公共服務電力與天然氣 (PEG) 2009 Q2 法說會逐字稿

Good morning. My name is Conchetta and I will be your conference operator today. At this time, I would like to welcome everyone to the Public Service Enterprise Group second quarter 2009 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. Miss Kathleen Lally, you may begin your conference.

Thank you Conchetta. Good morning, everyone. Thank you all for participating in our call this morning. We released our second quarter 2009 earnings statements earlier today. The release and attachments are posted on our web site, WWW.PSEG.com under the Investor section. And we also posted a series of slides that detail operating results by Company for the quarter. Our 10-Q for the period ended June 30, 2009, is expected to be filed later today after the close. I am not going to read the full disclaimer statement or the comments we have on the difference between operating earnings and GAAP results. But I do ask you read ask that you all read those comments contained in our slides and on our web site.

The disclaimer statements 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 reported in accordance with generally accepted accounting principles in the United States. PSE&G believes 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 him on the call is Carolyn Dorsa, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for questions and we ask you to 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 second quarter of 2009 are $0.63 per share, which is slightly more than a 3% increase over last year's $0.61 per share. Our operating results both in the current and prior year exclude the impact on earnings from a change the value of our nuclear decommissioning trust fund as well as mark to market accounting related adjustments. To say that the business environment we face is challenging is an understatement but we are meeting those challenges.

Cooler-than-normal summer weather has sent us to the record books to determine when we last experienced conditions similar to this year. In fact, June of 2009 will go down as the second coolest in this part of the country since 1970 and July is also been abnormally cool. Notwithstanding this unfavorable weather, PSE&G was able to increase its operating earnings and achieve success on several major regulatory initiatives that provide a foundation for future growth. But that's not all. We've also reduced the potential risk we face on our cross border leverage lease portfolio with the successful termination of five leases in the second quarter. Since the beginning of December 2008, we've terminated eight cross border leverage leases in our portfolio. These terminations have reduced the tax risk we face by approximately $350 million. Carolyn will go into greater detail on that subject later on.

I'm also pleased about the Environmental Protection Agency, US EPA, if you will, recent recognition of our success in reducing our rate of greenhouse gas emissions. We set a goal in 2002 to reduce our greenhouse gas emission intensity by 18% from 2000 levels by the year 2008. We surpassed that goal and achieved a 31% reduction in our emissions intensity. The importance of this is that we've solidified our position as one of the nation's leading low carbon energy companies. We have been active participants in the debate at the national levels as Congress considered action on bills that could reshape the nation's approach to energy policy. An established policy at the national level with clear objectives would provide the blueprint we and others need to proceed with discipline investment.

Fortunately, New Jersey is not waiting for Congress. The New Jersey BP approval of programs in the past two months supporting investments in capital infrastructure, economic energy efficiency and most recently, Solar For All, support the state's long-term clean energy goals as they also provide opportunity in the near term for jobs and growth for PSE&G.

None of the success would have been achieved without the focus of our dedicated work force. Operating performance remains strong, and our expenses have been reduced to help offset the impact of higher pension costs. But the abnormal weather conditions experienced thus far this summer and by that I do mean through the end of July, will challenge our ability to meet the upper end of our $3 to $3.25 per share operating earnings guidance.

I can assure you that we are working hard to create value for our shareholders. We're focused on optimizing margins on generation through the use of our asset mix. We're focused on managing our non-pension related cost structure, as well as, controlling the growth and pension related expenses. We're increasing our capital investment in areas that provide good, risk-adjusted returns and we're focused on maintaining our financial strength through a reduction in risk primarily through the lease portfolio. And now, I am pleased to turn the call over to Caroline Dorsa who will discuss the quarter in greater detail.

Thank you, Ralph and good morning. As Ralph has said, PSE&G reported second quarter 2009 operating earnings of $0.63 per share versus $0.61 per share in last year's second quarter. Just to remind you, our operating earnings exclude the impact of any change in value for NDT obligations, as well as other charges related to decommissioning, and any changes in value of transactions that don't qualify for hedge accounting or mark to market. The prior year number has also been adjusted on the same basis to make comparisons easy to follow.

Slide four provides a reconciliation of operating income to income from continuing operations and net income for the quarter. As you can see on slide ten PSE&G Power provides the largest contribution to earnings and was responsible for the improvement in earnings for the quarter. Power reported operating earnings of $0.47 per share, an increase from $0.42 per share last year. PSE&G reported operating earnings of $0.09 per share compared to $0.10 per share last year. PSEG Energy Holdings reported operating earnings of $0.07 per share compared with $0.10 per share a year ago. Parent company expenses which are primarily interest, declined to zero in the quarter from $0.01 per share a year ago.

We've provided you with a water fall chart on slide 12 that takes you through the net changes in quarter over quarter operating earnings by major business and I'll now review each of those Companies in greater detail. Starting with Power.

