公共服務電力與天然氣 (PEG) 2008 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by. I am your event operator today. I would like to welcome everyone to today's conference. Public Service Enterprise group fourth quarter earnings conference call and webcast. At this time all part pants 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, Tuesday, February 3, 2009, and will be available for telephone replay beginning at 2:00 p.m. Eastern standard time today until 2:00 p.m. Eastern standard time on February 10, 2009. It will also be available as an audio webcast on PSEG's corporate website at www.PSEG.com.

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

Thank you, operator. Good morning, everyone. Thank you for participating in our call today. As you are aware, we released our fourth quarter and full-year 2008 earnings statements earlier today. The release and attachments are posted on our website, www.PSEG.com under the investor section. We have also posted a series of slides that detail operating results by Company for the quarter.

Our 10-K for the period ended December 31, 2008, is expected to be filed later this month. I'm not going to read the full disclaimer statement nor the comments we have on the difference between operating earnings and GAAP results but I do ask that you read all of these comments contained in our slides and on our website. The disclaimer statement regards forward-looking statements detailing the risks and uncertainties that could cause actual results to differ materially from forward-looking statements made therein. We also present a commentary with regard to the difference between operating earnings and net income 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 would now like to turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of Public Service Enterprise Group. Joining Ralph on the call is Tom O'Flynn, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks there will be time for your questions. We ask that you limit yourself to one question and one follow-up.

Thank you, Kathleen and thank you, everyone for joining us today on the call. Earlier this morning we reported operating earnings for the fourth quarter of $0.49 per share compared to $0.53 a year ago. The results for the quarter brought operating earnings for 2008 to $2.92 per share and this to be compared to $2.72 per share earned in 2007. Our 2008 operating earnings fell right in the middle of the $2.80 to $3.05 per share range for guidance which we established over a year ago. We were able to overcome the impact on earnings from a decline in the value of our nuclear decommissioning trust fund of $0.10 per share in the fourth quarter and $0.14 per share for the year. This is to be compared to a $0.02 gain in 2007 amounting to a negative $0.16 per share swing. This was partially offset by a positive $0.01 swing in mark to market.

We have also maintained our focus on operational excellence. There was evidence of this throughout the Company. PSEG Power had a record year for generation. PSE&G, the utility maintained its top decile reliability standard and PSEG Energy Holdings sold the last of its major international assets at very strong valuations.

This operational excellence underpins our financial results. We have improved the strength of our balance sheet using proceeds from the sale of our major international assets to reduce debt and we are committing capital in areas that maintain reliability and advance the state's energy master plan goals. We also reduced our financial risk by establishing a reserve for a significant percentage of our potential LILO/SILO tax-related risk.

Turning our attention from the past and looking to the future, the policy issues shaping our industry have not changed over the past year. The need to meet customers' expectations of our infrastructure and to answer the challenge of climate change in an economic way remain ever present realities. We are also facing the challenge of a greater than anticipated economic contraction. We are aggressively responding to these challenges.

First, we have initiated a series of actions to reduce our cost structure. Second, we have responded to Governor Corzine's call for the utility industry to invigorate the economy by proposing to spend $888 million on capital infrastructure and energy efficiency programs over a two-year period. The New Jersey Board of Public utilities at year-end 2008 approved our proposal to invest $46 million on energy efficiency programs, targeted at underserved urban markets. Our current proposals with regulatory support will expand on that effort. Advancing the state's energy policy goals and help jump start the economy through the creation of jobs. However, we will not undertake these initiatives absent rate recovery as envisioned in the filings. That is to say, free of regulatory lag and at a return fully reflecting our cost of capital. The utilities also working on other programs to meet the state's energy master plan goals and other filings may follow.

We indicated to you on our third quarter earnings call of 2008 that we were expecting operating earnings for 2009 to come in at the lower half of our previously stated range of $3.05 to $3.35 per share. This remains the case. Our adjusted range of $3.00 to $3.25 per share aligns guidance with this expectation. We have resolved our Indonesian coal contract issues and we expect to experience an increase in our pension expense that is higher than had been forecast in the fall. But with the commitment of management and the support of our employees to control costs, we will succeed in these difficult times and meet the earnings objectives we have established. These are challenging times but they are also an exciting time for PSEG. We are financially strong and we are well positioned to address the issues facing the industry. Now I'll turn the call over to Tom.

