公共服務電力與天然氣 (PEG) 2011 Q1 法說會逐字稿

Good morning, my name is Tenetia, and welcome to the Public Service Enterprise Group First Quarter 2011 Conference Call and Webcast. At this time, all participants are on 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 it being recorded Thursday, May 5, 2011, and will be available for replay beginning at 1.00 pm May 5, 2011 through May 12, 2011. It will be also available as an audio webcast on PSE's Corporate website at www.pseg.com. I'd like to turn the conference over to Ms. Kathleen Lally. Please go ahead.

Thank you, Tenetia. Good morning. Thank you for participating in PSEG's call this morning.

As you are aware, we did release our first-quarter 2011 earnings statements earlier today. And as mentioned, the release and attachments are posted on our web site at 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 March 31, 2011, will be filed later today.

I'm not going to read the full disclaimer statement or the comments we have on the difference between operating earnings and GAAP results. As you know, the earnings release and other matters that we will discuss in today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. Although we may elect to update our forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if our estimate changes, unless required. Our release also contains adjusted non-GAAP operating earnings. I ask that you refer to today's 8-K or our other filings for a discussion of the factors that may cause results to differ from Management's projections, forecasts, and expectations, as well as for a reconciliation of operating earnings to GAAP results.

I'm now going to turn the call over to Ralph Izzo, Chairman, President, and Chief Executive Officer of Public Service Enterprise Group, and 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.

Thank you, Kathleen. Thank you, everyone, for joining us today.

Earlier this morning we reported operating earnings for the first-quarter of 2011 of $0.85 per share, to be compared with operating earnings of $0.87 per share in 2010's first quarter. Our results for the first quarter are strong in the face of difficult market conditions, largely due to the fact that our employees continue to perform at the top of their profession.

Probably the best example of that performance is in our nuclear operations. The PSEG power team's responsiveness was ably demonstrated throughout the quarter, as they maintained their commitment to safe, reliable operations and met increased calls for information on nuclear reactor design and emergency response procedures following the March 11 earthquake and tsunami that damaged several nuclear units at the Fukushima site.

Bill Levis, our President of PSEG Power, testified before the United States House of Representatives and Senate on behalf of the industry, regarding its ability to respond to emergency situations, as well as the operational improvements which have been added over the years. Bill and his team have also accommodated numerous local, state and federal requests for information on the effectiveness of the nuclear reactor design and emergency procedures in place at Salem and Hope Creek. These efforts are an extension of Power's ongoing community outreach to ensure public trust in our ability to operate our nuclear units in a safe, reliable manner.

It appears that the impact on nuclear reactors in Japan was caused by events which exceeded the limits supported by the reactor design. Although it will take some time before the implications for the US nuclear industry are fully understood, the industry has begun a thorough re-evaluation of safety, planning, and preparedness, and we owe nothing less to the public.

As you know, we filed with the Nuclear Regulatory Commission in August of 2009 for approval to extend the operating lives of our Salem and Oak Creek reactors. The process is on schedule, and we continue to expect to hear this summer from the NRC on our requests. This timely response speaks to the community support enjoyed by power in Salem County, the preparedness of our workforce, and the material condition of the facilities.

Now on a separate topic, the economy in our service territory has stabilized and is showing signs of growth, however slight. The normalized sales to the commercial customer base, which is our largest customer segment, have improved as unemployment, although still high, has declined. A return of growth would be welcome as we confront the marketplace still challenged by lower pricing.

In addition to the economy, the future marketplace will be influenced by environmental proposals which would affect clean air and clean water regulations at our generating stations. Recently completed upgrades at our New Jersey coal stations support their operation under more stringent environmental rules. We are evaluating the impact of the EPA's proposed rules related to the requirements under section 316b of the Clean Water Act. Most importantly, the proposal doesn't necessarily require the installation of cooling towers as the best technology available, but it's too early to say what form the proposed regulations may take when finalized over the next year.

Other market challenges were also clarified during the quarter. The Federal Energy Regulatory Commission upheld critical rules governing the operation of the wholesale power market by requiring new generation to clear in the RPM capacity auction at competitive prices. An action has also been filed at the US district court for New Jersey by us and others challenging the constitutionality of the New Jersey L-cap legislation, under the supremacy and commerce clauses of the US Constitution.

The New Jersey Board of Public Utilities has moved forward with approvals for 1,949 megawatts of new capacity. However, given FERC requirements to clear the capacity auction, as well as the contractual requirements to clear, we do not expect to know for one to two years if this capacity will be built. We understand the state's desire to implement policy that supports economic growth, but we would prefer to find a solution that supports investment in the state and doesn't look to long-term, above-market subsidies, which are likely to have unintended consequences for the customer.

Now we continue to work with the state in support of its economic growth agenda, and we await BPU approval of a $400 million expansion in electric and gas infrastructure programs and investments in energy efficiency to advance the growth of the economy, preserve system reliability, and lower energy bills for targeted customer segments. These programs will also provide appropriate risk-adjusted returns for our shareholders.

So we start 2011 with strong results. We continue to forecast operating earnings for 2011 of $2.50 to $2.75 per share. Although, there are signs of economic recovery, a decline in contracted energy and capacity prices from year-ago-levels, beginning in the second quarter, will have an impact on our full-year operating earnings.