As shown on slide 14, PSE&G Power reported operating earnings for the second quarter of $0.47 per share compared with $0.42 per share a year ago. The operating environment in the quarter was very challenging given the weak economy, abnormally cool weather and low gas prices. But power's results were strong despite this environment given its base load hedge position and the dispatch profile of its generating unit. As you will see, we produced a larger percentage of energy from our low-cost nuclear fleet and gas continued to displace coal in the quarter and as you may recall, this is similar to the situation in the first quarter. Higher average prices realized by power and lower fuel costs contributed $0.04 per share to earnings.

Higher average realized prices reflect the impact of two months of the 2008 BGS contract for $111.50 per megawatt hour, which replaced the 2005 auction contract which was priced at $65.41 per megawatt hour for the three-year contract period beginning on June 1th of last year. And one month of the 2009 BGS contract for $103.72 per megawatt hour which replaced the 2006 contract for $102.51 per megawatt hour. In addition, the repricing of a below-market, round-the-clock wholesale contract for 500 megawatts, which expired at the end of 2008, also supported the quarter over quarter improvement in prices.

Power's operating results continue to benefit if a strong performance of a nuclear fleet. Generation from our nuclear plants increased slightly more than 2% in the quarter even as Power's overall generation output declined 15%. Power's New Jersey fleet operated at an 88.9% capacity factor in the quarter, and including Power's ownership in Peach Bottom, the fleet operated at a capacity factor of 89.1% versus 90.5% in the year ago quarter. The performance in the quarter reflected the impact of 23 outage related days, versus 44 days in the year ago quarter. This year's results include 23 refueling outage days at our 100% owned Hope Creek Station. Last year in the second quarter of 44 outage days primarily related to the replacement of steam generator at our 57% owned Salem Two unit. So the impact on share overall generation was smaller per outage day last year since it related to jointly owned facilities.

The increase in nuclear generation this quarter is also a reflection of the upgrade and turbine replacement work competed at Hope Creek station and Salem in the second quarter of 2008, which added 173 megawatts to the capacity of those units. Cooler-than-normal weather, a weak economy and low gas prices have affected both demand and the dispatch of our generating fleet. As I said earlier, generation declined 15% in the quarter resulting in a 10% decline in generation for the first half of the year.

Slide 16 provides a breakdown of generation by fuel and the quarter is shown on the left side of the page. Nuclear was 62% of our generating output in the quarter versus 52% in the year ago period. Our combined cycle fleet experienced the 16% decline in production, but met 25% of the reduced load. Our coal fleet, particularly those units supplied with higher priced coal were not called much upon the month of June. Output from our coal fleet declined overall 51% in the quarter. Slide 17 provides a breakdown of our fuel costs for the quarter and year to date and overall, despite generation being down by 15%, fuel costs per megawatt hour declined 53% from $36.50 per megawatt hour last year, to $17.20 per megawatt hour in this quarter.

The shift in dispatch of our generating fleet enabling us to take advantage of low-cost gas versus higher priced coal, supported an improvement in gross margin. During the quarter, gross margin improved to $63 per megawatt hour from $50 per megawatt hour last year. To date, we've burned 1.2 million fewer tons of coal than normal. We have flexibility built into our coal contract that allows us to turn back deliveries at a cost, and we're currently at the high end of our capacity to store coal at most of our stations and without any change in demand, we would expect to incur some minimal expense to deal with management of our inventory in the second half of 2009. These costs, of course are of course factored into our guidance.

Other items which had an influence on power's quarter included a moderate decline in our BGSF results of $0.01 per share, the maintenance expense also decreased by $0.01 per share. Overall, power's O&M continues to be tightly managed, excluding the impact of pension expense, power's O&M year to date is in fact lower than in 2008. We've lowered our forecast of power's operating earnings in 2009 by 3% to $1.17 billion to $1.24 billion from the prior $1.21 billion to $1.285 billion. It will in fact be difficult to make up the loss of load experience in the first half of the year during the remainder of 2009. This is particularly true given the cool weather experienced already in the month of July.

Margins per megawatt hour, however, will be higher than our prior forecast for the year given the decline of fuel cost. We currently forecast gross margins for 2009 of $61 per megawatt hour versus our prior guidance of $57 to $58 per megawatt hour. This improvement offsets a significant amount of decline and demand that we see related to the economy. Our revised guidance takes into account primarily the impact of the cool summer experienced through the end of July.

Let me now turn to for a moment to the other operating companies. PSE&G. PSE&G reported operating earnings for the second quarter of 2009 $0.09 per share, compared with $0.10 per share for the second quarter of 2008, as shown on slide 21. Electric revenue declined during the second quarter by $0.01 per share, total gas margin improved by $0.01 per share. Earnings were also aided by an increase in transmission revenues effective on October 1st of last year for $0.01 per share and this improvement was offset by higher depreciation on increased levels of investment $0.01 per share and O&M expense at $0.01 per share. Regarding O&M, PSE&G also continues to demonstrate control with operating expense. Including an increase in pension expense and expenses associated with regulatory clauses which are recovered in revenue, operating and maintenance expense, the items that are really controllable, declined slightly for PSE&G during the quarter.