Thanks, Ralph and good morning, all. As Ralph said PSEG reported operating earnings for the fourth quarter of $0.49 per share versus operating earnings of $0.53 per share in last year's fourth quarter.

As you can see in slide nine, PSEG Power provides the largest percentage of our earnings. Power reported operating earnings of $0.40 per share flat with last year's results. PSE&G's operating results were also flat against the prior year at $0.15 per share. PSEG Energy Holdings reported a loss of $0.04 per share versus operating earnings of $0.02 per share in the prior year. Reduction in debt at the parent level in 2007 reduced parent Company expenses in the quarter to $0.02 per share versus $0.04 of a year ago. We provide you with a waterfall chart on slide 11 taking you through the net changes in quarter over quarter operating earnings for each city area. I'll now go through each one in more detail.

As I said, power had operating earnings in the fourth quarter of $0.40 per share consistent with that of a year. Power's results were aided by higher prices which added $0.07 per share to Power's quarter over quarter earnings. A decline in operating and maintenance expense added $0.03 per share to earnings. These improvements were offset by the turmoil in the markets resulting in decline in the value of Power's NDP fund of $0.10 per share. Very strong performance from both nuclear and fossil fleets drove a record amount of generation in 2008. Power's New Jersey nuclear fleet operated at a capacity factor of 89.6% for the fourth quarter resulting in a full-year capacity factor of 90.6%. Including Power's interest in Peach Bottom, the fleet operated at a capacity factor of 91.3% for the quarter and 92.6% for the full year.

Performance in the quarter was partially aided by the timing of refueling outages. Power's 100% owned Hope Creek nuclear facility operated at a full capacity rating during the 2008 fourth quarter and for the full year compared to a 57.3% capacity factor during the year-ago quarter when Hope Creek experienced a 33 day re fueling outage.

Generation from our coal fleet declined the fourth quarter as shown on slide 16. Total output was affected by a planned outage at the Mercer station to tie in the back end technology of the unit. We are pleased that this phase of the project was completed on time, on budget and we continue to meet all milestones related to our environmental consent decree.

We negotiated the settlement of contractual issues with our Indonesian coal supplier. As you recall, we contracted for an annual amount of 2.7 million tons of coal a year from Indonesia to meet the requirements of our Hudson and Bridgeport stations. We renegotiated agreement results in pricing more reflective of market levels and also provides for greater supply flexibility. The installation of back end technology at Hudson in 2010 should provide us with greater flexibility on our coal supply requirements at that station.

We have provided you with a breakdown of Power's fuel-related cost structure for the fourth quarter and for 2008 on slide 17. As a result of the settlement and market conditions in general, we expect the cost of coal to increase in 2009 by 25 to 27%.

On slide 18, you can see that the increase in pricing and volume in 2008 supported a 10% improvement in Power's gross margin to $55 per megawatt hour. This margin increase was accompanied by a 4% increase in total output, much of which came from higher combined cycle utilization which obviously generates lower margin per megawatt hour. We forecast a further improvement in Power's gross margin a 3 to 5% during 2009. Power's gross margin in '09 will be aided by an increase in generation including a full-year production from the nuclear power uprights and the roll-off of an undermarket contract. Our forecast of Power's gross margin in 2009 also reflects an increase in production from our combined cycle fleet which as I just mentioned operates at a lower margin than the average of our low cost generation fleet.

Now moving onto PSE&G our utility operating earnings fourth quarter of $0.15 per share consistent with the fourth quarter of 2007 results for the quarter of aided by colder than normal weather which added $0.01 per share to earnings. This offset the impact of the decline in the economy on gas and electric sales. Earnings comparisons in the quarter also benefited from PSE&G's ability to tailor its workload to match changes in operating conditions. The decline in operating maintenance expense added $0.04 per share to earnings offsetting an increase in depreciation of taxes of the same amount.

The economy weakened greater than expected in the fourth quarter, electric sales to our two primary market segments residential and commercial customers, declined 3.8% in the fourth quarter resulting in a 1.3% decline in electric sales to these two segments for 2008. Despite the challenging economic environment, we have not experienced a large increase in our accounts receivable balance but there is growth in the percent of longer date of receivables. To offset this we increased customer outreach efforts as well as actively participated at the federal and state levels to get our customers help with their utility bills. We have increased our allowance for doubtful accounts to cover the potential for account writeoffs that could occur as a result of the economy's decline.

