公共服務電力與天然氣 (PEG) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Valerie, and I am your event operator today. I would like to welcome everyone to today's conference. Public service enterprise group's third quarter earning 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, October 31, 2008, and will be available for replay beginning at 2:00 p.m. eastern time today until 2:00 p.m. eastern time November 10, 2008. 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, Valerie. Good morning, everyone. Thank you for participating in our call this morning. As you are aware, we released our third-quarter 2008 earnings statements earlier today. The release and attachments are posted on our web site, www.PSEG. com, under the Investor section. We also posted a series of slides that detail operating results by company for the quarter. Our 10-Q for the period ended September 30, 2008, as s expected to be filed later today. I am not going to fully read the disclaimer statement or the comments we have on the difference between operating earnings and GAAP results, but I do ask that you all read those comments as they are posted on our web site. Disclaimer statement regards forward-looking statements detailing the number of risks and uncertainties that could cause actual results to differ materially from forward-looking statements made therein. And although 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.

We also present a commentary with regard to the difference between operating earnings and net income and reported in accordance with generally accepted accounting principles in the United States. PSEG believes that the non-GAAP financial measure of operating earnings provides a consistent and comparable measure of performance of metrics to help shareholders understand performance trends. I think with that I would now like to turn the call over to Ralph Izzo, Chairman, Chief Executive Officer, and President of Public Enterprise Group. Joining us on the call is Thomas O'Flynn, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for your questions. and we ask that you him yourself to one question and one followup.

Thank you, Kathleen. And thank you for joining us today. We realize how busy everyone is given all of the volatility in the marketplace, and I would be remiss if I didn't take a moment to simply say happy Halloween to all. We reported operating earnings for the third quarter of 94 cents a share compared to 97 cents per share reported a year ago. Our operating results include the impact on earnings from a decline in the value of our NDP funded power, our nuclear decommissioning trust fund. The results for the quarter brought operating earnings for the nine months ended September 30, 2008, to $2.43 a share. And this is compared to $2.19 a share earned in the same period a year ago. We're experiencing some unprecedented turmoil in the financial markets, as you're quite aware. But despite the turmoil surrounding us, PSEG's work force continues to excel. This was demonstrated time and time again during the quarter.

I'll give you some examples of that. PSE&G, our regulated utility, was recognized for the third time in four years as America's most reliable electric utility. PSEG Power's employees also continue to exceed expectations. Some examples are that our nuclear fleet performed at a 98% capacity factor in the third quarter. As well as some turbine replacement projects we conducted at Hope Creek and Salem yielded even higher than anticipated levels of output. In addition to these operating achievements, the quarter was also characterized by progress in a regulatory and policy matters. First of all, the Federal Energy Regulatory Commission supported PSE&G's rate request for its transmission investment program. Secondly, FERC remained supportive of PGM's reliability pricing model as a means of securing new capacity. Third, the regional greenhouse gas initiative commonly referred to as REGI, held the first of what we believe will be many successful auctions of carbon in September with a clearing price just north of $3 per ton. Lastly on the local level, the state of New Jersey released its energy master plan. And as the name suggests, the plan sets the state's energy-related goals through 2020.

Perhaps most important, the plan delineates a leading role for utilities to play in energy efficiency and expand the opportunities for both our regulated and competitive businesses to grow in their renewables offerings. Now that the goals have been established, we're advocating for new rules that establish a more predictable environment for energy investments in our state, akin to FERC formula rates. The focus and dedication of PSEG's employees on performance allows the foundation that allows us to comfortably support our 2008 earnings guidance of $2.80 to $3.05 per share. PSEG's operational performance and our energy markets continue to support growth in earnings per share for 2009 over 2008. The stresses in the financial markets are expected to result in some headwinds regarding both pension and interest expense. Tom will have a little bit more information on this in his remarks. And we also face some challenges relative to one of our coal contracts. We're working hard to mitigate these pressures. For example, both capital and operating budgets for 2009 have been adjusted.

And the net effect of all these factors is that we currently expect earnings for 2009 under current market conditions to come in at the lower half of our previously stated range of $3.05 to $3.35 per share. We have the financial strength to manage through this period in the markets. We've worked hard to build a strong operating and financial base through our commitment to operational excellence and prudent financial management. Also aided by our reduction in debt with proceeds from the sale of our international assets, the company's facing these unprecedented times with $3.3 billion of available liquidity and very modest financing requirements over the next 15 months. I think I'll stop there now, and I'll turn the call over to Tom before Q&A.

