公共服務電力與天然氣 (PEG) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Angela and I am your event operator today. I would like to welcome everyone to today's conference, Public Service Enterprise Group third quarter earnings conference call and webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session for members of the financial community. (Operator Instructions).

As a reminder, this conference is being recorded, Wednesday, October 28, 2009, and will be available for telephone replay beginning at 1 p.m. eastern today, until eleven-fifty nine p.m. eastern on November 6, 2009. It will also be available as an audio web cast on PSEG's corporate Web site at www.PSEG.com.

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

Thank you, operator. Thank you, Angela. Good morning, everyone. Thank you for participating in our call this morning. As you are aware, we released our third quarter 2009 earnings earlier today. The release and attachments are posted on our Web site, as mentioned, 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, 2009, is expected to be filed in the next few days.

I'm not going to read the full disclaimer statement for the comments we have on the difference between operating earnings and GAAP results, but I do ask that you read those comments contained in our slides and on our Web site. The 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, 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. 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. Ralph is participating in the call today from our DC office. He is scheduled to testify later today before the Senate Environment and Public Works Committee On Climate Change Legislation. Joining Ralph on the call is Caroline Dorsa, Executive Vice President and Chief Financial Officer. At the conclusion of their remark, there will be time for your questions. We do ask that you do limit yourself to one question and one follow-up.

Thank you. I will now turn the call over to Ralph.

Thank you, Kathleen. And thank you, everyone, for joining us today, on this call. Earlier this morning, we did report operating earnings for the third quarter of 2009 of $0.92 per share, versus operating earnings of $0.94 per share reported during the year-ago period. Our operating results both in the current and prior year exclude the impact on earnings from any change in the value of our nuclear decommissioning trust, as well as mark-to-market accounting related adjustments. Including both of these would yield income from continuing operations of $0.96 per share for the third quarter of 2009, compared to $0.94 per share earned last year.

Now, at the risk of stating the obvious, operating conditions in the third quarter were quite challenging. A weak economy and cooler-than-normal weather conditions reduced the demand for energy and resulted in lower power prices. The effect on our results was largely offset by strong performance from our nuclear fleet, and lower fuel costs. The dispatch flexibility of our generating portfolio continued to be evident during the quarter, as generation from our combined cycle gas fleet displaced higher cost coal.

Results also benefited from the efforts of our work force to control costs while maintaining reliability. In fact, I'm pleased to say that PSE&G, our regulated utility, has won the National Reliability One award for 2009. The fourth year in the past five years that PSE&G has been honored for the quality of its service. Also during the quarter, we continued to sharpen the business focus of PSEG Energy Holdings. We successfully terminated an additional three leases in our cross-border leverage lease portfolio. Since December of 2008, we have terminated 11 of 18 cross-border leases. These terminations have reduced the tax risk we face by $525 million. We consider a recent court decision in favor of another taxpayer with a similar lease portfolio a positive development in the ongoing management of our lease exposure.

Further improvement in business focus was achieved by Holdings transferring its 2,000-megawatts of gas fired generating assets in Texas to PSEG power. This was effective October 1. The transfer followed the successful exchange of power debt for holdings debt, which took place in the third quarter. Power has been the operator of these units and now will have financial control of the portfolio. PSEG Energy Holdings' business plan will emphasize the investment potential for renewable energy. We will be investing $100 million in solar, working to develop a 350-megawatt wind farm off the coast of southern New Jersey, and promoting compressed air energy storage to improve the generating efficiency of existing fossil stations.

PSE&G has started to deploy capital associated with the $1.4 billion of energy programs approved by the state of New Jersey earlier this year. You may recall these programs were designed to reduce carbon and create jobs through the delivery of energy efficiency benefits to our customers, the installation of 80-megawatts of solar generation, and improvements in our energy delivery infrastructure. These investments, in addition to other corporate-wide efforts, will help PSEG meet a new carbon reduction target.

We intend to reduce our 2005 carbon footprint 25% by 2025. We have met and exceeded aggressive targets we set for ourselves in the past. While this target is technically achievable, it will require support of public policy to be economically feasible for our customers and our shareholders. PSEG's commitment to a low carbon business strategy has greatly enhanced our credibility as active participants in the debate at the national level, as Congress considers action on bills that could reshape the nation's approach to energy policy. It is important to get these rules right. An established climate change policy at the national level with clear objectives would provide the blueprint we and others need to make disciplined investments.

I can assure you that we are working hard to create value for our shareholders. We're focusing on programs to improve operating efficiency, taking advantage of opportunities in full requirement auctions within PGM that offer premium pricing to the market. We're increasing our capital investment in areas that provide good risk-adjusted returns, and we are focused on maintaining our capital strength. We're maintaining our 2009 earnings guidance of $3.00 to $3.25 per share. However, as you may recall from our second quarter earnings call, and as borne out in our third quarter earnings, the decline in demand experienced thus far will further challenge our ability to meet the upper end of that range.