A strong balance sheet, investment in projects that garner reasonable returns, and a focus on operations will all support our long-term results.

With that, I'll turn the call over to Caroline, who will discuss our financials in greater detail.

Thank you, Ralph, and good morning everyone.

As Ralph said, PSEG reported operating earnings for the first-quarter of 2011 of $0.85 per share, versus operating earnings of $0.87 per share in last year's first quarter. Slide 4 provides a reconciliation of operating earnings to income from continuing operations and net income for the quarter.

As you can see on Slide 8, PSEG Power is the larger contributor to our results. For the quarter, Power reported operating earnings of $0.53 per share compared with $0.62 per share last year. PSE&G reported operating earnings of $0.32 per share, compared to $0.23 per share last year. Energy Holdings reported a small loss in operating earnings of $0.01 per share, compared with positive operating earnings of $0.01 in the year-ago quarter. Parent Company recorded earnings of $0.01 per share, which was unchanged from year-ago levels.

We have, as always, provided you a waterfall chart on Slide 9 that takes you through the net changes in quarter-over-quarter operating earnings by major business. I'll now review each Company in more detail.

Let me start with Power, by highlighting the key drivers of the $0.09 per share decline in Power's quarter-over-quarter operating earnings per share. Power's first-quarter generation margin results were impacted by a slight decline in non-PJM market prices, which reduced earnings by $0.01 per share. An erosion of the margin on certain wholesale electric supply contracts that Power sources from the market also reduced earnings in the quarter by $0.03 per share. An increase in operating and maintenance expense reduced earnings by $0.03 per share, and this increase is largely tied to the timing of planned maintenance-related work at the combined cycle units. Power anticipates O&M levels for the full year to show a slight increase from the levels experienced in 2010.

As we mentioned on our year-end earnings call, the commercial operation of the back-end technology at the Hudson and Mercer coal units would result in an increase in depreciation expense and a decline in capitalized interest, now that the units are in service. For the first quarter, these items reduced Power's operating earnings by $0.03 per share.

Finally, the absence of a healthcare-related tax charge in the year-ago first quarter period improved results by $0.01 per share.

I'd now like to go into a little more detail on the change and output and price experienced in the different markets served by Power's generating fleet. Total generating output for the fleet declined 1% in the first quarter, and the biggest decline was experienced by our coal fleet. A decline in dark spreads reduced the economic dispatch of coal, and resulted in a 21% decline in coal-fired output. This decline in coal-fire generation is the reason behind the decline in total output for the quarter. And the decline in output was experienced primarily at Bridgeport Harbor in Connecticut, as well as our New Jersey-based coal units, Hudson and Mercer.

The nuclear fleet operated at an average capacity factor of 99% in the first quarter, compared with 97% capacity factor in the year-ago period. This improvement resulted in a 1.9% increase in nuclear generation. An improvement in spark spread supported our gas-fired combined cycle fleet, and during the quarter output from the combined cycle generating units increased 8%.

Power's New York and New England assets, which provide about 9% of the output produced in the quarter, experienced a 2% increase in volume. This improvement came from an increase in the output of the New York-based Bethlehem combined cycle facility. A decline in prices, however, offset the improvement in volume, resulting in a net decline in Power's earnings of $0.02 per share from New York and New England.

Power's PJM-based assets, which provided 91% of the output generated in the quarter, experienced a 1.7% decline in output. Lower output from the coal-fire generating facilities more than offset the increase in output from the PJM-based nuclear and gas-fire combined cycle assets. But the decline in volume had only a marginal negative impact on Power's quarter-over-quarter earnings, given the increase in the output of nuclear.

Realized market prices within PJM, however, improved during the quarter and, together with an increase in spark spreads, resulted in a net improvement in operating earnings of $0.02 per share. An increase in migration during the quarter partially offset this gain and reduced earnings by $0.01 per share. The average level of migration of BGS-related volume over the quarter was approximately 31%, compared with migration levels of 28% at the end of 2010. This level of customer migration was slightly less than expected for the quarter, and in addition for your information, head room was flat versus levels experienced in the year-ago quarter.

So the overall net impact of all of these changes in volume and price during the quarter was a reduction in Power's operating earnings of $0.01 per share.

As you can see on Page 16 of the deck, Power has taken advantage of market conditions to hedge increased amounts of its generation. For the remainder of 2011, Power has hedged 100% of its base load output, at an average price of $68 per megawatt hour, with approximately 75% to 80% of total forecast generation for that period hedged at an average price of $68 per megawatt hour. We continue to expect total generation of 53 terawatt hours this year.

Moving to 2012, hedges are in place for approximately 60% to 70% of base-load generation of 36 terawatt hours at an average price of $66 per megawatt hour. In 2012, this equates to 40% to 50% of forecast total generation of 54 terawatt hours hedged at an average price of $66 per megawatt hour.

Finally in 2013, Power has hedged approximately 25% of forecast base-load output of 36 terawatt hours at an average price of $69 per megawatt hour. This results in approximately 10% to 20% of total forecast generation of 56 terawatt hours, hedged at an average price of $69 per megawatt hour.

