公共服務電力與天然氣 (PEG) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group fourth quarter 2009 earnings conference call and webcast. At this time, all participants under 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 call is being recorded Thursday, February 18, 2010 and will be available for telephone replay beginning at 1:00 p.m. February 18, 2010 through February 25, 2010. It will also be available as an audio webcast on PSEG's corporate website at www.pseg.com.

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

Thank you, operator. Good morning, everyone. We appreciate you participating in our call today. As you are aware, we did release our fourth quarter and full-year 2009 earnings statements earlier this morning. The release and attachments are posted on our website, pseg.com under the Investor section. We also posted a series of slides that would be available to you that detail operating results by company for the quarter. Our 10k for the period ended December 31, 2009 is expected to be filed next week, probably by mid to late week.

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 please ask that you read these comments contained in our slides and our website. 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 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. As you know, 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 the non-GAAP financial measure of operating earnings provides a consistent and comparable measure of performance of metrics to helps shareholders understand performance trends.

I'm now going to turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of Public Service Enterprise Group. Joining Ralph on the call is Caroline Dorsa, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for your questions. We ask that you limit yourself to one question and one follow-up question. Thank you.

Thank you, Kathleen. Good ,and thanks, everyone, for joining us today on this call. Earlier this morning, we reported operating earnings for the fourth quarter of $0.62 per share, which is the same as what we earned in the year ago period. The results for the quarter brought operating earnings for 2009 to $3.12 per share. This is to be compared to $3.03 per share earned in 2008. The full-year results fell in the middle of the earnings guidance of $3 to $3.25 per share we set for 2009. These results were achieved in the face of what could only be characterized as very challenging markets. A weak economy and abnormal weather affected demand in the fourth quarter and throughout the year. When PSEG Power, our nuclear and combined cycle fleet of generating assets produced at record levels of 2009, their strong performance and availability helped offset the impact of lower power prices on our earnings. Earnings were also aided by our employees' response to weaker than anticipated demand with a reduction in expenses. At PSEG Energy Holdings, we were able to take advantage of the financing environment to negotiate the termination of 12 cross border leases, including two in the fourth quarter. These deals substantially reduced our potential tax and financial risks.

Clearly, our 2009 results demonstrate the importance of a balanced portfolio of assets. The credit for our results, however, belongs to our employees. It is worth repeating. Their commitment to our shared goal of operational excellence and their responsiveness to a call to control costs was a major contributor to our results. Cost reduction programs implemented throughout the organizations, including support from our union membership, will continue to be an important contribution to our operating results. For 2010, we are forecasting operating earnings will fall within a range of $3 to $3.25 per share. At the moment, we are not providing you with a breakdown of operating earnings by subsidiary as has been our custom in prior years. We intend to provide that guidance at the conclusion of PSE&G's distribution rate case.

Now let me take a step back for a moment to assess the business environment. The providers of energy in today's market face many challenges in light of changing fuel prices and the need to meet increased governmental mandates. I am confident that PSEG can meet the challenges of today's demanding market. We are working toward improving on our operationally excellent, low carbon integrated business model that provides energies to customers in a cost-efficient way and meets our shareholder requirements for attractive returns. PSEG's capital commitments are focused on maintaining the availability of critical generating units in constrained markets, expanding our investment in renewable solar energy products at attractive risk-adjusted returns and increasing our nuclear footprint through up rates of existing capacity as we also improve the reliability and functionality of our distribution and transmission infrastructure. We are well down this path.

Regulatory approvals received by PSE&G by 2009 support the investments of $1.4 billion to improve reliability, help customers save energy and expand the use of solar energy. These approvals provide us with prompt cost recovery and a reasonable return. Also, the New Jersey Board of Public Utilities' recent decision on our $750 million investment in the Susquehanna to Roseland transmission line will improve reliability in the northern part of New Jersey. We hope our past results and our ongoing passion help you to understand our commitment to providing excellence in operations into the future. The board of directors recently approved a 3% increase in the quarterly common dividend rate to $0.3425 per share for the first quarter, which represents an indicated annual dividend rate of $1.37 per share. The board's action represents the seventh consecutive annual increase in the dividends and a continuation of a 103-year history of paying an annual dividend to shareholders. We are committed to improving returns on operations, investing at levels that support our long-term growth and then sharing these returns. We look forward to seeing many of you at our annual conference for the financial community on February 26. As we have in the past, we will discuss the strategic drivers of our business, public policy that matters to our industry, our strategy to position PSEG for a changing energy environment, as well as the specific market and cost factors that influence us. And now I'll turn the call over to Caroline.