PSEG recently filed two proposals with the BPU which call for spending on capital infrastructure projects, $698 million and energy efficiency programs, $190 million. Over a two-year period begin April 1, of 2009. The proposals are based on a 51% equity ratio and a 10.3% return on equity and as Ralph said, would provide for a timely recovery of our capital. PSE&G is expected to experience a decline in earnings in 2009 despite the modest benefit that could accrue from regulatory approval of the capital infrastructure spending proposal. PSE&Gs '09 operating earnings will be negatively impacted by an increase of pension expense as well as the expenses associated with the startup of the Company's new customer information system, IPower. PSE&G is planning to file a combined electric and gas rate case later this year that will take into consideration higher costs including pension expense as well as significant incremental capital investment. The 2009 earnings forecast assumes the return on equity for state jurisdictional assets declines to approximately 8.5 to 9%.

Lastly, let's move onto Energy Holdings. Energy Holdings reported an operating earnings loss of $0.04 per share in the quarter compared to operating earnings of $0.02 a share in last year's fourth quarter. Earnings comparisons for the fourth quarter were affected by mark-to-market losses of $0.05 per share and higher operating maintenance expenses at the Texas generating stations of $0.02 per share. Earnings comparisons were also impacted by the absence of earnings from international assets sold late in 2007 representing $0.03 per share as well as a decline in the return on the leverage lease portfolio up $0.02 per share. These items more than offset a decline in interest expense to the $0.01 share.

Holdings expect to operate at close to a breakeven or modest positive level in 2009. Results will be influenced by a full-year decline in income on the leverage lease portfolio. The subsidiaries 2000-megawatts of gas fired Texas generating assets are also expected to be negatively affected by a forecast decline in natural gas prices versus very high prices in the first half of 2008 as well as a decline in availability and an increase in O&M expenses.

Pension expense, slide 29 depicts a change in our forecast of 2009's pension expense versus our 2008 pension expense. We estimate our pension expense in '09 will increase $0.15 per share over 2008's expense due to decline in the market value of our pension assets. This year-over-year increase in pension expense also widens from our third quarter earnings update. A decline in interest rates used to calculate pension obligations at year end has resulted in a higher than forecasted increase in pension expenses of $0.06 per share as compared with the levels we discussed during our third quarter call. Our estimate assumes approximately 62% of PSEGs expense precapitalization is allocated to PSE&G and we would expect an appropriate cost of service adjustment following our rate case.

As Ralph indicated, we forecast an increase in operating earnings for 2009 to $3.00 to $3.25 per share. The forecast for operating earnings by subsidiary Company is provided for you on slide 30.

Beginning with our results for the first quarter 2009, we intend to remove the financial impact of the nuclear decommissioning trust either positive or negative as well as mark-to-market changes from our calculation of operating earnings. We believe this more accurately depicts the basic drivers of our earnings and is consistent with how many of our peers report operating earnings.

PSEG has worked hard to build a strong balance sheet. The sale of our major international assets as well as an increase in cash flow has allowed us to reduce debt. We lowered the debt levels at holdings by more than $600 million in 2008. We closed out the year with $323 million in cash on our balance sheet and $3.5 billion of liquidity. PSE&G and PSEG Power have both demonstrated their ability to access the capital markets. PSE&G sold $275 million in medium term notes in November at a cost of approximately 6.3%.

Power recently launched a $500 million retail medium turn note program. This program offers Power an alternative source of funding at attractive levels. Power has sold slightly more than $200 million of the notes in the first two weeks of the offering with an all-in cost of borrowing of approximately 6.5%. This program and the cash on hand provide meaningful financial flexibility at a time when the credit markets remain substantially closed.

PSEG is focused on maintaining our strong operating performance in investing in a disciplined manner. The economic environment we face is challenging but we expect to meet our commitments. We look forward to seeing many of you at our annual conference for the financial community on March 18. As we have in the past, we will discuss the strategic drivers of our business as well as the specific market and cost factors that influence each of our businesses. Given the uncertain economic conditions and volatile commodity markets we are currently faced with, we do not plan to issue specific 2010 guidance until the second half of this year.

Lastly on the common dividend, as we have stated in our press release, the dates for the Board of Directors to declare the common dividend of 2009 have been adjusted to reflect the change in the meeting schedule, the next regularly scheduled meeting for the Board Directors is February 17, of 2009. The dividend declared on that date will be payable on or before March 31, 2009, to shareholders of record as of March 10. With that, operator, we'll now open it up for questions.