I am now pleased to turn the call over to Caroline Dorsa who will discuss the quarter in greater detail.

Thank you, Ralph. And good morning. Good morning, everyone.

As Ralph just said, PSEG reported third quarter 2009 operating earnings of $0.92 per share, versus $0.94 per share in last year's third quarter. Just to remind you, our operating earnings exclude the impact of any changes in value of our NDT investments and obligations as well as other charges related to decommissioning, and any changes in the value of any transactions that don't qualify for hedge accounting, i.e, they're mark-to-market. The prior year number has also been adjusted to be 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 10, PSEG power provides the largest contributions to earnings. Power reported operating earnings of $0.67 per share, compared with $0.71 per share last year. PSE&G reported operating earnings of $0.17 per share, compared to $0.19 per share last year. PSEG Energy Holdings reported operating earnings of $0.04 per share, compared with $0.05 per share a year ago. The parent company reported earnings of $0.04 per share, compared with a loss of $0.01 per share a year ago.

We provided you with a water fall chart on slide 12 that takes you through the net changes and quarter over quarter operating results by major business. But let me now review each company in more detail. Starting with PSEG Power. As shown on slide 14, PSEG power reported operating earnings for the third quarter of $0.67 per share, compared with $0.71 per share a year ago. The operating environment in the quarter was very challenging given the weak economy, abnormally cool weather, which you will recall we commented on in our second quarter earnings call, and low power prices.

As a result, Power's results in the third quarter were hurt by an overall decline in demand which reduced year-over-year earnings by an estimated $0.08 per share. Results were also hurt by a migration of customers away from the BGS full requirements contract in a period of very low commodity pricing. We estimate customer migration reduced earnings by about $0.04 per share. The decline in pricing was partially offset by reduced costs associated with an increase in production from our nuclear fleet, as well as a decline in the cost of gas. A decline in cost to serve on lower production benefited year-over-year earnings by $0.05 per share. A decline in operating and maintenance expense improved earnings comparisons by $0.03 per share in the quarter, and the results in the quarter were also aided by a decline in financing costs of $0.01 a share.

As you can see on page 16, generation declined by 10% in the quarter. The decline in production occurred at our fossil facility. Our nuclear fleet operated at a capacity factor of 94.6% during the third quarter, bringing the capacity factor for the nine months ended September 30 to 93.8%, which compares favorably to the 93.1% for the first nine months of 2008.

Salem 2 completed a 515-day run, before entering a refueling outage earlier this month, a record for the station. The increase in production from nuclear, coupled with the decline in production from our fossil fleet, especially coal, as you can see on page 16, resulted in nuclear generation declining about 56% of Power's generation in the third quarter, compared with 49% in the year-ago quarter. Low prices and a decline in the cost of gas resulted in displacement of coal-fired generation by our combined cycle fleet, with similar results as second quarter.

Our inventory of coal has increased given the decline in production from our coal-fired facilities. We are taking advantage of the flexibility built into our coal contract to reduce coal shipments that we don't require over the near intermediate term. During the quarter, we incurred approximately $16 million of expense to cancel whole shipments, which we felt was the right decision considering all-in economics, which we always do. The improvement in power prices in past month have supported the operation of our coal-fired facilities. Our current supply of coal, as well as the completion of back-end technology work at Mercer and Hudson will provide us with added flexibility regarding our coal supply beyond 2010.

As you saw in the second quarter, our gross margin per megawatt hour of production increased during the quarter, this quarter to $64 per megawatt hour, from $61 per megawatt hour in last year's third quarter. The increase is the result of higher levels of nuclear generation. An increase in nuclear as a percent of total generation, as well as the lower cost of gas. These factors, together with recontracting of the fleet, allowed the generating assets located within the PJM market to maintain their contribution to Power's total dollar gross margin on a year-over-year basis, fully offsetting the impact on income from decline in demand and customer migration.

The contribution from the New England assets declined year-over-year as a result of high cost of coal and low pricing, and a decline in spark spreads more than offset an increase in production from the gas-fired facilities in New York. On the contracting side, we have been active participants in full requirement auctions that have taken place in surrounding markets within PJM. These auctions have allowed us to secure contracts at attractive margins. The markets we believe have gone through an evolution in the pricing of load products. Risk is more appropriately priced into the market today than in the past. Pricing reflects capital risks as well as the risks associated with time, volume, and product. It is not just credit risk.

Our base load production is fully hedged for the remainder of this year. Approximately 80 to 90% of our base load coal and nuclear production is hedged for 2010, and about 45 to 50% of 2011's production was hedged. This is in keeping with our normal practice of hedging our product over a three-year period. Power's gross margins for the full year are benefiting from higher contracted prices, a decline in fuel cost, and stronger performance from the nuclear fleet than originally forecast. Based on performance of the nuclear fleet during the first nine months of the year, we estimate the fleet's full-year capacity factor could advance to 92 to 93%, versus the forecasted capacity factor of 91 to 92%, and similar to 2008's capacity factor of 92.6%.