Electric demand was heavily affected by the cooler than normal weather and summer weather, as measured by the temperature, humidity index, as you probably know as the THI, was 41% cooler than normal in the month of June, reducing air conditioning loads an as a result electric demand. Electric sales volume declined 5.4% in the quarter, but on a weather normalized basis, we estimate electric sales declined 1.8% in the quarter in line with our forecast for the full year.

Margins on electric sales were relatively unchanged. Slide 23 provides an overview of the items that affect electric and gas margins. As shown and as we've shown before, about 60% of PSE&G's electric margin and 30% of PSE&G's gas margin is supported by demand charges which are unaffected by changes in volume. PSE&G had a 9.2% return on average consolidated equity for the 12-month period ending June 30 of this year. The return earned on equity invested in the electric transmission business exceeded 11%. The return earned on PSE&G's electric and gas distribution businesses is substantially lower than the level authorized.

On May 29th of this year, PSE&G filed a request with the New Jersey Board of Public Utilities or the BPU, for an increase in electric and gas revenues totaling $230 million. The requested increase is based on a 2009 test year and supports an 11.5% return on equity and a 51% equity ratio and as we noted, we have also requested trackers for pension expense and capital additions. The rate case process typically requires nine to 12 months of hearings and deliberations before change is effective. We expect this case to take that full amount of time.

The BPU has also approved several initiatives proposed by PSE&G in order to help meet the goals of New Jersey's energy master plan. Recently on July 27th, the BPU approved PSE&G's Solar 4 All program. Through this program, PSE&G will invest $515 million on the installation of 80 megawatts of new solar projects over 2009 through 2013. On July 1st, they approved the investing of $166 million over 18 months on PSE&G's Energy Efficiency Economic Stimulus Program and these programs are in addition to their already 2009 of this year approval of PSE&G's capital infrastructure program. Together, these programs will increase PSE&G's capital investments by $1.3 billion over 2009 through 2011 to a total of $4.5 billion.

Slide 24 outlines the change in capital spending by year from the levels forecast in the 2008 10-K. We have reduced our forecast with PSE&G's 2009 operating earnings to 315 to 335 million from the prior 320 to 345 million. A revised forecast takes into account the impact of the abnormally-cool weather on electric sales over the months of June and July. We see no reason to adjust our forecast of the full year normalized weather sales. While we have experienced an uptick in growth, there is also no evidence to suggest a further deterioration in sales as a result of a weak economy. Results in the second half of '09 will continue to be affected by a increase in pension expense, appreciation and higher financing cost.

Lastly, let me discuss PSE&G Energy Holdings. Energy holdings reported operating earnings of $0.07 per share versus operating earnings of $0.10 per share during the second quarter of 2008. Holdings quarterly earnings comparisons were affected by several items. The operating profit of holdings' gas fired combined cycled generating capacity in Texas declined by $0.06 per share. A reduction in demand and lower energy prices comparison particularly to very strong pricing in the year ago period, more than offset a decline in maintenance expense and lower financing costs.

As Ralph mentioned earlier, earnings comparisons at holdings were aided by the recognition of gains on successful termination of five cross border leverage leases in the quarter for $0.05 per share. We've terminated eight of these types of leases since the beginning of December 2008, bringing in cash of approximately $450 million and reducing our cash tax liability by $350 million. Keep in mind, our cash tax liability was $1.2 billion at the end of 2008 and would normally grow as we recognize the tax deductions associated with our investments. In fact, if we had not terminated these leases, the cash tax liability would have grown do approximately $1.3 billion by this time and our actions terminate these leases has therefore, reduced this cash tax liability by over 25% and the reduction was funded entirely by the proceeds from our counter parties.

Also as we have indicated, since we established a reserve a year ago and we accrue lease earnings at a significantly lower rate, our income statement exposure is very limited. We have ten cross-border leverage leases remaining in our portfolio and we intend to pursue their sales when economically prudent. We also increased our reserve on deposit with the IRS during this quarter for this matter by $140 million to $320 million. And keep in mind, this is separate from and in addition to the taxes paid that I mentioned a moment ago for the termination.

We continue to believe we have a very good position should we pursue litigation of our claim in court, but our ability to terminate leases on economic basis reduces our dependence on a favorable court outcome. Based on the reduction in our cash tax liability achieved thus far, and our ability to fund an increased deposit from operating cash flow, we do not see the need to issue debt in 2009, specifically to fund any potential tax payment. We've raised our forecast of PSEG Energy Holdings 2009 operating earnings to $40 to $65 million from the prior year of 20 million. Our revised forecast takes into accounts the gains achieved on lease terminations and our ongoing efforts to reduce the portfolio.