(Operator Instructions) Your first question comes from Paul Patterson with Glenrock Associates.

Good morning, guys.

And good morning, Paul.

Just to circle back here, what was the mark-to-market benefit for the year?

It's on one of the attachments. I think it was $0.03.

$0.03 for the -- and I'm not talking year over year, I'm just talking about what it actually contributed?

The absolute -- the absolute number it's on attachment 12.

12. Okay. And that was $0.03?

Yes.

Okay.

$0.03 all of Power. Holdings was flat.

Okay. And then we have about $0.14 if I recall that correctly, for the nuclear decommissioning trust fund?

Correct.

So just with the changes in terms of reporting operating earnings and excluding those two factors, we have got about an $0.11 benefit; is that correct?

That's right.

Yes. If we -- as we discussed, that would be our pro forma treatment for 2009 if we did that for 2008 it would be an $0.11 increase.

That's fair.

Okay. And then just what's the ROE for PSE&G Power expected to be in 2009? I mean not Power. Sorry. The utility.

The state assets we are seeing about 8.5, 9%.

It will get lifted up a little bit. The transmission does better.

8.5 on the distribution side that's your guys--?

8.5 to 9 for the state jurisdictional assets which is about 85% of the asset base.

Great. Thanks a lot. Guys.

Okay.

Your next question comes from the line of [Ivana Irgovic] with Jefferies.

In your September presentation you indicated that you would expect 8 to 9% growth from 2008 to 2009 and also I think from 2009 to 2010. Is this assumption still reasonable or if not, at which number should we look at?

Yes, I think when we did that, that was during a materially different point in the economic and commodity cycle and clearly especially Power much of the long-term growth is a function of longer-term economic growth and commodity cycles. So at this point those would be difficult numbers to meet in this type of environment and I think in terms of longer-term growth rates, as I said in this type of environment, we will -- it's difficult to forecast out two or three years in that way. At our March conference we will lay out the drivers, utility and for Power as I said from a market and from a cost standpoint and allow folks to look at various scenarios that could impact our growth.

Ivana, I guess you can do the arithmetic on 7 to 8 and 9 and we will give clarity on 10 at the end of 9.

Basically I should assume definitely there is going to be 10 versus 9 lower than 8 to 9%?

I think we are going to wait until the end of the year to talk about that.

Wait. Yes.

Okay. Thank you.

Your next question comes from the line of Michael Goldenberg with Luminous Management.

Good morning.

Hi, Michael.

I wanted to follow up on this NDP issue. Just so I'm clear, the line that resulted in, $80 million loss in 2008 will be excluded completely from 2009 whether it's positive or negative?

It will be excluded from our operating earnings, correct.

Okay. And so I understand further, do you have any projections at this time similar to pension? Because, obviously, this correlation between there are some drivers. Do you know what you expect the 2009 entity fund activity to be?

The normal market, I think our planning expectation is a normal market for 2009, the expenses of the NDP and the income from the NDP are basically a wash so it's basically planned for zero.

Would you characterize--?

If you look at what it was on, I think it's attachment 13, if you look back to 2007, if you call that a more normal market, we did have a couple of cents of benefit from the NDP and that's generally what it's been. It's been a couple cents here or there.

I understand. Would you characterize this as a normal market, I guess, if what most economists are saying about 2009 were to be true would the number be significantly lower or would it still be around flat?

You may be in a better position to predict the market. I'm certainly not going to give that one a shot. But obviously the assets that are about half debt, half equity fell in value during the year. That's what caused the $0.14, and so if the market returned normal kind of levels, I think the planning assumption is somewhere in the mid sixes for that group of assets if they return to those kind of levels, then income and costs are basically a wash. What we thought is that it's really just stepping back on the pro forming out the NDP I think obscures the fundamental drivers of our business as well as mark to market. Mark to market was only $0.03 this year as a positive, but you think of intrayear and there is a table back here on attachment 12, remember, that we talked in the middle of the year that Power had some benefits that we expected to largely reverse during the year. So we -- we feel it's more straightforward just to take both of those out of our operating earnings as we present them to you. They will obviously still be there in the financials.

Got it. And just one final question. I understand you will lay out most drivers in March presentation but can you just give us a glimpse on PSE&G side, what are you expecting for electric sales both residential and commercial industrial and gas, commercial and industrial, a sneak peek of what you expect for 2009?