The improvement in the gross margin rate, as well as tight control of Power's operating expenses is expected to offset a forecasted decline in fossil generation for the full year. Power's O&M declined 9.6% during the third quarter, and 1.5% for the nine months ended September 30, despite an increase in pension expense. The reduction in O&M for the quarter reflects the absence of maintenance work on Hudson in the prior year third quarter. We expect power to continue ongoing expense control. We are maintaining our forecast of Power's full-year operating earnings of $1.170 billion to $1.245 billion. It is important to note that Power's operating results will include the full-year earnings impact of the fourth quarter transfer of the 2,000-megawatt gas-fired assets in Texas from Holdings To Power, as well as interest expense in the fourth quarter, associated with the newly-issued debt resulting from the exchange of Holding's debt.

Now let me turn to the other operating companies. Next, PSE&G. PSE&G reported operating earnings for the third quarter of 2009 of $0.17 per share, compared with $0.19 per share for the third quarter of 2008, as shown on slide 21. Electric revenue declined during the quarter by $0.02 per share. The decline was caused primarily by abnormally cool weather conditions and economic conditions.

Slide 23 lays out the difference in the number of hours where the average temperature was equal to or greater than 90 degrees in 2009. And as you can see, there were 66% fewer hours over 90 degrees versus normal conditions, and less than half the rate of last year. As you can see, and as you know, if you live here, this was far from a normal summer. The results for the quarter benefited from an increase in transmission revenues, effective on October 1, 2008, of $0.02 per share. This was offset by higher depreciation on increased levels of investment, and an increase in O&M and lower taxes, which together reduced earnings by $0.02 per share.

Electric sales declined 4.5% in the quarter, with sales to the residential sector declining 7.5%. On a weather normalized basis, we estimate residential electric sales declined by .9%. The results for the quarter and year to date continue to support a forecast decline in weather normalized electric sales of 1.5 to 2% for the full year. However, we expect the decline in sales for the full year to be at the upper end of that range.

PSE&G continues to demonstrate control of its operating expenses, excluding an increase in pension expense, and expenses associated with regulatory clause, which as you know are recovered in revenue, operating and maintenance expenses, the items that are controllable, were flat year-over-year, during the quarter. PSE&G earned an 8.6% return on average consolidated equity for the 12-month period ended September 30, 2009. The return earned on equity invested in the electric transmission business exceeded 11%, and the return earned on PSE&G's electric and gas distribution businesses is lower than the level authorized in our last gas rate proceeding and less than the 10.3% overall rate earned in 2008.

PSE&G has updated its May 2009 base rate case request with the New Jersey Board of Public Utilities on September 25, to reflect six months of actual results and six months of forecast results with 2009 as the test year. The filing currently reflects an increase in electric and gas revenues, totaling $22 million, over the original $231 million request. The rate case request will be adjusted in 2010, to reflect actual results for the 12 months ended December 31, of this year. The current schedule will provide for a decision in the first half of 2010. Rate council and other participants in the proceedings are expected to file their response to our request on November 19.

Keep in mind we receive immediate recovery of our transmission investments and costs through our FERC-approved transmission formula rate. In accordance with our formula rate protocols, we filed our 2010 annual formula rate update with FERC in October. The update provides for an increase in our 2010 transmission rates of approximately $24 million, and would be effective on January 1. We also anticipate the decision from the BPU on our portion of the Susquehanna to Roseland 750KB transmission line in early 2010. We are maintaining our forecast of PSE&G's 2009 operating earnings at $315 million to $335 million. The forecast continues to reflect an increase in pension expense for the full year, as well as higher levels of depreciation expense.

Let me now turn to Energy Holdings. PSEG Energy Holdings reported operating earnings of $0.04 per share, versus operating earnings of $0.05 per share during the third quarter of 2008. Holdings' quarterly earnings comparisons were affected by several items. The operating profit from the generating capacity in Texas declined by $0.02 per share. Although production levels were normal, a decline in energy prices in comparison to very strong prices in the year-ago period was the primary reason for the reduction in operating earnings. Lower pricing more than offset a reduction in operating and maintenance expense, in the absence of financing cost, following the redemption of the Texas project debt, which you will recall we mentioned earlier this year.

Earnings comparisons were aided by the recognition of gains on the successful termination of three cross-border leases in the quarter which Ralph mentioned earlier for $0.03 per share. Total proceeds for the sales were approximately $225 million in the quarter. Results were also improved by a reduction in operation and maintenance expenses and a lower tax rate for about $0.02 per share. During the quarter, 74% of the aggregate principal amount of energy holdings 8.5% senior notes due in 2011, for $368 million, were exchanged for 404 million of combined cash and newly-issued notes from PSEG power. The $20 million premium after tax was expensed against holdings third quarter operating earnings, for an impact of $0.04 per share.