Thanks, Ralph, and good morning, everyone. As Ralph said, PSEG reported operating earnings in the fourth quarter of $0,62 per share versus operating earnings of $0.62 per share in last year's fourth quarter. Our earnings for the fourth quarter brought operating earnings for the full year to $3.12 per share versus operating earnings for 2008 of 3.03 per share.

Just to remind you, our operating earnings exclude the impact of the change in value in our NDT investments and obligations as well as other charges related to future decommissioning. And any changes in the value of transactions related to our generating assets that don't qualify for hedge accounting, that is their mark to market. We also exclude the impact of adjustments to lease reserves, which I'll come back to later in the discussion. As we've also done throughout the year, we've adjusted the prior year numbers to make your comparisons easy to follow. Slide four provides a reconciliation of operating income to income from continuing operations and net incomes for the quarter. As you can see on slide 10, PSEG Power provides the largest contribution to earnings. For the quarter, Power reported operating earnings of $0.47 per share compared with $0,49 per share last year. PSE&G reported operating earnings of $0.13 per share compared to $0.15 per share last year. PSEG Energy Holdings reported operating earnings of $0.03 per share compared with the marginal contribution in the year ago quarter. The parent company reported a loss of a penny a share compared with a loss of $0.02 per share in last year's quarter. We've provided you with waterfall charts on slides 12 and 13 that take you through the net changes in quarter-over-quarter and year-over-year operating earnings comparisons by major business. But now I'd lake to review each company in a little more detail, starting with Power.

As shown on slide 15, PSEG Power reported operating earnings for the fourth quarter of $0.47 per share, compared with $0.49 per share a year ago. Please note that Power's results for the quarter, the year and the results for the year ago period now reflect the impact of the October 1 transfer of the Texas gas fired assets from Holdings to Power. Power's operating earnings for the quarter brought 2009's full-year operating earnings to $1.2 billion, in line with our guidance. The operating environment, as Ralph said, in the quarter continued to be challenged by low power prices, as well as a weak economy, although not as challenging as what we experienced in the third quarter when as you recall, weather compounded our difficulty.

Power's results for the fourth quarter were affected by those weak power prices which more than offset an 8% increase in generation. The decline in margin was experienced in the Texas and New York, New England market, $0.02 a share in each market. Margins in PJM, however, increased $0.02 a share, a 3.5% increase quarter-over-quarter. The PJM assets continue to benefit from higher hedge related prices and a 2% increase in nuclear generation, which together helped to offset a decline in BGS related volumes. The weak economy continued to affect the level of demand, which reduced earnings by an estimated $0.01 per share. The decline in BGS volumes also reflects the effect of customer migration, which we estimate reduced earnings by $0.02 per share in the quarter. And for the year, we estimate customer migration away from BGS cost us cost us about $0.08 per share. The earnings impact for the full year reflects a small impact for the first half of the year, or $0.02 per share over that first full six-month period for migration the third quarter impact of $0.04 per share that we spoke about on the third quarter call and the fourth quarter impact of $0.02 per share.

Despite all of these factors across the year, PJM margins were still up 9% for the year, reflecting our dispatch flexibility and hedging strategies, which offset a decline in demand. Earnings comparisons were also affected by an increase in O&M, depreciation and other miscellaneous items for $0.03 per share. But note that for the full year, Power's O&M expense was in fact 2% lower than a year ago. As anticipated, we earned $0.01 per share on trading activities and coupled with gains this quarter associated with contracting activities, including Power's participation in full requirement auctions, these activities together increased earnings by $0.03 per share.

As I mentioned, generation increased 8% during the quarter. Power's nuclear and combined cycle fleet each experienced record levels of output. Generation from the combined cycle fleet, including Texas, increased 29.8% in the quarter. Excluding Texas, output from the combined cycle units in New York and New Jersey increased 47%. The nuclear fleet operated at 92% capacity factor in the quarter versus 91.3% in last year's fourth quarter, bringing the capacity factor for the full year to 93.4%, record performance for the year and in line with our expectations as outlined on the third quarter earnings call.