We are maintaining our forecast of Power's 2011 operating earnings at $765 million to $855 million. Although wholesale market prices have been stronger than forecast, operating earnings during the remainder of they year will be influenced by a decline in contracted energy and capacity prices, with the June 1 implementation of both new BGS and RPM contracts at prices lower than year-ago levels.

Power's operating earnings in the second-half of 2010 also benefited from extreme weather conditions, which supported output and pricing in which we haven't assumed will repeat in our 2011 forecast. Power's results during the remainder of 2011 will also continue to reflect an increase in depreciation expense.

Let me also make a comment about our wholesale power trading contracts, all of which are served from the market. The losses experienced relate to current and expected migration from these load contracts, and their impact on the marked-to-market for the remaining life of the contracts. And going forward, we will be limiting load contracting to transactions that provide hedges directly to our assets.

Let me now turn to PSE&G. PSE&G reported operating earnings for the first-quarter of 2011 of $0.32 per share, compared with $0.23 per share for the first-quarter of 2010, as shown on Slide 20. PSE&G's earnings continue to benefit from higher rate levels, an increase in investment that is earning a contemporaneous return, and the ongoing management of operating and maintenance expense.

An increase in electric and gas rates that went into effect on June 7 and July 9, 2010, respectively, added $0.02 per share to operating earnings. An annualized increase in transmission revenue of $45 million that went into effect on January 1 of this year added a penny per share to earnings. An increase in revenues associated with investments in capital infrastructure and renewables also added $0.01 per share to operating earnings. And PSE&G's earnings also benefited from an increase in demand, which added a penny per share to operating earnings. Colder winter weather, which was also colder than normal, added $0.01 per share to operating earnings. Weather-normalized electric sales were estimated to have increased about 0.3 percentage point for the quarter.

PSE&G's quarterly results also benefited from a decline in pension expense, and the absence of storm-related costs experienced in the year-ago period. These items combined to improve operating earnings by $0.04 per share. Higher level of invested capital resulted in an increase in depreciation expense, which lowered operating earnings for PSE&G by $0.01 per share.

PSEG is awaiting approval by the New Jersey Board of Public Utilities for its request to increase investment in electric and gas distribution capital infrastructure and energy efficiency by approximately $400 million, and we anticipate a decision on these filings during this summer.

PSE&G has also filed a request with the Federal Energy Regulatory Commission, or FERC, for incentive rate making on five 230-KV transmission projects, amounting to an investment of $1.3 billion. The request seeks construction work in progress in the rate base, and 100% abandonment cost recovery, with rates effective on June 14 of this year. This represents a re-filing of a request for similar rate treatment on four of these projects, which was previously denied without prejudice by FERC. The current filing provides support for our requests on a project-by-project basis.

We are maintaining our forecast of PSE&G's 2011 operating earnings of $495 million to $520 million. PSE&G earned a return on consolidated equity, inclusive of distribution and transmission, for the 12 months ended March 31 of 2011 of 10.8%.

Our forecast of operating earnings for the full year assumes PSE&G is able to maintain its returns, given ongoing control of its expenses, and a full year of electric and gas distribution and transmission rate increases.

Now let me comment on PSEG Energy Holdings. Holdings reported a loss in operating earnings of $3 million, or approximately $0.01 per share, versus operating earnings of $7 million or $0.01 per share during the first quarter of 2010. The results reflect the absence of a gain on the sale of a lease in the year-ago quarter of $0.01 per share, and also a write-off of holdings investments in the energy, storage, and power joint venture during the quarter reduced earnings by $0.01 per share.

Just a comment on financings before we move to the Q&A. On April 15, PSEG, PSE&G and Power each entered into five-year credit facilities which in total represent $2.1 billion in credit capacity. The Company's total credit capacity is now $4.3 billion, an increase of $650 million since year end. And of this amount, $4.17 billion was available on April 30 of this year.

PSEG ended the first quarter with $900 million in cash, and this includes completing our annual funding of over $400 million to our pension trust this quarter, which brings our funded ratio on a PBO basis to over 90% . In April, PSEG Power retired $606 million of maturing 7.75% senior notes, using cash on hand. The sale of Power's Guadalupe, Texas, combined cycle plant closed during the first quarter for $351 million. The sale of the Odessa, Texas, combined cycle plant is expected to close during the second quarter.

So our balance sheet remains strong. The strength of PSEG's financial condition was recently recognized during the quarter with an improvement in S&P's outlook for PSEG, PSE&G and PSEG Power from stable to positive, as well as a positive outlook from Moody's for PSE&G issued just yesterday, together with a reaffirmation of our ratings.

As Ralph has indicated, we are maintaining our forecast of 2011 operating earnings of $2.50 to $2.75 per share.

And with that, we're now ready to take your

Ladies and gentlemen, we will now begin the Q&A session for members of the financial community.

(Operator Instructions)

Your first question comes from Paul Patterson from Glenrock Associates.

Good morning.

Good morning, Paul.

Could you remind us how much pension is expected to contribute in 2011 versus 2010? For the full year?

Sure. Thanks, Paul, it's Caroline. You may recall that we have experienced a decrease in pension expense since the increase we had between 2008 - 2009.