As indicated in the review of operating company performance, we've modified our range of expectations by subsidiary to reflect the operating conditions I mentioned. We continue to actively manage our controllable expenses during the first half of 2009, our O&M expenses, excluding pension expense are down lightly from year ago levels. But as Ralph said, the cool weather conditions we have experienced both in the second quarter and continuing through July, challenge our ability to meet the upper end of our $3 to $3.25 per share range for the year.

Just to comment on our capital and financial positions, which remains strong, the close out the quarter with $393 million of cash on our books, which is an increase of $72 million from year end 2008. This is after increasing our reserve at the IRS by $140 million, reducing our level of debt, excluding securitization debt by 80 million and completing all of our anticipated funding for our 2009 pension obligations of $360 million. In June, $100 million bilateral credit agreement expired at Power and another $100 million bilateral agreement expired at PSEG. Energy holdings also terminated its $136 million credit facility that was scheduled to expire in June of 2010. And to replace this capacity, we established a new $350 million syndicated credit facility at Power that expires in July of 2011. So as of July 24th, we have $3.2 billion of capital from our credit facilities available to meet the operating cash needs of the business.

Finally, a balance sheet has been strengthened to do a simple calculation of long-term debt to total capitalization. That number has been reduced from 50% at year end 2008 to 48% at June 30th. Our tax liability is lower than we forecast just six months ago based on our active portfolio management and finally, our internal cash remains strong.

With that summary, I'll now turn it back over to Conchetta and we'll be happy to take your questions.

Thank you. (Operator Instructions). Your first question comes from the line of Daniel Eggers with Credit Suisse.

Good morning. I was trying to map this but maybe I missed it. What was the total weather impact that you guys have seen year to or year to date relative to normal?

Dan, we've given that in a couple ways. We give it in terms of the THI effect and percentage of generation reduced. So.

I'm trying to see if there's a way of earnings impact to see how much of the slippage from the mid or upper end of the range is it. Just a function of weather this year.

For the utility year over year, Dan on the electric excuse, excuse me, this is Kathleen Lally, it costs about a penny for the first six months of the year and electric was probably some slippage in July, I don't know what that number is, and that's a penny and more importantly, you're going to see some of that impact for power, which is really, it's the -- the overall demand and I can't translate that penny we see for electric into power, but the decline in power is due to weather.

Dan, this is Carolyn, the first year quarter of the year, we saw total generation decline in power by about 4%, which was really more the economy and then this quarter we see 15%, there's really no reason to think the economy's very different and so when you look at the generation, think you should think about that net is about weather.

And when we look at what we have done as provided updated guidance, which you look at the impacts of the economy, particularly, if you assume it extends for the year, but then you look at what we've been able to do in margin and that pretty much offsets what happens from the economy and so I tend to being about that guidance reduction that we've given for power, which is about 3% and the aggregate when you compare the numbers is really the impact of the weather when you net it all out.

So take the margin.

I guess along those lines, the gas plant performance or utilization in the quarter or relative share was quite a bit bigger than I anticipated. How much -- how much more that have do you see, philosophically if you were thinking about the switching decision when you decide about coal versus gas, are you looking at market-based costs for fuels or are you thinking about legacy cost for fuels when you make that coal switch decision.

Certainly we look at the market based gas which obvious gives us a real advantage and we have to look at our cost for coal, we have that mix not just Appalachian coal but the higher priced to adero coal. So when we look at that, that is how we think that we can optimize our margins.

Okay.

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

I just want to ask some questions on the reduction in -- or the gain related to the leases and you mentioned that you had ten leases remaining. How much potentially could you reduce your cash tax liability if you were to exit the remaining ten leases and how likely are those actually to get done.

Good question. So from the ones that we have terminated thus far, as I said, we reduce that liability now to $950 million from what it would have been had we done nothing.

If we were to terminate all the leases, and I don't want to you necessarily conclude that we can terminate every single one since obviously that's a negotiation between two parties, but if we terminated all those leases, the only liability that's effectively left is the interest liability that relates to the timing of when those deductions were taken, and so if you reduced the entire liability except for timing, you're talking of a number about $250 million or so that would be left that's all timing related.

So can't say whether we'd get to all of of them. Probably shouldn't assume we'll do every single one. We're still looking at them, manage them economically when we can terminate leases and all the taxes due but that's about the rough map.

And just as you seen my follow-up question, did that have an effect on the tax rate in the quarter? I noticed it was 4 percentage points over last year. What is your full year tax rate expectations.

It has a slight impact in increasing the tax rate for the quarter because the lease terminations have some particular state tax results that are a little different from the ongoing business. So I would consider that bump in the tax rate for this quarter as related to the terminations and while not giving specific tax rate guidance, I would see more like we had in the first tax rate quarter.