Generation from Power's New Jersey coal units increased during the fourth quarter as compared to earlier in the year as an increase in the cost of gas relative to coal improved the economic dispatch of these units. But on an annual basis, as you can see on the slide, coal-fired generation was still below last year's level of output. The increase in generation from the coal-fired station this quarter, coupled with lower pricing, reduced average gross margins for the PJM New York and New England fleet to $51 per megawatt hour in the quarter and $55 per megawatt hour in last year's quarter, again, in line with our expectations. The average gross margin earned on the Texas combined cycle generation declined to $7 per megawatt hour in the quarter from $16 per megawatt hour last year as a result of the decline in spark spread, which we talked about before. The growth and output during the fourth quarter brought output for the full year to 59.8 terawatt hours, a 5% decline from 2008's level of generation.

Nuclear fleet provided approximately 51% of Power's total generation. The strong performance of nuclear, coupled with lower gas costs, supported annual average gross margins on the PJM New York and New England fleet of $60 per megawatt hour for the year, slightly higher than the $58 per megawatt hour we were forecasting at the start of the year. To summarize these drivers, we estimate Power's earnings for the full year were hurt by weak economic conditions, about $0.03 per share, cooler than normal weather during the important summer months, about $0.02 per share, and as we said earlier, customer migration was about $0.08 per share. On the other side, recontracting and dispatch flexibility of the PJM fleet helped results by about $0.08 per share.

Now I'll turn to PSE&G. PSE&G reported operating earnings for the fourth quarter of 2009 of $0.13 per share compared with $0.15 per share for the fourth quarter of 2008, as was shown on on slide 22. PSE&G's full year 2009 operating earnings were $321 million, also in line with our guidance. Gas margins declined in the fourth quarter by about $0.01 per share. The results were affected by warmer than normal weather in this year's fourth quarter compared with colder than normal weather experienced in the prior year. The reduction in gas margin was offset by an increase in transmission rates and higher client service margin, which together added about $0.01 per share to earnings.

Earnings comparisons were also hurt by an increase in pension expense, which more than offset a reduction in other operation and maintenance expenses and a lower tax rate. These items combined to reduce PSE&G's fourth quarter earnings by $0.02 per share. Abnormal weather conditions and a weak economy hurt demand in 2009. During the fourth quarter, weather normalized, electric demand declined 3.2% resulting in a 2.5% decline in demand for the full year. Within that total weather normalized demand from residential electric customers declined by 0.8% for the fourth quarter and 0.9% for the full year. For GAAP, weather normalized demand increased 1.1% in the fourth quarter, resulting in a 0.7% decline in sales for the full year. Trends in employment and housing tend to be pretty good barometers of the New Jersey economic conditions. Both are at multiyear lows. Although we may not be experiencing a decline as fast as we did earlier in the year, we've not experienced as yet any uptick in growth.

In other key developments at the utility, as you're probably aware, the regulatory calendar is full. PSE&G implemented a $23 million increase in transmission revenues effective January 1 as part of its formula rate treatment on increased investment. The New Jersey BPU approved PSE&G's $750 million investment in the Susquehanna to Roseland transmission line on February 11 of this year. The BPU's decision represents a critical milestone in the regulatory approval process. PSE&G also updated its filing with the BPU for an increase in electric and gas revenues totaling $222 million. This updated request reflects the actual results for 12 months ended December 31 of 2009. The update represents an increase in electric revenues of $14 million and a reduction in gas revenues of $23 million from the May 2009 rate filing. PSE&G's request is based on an 11.25 return on equity and 51.2% equity ratio. Following the normal process for this request, the BPU would be expected to issue a decision in May or June of this year, with rates effective mid-year. For 2009 for reference, operating earnings provided an earned return on equity of about 8% for our distribution business and about 11% for our transmission business.

Next, let me turn to PSEG Energy Holdings. Energy Holdings reported operating earnings for the fourth quarter of 2009 of $0.03 per share compared to operating earnings of about $1 million for the fourth quarter of 2008. Holding's quarterly earnings were aided by the recognition of gains on the successful termination of two cross-border leases which amounted to $0.02 per share. Results also benefited from a reduction in O&M expenses and lower interest expense, which added $0.02 per share to earnings.