So, we do anticipate a decrease in pension expense in the order of about $30 million between the 2 years. That contributes to an overall slight decrease in our O&M on the year-on-year basis. If you excluded the decrease in pension, O&M is reasonably flat ex-pension.

Okay, great. The RPM auction that's coming up -- with all the changes that have been made, and what have you, I was just wondering if you have any update on what your expectation is, with what we might see pretty shortly, I guess?

Paul, as you know, we don't project outcomes. We're in the middle of the auction right now. Data was being submitted this week, and final results will be posted by PGM a week from Friday, on May 13. That's about all we're prepared to say at this time.

Okay. And migration, it sounds like it was a little better than what was expected. Is there any change in the outlook there? I know it's just been one quarter, so I don't know if there's been -- I don't know if that's enough of a data point, but just any thoughts about how that might be going forward?

Yes, Paul, it's Caroline. Yes, you're right. It's a little too early to change any of our expectations and forecasts for the full-year based on what we saw this year -- this quarter. Pointing out not just the migration levels, but also the head room.

Head room was essentially flat to what head room was last year in the first quarter. As you know, as you think about this over a multi-quarter period, it is the head room that in the long-term matters relative to the ability of retailers to garner customers. So, flat head room year-over-year -- and by the way, flat at not a very high amount.

You remember last year we saw head room get very flat as we had a very, very hot summer and high prices in the marketplace. Two years ago head room was higher, so that compression of real-time prices, given what happens in the market, either because of demand, or driven by the economy or weather, makes a difference to head room. And in the long term that's what drives the ultimate migration. So, it's a little too early from 1 quarter to modify our expectations at this point. But so far, a little bit better than what we were expecting.

Okay, great. Thanks a lot.

Your next question comes from Ashar Khan.

My question was regarding the head room, so it's been answered. Thank you.

Thanks, Ashar.

Next question, Operator, please.

Your next question comes from Jonathan Arnold from Deutsche Bank.

Good morning.

Good morning, Jon.

My question's on hedging, and specifically 2013. Last time, I think I guess it was mid-April, you put out that slide that was 20% - 30% at $72 on base load, $72, and now it's 20% - 30% at $69. Have you just moved up the number within the range, or have you added some off-peak hedges, or is there something else going on in there?

Jonathan it's Caroline. No, nothing going on unusual in there. Keep in mind, when we provided the hedging data at the March 7 meeting, or at the last call, we had the BGS results that had a portion in there. So, now we're just adding some incremental hedging for 2013, as you normally would expect that we do, and, of course, as you add those hedges, prices come down slightly relative to what was embedded with the BGS hedges. So, nothing unusual there. Really just layering on hedges.

Within that 20% - 30% range, you are now more hedged than you were before?

That's right. That's correct.

You said 25%. I guess that's -- is that a spot -- just you're saying you're just somewhere in that range?

We are just in that range. We don't give the specifics within the range.

Thank you. I guess if I could ask another 1. On the retirement of the data PEG Power, should we anticipate that you'll be looking to refinance that, or is this just part of the ongoing deleveraging?

Yes, so good question, Jonathan. We were able to pay down the debt in April from cash on hand, as I mentioned, given the strong performance through the first quarter. Relative to refinancing, obviously, we look at those plans over the long term. Don't have any immediate plans for refinancing.

And of course, we watch the metrics for PEG Power, and they're in very good shape in terms of where we ended the quarter, debt-to-cap was 40%. So, no immediate plans. The balance sheet's in very good shape.

Over the long term, you should anticipate, obviously, seeing us do some refinancing. The next maturity, actually, for PEG Power doesn't come until later into 2012. So, we have a pretty stable balance sheet for Power right now. So, maybe over the long term, but nothing coming up in the near term. We don't need it.

Yes.

Thank you. Next question, Operator?

Your next question comes from Paul Fremont with Jefferies.

Thank you very much. Really 2 questions. One, the significant drop in volumes in New England -- do you expect that to be permanent on a going-forward basis for the rest of the year, or what are you expecting to see, given the relatively low gas prices that we have?

Right. So, Paul, good question. Relative to New England, though, it's really all about coal, because as I mentioned, what we have in New England, of course, is our Bridgeport Harbor station. So, given where prices are and where spreads are, a little hard to forecast that this period of time, but we did have some obviously lower generation because of having the coal fleet, and just the challenges right now for coal in that market, relative to gas.

That trend should continue also with the generator tax, I guess it was signed by both the House and the Senate. I think the governor's expected to sign the legislation. Do you have any plans to contest that tax or --?

Yes, we joined with others in Connecticut, in identifying the fact that's really going to just increase customer bills in the state and is not in the state's best interest. So, we're an active participant in that right now, Paul.

Back on your question relative to longer term. So, obviously the economics of coal and dispatch are challenged right now, and that's what Bridgeport is experiencing. Over the longer term, we do expect coal to return.

In fact, if you look at our hedging data and the terawatt hours we expect to generate, for the subsequent years you see increases over this year, and that's from the expected improvement across the fleet from coal generation, given that long-term expectation for some improvement in dark spreads.

I guess the last question I have is, it looks like coal prices per megawatt hour actually decreased quarter-over-quarter. Does that relate to contracts, or are you seeing prices that are different than what we see quoted in the spot market?