Your next question comes from the line of Greg Gorden from Morgan Stanley.

Thanks everyone. Still getting used to that new name, but when I look at slide 24 at the revised capital spending numbers and we look at the makeup of that coming from Stimulus Energy Efficiency and Solar 4 All, are these items all being accounted for in terms of the ultimate ability to generate revenue and earnings for mechanisms outside the formal rate-making mechanisms? Are they all in riders and trackers so we can assume that you'll earn on them at a reasonable return without having to have the classic regulatory lag?

Yes, Greg that was a condition precedent with our regulators in a formula rate type structure.

Great. So what is the formula in the formula, what's the equity ratio and the return on equity?

The way it works right now, is they get a 10% return on equity with a 47% equity ratio. Those numbers will be adjusted to whatever comes out of the base rate case, which we have filed. However, the contemporaneous nature of it will not be changed.

So are the adjustments to rates made quarterly? Semi annually?

So what happens is we forecast the spend going forward.

Okay.

Then we get a rate adjustment prospectively for that and we true up at the end of the year.

Great. Thank you very much.

You're welcome.

And your next question comes from the line of David Frank with Catapult.

Good morning, David.

Hi. Can you guys hear me?

Did you just have an earthquake?

No, I was trying to take off my head set and usually the phone takes off when I do that. But it didn't. I want to ask you, did you participate in win load in Peco's auction?

We have participated in Peco's auction. We actually participate in a number of those type of transactions either block or full requirement and we did win a few and we're pleased with that. That's parted of the ongoing activities of our resource and trade group.

Okay. So were you a winner in the Peco auction.

Yes, we did win some.

I was told there were only two winners, Peco and one other party.

We can't comment on that.

We don't know that. We're one of the them.

Okay. I think you're one of the two.

We don't know.

This brings up an interesting point because.

Where do you get your information from?

Well, that came from someone at Excelon. They were curious who the other party was and I figured you were one of two picks. Okay. On these auctions, I heard talk about auctions earlier today and I was talking to reliant about them recently and a few parties, and I guess the impression I'm being given is when you participate in an auction in your service territory or where the generation is incumbent to serving that load you realize really fantastic margins even if power prices or moving down and risk spreads are declining. Whether you start getting into other regions, the impression I was given now is that when you factor in the costs of transmitting the power and maybe buying some of the costs related to serving that load, that the margins have been bid down to almost, well, very nominal amounts versus what the around the clock price in those regions are. I don't know if you had any comments on this, is this accurate? Are you seeing a trend?

I wouldn't agree with that characterization as the cause for margin differences, David. What I think is a primary cause behind one company or another having a better or not as good margin is the asset mix. And whether or not the product is a full requirement product or whether it's a block product. And there's risk associated with only having a slice of the asset mix required to meet the full requirements of the customer.

And to the extent that one has to split the baby or split the pie with others when you don't have that asset mix, the question is how much the margin is yours how much is shared, how much risk do you have to take in relying on somebody else's operation. How much risk do you have not controlling the assets and may eat into all the margin you accumulated in the prior 364 days and so forth. So what you tend to see is that those companies with a comprehensive asset mix along a dispatch curve are well-positioned in those markets. Where they don't and rely on others, the margins get thinner.

I guess suffice to say when you're bidding on load outside your region, have you seen a decline in margins versus what you were able to get in auctions maybe a year or two ago.

Versus year -- I don't think that's true. In fact, the margins can if anything have gone up. Look at what the cost of credit is. Look at the risk associated, look at the risk premiums that the capital markets are applying in a whole host of areas, so I would say quite the opposite. Now, if your question is are your margins stronger in places where you have assets you don't, the answer to that is yes. but I don't see -- given an identical asset mix and given location, margins are probably increased over the past few years rather than gone down.

Okay. So you guys are the first person I've heard say that on in this issue, but I guess maybe we can do a bit of a dive off the call.

Sure.

Thanks, Ralph. I appreciate the insight.

And your next question comes from the line of [Ashai Tahan] with Incremental.

Going forward as you look at energy holding, should we go back to kind of the lower guidance because these lease income gains are no longer going to be repeatable? I'm trying to get a sense as I look at this for next year and the year after.

So we haven't given any guidance for after this year, but you're correct that the increase that we've put in this guidance is reflective, significantly of the lease gains on our ongoing efforts to reduce the portfolio.

Keep in mind, though, that we're assuming we're terminating all the lease and we still will have lease income from probably some of these leases and the rest of the lease portfolio and energy holdings other assets from Texas and some of the renewable. So it's too early to give any guidance for '10 but holdings are not just the leverage lease.

As we look forward to the earnings potential of these leases and we pull that into the current year, we only do that when we think we can pull forward a greater economic value than would otherwise be there.