Thanks, Ralph. Good morning, all. As Ralph said, PSEG reported third-quarter operating earnings for 2008 of $0.94 per share versus operating earnings of $0.97 per share in last year's third quarter. As you see in slide 10, PSEG Power provides the largest percentage of our earnings. Power reported operating earnings of $0.65 per share compared to $0.66 per share last year. PSE&G reported earnings of $0.19 per share compared to $0.21 cents last year. And Public Service Earnings Group Energy holdings reported $0.11 per share compared with $0.12 per share of a year ago. A reduction in debt at the parent level during 2007 reduced parent company-related expenses in the quarter to $0.01 per share from $0.02 per share of a year ago.

We provide you with a waterfall chart on slide 30 taking you through the net changes in quarter-over-quarter operating earnings by each major business for the quarter. I'll now go into each company in more detail. As I said, we had operating earnings of 65 cents per share compared 66 cents per share a year ago. Power's results were aided by recracking and stronger energy prices, particularly in PJM. Higher prices added $0.12 per share to Power's year-over-year earnings. They were also helped by strong performance of our generation fleet. And overall increasing output of 1.5% was led by a 3% improvement in generation from our nuclear fleet.

Power's New Jersey fleet operated a 98% capacity factor during the quarter, raising its capacity factor through September to 90.9%. Including Power's ownership interest in Peach Bottom, the fleet operated at a capacity factor of 94.6% during the quarter and 93.1% for the nine months ended September 30. The performance was aided by the increase in capacity from the up rate and turbine replacement work at Hope Creek and Salem. This work resulted in a net increase in nominal capacity of 173 megawatts compared with our original estimate of the increase of 140 megawatts. We continue to forecast a capacity factor for the nuclear fleet of 91%. Peach Bottom returned from a refueling outage in October, and Salem One is expected to return from its current refueling outage in early November. The combined cycle fleet continues to respond well to market conditions. Output increased 2.4% with the fleet operating at capacity factors in excess of 50% during the quarter.

Generation from our coal fleet declined during the quarter. Results versus last year were impacted by scheduled outage work at several fossil stations to improve long-term reliability. This work as well as the costs associated with the refueling outages resulted in an increase in operating and maintenance expense of $0.06 per share during the quarter. The increase is evenly split between nuclear and fossil. Earnings comparisons were also affected by the reversal of mark-to-market gains on positions taken in natural gas earlier this year to hedge our fuel cost exposure. We reversed $0.05 of the $0.08 per share recognized during the second quarter, leaving about $0.02 per share to roll off during the remainder of the year.

Earnings comparisons were also affected by the market-related decline in the value of some securities held by Power's nuclear decommissioning trust fund. This was about $0.02 a share. Power's margin per megawatt hour is an important means of evaluating operating results. As you see on slide 16, gross margin improved in the third quarter to $58 per megawatt hour, from $56 per megawatt hour in last year's third quarter. Bringing margins for the nine months, September 30 to $55 per megawatt hour, and keeping us on track to achieve an improvement in margins during 2008. Power's EBITDA for the quarter improved to $647 million, bringing EBITDA for the nine months to $1.68 billion. Higher prices for energy compared last year are expected to support Power's fourth quarter and full-year 2008 margins and operating earnings.

This improvement in pricing is expected to be offset by an increase in fuel costs and higher O&M prices. We're in the mid of a lengthy planned outage in addition to the lengthy back-end technology to meet environmental requirements. The capital markets obviously remain volatile. As you're all aware, continue to experience a decline in value during the month of October. We have factored these results into our forecasted returns on Power's MDT fund for the full year. The MDT is a $1 billion fund. Just to remind you, unrealized losses flow through the income statement. Gains only flow through when they are realized.