We are assuming a much lower than historic growth rate. It's between 0 and 0.5%, Michael.

But you are assuming either flat to positive in both electric and gas in overall -- I guess in overall -- megawatt hours sales growth?

That's correct.

Got it. Thank you very much.

Your next question comes from the line of Angie Storozynski with Macquarie Capital.

Thank you. Just about Michael's question. What was the weather impact on electric sales in the fourth quarter in '08? It seems like the sales were sharply down. It seems like heating degree days were actually up for the quarter.

Angie, in the quarter we have THI was almost 90% below what we had in '07.

Okay.

THI hours. And for the year THI hours were 8.5% below '07.

Okay. Fine.

Now, you should realize, though, that THI hours are almost irrelevant in the fourth quarter, right? Cold month. Not a warm month.

Okay. Now, how are you going to manage the PSEG's parent's lower expenses? Because it seems like in the fourth quarter of '08 you expected to have between 10 million and $15 million loss, now it turns out we got $24 million. Now you are guiding to anywhere between 0 and $10 million. How are you going to manage that?

You're referring to the parent expenses?

Yes.

Yes, the parent expenses have come down a little over the last year that's largely a function of debt retirements.

Okay.

We retired some debt at the parent earlier in 2007.

But what I'm referring to is the third quarter guidance for '08. We are assuming expenses anywhere between 10 and 15 and we ended up with 24. So my question is basically how are you going to -- what kind of cost cutting measures are you going to have?

Yes, the biggest piece in there was a meaningful contribution we made to the PSEG foundation. We tend to make that in lumps and the foundation spends that over a period of time. So that was a one time--.

The year-over-year difference is the lack of this contribution?

Yes.

Okay.

And that was the one time. We tend to do that on a discrete basis, PSEG for tax purposes makes the contribution to the foundation. The foundation is then the fiduciary to make contributions -- or to support the community in a number of good ways.

And that contribution is safe to say was higher than what we were doing in the--.

Higher than normal. We don't have a contribution budget for '09 or for '10 at this point.

Now energy holdings. So you're pretty much assuming flat or breakeven earnings or the lack of them. Why is it? Is it because you don't have any hedges for your gas assets and that 2008 numbers were impacted by the weather or what's the -- I understand the divestures of assets but how about the fact that you're assuming no contribution now?

I think the big -- the largest earning asset in holdings is clearly 2000 megs of generation from Texas. Those assets had a very good year in 2008, especially the end of the second quarter when temperatures were quite high. So EBITDA down in Texas was about $145 million for the two plants for 2008. We went into 2008 with a forecast of about 100 maybe 110, something like that. So that was a second quarter that really materially helped that. As we look at 2009 spreads, Spark spreads have come off and we are facing some curtailment at our plant in West Odessa, curtailment because of the wind. So the capacity factor out there is probably 25, 30%, something in that range. So net-net embedded in that 0 to 20 number for holdings is an EBITDA number for 2000 megs in taxes of about $85 million. So it's materially lower than last year. We have found, to be honest, Texas is a tough market to predict and as we look back we've been positively surprised in Texas the last few years. But that being said, as we see it now, 85 EBITDA seems like a reasonable number based on the forward curves.

The other piece of it ten is the larger -- virtually all the international assets are sold. I think we have about $25 million left internationally, something in that range so everything has been sold. Good prices, good value, cash redeployed. And then resources is basically at zero or slightly negative income as we took our large impairment last summer.

And the last question, I promise, you -- previously you disclosed segmental guidance. Now looking at PSEG Power number for '09, how should we think of it? I know that you cannot comment about the BGS auction but is it somehow reflective of what you guys are seeing from the auction, the range, is it something that you feel is achievable through the auction?

Oh, I just -- yes. The BGS auction is going on. Obviously we are not going to comment on that in any way. But, yes, the -- as we talk about our view for 2009, A, keep in mind we are largely hedged for 2009, but we do have some modest piece open. But just as we talk about the business in general, it is reflective of general market conditions, gas, power, et cetera, and the BGS is also, obviously, a function of those same markets.

Maybe I'll ask it differently. Are you assuming that there's going to be a risk premium embedded in BGS auction or not?

Yes, I think I got it. We got to stay just because it's -- it's going on as we speak, so we are going to refrain from any comment whatsoever in the BGS.

Okay. Thank you.

Your next question follow-up question is from the line of Paul Patterson with Glenrock Associates.