A reduction in the value of our remaining international generation asset lowered earnings by a penny a share and reduced our investment in that asset to a nominal level. The termination of the two leases in the fourth quarter brings the number of leases terminated to 13, 12 in 2009 and one in 2008. Our activity reduced our potential cash tax liability to $660 million dollars. As we've discussed before, if we had not terminated any leases, our potential liability would have risen to more than $1.3 billion. So we have, in fact, cut our risk in half. And as we said before, we've been using the proceeds from counterparties from those terminations to accomplish this risk reduction. In addition, we still have $320 million on deposit with the IRS to meet any potential tax liability. So think of that as an offset to the $660 million exposure. Also, we have reduced our reserve for leased exposures by $29 million after-tax ,based on a reassessment of risk following the outcome of the favorable court decision late in 2009 for another utility. The net after-tax gain of $29 million is reflected in earnings from continuing operations, but it not in operating earnings.

In terms of 2010 outlook, as Ralph mentioned, we are providing operating earnings guidance for 2010 of $3 to $3.25 per share. We won't be providing operating earnings guidance by subsidiary until the conclusion of PSE&G's distribution rate case. Overall, our guidance is based on expectations of a modest improvement in demand and normal weather versus the very weak conditions experienced in 2009. We estimate the combination of abnormal weather conditions and a weak economy reduced our 2009 earnings by $0.08 per share at Power and PSE&G. However, 2009's operating earnings also benefited from the $0.13 per share of gains on the termination of leases which we don't expect to see duplicated in the current year. Remember, we have only five leases left, and we do continue to actively manage them. Our ability to control growth and expenses and operate at top quartile levels of performance in many areas of our business provides support for our 2010 earnings guidance. We estimate our O&M, excluding the impact of regulatory recovery clauses for our Company as a whole will be flat year-over-year as it was for the Company as a whole for 2009.

Finally, a brief comment on financing activity. As you probably are aware, we remain fairly active in the fourth quarter. We eliminated the last piece of long-term debt as a parent with the redemption of $49 million of debt. PSE&G was able to take advantage to attractive debt markets to prefinance a portion of its 2010 capital needs through the issuance of $250 million of 30-year medium term notes at a rate of 5.375. PSE&G also made an early redemption of $44 million of debt. And, as I said, we continue to reduce our potential lease related tax liability with proceeds from the termination of leases. From up then at year end, a simple calculation of debt to capital would reveal a reduction in debt to capital to 45% from 49% at the end of 2008, so the balance sheet continues to be strong. That concludes my remarks. And now we look forward to taking your questions.

Ladies and gentlemen, we will now begin the question-and-answer session for members of the financial community. (Operator Instructions) Your first question comes from the line of [Reza Hatifi] Duquesne Capital.

Thank you. I was wondering, what is the base load coal and nuke generation volumes assumed in 2010?

Haven't given any estimates for generation volumes for the business for 2010. Keep in mind that what we are anticipating is to have normal weather and of course, we had much cooler than normal weather in 2009, and some benefit from the economy, but we're not ready to say we expect the economy to fully rebound. But we haven't given details on the generation volume. Keep in mind, we also use our dispatch selectability based on pricing in the market to dispatch our assets for the best economics in 2009. We'd do the same thing in 2010.

And what is your hedge percentage and average hedge price in 2010?

So for 2010, we are about 90% hedged on our base load coal and nuclear. Following the BGS, an average hedge price of about $72 per megawatt hour.

And could you --

Reza, we're going to ask that you allow somebody else to ask a question. You can get back on. Thank you.

Okay. Thanks.

Your next question comes from the line of Paul Patterson, Glenrock Associates.

Good morning.

Good morning.

The gains on the contracts that you guys saw in the quarter, what was it for the year and what's the outlook for 2010 on that?

On the leases? Okay, the lease? So the gains on the leases --

No, no no, I'm sorry. I'm talking -- there's contract gains that was mentioned in the release, I think it was about -- I'm not sure exactly how many cents a share it was, but during the fourth quarter, you guys saw gains on contracts entered into during the fourth quarter.

Oh, right.

Can you explain a little bit more of that?

Sure, sure. So those are the full requirements contracts that we enter into as we participate in some of these polar load auctions that we're doing more of, that we've talked about during the year. That contributed about $0.03 to the quarter, together with one penny of trading gains that I mentioned. As we said, we're not giving guidance for subsidiaries and certainly not at that level of detail. I think it's fair to say that we've expanded our participation in those types of contracts. During the years, we've talked about we participated in PECO contract, for example. We expect to continue to do that in 2010, but of course those are auctions, so it's too early to try to forecast exactly what kind of results we'll see from that.