The markets for Power have been extremely volatile. Credit issues and the uncertain macro economic outlook as well as questions on environmental standards have had an effect on commodity prices. The move in commodity prices may be exaggerated in a decline in liquidity as some traditional participants limit their market activity. This could also lead to an increase in the risk premium placed on products at PSEG Power, it's very well equipped to provide. Power entered 2008 with hedges covering its 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 about 85% to 95% of its anticipated coal and nuclear generation. With approximately 45% to 55% of its coal and nuclear generation hedged in 2010. Power largely remains open to the market in 2011, with hedges in place representing 15% to 25% of anticipated coal and nuclear generation. Our approach to hedging has typically provided more stability to our cash and earnings than with dependence on short-term market pricing.

Now moving over to PSE&G. PSE&G reported operating earnings for the third quarter of $0.19 per share compared with 21 cents per share for the third quarter of '07. The results for the quarter were primarily affected by a modest decline in electric sales impacting about $0.01 a share and an increase in miscellaneous expenses, another $0.01. FERC granted PSE&G's request for formula rate treatment on its existing and future transmission investments with a small increase in transmission rates effective October 1, 2008. The order provides for a return on equity of 11.68% on transmission and a forward-looking rate design. The first-year rate is from October 1, 2008, to December 31, 2008. With subsequent rate years running from January 1 to December 31. The annual reset and true-up of rates will take effect on January 1 of each year. As you can see on attachment 10 of our earnings release, electric sales year-to-date have decline by 1% with some of that being explained by weather. We don't expect the decline to have a material impact on PSE&G's results during the remainder of the year. We have, however, adjusted our forecast of long-term sales growth to about 0.5% a year from our prior forecast, which looked at annual growth of approximately 1%.

Lastly, moving on to energy holdings. Energy holdings reported operating earnings of $56 million. $0.11 per share for the third quarter of 2008 compared with operating earnings of $63 million or $0.12 per share during the third quarter of '07. Holding's global subsidiary reported a $0.04 per share improvement in earnings. The improvement was the result of stronger production and increased spark spreads from Global's 2,000 megawatts of gas-fired Texas generating capacity coupled with mark-to-market gains of $0.04 per share. These items more than offset the absence of income from Choquinta and Luz del Sur, which was sold in the fourth quarter of 2007. Global's results also benefited from a net decrease in financing costs. This more than offset the higher tax rate.

Holdings resources subsidiary recorded a $0.05 per-share decline in quarter over quarter earnings. The reduction was the result of lower income as a result of its decision to recognize a substantial charge in the second quarter related to the IRS challenge and a higher tax rate on its leased portfolio. Holdings operating earnings were expected to decline in 2008. However, the full-year forecast of operating earnings has been adjusted to reflect stronger than anticipated markets in Texas. Results during the fourth quarter will reflect the loss of income from the sale of Choquinta and Luz del Sur as a decline on resources leased portfolio. PSEG has worked hard to build a strong operational base through our commitment to performance, a reduction in debt, and a tighter business focus resulting from the sale of our international assets.

Moreover, as shown on slide 29, we have $3.3 billion of available liquidity and modest financing requirements over the next 15 months. We're also proactively responding to changes in the marketplace with the reduction in our forecast of capital expenditures for 2009 by $275 million to $325 million from previously disclosed amounts. Now, just a couple of minutes on '09. The fundamentals of the business are good and continue to support growth and earnings in 2009 versus 2008. The outlook takes into account issues that we've known of and planned for such as the forecast decline in PSE&G's earnings as well as a decline in income from holdings. I'd like to briefly review the impact of new issues on our outlook for 2009.

The stresses in the financial markets are likely to cause us to experience some increase in pension and financing costs. We estimate these items could result in an increase in pension expense of about $0.08 per share and an increase in financing costs of about $0.02 per share. The primary driver for earnings in 2009 is an anticipated improvement in Power's margins and EBITDA. We are, however, facing higher coal costs resulting from the potential renegotiation of a contract with a key supplier. We're currently in negotiations with the Indonesian supplier of coal to our Bridgeport and Hudson stations. The contract which expires over 2011 represents 2.7 million tons on an annual basis. Though this declines by about 50% in 2011. We've had a long and good relationship with our supplier since we entered into our first contract with them in late 2002. At that time, coal was trading at about $30 to $35 per ton. The market for Indonesian coal is currently trading in the mid-to high 60's per ton. Though prices have been falling. We obviously are in discussions with them and working toward what we hope will be a constructive resolution.