Since December of 2008, we have terminated 11 of our cross-border leases, reducing our cash tax liability, by approximately $525 million, from a potential liability of $1.3 billion. We mentioned that our net potential tax liability was reduced to $950 million at the end of the second quarter, with the three leases terminated during this quarter, our net tax liability stands at $780 million. We believe, as we have stated, that our terminations are economically advantageous to our shareholders, as the total amount of the liability reduction is funded with cash received from the counterparties. In addition, we still have $320 million on deposit with the IRS. As Ralph has indicated, we consider the recent court decision in favor of another taxpayer with a similar lease portfolio to be a positive development in the ongoing management of our lease exposure.

Effective October first of this year, Holdings transferred the Texas gas-fired assets to Power, and the transfer will result in the movement of operating earnings associated with the Texas generating assets from Holdings to Power for the full year. As a result, we are reducing our forecast of Holdings' operating income for 2009 to 25 to $45 million, from 40 to $65 million, to reflect the debt premium, and the transfer of Texas assets on a full-year basis. Please note that the premium charged against Holdings' full year operating earnings is reversed at the parent level as this transaction was in fact between two wholly-owned subsidiaries. This accounts for the forecast improvement in the full-year results at the parent level, as you see on slide 30.

To comment on earnings guidance, we're maintaining our full-year 2009 earnings guidance of $3.00 to $3.25 per share. Slide 30 provides a review of operating earnings guidance by subsidiary for the full year, and incorporates the changes associated with the asset transfer from Holdings to Power, and the debt exchange. As Ralph has indicated, the difficulties encountered in the third quarter increase the challenge to meet the upper end of our guidance. Finally, let me make just a few comments on our financial profile. We have been very active in the past quarter, and throughout the year. Our financing activity has reduced our overall cost of debt, and simplified our balance sheet.

We have redeemed $200 million of debt at the parent company level in the quarter, leaving only $49 million at the parent, which will be redeemed by year end. We exchanged expensive paper Holdings for Power, debt and cash, and we continued to reduce our potential lease-related tax liability with the proceeds from the termination of leases. The use of cash for debt reduction, lowered our cash balance at the end of the quarter to $130 million from $393 million at mid year. Our balance sheet has been strengthened. The simple calculation of long-term debt to total capitalization has been reduced to 45% from 50% at year-end 2008, our tax liability is lower than previously forecast, and our internal cash position remains strong.

We're now happy to take your questions, and at this point, I'll turn it back over to Kathleen to discuss the process for our Q&A. Kathleen?

Thank you, Caroline. I would like to remind all of you that we ask that you ask us one question and one follow-up, and if you have further questions, to get back in the queue. Also, given, with this call, given the fact that Ralph is in DC, and the rest of the team is here in New Jersey, we ask that you direct the questions to Caroline, not that Ralph is unavailable to answer them, but that we will act as referee here from New Jersey in terms of getting your questions answered. Thanks. Operator, if you can queue up the first question.

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. Your first question comes from Dan Eggers from Credit Suisse.

Good morning. Caroline, I was wondering if you could talk a little bit to the migration of customers comment you made. First of all, assume that means customer shopping. And then second, the $0.04 impact in the quarter. Can you talk about kind of how that has been trending this year, and what you guys are doing to respectively combat that customer migration trend?

Thanks, Dan. Thanks for the question. Yes, so relative to migration, this is a relatively new phenomenon, and while we've been watching it, obviously it has been something that has really become material in this last quarter. And I think there is something to keep in mind that can help explain this. What you have happen this particular summer, we had particularly low pricing, as you know, and we also had particularly cool weather, which depressed pricing overall, so you have the commodity price and then the weather-related impact on pricing. And of course, in BGS, which we are seeing the migration from, you have, as I'm sure you know, a premium price that goes on BGS for the summer. So because of the disparity on the commodity levels and the impact on pricing from the reduced demand relative to the pricing of the BGS which had a premium for the summer, that is really what caused or provided that head room, or that differential that resulted in the kind of migration that we saw.

I point that out because I think it is important to keep that in mind as we think about migration on a go-forward basis. Those were particularly unusual conditions, the cool weather, the low commodity pricing, the low power pricing, with the BGS price that led to that margin and that gap. If you look at where prices are now, for example, in the market, relative to where they were in the summer and you look at the forward curves, you don't see that kind of pricing and of course, you no longer have the BGS differential, so I think that coming from those sort of historic differentials, to something that is becoming more normal each now, even though it is not like that historically, you should factor that into your thinking and certainly we do, as we think about migration going forward. It was particularly unusual period in this summer. And I don't think we should think of it as a go-forward equivalent rate.

I guess there is the question that amount of load that has gone, are those customers coming back now that the free lunch over the summer is gone, or are they staying gone at this point in time to the point we should assume some of that, the forward hedge as you talked about today is not as solid of a forward hedge as we otherwise would have thought.