Right. So, remember, Paul, as we always talk about the prices quoted in the spot market and the prices that we pay for coal are different, because you have to factor in transportation and of course the contracting that we have. If you think about what we have for coal -- and by the way, we're relatively hedged for coal out through 2011 - 2012 --the prices that we pay, keep in mind now that the BETs in service were not using the Adaro coal at Hudson, and that reduces prices on a per-megawatt-hour basis to about the mid-40s this year, relative to having Adaro coal last year.

By the way, the pricing of Bridgeport Harbor with Adaro this year, and you know we have a reset that occurs at the end of each year -- is about the high 40s relative to Adaro. Then for Mercer, given the BET, it actually also has prices that are around the mid-40s on a per-megawatt-hour basis, as well.

Of course, Keycon continues to run the cheaper coal, the nap coal. But that hasn't changed on a year-on-year basis. And that's the lowest-priced coal. And actually, that's the unit that was running more -- the 2 units that were running more in the quarter.

So, if you compare quarter-over-quarter, you're seeing less coal being run, and it's the higher-priced coal, if you will, from the units last year's quarter, like Bridgeport, versus this quarter. Less coal is running, so there is a higher proportion that represents Keycon, which is the cheapest coal.

Thanks a lot.

Okay.

Your next question comes from Julien Dumoulin-Smith from UBS.

Hi. Good morning.

Good morning.

I have a quick question about the New Jersey LCAPP new build. Assuming comparable energy prices to last here through the balance of this year, what would a mitigated bid from a combined cycle look like, for a unit akin to those proposed? Presumably that would be above clearing prices, but I'd be curious to hear from yourselves.

Let me make sure I understand the question right. So, the net co-number is a combination of the capacity of the construction costs and the energy price, historically viewed over the prior 3 years. So, in this particular year, we have 2 anomalous years in the history, if you will, Julian. We have the $13 permit BTU days of 2008, and we have the incredibly hot summer of 2010.

So, I believe the net co-number this year for combined cycle is about 205 - 210, something of that sort. The minimal off of price rule says that you can bid no less than 90% of that, which gets you down to the 185 level.

So you'd have to have a summer in 2011 that's not likely to be driven by high gas prices, just because of the fundamentals of the market, but would have to be driven by the high weather, and even that probably doesn't get you to you what we saw in 2008. Our expectations would be that the net co-number next year is likely to be higher for a combined cycle unit than it is this year.

Any sense on magnitude there? Sorry to cut you off.

No, I don't want to put that number out there, but PJM will publish it in January of 2012, so we'll all know together.

All right, great. Secondly, with respect to the infrastructure stimulus projects, I believe originally you had discussed getting approval, call it in the April time frame. Just perhaps a little bit of commentary around it seems like a little bit of a delay here? Is that tied at all to the EMP delay? Is that sort of becoming meshed together, or is it sort of a separate topic?

I think that our history of perhaps predicting regulatory schedules is one that lends itself more to coming out a little bit later rather than on time or sooner. If you look overall, many of these filings went in November of last year, so we're still within a 5-month window.

I wouldn't read anything into this other than people are busy, and they're tackling LCAPPs, and SOCAs and infrastructure filings, and we're having very productive conversations with the staff about the importance of these things. As we said April last time, we appear to have missed the deadline, and we're not worried about the long-term acceptability of it.

Great. Thank you.

Your next question comes from Brian Chin from Citigroup.

Hi, good morning.

Good morning, Brian.

Ralph, we've seen now 2 companies in PJM merge, ostensibly part of the reason why they merged is they're merging their competitive retail and generation businesses, and arguing that overlapping of business models is the right way to go.

To what extent do you think this changes PEG's positioning in sort of the competitive landscape, just overall, not just for retail, but just overall? How do you see the broader, strategic picture unfolding for PEG here -- if it's changed over the last 2 quarters or so?

We talk about it all the time, Brian, but it has not changed. We are terrific and getting even better at running power plants and making sure that the output of those power plants is there when needed to supply the market, and the retail business is fundamentally a different business.

So, our strategy continues to be to have operational advantages -- operational broadly defined as cost advantages, environmental advantages, and those are related to each other, in competitive markets. That's the business I think we're good at, and that's where I think I still see value-creation opportunities.

One follow-up question to this. Many of the issues that investors have been thinking about with PEG over the last year, I think it's fair to say, have come from New Jersey-specific regulatory and political issues. Any thoughts on whether diversification outside of New Jersey would, in your mind, help be part of the value creation story potentially down the road, or just extra thoughts there on how to think about that?

That is something we have said consistently for a good number of years, that we would like to see diversification outside of New Jersey, only a footprint. The characteristics, the features of markets we're looking for are competitive markets, with the opportunity to demonstrate our operational capabilities and our -- so that we've been quite candid and straightforward on. That has not changed, either.

Thank you.

Next question comes from Steve Fleishman from Bank of America.

Hi, Ralph. Be curious to get a sense of the reaction of the New Jersey political regulatory folks to the FERC ruling, and what should we be prepared to be watching over the next coming months with respect to their reaction?