So when you say gain on contract, is that a -- how -- is there some specific accounting associated with that? In other words, when you enter into the contract, does that provide a benefit at that point in time? How does that work, I guess,what I'm wondering? Have you sold the contract?

Sure.

And what was the total impact for 2009?

Sure. So let me just describe the process a little bit in terms of how to think about those numbers. Those are real economic gains that come from participating in those types of auctions, and then to the extent that we win load opportunities in those auctions, we then hedge out the cost aspects and supply aspects of those contracts fully right at the time, so we don't leave ourselves open. And based on what we win and of course, how we bid obviously reflects our expectations of the profit margin we expect to get. Then as we win tranches, we then hedge out the cost of supply. The delta between those two are the gains that you see that we're reporting on a quarterly basis. And those are real economic gains. Those are then in our portfolio. They're mark to market during the year, but they are fully hedged once we enter into them.

Okay. So basically, the contract might be good for a period larger than the actual quarter that it's been recognized in, but effectively, you've hedged both sides, so you feel pretty confident in that the economic value will materialize. Is that the right way to think about it?

Yes. They are the contracts for serving load in a forward period that we enter into in a current period, and so we have those gains.

I got you.

Exactly. And then we serve the load over time.

Okay, and how much was that for the full-year 2009? This whole benefit from that kind of activity?

About $0.05. You can go back and look at our quarters. We've had about $0.02 this quarter, so $0.01 was trading, $0.02 was the load contract and a few cents in the prior quarter. So about $0.05 for the year.

That's for the total benefit. That's not the delta over the previous year, correct?

Correct, total benefit.

Okay, and the sales outlook for weather adjusted --

Paul, I'm going to have to ask that you give someone else a chance.

Absolutely, sure.

I'm sorry.

Your next question comes from the line of Jonathan Arnold, Deutsche Bank.

Good morning.

Good morning.

My question's on your comments on migration. And if I heard you correctly, you said it was -- it hurt Power by a couple of pennies in Q4 and about $0.08 for the year. So my question is, what kind of follow through full year impact is there to come from the migration you've seen to date in 2010? And then what level of additional switching beyond that have you embedded in the 2010 guidance, some rough idea on that?

Sure. So relative to migration, your numbers are right for 2009. $0.04 in the third quarter, $0.02 for six months and $0.02 in the fourth quarter. In terms of our thinking about migration on a year-over-year basis, again, we're not giving details, aspects of guidance. But I would not expect migration to be a higher impact year-over-year. So I wouldn't expect to see, at this point, deltas year-over-year on migration from the level that we have in 2009. And the reason for that is, think about some of what happened in 2009. In the summer quarter, which is our highest demand quarter, there were some very usual weather conditions, as you may recall, that led to some of the lowest prices we've seen in power during the year we're seeing in the summer quarter, while at the same time, the BGS price had its summer premium. So the differential or the head room or the opportunity for migration was the largest in the summer.

So what we've seen and we mentioned on the third quarter call was migration of about 11%. That has increased, but at a much slower rate to about 15% of our total load has migrated. But at the same time, keep in mind that that differential -- that price differential has moderated very significantly. So the opportunity for impact to us from migration is very different right now and our expectations for normal weather and therefore, more normal pricing next year, than what we experienced in 2009. Again, those are assumptions and estimates. We'll have to see how that plays out over time. And also given the results of the current BGS auction, you'll have some slightly lower pricing in the summer as BGS rolls in with a new option in June. And there's a bit of a moderation in the way that summer premium will be calculated in 2010, again, that will affect that head room calculation. So year-over-year, we don't see a material impact on a year-over-year basis from migration.

Thank you very much.

You're welcome.

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

Thank you. Have you had an opportunity or has your team at PSE&G Power had the opportunity, PEG Power had the opportunity to look at the structure that's been created for the 2013 and 2014 capacity auction, and do you think that pricing in that auction is biased to be higher given the parameters that have been laid out versus the prior year's auction?

So certainly, we've had a chance to look at those in some detail, as you would imagine our Power group. I think, given the fact that those are the preliminary parameters put out and of course, the auction doesn't occur until May, it's too early for us to speculate as to how we might expect to see that clear.,

If we presume that the financial rules look exactly like the current proposed rules, would you expect at least that pricing would not be lower than it was in the prior auction?