Right. So customers who have gone can come back at any time that they want to come back, but keep in mind, as those customers leave, and they get served by others, we're still generating the power, so we could be serving some of those customers through our sales of power in the open market, and to some of the retailers we can reveal. And keep in mind as the prices come back, as they have since the summer, we will capture those higher prices as we serve those customers, whether it is in the market or when they come back to BGS. So we have the opportunity to essentially touch the customers with our power through a different channel, not just through BGS, so you shouldn't assume that complete margin is lost to us on a go-forward basis, because we get that back as we serve them in the market, or if they come back to BGS, and as the prices come back, as we've seen them come back, that differential becomes smaller. And of course our hedges fully reflect migration.

And I don't mean to break Kathleen's rule but are you guys doing anything to try to draw those customers back or try and protect the BGS share given your stake in the auctions, it is hard to really try to compete them back?

So from the BGS perspective, of course there is nothing that we do particularly. Those customers can leave. Those customers can come back. But I think the way to think about it is you really need to think about your forward expectations for pricing relative to BGS pricing, how big you think that different shall will be, and then how we will capture that margin either through BGS or through the marketplace. Again, we don't directly touch retail customers, as you well know. But as those differentials become narrower in the future, which is what the forward curves predict, I would encourage you to think about that as you think about how much migration impact we could see in the future.

Okay. Thank you.

Your next question comes from Greg Gordon from Morgan Stanley.

Thank you. Good morning.

Good morning, Greg.

The current spark spreads in Texas, you can make money on your Texas plants?

Hi, Greg. It is Caroline. Good morning. Yes, those spark spreads are certainly lower than they were last year, as you well know, and that's been the challenge relative to our performance of the Texas assets versus prior year, but yes, our Texas plants are profitable.

Thank you.

Next question?

Your next question comes from Paul Patterson with Glenrock Associates

Good morning, guys.

Good morning.

The fuel cost decline, is there any deferral of fuel expenses into the future? I know that you guys took a $16 million hit, I think I heard you say, in terms of cancelling contracts, but is there any -- is there going to be any impact in future years due to maybe the deferment of higher cost coal contracts? And in that same vein, the Bridgeport Harbor coal, I saw that mentioned, I was just wondering if you could elaborate just a little bit more on that.

Sure. First of all in terms of fuel costs there is no deferral of any kind of fuel costs into future periods. Everything is matched in the full cost of fuel in this quarter as it is every quarter. To the point you raised about the $16 million, the $16 million is the cost that we incurred, that is expensed in this quarter, that relates to the transportation costs for coal shipments that we canceled, which we have the option to do, under one of our coal contracts.

And so based on the full equipments of considering our coal, our stockpiles, our need for coal and the cost to return the coal, we determined that that was the right all-in economic. That's not deferred. That's expensed. And all of our fuel costs are expensed. Relative to Bridgeport harbor, that is where we use the higher-priced coal, the ADORO coal that you may have heard us speak about, and we will continue to use that coal into the future, although the contract terms change as we go into 2010.

Okay. Just to sort of go back, when I mentioned deferral, I'm not talking about an actual accounting deferral. What I'm really referring to is what we've heard with some companies is that they have essentially stockpiled the higher cost coal, and burned the cheaper coal, if you follow me, or they've delayed delivery of higher cost coal to future time periods, and that's what I meant by that. I wanted to make sure that I didn't confuse you with that term deferral. Do you follow me? Did any of that take place?

I understand what you're saying. No, let me just articulate how we think about our coal piles. We do have a lot of coal in stockpile right now. More than we would normally have because as you saw from our data this summer. But we don't have the kind of option that you might be thinking about relative to burning cheaper coal, versus burning more expensive call at a particular location. Based on our asset profile, certain assets can only burn certain types of coal, so at Bridgeport Harbor and at Hudson, we burn the most expensive coal. When those units run they can only run on the most expensive coal.

In the case of Bridgeport that will always be the case. In the case of Hudson at the end of 2010, when technology goes live, we will be able to burn some cheaper coal. Same thing for Mercer which burns metallurgical coal, it will also have some opportunities for some different type of metallurgical coal after the back-end technology. But it isn't the case that a single plant can change the type of coal that it burns. So to put that all together for you, we have inventory stockpiles of our various types of coal, and as those units run, that pull those particular coal types with their particular costs, that is when they run through the P&L.

Okay. Thank you.

Your next question is from Kit Konolige with Soleil.

Good morning.

Good morning.

On your reference to the higher prices that you're seeing in the market, you can give us some color on that? And also, some color on your reference to better pricing and of risk, in the RFP situation.