I just look at running up a life of the lease and generating earnings that way, as well as, selling the leases and generating earnings that way as a prudent management of these assets, and so whether it's earnings by sale or earnings by running them out, that's -- that's to me just whatever, you know, we can do on behalf of the shareholder that maximizes their value. Plus I think from the repricing of the leases, they weren't contributing much to earnings this year.

No, no.

As a matter of fact, I think they were producing a loss this year if I'm not mistaken.

Okay. Well, that was my next question. What is the lease income left over from the remaining leases?

It's a very small number because as you may recall last year, not only do we take the reserve to bring the leases in line with the expectations with the IRS, we also look at a very much reduced rate on on ongoing basis. So in terms of the year over year impact that was a negative impact but we actually will be booking, it's a very small number.

Then if I could shift into the higher CapEx guidance, previously used to have an excess cash, does this higher CapEx now take care of all that excess cash that was to be kind of a -- what to do with all that excess cash. I'm trying to get a sense of does this fully fund itself enter that block you had in your previous presentations?

No. I'm glad you asked that question. So just to repeat as we said on the summary of our financial position, we closed the quarter with almost $400 million in cash and when we look at the capital expenditures that we have here, both for the utility, the new ones that we mentioned as well as the ongoing base level of CapEx, which by the way includes transmission which obviously gets a significant return, and Power's CapEx. We look at this from the perspective of being able to fund it with the combination of internally generated cash but also appropriate access to the capital markets.

And when we lock out, just sort of speaking in broad terms, we see our ability to do that from both sources, while still keeping a tight balance sheet while keeping overall debt to capital ratios and absolutely not needing any equity. So I think this is within our balance sheet and access to capital markets means but not precluding us from doing the things we need to do and certainly not issuing.

And if I can just end up with the -- just to Greg's question, the higher CapEx in '10, will that, the amount that is higher, will that translate into earnings for that year or does the you true-up happen -- I wasn't understood it properly. Will the true-up happen at the end of the year or higher CapEx will show up in earnings in '10.

No. No, the prospective rate, as we file the case and as we get approval, the earnings actually show up in '10. So we --

So, the higher CapEx that you're doing for solar and energy efficiency and all those things in '10?

Correct.

Will those earnings show up had in 2010 for those items or in 2011?.

2010 for those items. The requirement on us is that we monthly confirm with the Board of Public Utilities. In fact, we've made those capital investments, so as long as we stay on the schedule we give the Board of Public Utilities, then the prospective rate making produces a 10% ROE on 47% of the investment.

We can do that 47 times ten on those investments and those will be additional earnings in '10.

That's the rule of thumb.

Add a point about that as you think of the capital and total, in the 20 -- highlight what's new. There's significant capital within that say that 1.1 billion in 2010 that is transmission related. That also provides current return on a similar basis, so about -- about 490 million of that 1.1 billion is transmission related and that operates in a similar manner to what Ralph just described for the newer additions and the kind of returns we get on the transmission are in the 11 to 12% range. So think of that when you think of the capital as well.

Okay. Thank you very much.

Your next question comes from the line of Paul Patterson with Green Rock Associates.

Good morning.

Good morning.

Not to ask too many questions about the leases, it looks to me like you guys increased your numbers based on not only what you guys have recognized already but what you might recognize in the future. And I guess I'm sort of backing into it, I might have done the math wrong but $0.05 per share additional lease sales this year?

No. So --

Going from zero to 20, 40 to 65 and it would seem to me that about -- I don't know, that the difference between 40 and 65 seems to be your 25, which would be about $0.05 a share. I would guess, correct?

Well, in terms of the leases that we already terminated this quarter, as we said those leases contributed $0.05 per share on the quarter. Of course that's wrapped into your full year guidance.

Right, but $0.07 for the first six months, correct.

That's correct.

Okay. So there's the potential for you to do more. I guess whether I'm trying to get a figure more, what is the potential additional benefit you might -- you're projecting in your numbers for lease sales?

I think it's -- we shouldn't project that or forecast it and if you think about it, we really can't because it relates to our ability to negotiate with the counter parties and terminate the lease and while we intend to continue to do that because of the favorable results we've had thus far. We do have criteria for doing that, and that includes that they be economic transactions.

We're not giving these away . They meet the kinds of things like enabling us to meet the liability with the IRS primarily funded through the counter party. So I think we're not going to get interest that detail except to say yes, we're trying to do more of this. This is a good way to manage our risk but beyond that, I don't want to speculate at

Okay.

Paul, I don't think you can simply say the difference between zero and 20 and 40 to 65 is all leases or that we're going to be doing a lot more. We've got 36 -- if you take the difference between zero and 20, let's say we were going to earn ten combination, which is Texas and other assets, from leases in there perhaps a loss on an operating side but we've booked 36 million in gains from the first half from that ten gets us to 46. So between that and you know, normal operations in Texas maybe we've got there. I don't think we want you to lead you to think there's a chunk more of gains, even though we're working hard to secure that reduction in tax liability.