Just to remind you, at PSE&G, our forecast takes into account an expected reduction in return on equity invested in our state-regulated business to about 8.5% to 9%. We currently expect to file for a change in rates in New Jersey by mid-year 2009. Holdings as we've anticipated in our guidance will be pressured by a decline in lease-related income as well as the need to begin to reverse the mark-to-market gains of about $58 million that has accumulated under a contract which expires at the end of 2010. Summing it up, we continue to see growth in 2009, and we're focused on achieving our previously stated guidance and have effort underway to mitigate the impact of some of these pressures. However, as Ralph said, as we see things today, we expect earning for 2009 to come in in the lower half of our previously stated range of $3.05 to $3.35 per share.

Lastly, just a brief update on share repurchase. We have $658 million remaining under our share purchase program, which is authorized by the board to be executed over an 18 month period beginning August 1 of 2008. We have not made any purchases since late September, given the instability in the capital markets. We look to reenter the market, if there is a more stable environment. With that, we'll open it up for questions.

Ladies and gentlemen, we will now begin the question-and-answer session for members of the financial community. (OPERATOR INSTRUCTIONS). One moment, please, for the first question. The first question is from Dan Eggers with Credit Suisse.

Hey, good morning. Tom, I wonder if you could expound a little more on the end, around the Indonesian coal contract conversation. What are the alternatives that you guys see out there? Is it -- can you switch to a domestic coal and how do you see pricing comparisons between the $60 range price and what you could replace the coal with if that's an option?

Yeah, Dan, I'd say the Indonesian coal has been -- has been good for us. We may have some flexibility, that flexibility would expand and be at Hudson once we finish our back end at Hudson in late 2010. We would have very broad flexibility to use lower grade coal specifically. And that would be our expectations at Hudson. As we currently see it, there's still value in that coal. Prices have moved up, and we tried to bracket that for you. So our expectations is to work toward a resolution with our supplier over there. That may result in some cost pressures, and we want to make sure that people were aware of at least what the range of those could be.

Any idea on when resolution could come on -- on the contract?

We're having discussions, so I think it would be certainly during this quarter. It's probably hard to put a finer point on it than that.

Okay. Then you talked about lowering the CapEx for 2009. Any commentary kind of on expectations for O&M cost inflation, nine versus eight, both urges tilt and the generation business kind of in a belt-tightening mode?

Yeah. The utility has consistently the last five years respectively seen O&M increases at or below CPI. We've had to make a few more investments in our fossil fleet. So that's been slightly above. But next year we're targeting all businesses to be at about a 3% level.

And then on the CapEx reduction, is there any allocation between where the dollars are being pulled away right now between utility and generation?

Right across the board.

It's probably about 60% at the utility. And we're focused there on the -- on the state gas and electric, less at the transmission business. Obviously the formula rates helps the -- helps get the support for financing comfort there.

Okay. Thank you guys.

The next question comes from Greg Gordon with Citi.

Good morning.

Good morning.

Okay, so just the CapEx reduction number was $750 million.

No, the CapEx is -- the reduction is $275 --

$275 --

To $325 --

Sorry. I was -- I missed the call for a moment. I apologize. And that's 60% at the utility?

Yes.

Okay. The $58 million of mark-to-market holdings for 2010, does that unwind predominantly in nine, does it unwind ratably across the two years?

It's pretty split between nine and 10.

Okay. And the FAS 87 expense, should we assume for modeling purposes that that's sort of pro rata across the business?

Yeah. And just to be clear, the mark-to-market holding, those are pretax numbers.

Okay.

Based upon where we see the forward curve at this time. Pension expense, yeah, generally the -- the overall pension is about 60%, utility about 30% power. And 10% other holdings and other -- other allocated costs. Some of the utilities' numbers are capitalized. So -- net to net utility is probably a shade less than half of that.

Great. The funding needs for the pension? Is that going to be an incremental cash outflow next year?

Modestly. I mean, we're expecting -- if you asked me a year ago, we thought we'd put $30 million to $50 million of the pension in the annual basis at this point. Maybe that number is up by $75 million, something like that --

Up to $75 million or up to $125 million?