Hi, guys. I was wondering if you could just give us a little bit more of a -- if it's possible, when you think we might get the BP$ to release the results of the BGS auction?

Paul, the BGS auction has ranged in the past from two days to nine days, so we are really just -- Angie tried and now you're trying. We are just going to stay clear of BGS pontification, okay?

Okay just to make sure I understand. Weather adjusted, what was the electric sales growth in 2008 assuming normal weather, what do you guys estimate sales would have done?

First of all, attachments 9 and 10 give you non weather adjusted.

I'm looking at them right now.

And at the risk of sounding like a broken record, you will all now that weather adjustments are as much are as they aren't science but we think they would have been about 1.5% down both electric and gas weather adjusted. But when you have THI hours avenue by 8.5% and degree days off by 3.1%, slight inaccuracies need to be factored into that.

Sure and then just on the industrial, the big decline in the quarter, what was causing that again? Was there a particular customer that -- I mean, it seems like a very large number.

There was a particular co-gen who had reduced operations during the period.

Okay. And on the Texas--?

That's a small percentage of our units, it's about 12% of our units but it's a much smaller percentage by margin.

Okay. And then the Texas generation, there was discussion of higher O&M and lower availability in the news release. Could you give us a sense as to what the outlook for those two issues are on the Texas--?

I think that's just the lumpiness of outages. We tend to -- the outages come about every two, three years, depending upon number of starts and we generally expense those so it's not indicative of a long-term issue. It's just the lumpiness about it. Though as we look at the forward market, we do see gas coming down, these are efficient gas plants so gas comes down, there's spark margin on a dollar basis gets compressed. The curtailment issue, Paul, is what I mentioned in the West. It's the wind in the west. It impacts Odessa, two issues there that may help us longer term is [Crez], the transmission, in shorter term we are bidding some of those megawatts out to a different power pool in a competitive process so we will see how we do that.

I know we are going to have a meeting coming up and a lot more information there, but just in terms of this Indonesian contract that you guys have been negotiating and fuel expectations going forward for '09/'010 do we have any flavor there as to what you guys have been seeing given all the dynamics that are happening in the market and the fact that you guys have signed this contract and everything?

Well, we think we are in good shape for '09. We do have some -- we have tried to add for this package and we will keep it going in the future is some more detail on historical fuel prices so we have broken out gas, coal, nuclear, '07, '08, give you generation hours so you can really do some cross multiplication and get, fuel price per megawatt hour. We did say that coal in general is going to go up 25, 27% from '08 to '09. The Indonesian issue, we have generally settled it in the overall cost impact we walk you through is in the -- is about $0.07 a share.

Okay.

Year over year. That's -- I think when we talked about it worst case going back to November, if you kind of cut through it all, we said the worst case was higher than that, was about $0.10 per share. At the end of the day we settled it through a combination of things, one, prices came down a little bit. We talked about prices being in the high 60s and around 60, we did move up towards market. We did get some benefit for some prior coal that we had that had not yet been delivered so that gave us some benefits and we will probably buy less -- lower amounts. So net-net '08 to '09 is about $0.07 for that coal.

Great. Thanks a lot, guys.

(Operator Instructions) You have a follow-up question from Michael Goldenberg with Luminous Management.

Hi. My question has actually been answered. The only thing is just so I'm clear, I know you've stayed away from answering any sort of BGS auction question but is the auction still going on or has it ended and we are just waiting for the results?

It's Kathleen's turn to say no comment.

So you can't even say whether it's still going on. Okay. No problem. Thank you very much.

Any other questions, operator?

Your next question comes from the line of Sarah Akers with Wachovia.

Hey, good morning.

Good morning.

Can you guys give an update on your hedging positions over the next couple of years for Power's output?

It's generally consistent. We update it on a regular basis, I think the last slide is on the web. We head up from mid-December, but this year we are largely -- we are virtually all sold for our coal and nuclear for 2009 that would leave our gas open next year coal and nuclear is about half and then 11, it's about a quarter and then 12 it's about 10%. 12 nuclear, we showed you the amount of megawatts but they generate a higher proportion of our margin, obviously they are lower marginal cost units. The only comment I'll say is that we have historically used a BGS auction to leg forward, if you will, in our hedging profile to the extend that older BGS expires and we are successful in new BGS. No comments on timing likelihood price, but historically we have used new BGS auctions to add incremental tenor to our portfolio.