Sure. Thanks, kit, for those questions. So in terms of better pricing that we're seeing in the market, what I'm really talking about here is just if you follow the price curves, as I'm sure you do, as we do, and you look at the price curves or the pricing that was in the market and assumed in the market when we were in the summer time period versus where we are now, PJM, went around the clock, for example, expectations for pricing for the remainder of the year, when you are in the summer time and now I'm talking about without basis shift PJM west, you're looking at numbers of $36 per megawatt hour and you see those numbers now up to about 43, 44, 45, without, the full invasive and everything else. That was really the reference I was making.

In terms of the auctions, we have been participating, and as Ralph mentioned in his remarks, in a number of the auctions for full requirements provisions. Something that we know and are experienced at from the years we participated in BGS. What we're finding in those auctions is we consider the kind of risks of things that could always happen in the full requirements, in terms of the time between now and when you have to provide the power, some of those, as you know, have future start dates, and other risks, related to the cost to serve, and volume amounts, as well. In prior auctions, we saw that sometimes those weren't fully reflected in the prices and sometimes we wouldn't win, but now, we're actually seeing a little bit more attractive margins. I would say commensurate with the risks that a full requirements provider has to take on.

We're pretty comfortable that those economics, which are attracting by the way more bidders who recognize that, versus perhaps some of the bidders who earlier may have underbid, and unfortunately for them didn't profit and may have pulled out, but that's a better functioning market, that's pricing in the risk, and providing us with the experience and with the dispatch that we have among our fleet to lock in some potentially good margins that are commensurate with taking on that risk, which we think, given our experience, we manage relatively well.

Can I just follow up on that? Can you put any numbers on that? Say in comparison with your realized gross margin that you discussed previously?

No, I really can't think about it from the perspective of the competitive nature of those auction, and so I really can't do that at this time. But I would say that the market is one that we're happy to have available, and participate in.

Okay. Thank you.

Sure. Next question?

Your next question comes from Jonathan Arnold with Deutsche Bank.

Good morning.

Good morning.

I wanted to ask another question on the commentary, you said with the recovery in markets you're starting to see coal run a little bit more. But as in the third, as we're in the fourth quarter, are you still turning back incremental coal or was that just a third quarter phenomenon?

Right now, we're not turning back coal any longer. That did happen in the third quarter based on those economics. And yes, as I mentioned earlier, the coal plants are running a little bit more. Not up to the kind of normal levels, but a little bit more now. So we think that is a good auger for the future.

Thank you. And if I may, just you mentioned the sales forecast you're now tracking kind of more to the higher end of the range that you had given before. I can ask what -- where are you finding offsets to the additional pressure of sales, and any early thoughts about what kind of sales growth you might expect into 2010 from what you are seeing today?

Sure. So as the utility, you're talking about the pressures on what we're seeing in sales, and that's weather normalized, right? So of course taking out the effects of the cool summer. We had forecast at 1.5 to 2% decline earlier this year, and we're now saying they are probably going to be at the top end because of the pressure that we're seeing. Really, the primary offset for us is continued strong management of operations and maintenance expense, which we're doing.

As I mentioned, I think in the remarks, when you adjust for those things that frankly were fixed as we came into this year, like pension expense, and adjust for the O&M that is fully recovered in clause, so it is not really hitting the bottom line, the utilities really managing their O&M on basically a flat basis, and considering, obviously all of the things that need to be done. Too early to forecast 2010. We're not giving any guidance for 2010 at this time. But as you could well imagine, overall, expense management, across all of our businesses, is an important thing that we certainly focus on, and have a lot of effort under way.

Thank you very much.

You're welcome. Next question?

Your next question comes from Ashar Khan with Incremental Capital.

Hi, my questions have been answered. Thanks.

Thank you. Next question?

Your next question comes from Andrew Levy with Incremental Capital.

I'm good, too. Thank you.

Next question?

From David Frank, with Catapult.

Hi, good morning.

Good morning.

A question on the shopping, you can tell us what percent of the BGS retail load is currently shopping? And do you have a forecast for year-end shopping levels?

Currently shopping and currently potential, no, we certainly don't know. It is not really something that we see until it actually happens.

Okay. But as of the end of the third quarter maybe?

As of the end of the third quarter, and related to what we determined from our $0.04 per share for the quarter, it was approximately 10% of the BGS fund.

Okay. And then one other question. I think every year, the BPU looks at making changes to the power procurement process in New Jersey, and at least to this point, I think any changes have been minimal, if any. Is there any more momentum of late to perhaps change things, or what do you think?

Yes, good question. And we've got than question a little bit earlier this quarter as well. Every year, the BPU solicits comments from all of the parties involved in the BGS auction process, to ensure that the process is working most effectively for all of the constituents. That is happening now, as it has happened every year. So -- but we don't have any reason to foresee that anything different would happen to the auction process, based on anything that has happened thus far. So it is a normal activity and frankly from our perspective, we are pleased that those things occur on a regular basis, because it continues to reinforce the BGS process, which has basically remained essentially unchanged since it started.

Great. Thank you.

Thank you. Next question?

Your next question comes from Angie Storozynski with Macquarie Capital.