In the $125 range, 100 to 125 range. So a pension contribution numbers next year, we're still looking through it obviously. But -- and it depends on where you end up at the end of the year. But my guess is it would be about $100 million to $125 million total for the company for the year. And that would be a run rate that we expect to do. That's obviously premised on where the markets behave in a reasonably normal fashion, wherever that is, for the next couple of months. And it does take into account the expectation that there would be a higher discount rate at the end of the year.

One last thing. When I think about the year exposure to this coal contract negotiation, I mean, it seems pretty simple. It's 2.7 million tons. And if you were to be forced to replace that contract with a market-based contract, that would be a doubling of the cost on 2.7 million tons. Which -- looks like it works out to after-tax impact of just under a dime?

That's the math. Yep. Obviously, once again, we've had a good relationship with these guys for a number of years, with these folks. We're looking forward the constructive resolution, but we laid those numbers out so you could understand what a worst case would be.

Thank you. Take care.

Okay.

The next question is from Ashar Khan with SAC capital.

Good morning. Just wanted to -- Tom, just going back to what you were saying regarding '09, you expect -- you told the earnings to be down versus '08, is that correct?

Yeah. That's -- we said that consistently. The utility probably in the state they'll probably earn a -- just a -- a bit north of their 10%, target return. We have some modest O&M escalation like any business, I think it's 2.5% to 3%. We do have a new customer information system that goes live in January that would have some incremental expenses including depreciation. So -- net-net as we see it, we think in the state we're going to earn 8.5 to 9. And we expect to file a rate case sometime next year that would then be outstanding through, say, the middle of 10.

Middle of 10. Okay. And so the new rates will come in in the middle of 10.

That's our base plan. Obviously there's ways that we can work around and potentially improve that. That's our base planning.

And that includes -- and you're taking into regard the slower growth and everything in those forecasts?

Yeah. Yes, that number would -- would look at a -- a sales growth electric of about 0.5% and gas flat to maybe modestly down.

Okay. Okay. And then you mentioned holding is going to be down. What do the -- to the levels that you were projecting this year in the beginning, or -- or I was trying to get a sense.

Yeah. We haven't really looked at -- we haven't put out, let's see, subsidiary '09 guidance. As you know, we normally do that on our next call, say, at year end. I -- the biggest things that have changed over the year, one is obviously the reduction in lease income. We took that fully into account when we did that in the second quarter. The Texas market is down somewhat. The -- the sparks are a little bit -- are backward dated nine versus eight. Though having said that, Texas is materially above the result this year versus what we had thought a year ago. So it -- it seems like a forward Texas sparks are a little hard to accurately predict. But the unwind of the mark to market would be an incremental piece.

Okay. Okay. And then -- and then finally the hedging numbers that you gave, did you hedge anything in the last three months among any of the curves, eight, nine, and 10?

A little bit. Not material. Those numbers are -- are pretty consistent. We -- we did a little bit in the summer. But those are pretty consistent with -- with where we've been.

Okay. Okay. Thank you, sir.

Yep.

Your next question is from Paul Fremont with Jefferies.

Yeah, just going back to the share repurchase, given sort of what's gone on in recent credit markets, have you guys at all thought about your target debt-to-total capitalization ratio, I think in the past it's been about 55%. Does that change in the current environment, or does that stay the same?

Well, we feel good about where we are, Paul. Our debt to cap's come down. I think it was at least as we calculate on the bank test, it's gone from about 50 to 48. End of year last year to end of Q3. So in our credit stats -- and our credit stats are all improving. We think we've got incremental debt capacity. And would look to potentially move forward on that once the markets settle down. So we're not -- we would continue to have the same target. That being said, we have to be mindful that it's a cautious environment. Some companies in other sectors in particular have had some credit-related issues. So whenever you get into a more defensive environment, I think you just have to be sensitive that -- that you need to be attuned to -- to potential changes in credit metrics, let's say. We're not aware of any. We're still keeping our eyes focused on the same metrics that we've been looking at for the last couple of years.

One other question relating to I guess power prices in New Jersey. I guess in the past you guys had talked about potential short supply in certain parts of the state. Particularly the northern part of the state. Do the new transmission lines relieve a lot of those bottle necks, and should we -- or should we still view certain parts of the state as potentially short supply?

Paul, this is Ralph. The -- the new transmission lines that we are in the process of booking were strictly borne out of PJMs, RTET, regional transmission expansion plan, which is solely related to reliability calculations and not driven by the desire or need to change the economics of wholesale power markets.