Thank you.

(Operator Instructions) You have a follow-up question from Angie Storozynski with Macquarie Capital.

Thank you. I promise it's not going to be about the BGS auction. This time, however, we are seeing some dramatic reductions in deliveries of coal to the northeast over the last, especially month and a half and given where gas prices are, I was just wondering if you guys are seeing already fuel switching so basically higher utilization of gas plants and lower of coal plants? And do you think that it's going to -- it can impact you? And I know that most of your coal plants are already hedged, but is there a possibility that you can output your gas lines more?

We are not there yet. It's obviously something we are looking at, but we're not there yet. We would have to see gas come down a little more for it to make sense. We also need to be sensitive that these are older, older facilities and they can't--. You need to take into consideration some wear and tear on the machine to the extent you go back and forth. It's something we are looking at. It's hard for me to comment on whether other folks are doing it but at least our facilities, Hudson, Mercer and Bridgeport, we are not at that point yet and Keystone Common has very low cost priced coal so I doubt they would ever get to that point.

Thank you.

Your next question comes from the line of Nathan Judge with Atlantic Equities.

Question generally about how you are seeing environmental legislation come together in Washington, both on the RPS and carbon?

Nathan, this is Ralph. We will be testifying next week, actually, in support of a national RPS. I think I'm reading the same comments you're reading that Mr. Waxman is pretty aggressive and eager to move on climate change legislation this year. With all due respect, we have heard those comments now for probably three years from various members of the house leadership. I do think in general the mood in Washington is very aggressive on the environmental front in a way that will benefit us but tempered by economic realities. So whether it's a national RPS or climate change legislation or stimulus package full of pro environmental incentives all of this will have to factor into the calculus of what the Nation can afford but in general we are actively participating and I think all the signs are in the right direction. I would include on that list an eagerness, it would appear, on the part of both the agencies as well as the members to act on the care rule and that that will also help companies with our particular mix of assets. Could you also give us an update on your perspective as far as investing into power? I think at some point you had looked at potentially investing in some new power plants, et cetera.

Given today's environment, do you think perhaps that investment is going to go forward and/or is it switching to something else or perhaps you're just pulling back entirely?

No. That's still an area that we actively look in for opportunities. Right now most of our efforts are focused on the RPM process in PJM and the ability to develop a couple of peaking projects that we think would be economically wise and serve the system well. What we keep running into is notwithstanding the reduction and asset values, people's expectations are higher than ours for some things that go into the valuation. So we continue to look for investment opportunities in power but so far the best things that we have seen are the ability to develop peakers in Connecticut and our own expectations for participating in the RPM auction coming up in May.

Just looking at those long-term RPM prices, could there potentially be an impact on those capacity prices in out years related to weak demand in current markets and how do you see that playing out?

Of course supply and demand is at the heart of it, but I think a combination of environmental constraints on high energy delivery days and just the natural aging process of some of these units and still while we do talk about sales growth, we are -- we are not quite convinced that we are seeing demand destruction, although it's difficult to say given the shortness of the time frame over which we have some contraction data, so I think that a combination of factors not the least of which is revisiting the cone values. We have been on the record for a couple of years saying that the old cone that PJM had was too low. We have also been on the record of saying we are not quite sure as to whether or not there was complete rationality behind the treatment of the DQE supply versus the DQE demand so I think that in the next few weeks we will likely see some type of filing from PJM to FERC and FERC ruling on that that will significantly influence May but overall you're not seeing an abundance of new investment in the areas of -- I think the pressures will be such that the supply will be tightening while demand increases. Remember, this is the May auction will be for three years out. So this is less about '09 demand and more about where you expect demand to be in July of '12 out to May of '13.

Thank you very much.

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

I think we have pretty much covered it, folks. Look, these are tough times. We are all facing them. We are quite proud of what we accomplished in 2008 and we have a firm eye on the horizon for 2009. We know exactly what our challenges are. But we have a good set of assets in markets that are functioning and functioning well and with some operating performance that we couldn't ask more of our people to produce. So we will try to look into the crystal ball with you in March. Ours is probably not that much clearer than yours but what we will tell you is exactly what it means for us depending upon what your expectations are for credit market, economic cycles, gas prices and the like but with that thank you for spending time with us. We hope you are pleased with our '08 results and what our outlook for '09 is as we are and we will see you in about seven weeks.

Thank you.

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

Thank you.