Yes, Steve. It's always a little risky to give other people's reactions, right? So, I'll play back for you what we've seen reported in the press, which is that the regulatory reaction has been one of disagreement, and an intention to appeal to FERC and possibly to appeal in the courts. So, I think that speaks for itself, and at the risk of throwing a bit of a lifesaver to FERC, -- not that they need 1 from me -- we too were slightly disappointed.

We thought that the clearing price should have been multiple years as opposed to 1 year, so maybe FERC got it right. But they didn't satisfy everybody with their decision. Nonetheless, we think at least that it was a very constructive decision, and one that moved in the right direction. I'd rather not speak for others, I guess, is my bottom line there.

Okay. And I guess 1 other question. Obviously, the balance sheet's very strong, and you've been getting some, at least, credit stability or upgrades.

It doesn't really appear that the stock market's giving you any credit for the strength of the balance sheet? I don't know if it's just the point in time, but just how are you thinking about that?

Steve, we think about this over the long term. I couldn't agree with you more. Perhaps in the DNA of the Executive Team to always believe the stock market's not giving enough credit. That's perhaps a separate conversation.

So, we do have some investment opportunities. We talked a minute ago when Julian asked a question about the stimulus funds, and we'll have another round of our tests to look to see what transmission needs are coming up and so, we think we have good ideas to get fair risk adjusted returns for that capital deployment.

Over the long term, we still are in basically a commodity business with its ups and downs. You want to have that strong balance sheet to protect you in the future. I think that over time, we will get recognition for our capital discipline and for that strength that we value so highly. And if that's not realized on a day-to-day basis by a couple of folks who are not long-term investors, then that's a price we're willing to pay.

Thank you.

Next question comes from Marc De Croisset from FBR Capital Markets.

Thank you very much. Good morning, everyone. I just wanted to focus for a second back on that hedging update slides on 2012 and 2013 base-load volumes. You have about 36 terawatt hours there.

It just occurred to me that in recent years that number's been in the 39- - 40-terawatt-hour range. I just want to be clear about what the source of that difference is in the forecast, between the history and the future here?

Keep in mind, when you look at the way we've now configured our slide, just to make sure we kind of give you the detail on how we did the hedging. We used to provide the hedging data for you on the basis of nuclear and coal, and our hedging percentage of nuclear and coal and nothing else, right? And that's where we would talk about how BGS layered in, and went from being about 50% of the nuclear and coals to about 35% where it is now with migrations.

We've now split out the chart in a different way. When you look at base load on our chart, so if you look at the chart that we've provided, let's just go out to look at 2012 because it's a full year, you see 36 terawatt hours, but that's a different calculation of the total. It is not total nuclear and coal. It is nuclear and base load coal.

So it is nuclear and Keystone and Konoma. The coal that we have Hudson and Mercer and Bridgeport is in the intermediate coal category, which is now together with combined cycle and peaking.

So, the numbers that you think of from the previous way we provided the slide was a different cut of the data. We've now tried to cut it in a way that we hoped would be more helpful, which is to give you base loads, those units that typically are running all of the time, and of course nuclear is one of those.

And Keycon, as I just mentioned earlier, tends to run most of the time. And then provide the rest of our fleet in the second category, and then give you the breakout of the hedging between the two categories, category-by-category, and in total.

So, in the aggregate, there's not an expectation of a different expected total generation of the fleet at all, and you see we moderated a little bit year-by-year as we run the forwards and look at the dispatch, but we've tried to break the data out in a different way that we hoped would be more helpful to you.

We'll update it , as we've done this quarter, on an ongoing basis, inclusive of the total amount of hedging that moves into the intermediate fleet -- more than just coal, if we're doing some nearer-term combined cycle hedging. So, that's the reason for the difference, and I hope that helps square the math from the prior

That's actually very helpful. So, there's no -- this is not a reflection of the impact of dark spreads on even base load volumes. That is not at all a correct interpretation, right?

Not on base load volumes. Keep in mind what we have in base load is Keycon, and they have run, right? The dark spread impacts you're seeing, as I talked about in the remarks, related to the mid-merit poll in the current environment, but we do expect more generation in the out years with the improvement in dark spreads, and that's why you see the total terawatt hours climbing in the out years.

Okay, terrific. Thanks for that clarification.

Your next question Gregg Orrill from Barclays.

Thanks. I was wondering if you could comment on the $1.3 billion in transmission opportunities on the 230-KV projects that you're re-filing, and sort of what the strategy is there, and how you expect a different outcome when re-filing?

When we filed 4 projects originally, we filed them as a single unit and FERC basically, without prejudice, refused to give us the incentive rate treatment. In this case incentive rate treatment is really construction work in progress, and recovery of any costs that may have been incurred in the event of an abandonment.

What FERC said is, you need to come back and simply file each of these projects on their individual merits. So, we have gone back sometime in mid-April, I think we did, and now instead of re-filing the 4 projects as a single unit, we've re-filed 5 projects separately, and we're asking for the 11.68% return on equity, and the construction work in progress, as well as the abandonment recovery.

We asked for those rates to be effective on June 14. Typically FERC takes about 60 days to decide these things. Unfortunately, you can't handicap them. Ask on June 15 what we think the outcome will be, because we probably will have had it in hand for 24 hours at that point.