So should I take that to mean that the northern part of the state still potentially either needs incremental build or new supplies going forward --

We'll look to the RPM to decide that. But as we've pointed out in the past, we've -- we've bid some new capacity to the RPM in the northern part of state. And I would safely say that our plans to do that in the upcoming May election are unlikely to be the same. So we plan to bid new capacity, incremental capacity for the northern Ps in the northern May auction.

Thank you.

Your next question is from Michael Goldenburg with Luminous Management.

Good morning. Wanted to get a couple of numbers down. The pension increase that you expect in 2009, how much will be ahead to the income statement from all the units, utility, power --

Michael, all $0.08.

Okay.

So -- would be a hit to the income statement.

Right. $0.08 plus a portion that's capitalized, but that's a different bucket. Right?

Correct. Total amount -- the rough numbers is -- is close to $90 million I think it is. And then part of that, about 25% of that gets capitalized for utility capital work. And then so the remainder is -- is a direct expense to O&M. Now obviously when we go in for the rate case, part of that rate case would be cost of service at the utility, and that would pick up from incremental pension cost numbers. So we would expect to then be made whole if you will, for that incremental expense when the rate case gets resolved in 10.

So the rates will be affected, when, beginning of 2010? That should include higher expenses or --

More likely the middle of 2010.

Takes about -- about one year to process a rate case in --

Okay. And the CapEx cuts that you were making, are they generally -- on the power side, not on the utility, but on the power side, they usually to the growth projects, or are you pushing back some environmental? What exactly are you doing with CAPEX?

Well, it's -- it's mostly maintenance CapEx spread over a variety of places. And as we said, about 60% of the capital is in the teen -- is in the districts business in the utility. And --

Right --

Productions in planned growth investments in holdings that make up the balance.

Okay.

Just to go back to your prior question, I just want to emphasize that all of the headwinds that Tom described, that the pension expense, the -- the Indonesian coal renegotiations, as well as some of the ones that we previously talked about are all factored Bo the lower half of the guidance for -- for next year. So those are not in addition to or anything --

Right.

And the mark-to-market stuff at holdings as well as others, doing this because commodity is down. That you -- that will hedge here in 2009, how much has that increased versus your previous expectations of mark to market hit, because as you stated correctly, you expected some mark to market hit in '09 because of really good '08 and '07. But how much of that increased versus previous expectations? And does bringing down -- thus bringing down your 2009 number?

Yeah. I would say at Power, the mark to market is really all intrayear. So I think we talked about at last call we had some positive numbers. There was $0.08 up And then we had $0.05 down, and then $0.02 off, so go up and you come down seven, you're basically back to where you started. And that was just strictly -- obviously when we -- when we enter into the BGS, based on our gas gen rather than buying gas forwards, we just hedged, work some options to manage our gas to be able to manage our risk. Some of that was mark to market.

All the options were mark to market. On the holdings slide, if you look back at attachment 12 for 2008, you can see that -- that holdings mark to market for this year is about $0.04 and -- much of that would be mark to market that we had not expected. And then --

What about 2009?

Well, then that would -- in other words, that -- as it -- as most of that we had not expected, obviously the markets were where they were at the end of the year. By definition you don't expect there to be futures. So we got more. The $0.04, and that would largely then reverse itself out over '09 and '10 in a ratable fashion.

Okay. So simply put, we can take the $0.08 and the $0.04, that's the $0.12 that are primarily the reasons for you pointed to the lower end of -- of 2009 guidance versus previous communication with investors?

Well, no, Michael, I think the major thing on -- that are new is, one, the financing costs. The -- the pension and financing, that's $0.10. Obviously no one predicted the kind of markets that we've seen. Going into the year, we thought our pension expense would be pretty flat.

Uh-huh.

And the financing cost is all -- we don't have a lot of new financing. When financing moves by a couple hundred basis points, that add up. The financial members -- basis points, that adds up. The financial numbers add up. It's a result of the last six, eight weeks. The Indonesian issue is something that we have talked about in the queue. It was a second-quarter issue for us.

On the Indonesian front, I'm sorry I'm taking up a lot of time. Are you saying those costs should double? Given the -- the sliding commodity, coal commodity over the last couple of weeks, do you really think it would still be double if you had to recontract that?

