sales, is that because you're selling more assets or because the proceeds are higher because you're getting a better price for the assets than you previously expected?

The latter. We had used to be honest a very conservative value for SAESA, and there is also one other investment in resources that is we have been looking at selling that we have been using a conservative number for.

Okay, great. And then finally on the quarter, there is about an $0.08 market-market gain as I calculate it year to date, about $0.03 for the quarter. Are you guys expecting that to reverse?

Yes, we do expect that power -- and its unusual, Power does most of their stuff is hedge accounting or normal purchase in sales, so we don't get mark-to-market. That is virtually into a year. So it was things that were positive in '08, positive first half will roll off and be negative. So net-net it would be neutral. And obviously as we buy fuel for our plants, we burn a lot of gas rather than buying forward gas we bought some options.

Okay, great. And then finally you said weather adjusted sales were down, retail sales. I don't know if I got that correctly -- I'm sorry, how much were they down?

Weather adjusted residential sales which are really the things we watch closely were down .5% in electricity year-to-date.

Okay, thank you, sir.

Okay.

Thank you, our next question comes from the line of Ronald Kahn from Barclays Global Investors, please go ahead. Mr. Kahn, your line is open. Mr. Kahn --

Perhaps we should move on and Mr. Kahn can call back if he still has questions.

Our next question comes from the line of Greg Gordon from Citi Investment Research. Please go ahead.

Thanks, good morning.

Good morning.

The -- you pointed out that one of the things that drove better quarter performance was performance of your gas plants?

Yes.

You run -- you manage those plants, if I'm correct, you purchase the gas and sell the power in the short term markets, right. So they're not part of the long term hedging program, right?

They are, Greg, in that we sell our load into them. The reason we talk for the most part we talk about longer term hedging we talk about coal and nuclear because that is the majority of our margin. To the extent in the BGS, the BGS we did sell and hedge our way through so that we had sold power forward such that we would -- we basically sell into our natural gas stack. So when we do that, then at a reasonable point in time within doing that, we then procure the gas. We would -- I would say, Greg, the extent that we looked out long term sparks out two our three years and thought that they were at a good value, we could certainly sell sparks forward. But to date we have not seen sufficient value in the forward spark market to do that.

But -- so you do utilize them to serve loads to the extent they're bundled, you have a hedge that is a low serving hedge? You hedge out some of the gas?

Yes.

But the remaining piece you would just sell at prevailing sparks in the short term market, right?

Yes, but even if we don't buy the gas and we are effectively in the day market or in the short term markets, they're still being dispatched at short term gas prices. Obviously to the extent we have the gas at contracted different than market, we can make the different decisions on the gas versus the plants. But the bottom line I think the plants are running more, which is they're more in the middle of the fairway of what PGM is needing for keeping the system going on a daily bread and butter basis, so --

What type of sparks price are you seeing on the -- or did you see on the assets in the quarter?

So just on capacity we have seen capacity factor go up. And this is really Bergen, Linden are really the drivers in the PS area, they have gone up 5% or 10%. Sparks, we have seen them be in the -- depends on the weather, but generally in the $20 or $30 range -- I have got mid-to high $20s in April, May was mid-teens, June it was up about $40 to $50. So obviously --

I assume the cycles -- those are on peak rates, right?

Yes, that is right. Yes, they're running most of the time on peaks -- on peaks half the time. And their capacity factor is around half. So they're most of the time on peak, they're running.

Great, thank you.

Thank you. Our next question comes from the line of Daniel Eggers from Credit Suisse Securities. Please go ahead.

Hey, good morning. Just thinking about the share repurchase program and the Board's comments that buying back share might be the best return option you guys have from an investment perspective. How are you going to lay out the CapEx program you've laid out so far, to make decision on when to buy shares and when maybe to put off or cancel CapEx projects?