Well, as I said, it's really too early to speculate, and I think we just have to wait and see how it plays out.

Okay, thank you.

Sure.

Your next question comes from the line of Paul Fremont, Jefferies.

Thank you. Can you tell us for 2009 what the contribution of BGSS was and also power trading?

So for trading, as I mentioned, that participation and full requirements contracts and some of the gains, as I described, as we calculate them, was about $0.05 for the year And then there's that small amounts for trading that I mentioned as well. For BGSS, we don't break that out specifically. Year-over-year is relatively consistent, but we don't give that detail for BGSS.

I guess in prior years, though, you had -- well, for 2009, it was supposed to be within several cents of what it had been previously. The last disclosures I think you had made were somewhere in the $185 million range. Should we assume that it's not materially different in 2009?

Without confirming that particular value, we haven't given out that number, what I can tell you for year on year, the margin from BGSS is basically consistent.

Okay. Thank you very much.

You're welcome.

Your next question comes from the line of Leslie Rich, Columbia Management.

Hi, thank you. Just going back to the customer migration. Do you -- now that the head room has -- the projected head room has disappeared, as you look forward, would you expect to see any customers come back to you, or do you assume that they're going to be served by competitors going forward?

Yes, Leslie, good question. We're not building into our projection expectations of customers coming back thoroughly. There's still a little bit of head room. But again, very different dynamics in terms of pricing. Keep in mind, though that even though customers migrate, they are still in our territory, and we still serve them. That's what our ER&T group does. So it's something we'll talk about a little more next week, of course, at our analyst meeting. But they still have to buy power, so we still get some of that margin back. But I think it's too early to speculate on how we think about customers coming back. Of course, we're not in the retail business, so it's really up to the retailers and their pricing and strategy and how customers compare that with pricing coming back in.

And are those commercial and industrial customers or all classes?

They're primarily those -- commercial and industrial because as you would well imagine, it's probably the least profitable for retailers and try to migrate residential customers.

Okay, great. Thank you.

Sure.

Your next question comes from the line of [Badoula Morty], CDP US.

Good morning.

Good morning.

My question has to do with the balance sheet at PEG Power. And I was taking a look, as of at least third quarter, there was just about 3 -- just under $3.2 billion of long-term debt. I'm wondering, one, with the asset transfer down from Holdings into PEG Power, is there any material debt that's going to be transferred down, and then I have a follow up question after that.

Sure. So good question relative to Texas asset transfer. So you're right, that came over to Power. But I can tell you when you look at the long-term debt at Power for the end of year, and you'll see this when we file the 10k, as Kathleen said, later in the month, you'll see long-term debt at Power of about $3.1 million. And so actually Power's debt to cap ratio is about 43% at the end of the year, slightly better than the debt to cap ratio for the Company as a whole, which is 45%. And of course, the utility has its debt structure consistent with its rate case. So we're running a trim balance sheet for the whole Company that's even slightly trimmer for PEG Power.

And my second question is that when you interpolate the current interest expense on the debt balances at PEG Power, it looks like your cost of debt is just below 5%, if I'm thinking about it properly. I'm wondering, what type of potential refinancing issues there could be down the line and whether I'm thinking about that properly?

Yes. So, don't want to speculate on specific timing for financing. As you would expect, we try to capitalize on the markets as we see them and of course, Power's own capital and investment needs as well as what it dividends up to the parent. What I can tell you is, think about Power, which has significant capital expenditures last year of about $900 million. Utility will be the growing capital expenditure part of our business in the upcoming period, but given that and Power's cash flow, our intention is to keep that kind of debt to cap ratio and the kind of FFO to debt that we run at Power trim. So within the context of its business needs, we'll finance it. But you're not going to see it change in terms of its capital structure in any meaningful way, because it's obviously critical for to us keep Power well situated as a credit rating.

Last question, any meaningful maturities coming up at Power that will be refinanced in the next two, three years we should keep in mind?

There are one or two maturities, I think, at Power. Not huge numbers. Small maturities in 2011.

Thank you.

Your next question comes from the line of Annie Tsao, AllianceBernstein.

Good morning. Can you hear me?

Yes, Annie.

Okay. I just have a question in regarding just a clarification on your 2010 earnings guidance. $3 to $3.25. that's assume no gain in the lease termination, right? Or there is some?