No, we're not -- once again, we don't want to get into the middle of speculating where we might go with discussions. I would just say that the current Indonesian comparable coal index and you got to -- it's adjustable, mid-60's, it has come down meaningfully. If you asked us a couple months ago, that number would have been meaningfully higher. And it does -- it is coming down. So that might argue that time is on our side. But --

Your current contract as of $60 a ton delivered --

No. No the current contract was negotiated at a time when the market was in the $30 to $35 range.

Uh-huh. Delivered. Or --

Commodity freight. We deal with separately. We're fine on freight. But just our supplier in conjunction with the government has brought forward the fact that the current market price is meaningfully higher. As I said, mid-60s is a reasonable estimate of that. You're absolutely right, that number has been coming down and coming down quite -- quite dramatically over the last six weeks.

And of course, freight has also moved in your favor considerably over the last --

Somewhat. Though we've got a freight set for the next couple years.

Got it. Thank you very much.

(OPERATOR INSTRUCTIONS). The next question is from Paul Patterson with Glenrock Associates.

Good morning, guys.

Good morning.

Just to clarify a few things. The Indonesian impact contract is in 2009, correct?

It is. As we say, we're sitting here today looking at the lower half of the '05 -- of the 305 to 335, that would contemplate a renegotiation of the Indonesian contract.

As well as the pension expense and the financing costs and the slower growth in the utility, et cetera, et cetera.

Right. Really, a -- I think your chance here to finish the question with Michael. Many of these things were already in our guidance such as a lower borrowee at PSE&G, something that we've talked about all year. Things that would lead us to the lower half, we want to make sure we're responding to information as we get it, is about $0.10 for financing costs, potential adjustment with respect to our Indonesian contract, and forward markets have come down. We're largely hedged for 2009, but we do have some modest open position that impacts us as the forward curves go around.

Okay. Great. The second thing is the buyback. Which Paul Fremont touched on. I'm just wondering did you guys have any activity with the -- with the lower stock price opportunity that was out there in the last month or so, or mean you guys gave it as of September 30. I'm wondering -- you mentioned on the one hand that you guys still saw that as something you guys planned I think on executing. On the other hand, you guys were being a little bit more cautious because of the credit environment and what have you. Can you elaborate a little bit more on that?

Sure. Sure, Paul. We obviously were in the markets. We -- I think Tom gave you the numbers. We have $658 million of the original $750 million authorization available to us. And as -- as any self-respecting company believes its stock is underpriced, we do, too. Since late September, we haven't been in there because -- the markets became so unstable, and -- and liquidity became such -- at such a premium that even though we had the $3.3 billion available to us, we thought discretion of the better part of valor for that period.

Okay. But now you guys feel a little more comfortable, rights?

Well, the authorization remains in place, and we -- we discussed it internally all the time. And -- and I would just as soon leave it at that. We promised all of you and will continue to live by the promises. We'll tell you what we did whether we did it. Every quarterly call.

Okay. And then the weather-adjusted sales growth for year to date and Q3, I'm sorry if I missed it, what -- what has it been?

If you adjust for weather, which was 2% lower in THI, temperature-humidity index, if you adjust for that, we were about half a percent lower on a weather normalized basis. But boy, you understand the accuracy of these models. So we're talking about a 2% weather effect, backing that out, and including that, 0.5% weather normalized effect. So I wouldn't want to get too carried away with the precision of being able to separate those two phenomena.

You have seen negative sales growths out of weather --

We have been seeing it on the gas side. This is the first time we're seeing it on the electric side.

Did you guys see it on the electric side in the second quarter? I thought but.

I'm sorry, yes. I was thinking more year over year. Yes, that's correct.

Okay. So now that brings me to the final question. The energy master plan has these pretty ambitious goals of a 20% reduction in peak and consumption by 2020. I mean, can you comment on this? I mean, like, I guess 30% renewable, whatever, these are obviously goals. But what does that do to the long-term outlook of -- of the -- of brief PSEG Power? If -- of PSEG Power? If it's attainable, when does that happen? What does that do to demand and supply if you know what I mean?