Yes, I think in general, Dan, as we look at our business horizon over the -- between now and 2011, we have got a large CapEx program which is consistent which what we told people in March, and not too different than what the Q was. At the same we do have some discretionary CapEx, and discretionary CapEx is probably $500 million or $600 million. Or it's a little more than that, but I haircut the PSE&G numbers because those are really -- I have to think about the impact on dividends that changes on CapEx could have. And the reason to do that is there are certain businesses that we look at possibly growing. But before we make any investment commit to any investment, we're obviously going to look at the value of the returns, the risk profile, the shareholder value accretion that such an investment would yield. And we'll look at that relative to our stock at the time.

Our -- just kind of more broadly, our assessment on how to deploy our share repurchase capability is going to be based on our yield cash or obviously conditions in the market that could be both financial such as stock market reaction, commodity markets, certainly, change in commodity markets relative to the changes in our stock value will have an impact. And then lastly, our ability to deploy or not deploy capital into discretionary CapEx or other investments that could be attractive.

So would I need to assume that $500 million plus of the discretionary CapEx needs to be put off to support to buyback or -- CapEx, would that mean you could buy back even more stock?

No. It's the latter, it's the latter. If we had five to six, if we did not pursue those investments, we would have five to six more share repurchase power.

Got it. And then seems like there is a decent amount of plant maintenance, and kind of planned work going on. It feels like it's more than what we normally see. Is that one, a correct assessment? And two, if so should we be -- assuming that continues on over the next couple of years?

I think it is really Hudson and Mercer-related. Keep in mind that these are two plants that have been older, coal plants. We are putting the plans on for the back ends on -- the back end and that is scrubbers, making them fully legally compliant with every pollutant with the exception of carbon. Mercer was spending $500 million, Hudson about $725 million. So as a part of that there are power outages to prep for those. And there is some maintenance associated with those plants as we do those back ends. So Mercer is done with that late '09, early '10, and Hudson is late '10. But those are baked into our numbers. These are -- it is important to say that the work we're doing is not different than what was anticipated and what was in our -- baked into our guidance in forecasting everything else.

With the lease decision all else, do we need to kind of think about carving out the $0.10 or so of earnings over the next couple of years out of previous expectations given the settlement you announced today?

Yes, that is fair that something will be a headwind for us, $0.05 or $0.06 this year, and then $0.10 to $0.12 the next couple of year. Then I think as I told Paul it cuts down to about $0.05 or $0.03 as I look out and then levels thereafter. So all of the things being equal, that is a headwind. Obviously there is different moving parts and we'll do our best to define ways to offset that.

Okay, thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Vic Khaitan from Dutch Investment Management. Please go ahead, sir.

Hi. I have two questions, one on this IRS related settlement talk. Looks likes this amount you have taken charge, could we assume that that is the amount you are willing to settle for? Or is there something which you think is the most likely -- liability you might have?

Yes, Vic, I guess technically it is within 48%. You do a very complicated probability weighted series of events. And based on that probability distribution, once you get to a scenario that is more than 50% likely that is the result that happens. So that is the technical answer. I would say we think that our case still has some strong merits to it. There have obviously been some -- three cases gone the other way with financial counterparties. We think our position as an operating company puts us in better stead.

That being said, we want to be mindful of the FIN 48 guidelines and also be conservative, and try to put it behind us from a financial standpoint. So from where it is on the books, it's -- we've largely provided for it from our cash position as we talked to you about discretionary cash, we're taking a very large number that is the vast majority of the exposure, baking that in as a cost. So we talked about our cash availability it is after assuming we make very substantial payments.

So -- could I understand then that, is the IRS willing to settle with you, or they are are not interested in settling, just going through litigation?

I think we have had obviously some settlement discussions, it wouldn't be fair for me to characterize the [business aspect of that]. I think I said earlier we expect -- I wouldn't want to rule out settlement. We expect litigation is the more likely path, which would say that there is a bid -- a meaningful difference on the -- in the -- at the settlement table.