Okay. Great. In terms of like just to sort of understand this, what is the impact, is there any impact other than the potential absence of having these gains in future years? I mean, does it -- if you're -- if you're doing these transactions, does that impact 2010's earnings in any material way?

So keep in mind and you're right to ask the question, if we terminated the leases then we no longer have lease income in future years but remember when we took the reserve last year in the second quarter, not only did we take a step up in the reserve, we significantly reduced to really minimal levels the amount we're actually booking for leases. So it's not a big number in terms of going forward into 2010 for the leases that we terminated.

But yes, what we're doing in recognizing the gains this quarter, we're accelerating those -- that operating earnings in the quarter by the termination. But we haven't broken out. We haven't guided for '10 but that's generally the right way to think about it. But remember it's at a very reduced rate for the P&L.

The coal, low coal burn, you mentioned you've got higher priced coal and lower priced coal. I'm wondering, it would seem to me and clarify this if I'm wrong, but it would seem to me if you're burning less coal, you're increase stock pile of coal. What I'm wondering is, is what kind of coal is being stocked piled, assuming that I'm right, if there's more coal being stock piled or more to be delivered in 2010 or to be burned in 2010, is that the higher prices coal or lower priced coal.

It's a combination of met coal and adareo coal that we are stock piling and you are correct, Paul, to assume we are stock piling coal. It's important to know we have flexibility in our higher priced coal, the adareo coal to turn back coal and we have turned back coal. That comes at a modest cost but nonetheless, we do the. To answer Dan's question, the market price comes down we don't worry about the fixed cost, we worry about the market cost and we would operate those coal plants if we get a decent market rate relative to goods. The issue here has been the rate at which gas has been trading. So we are stock piling. We have the ability to turn some of the coal back and we carefully monitor the difference the market price of those two fuels as we dispatch on a day-to-day basis.

In other words, is there any potential impact on EPS in 2010 as a result of this.

No, not in 2010.

Thanks a lot guys.

And your next question comes from the line of Andrew Levy with Incremental Capital.

Most of my questions were asked. I'm just trying to figure out the thinking on including the lease gains in operating earnings for guidance, just explain that?

Sure. So we think about the leases that we have in our portfolio, we're in the leasing business and as we -- within holdings, of course and it is a part of our operating earnings as we earn out over these leases. So the way I think about this is is a reflection of accelerating what might have been otherwise operating earnings over a very long period of time. It is part of the holdings business. So I wouldn't take it out because it is effectivity operating earnings but recognized at a different point in time.

I don't know if I'd agree with that. But just as you get in this going what Paul said, I would assume we'd have to back out these earnings in the 2010? I understand that you have other ways to make it up. But just want to understand that, we should be backing out those earnings?

I wouldn't -- I would caution you against thinking about backing out this in 2010. These are very long leases that we are accelerating by the termination now.

Right. But we're not going to see the actual dollars in 2010. We've seen them all in 2009. Is that correct?

You've seen the dollars in 2009 that you would have otherwise seen over many years.

And I understand that. But I'm just saying as far as thinking about 2010.

Yes. That's correct. But it's a small number and it's not a significant number for 2010.

Right. Did you say maybe I missed it, that you increase your reserve by 120 million; is that correct?

No. We -- you may be thinking about the fact we increased or deposits with the IRS.

Increased deposit.

Right and what that does is reduces the rate of accruing interest. So it's favorable from a basis.

I just misheard. Thank you very much.

And your next question comes from the line of Mark Siegle with Cancord Adams.

Good morning. I was wondering if you could talk a bit more about initiatives comprising the energy efficiency program. What are the major pillars of the 166 million capital spent.

Sure, Mark, these are primarily low tech programs. We're talking about weatherization, and lighting programs. We have been trying to direct them more towards the lower income urban communities of the state, and they're distributed among residential and small commercial customers largely.

And anything planned for smart grid or smart metering specifically?

We have some work in progress in the sub transmission level for what we call advanced loop design, as you well know, smart group has ten definitions for every five people you ask the question of. So we tend not to act on smart grid in terms of smart meters or two-way communications but look at ways to improving our overall network and advanced loop allow us to minimize the impact of storms and outages for customers should one come through and it allows to sectionalize the circuits with precision. It's a great reliability tool that we have applied on one circuit with tremendous success and we are looking to do more of that.

Thanks for the.

Your next question comes from Michael Worms with BMO.

I have a question regarding the solar project and if I calculate the number correctly it comes out to about $6400 per megawatt, which comes close to a nuclear plant. What kind of capacity are you expecting from the solar project?

Michael, it's about 10 to 12% capacity.

Your next question comes from the line of Danielle Seet.

Thank you. Do you have any specific plans for operating and maintenance expenses especially over the longer term, and also the reduction in refueling schedule in the second quarter, is it caught up in the fourth quarter?