Thank you.

Your next question comes from Reza Hatefi from Decade Capital.

Thank you very much. I was just curious, there was some questions on the balance sheet strength. The dividend now has been flat for, I think, 6 straight quarters. What is the thought process there, and why not have an increase? Why has it been flat, I guess, for the prior couple quarters?

Sure. Thanks for the question. Of course, we did increase the dividends last year in the first quarter, and what we announced this year was the dividend at the same level. So, we didn't have an increase this year.

Keep in mind, as you know, our guidance relative to the dividend is on a payout ratio target basis of between 40% - 50% of our operating earnings as our dividend payout. Given the operating earnings forecast that we have provided and re-confirmed again on this call, if you look at the mid-point, approximately, and look at our dividend, you would get to a payout of about 52%.

So, while we don't look at the 40 - 50% as an absolute, and we're not at all uncomfortable with the 52%, given the current challenges relative to pricing in the market, we felt that the balance of always monitoring that payout, so we can keep it in that range on a long-term level.

But, given what's happening with prices right now, it seemed appropriate to keep it at the same level at this point in time. But, of course, we looked at that over the long term, as well.

I guess just a follow-up on a prior question. You mentioned having an interest in diversifying out of New Jersey. Would that interest solely be in unregulated, or even regulated, would be of interest to you?

The focus would be in unregulated. With the approach we've taken on regulated growth, has been an organic approach. We're just uncomfortable with the valuation of purely regulated plays. The premium one has to pay for the regulated play.

Then the give-back that occurs in terms of the regulatory approvals that are required, whereas doing regulatory growth organically is something that we think has been a benefit to our shareholders, as well as our customers in terms of meeting some of the policy objectives of the state.

In the unregulated space, we would look for expansion, both in terms of wholesale power generation, as well as renewables growth. The challenge there, of course, is not being bitten by the winter's curse.

What we look to is to find assets that we can materially improve their operation, or make capital improvements that are consistent with capital improvements we've made in the past, so that we have an ability to differentiate ourselves, other than simply having some unreasonable rosy forecast of what forward prices are going to be.

Thank you. Thank you very much.

Our next question comes from Nathan Judge from Atlantic Equities.

Good morning. Could you give us an update on when you expect the BLM to provide your permit for Roslyn Susquehanna, please?

Nathan, it's actually not the Bureau of Land Management, it's the National Park Service, they're 1 of the entities. We will be giving further detail in the Q, but we did receive a letter from the National Park Service yesterday, saying that they expect a 3-month delay in the issuance of that permit, and because it was yesterday, our construction team has not fully evaluated what that may or may not mean for the construction schedules. So, the new news is a 3-month delay, but we've not analyzed what impact that could have on construction.

Thank you. I understand that the water, the 316b rules, are not finalized, but as they're proposed currently, do you expect to have to put in some type of water cooling towers at Salem or the Oak Creek plant?

We do not. There's a little bit of a work that has to be done there. We're delighted by the fact that the proposed rules -- and as you correctly pointed out, they won't be made final for another year -- specifically mention the technology that we use at Salem as the best technology available, or a candidate, one of the best technologies available, limits themselves to one. So, that's a positive outcome.

The dilemma that we're faced with that we're trying to get our engineers to get their arms around is the fact that the impingement rate that is quoted in the proposed rule, using that technology is lower than the impingement rate we've been able to achieve. We have some technical people trying to figure out is there something operationally that others have done that gave EPA the confidence to go out with their impingement rate, or is that perhaps a miscalculation of where that number needs to be. I don't know if Oak Creek is already on a cooling tower operating basis.

Okay, great. Just as it relates to the contracts you signed under the LCAPP, and obviously you signed them under protest. I think that they're for a kind of 2015 - 2016 period. How does it work out given, say, FERC ruling?

How do the generators actually build this? Are they liable now? Could you just give us a bit more about the contracts, and how you see it all playing out? Thank you.

What I will speak to is why PSE&G signed those under protest. We're just concerned that these contracts, which we're not allowed to disclose the price of the contracts, but they're above market, and they're going to require billions of dollars in price guarantees, in return for some untested claims of future benefits.

Now, I'll let the developers speak to why they think that it's a reasonable risk on their part, or why the contract is protective of them. That's not for me to say.

Are those any details available? I know the Commission declined to provide that until, I believe, next year. But are there any available details that can be disclosed?

I don't -- there are some public documents, but I don't know. I just have to be careful, because as part of the utility we have access to information. I just don't recall the details of what is and isn't available. I rather just simply say you can get the agent's report from the BPU, and that's the right way to get the information.

I understand. Finally, could you provide some more information on what was in Other Income, I think, for Power this quarter? I think there was about a $60 million some-odd Other Income boost there. I just wanted to see if there's any further detail there.

Sure, sure, Nathan. In Other Income, 1 of the things that is in that is the NDT, the impact of the NDT trust. So, we have 2 items that we pulled out of our operating earnings and put, if you will, below the line for operating earnings purposes.

One is the marked-to-market on transactions that actually are not (technical difficulty) the trading portfolio but transactions that relate to our access. That is in margins. That is not in Other Income.