Good morning, Angie. Good morning.

Hello? I'm sorry. I have a question about the IRS tax liabilities and the Con Ed decision. Should we expect that's a similar path that your company is going to follow with some lawsuits and no settlements in sight?

Thanks for the question. I wouldn't characterize it that way. I think what we have been doing, we've been very obviously pleased with the results we've been able to achieve thus far, in terminating leases, and keep in mind the impact of the termination of the leases that reduction in our tax exposure from the $1.3 billion we would have in the middle of the year if we had done, to $780 million at this point in the year, all of that reduction was funded by the proceeds from the termination. At the same time, we have been in the appeals process discussions with the IRS. So we actually are pursuing really keeping our options open which has really helped us.

We terminated leases, we have taken exposure off the table. We are still in dialogue with the IRS. And while the Con Ed case then occurred, it was very favorable with, you know, fact-based rulings that are similar to our facts, we frankly think that just gives us more options as we go forward. So we haven't yet determined what our final strategy will be. We're very pleased with what we've done so far. And we think the favorable ruling in such an important case, another company that looks like this company, just gives us more optionality.

So we're going to do what's best overall for risk reduction and what is best or four shareholders and it too soon to see what form that will take as we continue to look at lease terminations and other things as well. And we think it is a positive development. It helps us and keeps more doors open.

If I may, have you ever considered maybe exploring the competitive resale activities yourself, if that is the trend that we're seeing with your neighboring states companies that sell power through auctions and they may need to retain some of their load by basically luring them in to their companies by offering them competitively billed services. Is that something that your company might explore?

As a kind of long-term and bigger picture strategy question, I just ask Ralph, if you want to comment on that.

Sure, Caroline. Well, Angie, we were actually in that business about five or six years ago and opted to get out, simply because the margins are typically razor thin. Caroline tried to describe earlier in her answer to Dan how unique this particular summer was with the amount of head room. That doesn't mean there isn't a role for retail third party suppliers in the future. But it is a fundamentally different set of skills, a fundamentally different set of systems, with a whole different profitability picture. So I would say that in the near term, we will continue to make sure that we price BGS properly to reflect the risk. We will work with third party suppliers to supply them. But you won't see us jumping into the retail business in the near future. Never say never. But you don't see us doing it in the near future.

Thank you, Ralph. Next question?

Your next question comes from Neil Kalton with Wells Fargo Securities.

Good morning.

Just a follow-up on the IRS and the lease issue, in the last Q, I think there was a mention that could be substantial incremental deposits made with the IRS later on this year. How should we think about that now, given you've sold some additional leases, and then does that change with the impact of the Con Ed outcome?

Good questions. Let me just sort of back up and mention what is on deposit now and how it all figures in. So we have in addition to all of what I just mentioned about the overall liability reduction that brings it down to $780 million, sort of separately from that, we have $320 million already on deposit with the IRS. So think about it this way. And I will come back immediately to your point about what future deposits could be. If we were to settle at 100%, and I'm not saying we would do that, but just to help you kind of do the arithmetic, that is what the $780 million in exposure relates to. It is the interest loss 100% settlement.

If we were to do that, the amount of new cash that PSEG would have to pay or fund would be 780 less the amount on deposit of 320, or $460 million, so when you look at our balance sheet, if you think about what our tax liability could have been at $1.3 billion and you look at what our balance sheet would have to fund now, that number is 460 million, assuming 100% settlement. So that is just for backdrop. There were citations in the Q in the last quarter. And you will see some updates to that in the Q this quarter, when we file it, that relate to payments that we would need to make if we were to get a notice from the IRS and pay funds in order to pursue litigation. So you will see updated numbers for that in the Q.

But keep in mind that relates to whether we decide to pursue litigation, and that really depends on what the IRS does in terms of notices for us, and they are broken out into two periods, the earlier period, 1997 to 2000, and later period, 2000 to 2003, depending upon how we might proceed if we decide to go to court.

That's very helpful. Is there any way to handicap when you might get that notice? Would this be a 2009, or a 2010 event?

It is really difficult for us to forecast that. I think the important thing to keep in mind is that we are in the appeals process. We are in discussions with the IRS. That's obviously a good thing. But you know, how those proceed, and what the dialogue turns out to be with the IRS, will have an impact on when we might see any statutory notice. It is really hard to predict exactly, you know, when you would expect to see that. We have not gotten a statutory notice as yet. And of course, the IRS has to make some decisions about whether they want to appeal the Con Ed case. They have a period of time after that case is -- the final filing of that case occurs, they have some 60 day window, some potentials with extension to appeal. And of course, the IRS has to really factor that perspective into how they approach us in a settlement discussion. With the judgment on that case not yet quite a week old, it was Wednesday night of last week, everybody of course on both sides are really just continuing to evaluate the results and their impact.

Thanks.

You're welcome. Next question?

Your next question comes from Paul Fremont from Jefferies.