I see. One more question, Tom, on this open EBITDA you mentioned, $2.6 billion or $2.8 billion, is that based on current prices or is that more like a an anticipation on your part, or how did you come up with that open EBITDA calculation?

I have been in the conference room for a couple of hours so the market may have moved a lot as you know. But it is generally based on what I call mid-July numbers. It is certainly not -- we're not expecting numbers to move up to their peak as to where they were the last few days of June. But it is based on mid-July numbers.

But it it realistic to assume you can achieve those open EBITDAs? That is what I'm getting at.

We think it is very reasonable. But there are numbers that are very consistent. We -- since we gave the number out in March, obviously there was certainly from our time in the market when open EBITDA would have been higher. And so one -- we were asked a few times whether we wanted to update things. And we would rather stick to a number that stays away from some of the upswings and downswings in the market. But in terms of mid-July numbers, I think we're still comfortable.

Okay, thank you very much.

In general, I would say, Vic, as we look at the market, obviously gas prices have come up, as we look add sparks and darks, there are some lower numbers that we think make sense. The CAIR ruling caused quite a fall-off in the market. And we think some of that may naturally correct itself.

Okay, thank you.

Thank you. Our next question comes from the line of Shalini Mahajan from UBS Securities. Please go ahead.

Thanks, and good morning. Vic did ask my question, the open EBITDA. But I was just wondering Tom, and I apologize, because I did step off the call, I'm not sure if you addressed that, but if you could just maybe talk a little about your Texas markets and your outlook on spark spreads, both on the western and southern zones that you operate your plants in.

I actually, Shalini, was not asked about the Texas market. We're generally doing very well at Guadalupe and not as well at Odessa. Sparks are strong at Guadalupe and capacity factor is about 50%, sparks are in the high 20%s, sort of 20% -- 26% to 29% sort of zone would be our expectation, which would be quite a pickup from where they were last year that was probably more like mid-teens. And that plant to run at capacity factor of about 50%. So the cycle is running at the peaks and not running on the off peaks. Odessa, sparks have declined modestly from about $20 to $16, $17, but we are losing hours, the plants used to run similarly to Odessa, sort of 50%, 55%, it's now running more like 35%, getting backed down by wind. That has been the biggest disappointment for us in Texas, is just losing capacity factor at Odessa, which is in the west, just to clarify. Guadalupe is by San Antonio, Odessa is in the west, right in the middle of a lot of wind. We were encouraged by the decision to put multibillion in transition going over to the west in bigger load centers. And we're hopeful that it improves Odessa's capacity factor albeit not for a few years until that stuff gets built.

Okay. Then we saw a huge spike in Texas in May to mid-June. Is there -- I mean have you guys isolated -- were you able to take advantage of that, and could you the isolate the impact -- the positive compacts from your earnings on that?

We were able to take advantage of it. That was at Guadalupe, within the month -- certainly there were a couple of months where we were up -- I think at Guadalupe, $15 million or something in that range.

Okay.

But if you think about the -- we moved -- just for the year we moved our EBITDA up considerably by $40 million. And Odessa is down somewhat, so Guadalupe has gone up by more than that amount. Probably Guad is up $50 million, and Odessa is down $10 million. We did do some '09 hedging during some attractive periods in the market, too.

Okay, so when you say that Guadalupe is going to be up $50 million, $15 million of that was just positive impact from the second quarter, and the rest is the strength in stock spread that you see for the rest of the year. Is that a fair way to think about it?

Yes, that is probably fair.

Okay.

And of course we say that we used the time to realize some. And then we also did some incremental forward sales within '08.

Okay. Great, thanks so much, Tom.

Thank you. Ms. Lally, there are no more questions at this time. You may continue with your presentation or closing remarks.

I think that is it, Operator. If there are no further questions, we appreciate the interest shown by everyone on our call. And if you do have any other questions, please feel free to call into Investor Relations and the material should all be available to you on our website. And the IR number is 973-430-6565. Thank you.

Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We do thank you for your participation and we that you please disconnect your lines.