I'll answer on the operating and maintenance just to start off. So keep in mind that we said earlier this year that we would manage operating and maintenance expense to be at a low level close to a flat level excluding pension expense. And we've been able to do that in all of our businesses year to date, so both businesses excluding our core businesses, power and utility, excluding pension expense are flat to down and that's certainly the kinds of things we certainly look to target. We're very focused on managing it just the way we've been managing it year to year.

Danielle, hopefully we didn't miscommunicate. We have not changed our refueling program at all. The plans come up every 18 months. What we tried to discuss before was last year Salem 2 had an extended refueling outage because of a steam generator replacement and this year or wholly owned had a refueling outage which it did in his fastest ever time. When you look at that time the relative size of Hope Creek to Salem and you look at the relative duration of the outages and our ownership position, you get this slightly different effect quarter to quarter for refueling but there's been no change in our plans for refueling nor have we delayed anything with the nuclear plants.

No, I was just thinking that sometimes the 18 months for more favorably in the second quarter or the fourth quarter and that was the only reason I was asking the question.

We have a outage coming up the the fourth quarter of this year as well as the Peach Bottom 3. We'll run the Salem outage and we're back on the regular schedule. I'm guessing next spring it will be Salem 1 and next fall will be Hope Creek and I won't take you out further than that.

Thank you very much.

Your last question comes from the line of Nathan Judge at Atlantic Equities.

Just had a follow-up question. When you think of the renewable opportunity in New Jersey, given that the utility now seems to have the kind of cat bird seat as far as putting in renewable energy, how do you view power participating in the renewable energy space, excuse me, and when you look at Rex, will there if indeed a bill gets passed in the senate, will there be enough Rex produced from what the utility can produce in order to satisfy the needs for Rex in the state.

So Nathan, just sort of we're clear, the utility program will satisfy 4% of the solar component of the renewable portfolio standard in New Jersey. So the state I believe at the risk of speaking for policy makers are still eager to see a vibrant, competitive marketplace in renewables and particularly from solar just given the constraints from a land perspective of onshore wind in our state. It is just very difficult given the density of our population to site onshore winds. Having said that, the state has really directed to us make these solar investments in underserved markets which is why you see us doing it on utilities poles, on our own land, on HMFA financed housing, on some of the municipal urban enterprised zones locations. So they're really trying to get us to deploy our capital in a way that gets the market going. So part of the project that we just announced will result in a local manufacturer hiring a hundred people with their inverted technology which is essential for some of these small distributed facilities. So I think the why you see a prominent role for the utility is you recognize it's not competitive. At current the way in which energy prices are structured today with the absence of externalities excluded, solar would never get built. So if you have to deliver a subsidy for solar to get built, whether that subsidy is in the form of a grant, the regulators will properly identify the fact that the utility is the least cost method for delivering that subsidy. Even having said that, is still leaving the place for competitors on the backs of these subsidies in the forms of continue to play. I think over the long-term if technology delivers on its promises you'll see utilities back out of this. Power is not active in the renewables market right not. The only renewables we have is offshore winds but has the prospect of being more competitive than solar. Although, that's got a huge error bar of uncertainty around it at this time.

Just as a follow-up question, if indeed in the competitive costs of solar doesn't fall and you are indeed needing to add more solar to the grid, as they say, I guess one of two things would happen, either the the utility would step up or SREC would rise significantly. Do you have appetite to put on high-cost rate based shall we say or said differently, through the cost of SREC have to rise considerably in order to make them competitive and that would, therefore, bode for higher PGS prices?

I would argue that the smarter way to do through the utility. What happened the -- we're in both businesses, we're in both of utility and part of the holdings doing it as a competitive business outside the utility area. You need an SREC price that is at today the market and lock it in for eight to ten years and that's tough to sign on to when the develop -- when the panel manufactures are telling you the price is going to drop 50% in five years, why would anybody do that. So the discount rate that people apply to SREC price is enormous. That all gets passed on to the customer.

The alternative is turn to the utility and say whatever the SREC is, that benefit will flow back to customers. Whatever the market price for power is, that benefit will flow back to customers. You the utility, as is the case here, we will get paid whether it's a circuit breaker or mile of copper wire, put that panel in place, tell me what it costs, finance it with half debt, half equity and here is your return.

So the cost for the capital projects is lower, the risk associated with the subsidy, if you will, is lower, and if society, we don't make public policy but if society decides that all of the benefits associated with solar and there are many, I won't list them all here are worth the extra cost, I think that extra cost will be less, if done in the utility. That seems to be agreed to by our state regulators right now.

Thank you.

You're welcome.

Thank you operator, I think he we'll conclude the call at this time but if there are folks who continue to have questions or if not now, later, please feel fee to call Investors Relations at PSE&G. The main number is 973-430-6565. Thank you.

This concludes today's conference. You may disconnect.