Thank you. My question has to do with the decline in basis differentials between PJM west and some of the more constrained areas. Can you comment at all as to where that differential historically has been, and what have you seen sort of more recently? Has the differential changed?

So what you may be referring to is there were some changes in the basis that brought basis down as prices came down and basis in the summer time, was generally lower than it is normally expected. What we see now, and as we kind of look forward, we see basis coming -- moving back up, you know, not fully to perhaps historical normal level, but coming back up from where it has been. So it came down, as prices came down, it is starting to come back up, not quite at normal levels yet.

Can you put some numbers around that? In other words, what type of basis differential have you seen historically, and where was it, you know, what type of a number was it this summer?

So historically, you tend to see numbers of about $8.00 to $10.00. In the summer, we tend to see numbers more around the $6 to $7.00 level. And we're not quite seeing numbers come back quite that high yet. But starting to come back closer to the more normal levels.

Thank you.

Your next question comes from Paul Patterson with Glenrock.

Hi, guys.

Good morning.

You mentioned the capacity factor was going to be higher, I think at the new plants for 2009. Is that correct?

Yes.

And was it going to be higher in 2010 or --

No, capacity factors for 2010, we haven't given any guidance for 2010 capacity factors. What we mentioned is we were pleased to see the capacity factors we had this year, and have the potential to see the capacity factors for the full-year be similar to what they were last year.

Okay. And then on the shopping, just is there any particular customer group or area, geographical area that seems to be responsible for this, or is there any more you can elaborate on that?

You mean the migration?

Yes, the migration, I'm sorry.

Yes, sure. Yes, so just keep in mind, there are three segments I guess, I ask you to think about, the very large customers, the largest customers in New Jersey, those customers have separate contracts and aren't typically in BGS, so when you think about BGS, think about the residential customer, and think about those medium-sized businesses. So what you're seeing from migration are typically those medium, smaller-sized commercial and industrial customers, whom retailers can reach much more easily than residential, and who might be thinking about their energy costs in a more direct management way than someone residentially. So typically it might be hospitals, or small commercial or industrial customers that would be generally those who would take those actions.

Okay. Great. Thank you.

You're welcome.

Your next question comes Travis Miller from Morningstar.

Good morning. Good morning. In the PSE&G rate case proposal, what were the key components of that $22 million increase that you guys filed for in September?

Sure. So the $22 million increase is really just an update. This is our test year, 2009 is our test year, so when we filed, more of the test year was on a forecasted basis. We updated for actual through June, and the forecast through the rest of the year. We will update again when the year closes on actual. So for example, this went up by 22 million with the new actuals. It could go the other way when we put in the final actuals. So I wouldn't read too much into that increase as signaling something. It is really just consistent with what we do in a test year, which is update with actual as we go through the year.

I'm supposing that demand is a big component of that? Is that correct?

No, no.

No?

Not demand driven. Really just actual in the test years.

Great thanks.

You're welcome.

Operator, we have time for one more question.

Your next question is from Andrew Levy with Incremental Capital.

I just want to get an idea of your cash situation. I guess you had mentioned that you already see yourself meeting or exceeding key credit measures. And now the IRS thing slowly, hopefully working itself out. Any chance of using that cash for, whether it is stock buyback, or something like that, in the future?

Good question. So as you probably are aware, that we had a share repurchase authorized by our board last year that we purchased a small amount under, but have most of that authorization still left. At this point, when we think about our capital deployment, as you know, we have a significant number of opportunities to make investments that we think generate the right risk adjusted return level for our shareholders. As we mentioned, I think earlier, in our remarks, over a billion dollars in energy master plan, and stimulus investments, over a billion dollars will be invested in the utility, transmission, which of course gets favorable rate and premium under the FERC formulas, as well as things in Power which we didn't mention like the extended power operated Peach Bottom which is about $400 million our share that gives us obviously additional nuclear generating capacity.

We consider those to be the first uses for our cash, and the best uses for our cash to support growth for our business, and returns for our shareholders. And of course, supporting our dividends. That's critical. So at this point, we don't see the role for share buyback, because we think that we have the right places to deploy the capital for our shareholders and provide them with a good all-in return. That doesn't mean it could never happen in our future. But right now, it is not in our planning forecast.

Thanks a lot.

Thank you. Operator, I think we've about run out of time for this call. We dedicated an hour to this. We don't want to abuse everyone's time this morning. But Ralph, if you have any last-minute comments that you would like to make, and then we will close with that.

Well, Kathleen, just really to thank everyone for participating, just at the risk of repetition, there were some strong head winds, once again, our employees stepped up to the task, reducing costs while preserving reliability, four out of five years, as the most reliable electric utility in the nation, continued improvement in our nuclear plants, continued acceptance and ability to invest in carbon light future, it is -- I think at this point, we would just sign off and thank you for your attention and look forward to talking to you in the next quarter. Thank you.

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