But the NDT trust, which is an over $1 billion trust that we've had dedicated since the commissioning of our nuclear plants. That is something that the results of which go into Other Income but then we take them out for operating earnings purposes.

You'll see some benefit relative on a year-on-year basis in the NDT portfolio this quarter, and it relates to the fact that portfolio is recognized in our income statement on the basis of realized gains when securities are sold, not, if you will, on a marked-to-market basis when there are embedded gains. It's sort of like holding a stock that's in your portfolio. You don't recognize the gain until you sell it.

We did some portfolio modifications in terms of our managers, the long-term portfolio in equity and bonds, and by virtue of making some manager changes, some of the securities were liquidated. Those gains rolled through the NDT line. Comes into Other Income on the GAAP statement, goes below operating earnings for purposes of our disclosures to you.

Thank you.

Sure.

Your next question comes from Angie Storoznyski from Macquarie Capital.

Thank you very much, 2 questions. One, I understand the subsidized gas-fired capacity in New Jersey will be MOPERed into -- well not this auction, but next year's auction, capacity auction, -- but I also remember that New Jersey has the RACT rule, the Reasonable Available Control Technology rule that kicks in, in 2014 - 2015, which we could lose some of the older gas or oil units in the state.

So, it is still possible that even with MOPER in place, this new capacity will actually clear in the next auction. We heard from some companies still pursuing the bill, the gas bill, even despite MOPER. Is your view that -- obviously there are pending appeals. Is your view that this is basically, it is not going to distort both capacity and energy markets in New Jersey? This additional capacity?

So, Angie, let's make sure we get our MACs and RACTs and all that other stuff right. So, the MAC rule, which would apply mostly to mercury emissions, or SO2 and NOX, are largely anticipated to have an effect in 2015 for coal-fire generation. We're okay in that regard, having made the improvements that we've made.

However, there is an ozone issue surrounding high-energy delivery days that will affect some of the older peaking units that we possess, as well as others possess, that right now look like they will be withdrawn from the market, more than likely in 2016. Although as the rules are written now, it's 2015, but there's been substantial discussion and some comments made by regulatory officials in the Department of Environmental Protection that they do anticipate that possibly moving out a year.

As capacity is withdrawn for environmental reasons, the market price will call for the need for additional capacity or the expansion of existing capacity. And we think that's the right way for the market to allocate resources. We've already, in fact, bid and cleared 2 new peakers in anticipation of that future. Others are bidding DSM in anticipation of that future, and what RPM is doing is making sure the lights stay on at the lowest possible prices. Where we tend to disagree is when government decides that it wants to be the 1 to manage supply, and it agrees to finish contracts that are above any market price that we've seen in the last 7 years.

If supply is needed, and these plans can fit underneath the market mechanisms established, then that's great. We would expect ourselves to be full participants in that market. It's when you start guaranteeing someone a price that's above market for a decade and a half that we think that's not fair to investors who have put their capital at risk, nor to customers, who are then on the hook for the long term.

Okay. The second issue, you mentioned that the migration in the quarter came slightly below your expectations, but we have -- we've seen one big merger just completed, building a big retail operation. And now we have another one just announced, also potentially or in the future expanding their retail operations.

Is your stance still that you are not willing to get engaged in retail as a defensive strategy? You might be facing even more competition going forward for your customers at the utility?

You never say never, Angie. However, what we're seeing is that the headroom is changing, right? As what seemed to be an anomaly of $13 - $14 gas prices now has resulted in a year of steady power prices, with not a lot of movement in what those look like. It's not a question of Power being able to capture all of the margin that was lost, if we're only selling electricity at retail.

The benefit of competition is that the decline in margin appears to be something that is being garnered by the customer, and the low barriers to entry into retail business appear to be resulting in a fairly competitive world, where customers are being signed up for thin margins barely above wholesale. So, 2 years ago we saw headroom that was 3 times what we saw this quarter. We think that's probably going to be a path in the future.

I don't want to second-guess other people's strategies, but given the different skill sets, given the different requirements for participating in that market, what I'd like to focus on is running power plants really, really well, and being the one that can be there when power prices reflect the needs of those retail customers, and let others worry about whether or not there's an attractive margin to be gained by being an intermediary.

So, I don't see right now the retail business as being a hedge for the wholesale power business the way others do. But believe me, we look at all sorts of data, and all sorts of numbers and follow the performance of others to see if there's something we're missing. Right now, I just like the fact that our (technical difficulty) ran 2% more for this quarter than they did last year at this quarter. And that's what we will pay attention to.

Thank you.

Operator, we're slightly past the hour that we've devoted to this, so I'm going to turn the call over to Ralph Izzo for some closing comments.

Thank you, Kathleen. So thank you, everyone, for your interest, for your listening in, for your questions, and despite the market conditions, I hope that you are as pleased as we are with the first-quarter results.

I just want to reiterate that you can look forward to our steady-as-you-go approach. We're going to continue to demonstrate a passion for operational excellence. We're going to continue to have an ironclad commitment to preserving our financial strength, and a highly disciplined approach to capital deployment.

With that I will wish all of you a very, very happy Cinco de Mayo, and we'll see you again soon. Take care.

This concludes today's conference. You may now disconnect.