What we have been saying to policymakers is that the market is not going to achieve those goals. Not the renewables goal, not the energy efficiency goal not the energy efficiency goal. The only way that is going to be achieved is with the prominent role of the utility. You may see if we achieve the 30% renewables goal through 2020 and you articulated a shift in the earnings power of the -- of the PEG E subsidiary from the power to the utility. Suffice to say I find it hard to believe left to its own devices that people say we'll be investing in -- in -- in onshore wind in New Jersey or in things that are anticipated in the energy master plan.

In terms of consumption, I guess, I'm wondering -- there are different ways this can be done. One might be actual opportunities for you guys to reduce demand and return on it. Others might be things like appliance efficiency standards and stuff like that that theoretically just might create a reduction in demand.

Yeah --

Which wouldn't give you guys money for -- how do we think about that, and do you think that's -- when do you start to think these reductions in demand might actually happen if they do happen?

Well, meaningful long-term reduction necessary demand -- meaningful long-term reductions in demand require investment. And I would maintain that the likelihood of our customers making those capital investments on a broad scale unassisted by utility programs is very, very low. So we just need to think about the role of the utility in the future may not simply be a purveyor of electrons and molecules of gas, but someone who is permitted to invest in those energy-consuming devices that customers left alone won't invest in themselves. In other words, have a much different and expanded definition of rate base. Otherwise, I just don't see it happening.

Right. So in other words you feel that the utility would basically get the earnings that would be -- that would be coming -- it would basically be shifting from one bucket to the other so to speak as opposed to actually having --

Yeah. And in fact, you know, look -- I don't want to get carried away but with potential upside. What we're talking about here is that the lion's share of any utility customer's bill in its integrated form including the supply component is to pay for fossil fuels. And PSEG is not in the fossil fuel business, we're in the process of delivering that. If we can make money by investing on behalf of people in assets that help them consume less fossil fuels, then as the -- the -- there's a distinct potential that what is less going to power could be more and then some going to the utilities. Now obviously that's a case-by-case basis. It's not going to do it by itself.

I appreciate it.

Thank you.

The next question is from Rudy Tolentino with Morgan Stanley.

Hi, good morning. Can you give us an update on the leverage lease issue? I know that -- I recall last quarter you were talking about, potential settlements or -- at least discussions about settlements. If you can just give an update, please.

Sure, Rudy. It was a -- a broad-based settlement offered by the service to all people who had entered into these types of transactions. There was a -- a date to accept that that was earlier this month. We did not accept that. The -- the cost of that was -- was quite high. It was just a -- a shade higher than the -- the economics that underpinned the reserve that we took in June. Does that make sense? So we -- we're assessing our options, but we may well pursue the litigation path as -- as I think we talked about in second quarter. There's not a lot new.

There is, you know, we -- we continue to think that our transactions were -- were fair and based upon good tax lot time. And we think that our facts as the owner of utility assets gives us a much better fact pattern than some other of the financial parties that were also offered this settlement. So we'll see. The only thing I would say is that we did make another $80 million deposit with just a voluntary deposit. So our voluntary deposits with the service there about $180 million. And that's just -- I think we've said in June that we were going to take the reserve. We were going to run our company from a financial perspective as if that was going to be an ultimate cost. So we're -- we're mindful of that. And manage the business on a quarterly basis in that fashion. At the same time we are -- we are quite likely to pursue a litigation path.

And as far as like pursuing litigation, you have no timeline I take it. Or do you have a timeline, or is it still --

No specific -- without getting too much of the details, it's something we would pursue over the next three to six months. At least initiate over the next three to six months. It is generally a -- a two to three-year path, ultimately. There officers -- there is one other case that's -- that may well reach a final decision in our industry, someone that would have a better fact pattern and be in our industry, that may have some news on that end this year, first quarter next year.

Okay. Thanks. Thank you very much for the update.

Yeah.

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

Thank you all for participating again. We're feeling quite confident about our operational performance throughout the business at our nuclear plants and our combined cycle plants. We're pleased with the construction schedule and the cost control of our major back-end technology projects at our coal unit. We're delighted again to receive the recognition we received in utility. These are -- these are difficult markets. We're not sitting back, we're adjusting our spending patterns. We're adjusting them both with the capital and at the O&M level. We think we have our risks under control and are looking forward to a strong fourth quarter and some growth in 2009. We'll see you at EEI. Thanks for your attention.

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