As I said, Annie, we haven't given out subsidiary guidance, so don't want to drill into guidance by each of the operating companies. What I did mention was to keep in mind that the $0.13 per year that you saw this year in its contribution to operating earnings is not something that you can repeat next year and for a good reason. We've terminated 13 leases. We only have five leases left. So even if we were to terminate all of them, you're not going to see the same sort of economic dynamics just on 2009.

That being said, we still intend to actively manage the portfolio. Every time we terminate a lease, we take down our tax exposure, which is terrific. But of course, those are negotiated transactions, so you can't really forecast whether you are going to see terminations, to what extent in 2010. So with that, kind of keeping that in mind, it's one of the things that's one of our priorities, but can't really forecast within our guidance how much to expect from terminations.

And what kind -- are you assume normal weather and some kind of economic recovery? And then. what kind of demand growth then you anticipate then?

Well, as I said, we are assuming normal weather. Just because it's too early to assume anything different and better not to try to forecast that. We are assuming that we may have hit bottom on the economy and start to see some recovery, but not to the extent that we had economic hits in 2009. As you probably may be aware from the filings that we made for the utility, we're not assuming significant amount of growth in our business from the distribution side as well.

Thank you.

Your next question comes from the line of Brian Chin, Citigroup.

Yes, the question was asked and answered. Thank you.

Okay.

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

Thank you. Two questions, both related to the BGS auction and migration. One, you guys mentioned that there's some new structure regarding the summer premium calculation on top of the BGS auction. I wonder if I just misunderstood that, or is it just an indication that the summer BGS prices will be lower because the BGS auction cleared at a lower level?

So the question Angie, it's actually both. Every year there's -- in the BGS auction, there's a setting of the summer premium. And it varies year by year. So in the way in which the BGS auction was set for 2010, there was not a summer premium put in, so when you factor that in, of course, that's just one-third of the total BGS for 2010. There will be some moderation of that summer premium uptick relative to what you saw, say in last year where all three of the tranches had a summer premium. But it's the normal process, it's something that the BPU set on a regular basis.

Okay. And the other question is about the migration. You mentioned the concentration is on commercial and industrial clients. But the way I see it, margins for competitive retailers are actually the highest for our residential clients. Maybe the volumes are lower and maybe it's a hustle to sign them up, but the margins are significantly higher for residential customers. So I'm actually surprised to hear that the switching is mostly among C and I clients.

Well obviously, it's the data that we see. And as you know, we've spoken about before, and Ralph mentioned, it's not a business that we're in and not one that we intend to get into. So I'm not really familiar with how retailers are calculating their margins.

Okay, thank you.

Your next question comes from the line of Paul Fremont, Jefferies.

Yes. In the rate case, should we look at the window of opportunity for settlement as going all the way through to final rate order or practically speaking, is -- does the likelihood of settlement potentially become significantly less after the hearings?

No, Paul. This is Ralph. I would say just the opposite, that the possibility of settlement increases after the hearings. Having said that, you're looking at the earliest possible settlement being more of an April timeframe, but a rendered decision being more of a late May, early June time frame. So we're counting on rates effective middle of the year.

Thank you very much.

(Operator Instructions) Your next question is a follow-up from Paul Patterson, Glenrock Associates.

Good morning, guys.

Good morning.

I think most of my questions have been answered. Just to quickly make sure I clarify something here. The sales growth, the weather-adjusted sales growth, you guys expect it to be somewhat positive, but kind of lackluster. Is that an adequate regurgitation on my part, or how would you describe it?

Yes. I would say our expectations are for some sales growth in 2010, and we look at that as we think about rates and utilities, but modest. We're really talking between -- less than 1% for the upcoming year. Weather normalized, of course.

Excellent. Thanks a lot, guys.

Sure.

Any other questions?

(Operator Instructions)

I think we're maybe ready to wrap up.

Mr. Izzo, Ms. Dorsa, there are no further questions at this time. Please continue with your presentation or closing remarks.

Okay. So just in conclusion, I must tell you all the biggest source of pride that I felt this past year was to witness the teamwork that our employees across the Company, labor and management, long-term, short-term, entry level, senior level, all of whom were looking for ways to save dollars, but preserve service levels. I can tell you emphatically, without doubt, that we did so successfully. So thank you for joining us today. I would encourage you to join us next Friday at our investment conference. It will take place in the morning in New York City. Please don't hesitate to contact Kathleen or our Investor Relations group for the particulars, and we hope to see you there. Thanks again.

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