公共服務電力與天然氣 (PEG) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group third-quarter 2011 earnings conference call and webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session for members of the financial community. (Operator Instructions).

As a reminder, this conference is being recorded Tuesday, November 1, 2011, and will be available for telephone replay beginning at 1 P.M. November 1, 2011 through November 7, 2011. 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, Vice President of Investor Relations. Please go ahead.

Thank you, Ashley. Thank you, and good morning to everyone who is participating in our earnings call this morning. As you know, we released third-quarter 2011 earnings statements earlier today. And as mentioned, the release and attachments are posted on our website at www.PSEG.com under the Investors section.

We also posted a series of slides that detail the operating results by company for the quarter.

Our 10-Q for the period ended September 30, 2011 is expected to be filed shortly.

I don't intend to read the full disclaimer statement or the comments we have on the difference between operating earnings and GAAP results. But 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. 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 we are required to do so.

Our release also contains adjusted non-GAAP operating earnings. Please refer to today's 8-K, which contains our earnings release and attachments or other filings, for a discussion of factors that may cause results to differ from management's projections, forecasts and expectations, and for a reconciliation of operating earnings to GAAP results.

I would now like to turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of Public Service Enterprise Group. Joining Ralph on the call is 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. Thanks.

Thank you, Kathleen, and thank you, everyone, for joining us today. Earlier this morning, we reported operating earnings for the third quarter of 2011 of $0.83 per share compared with operating earnings of $1.03 per share earned in 2010's third quarter.

We achieved solid operating earnings for the third quarter in spite of daunting challenges. Our biggest challenge remains the low price of electricity. The effects on our earnings are realized primarily through reductions in BGS and RPM prices effective on June 1 of this year.

During the quarter, however, we were also faced with the need to respond to the biggest storm to hit our service territory in our 108-year history. We experienced an historic number of customer outages and level of system damage in the wake of Hurricane Irene. As usual, our employees met the challenge. Thousands of employees from around the entire enterprise banded together with a common purpose, to help our customers when they needed us most.

The utility counted on and received the assistance of everyone in PSEG who could lend a much-needed hand. The employees of PSEG Power also met the challenge. Their efforts to maintain the material condition of our generating units assured their availability during that critical time. Our three New Jersey nuclear units remained online during the hurricane, and that strong storm performance was typical of the quarter as a whole.

The Hope Creek nuclear station operated at a 97% capacity factor during the quarter, resulting in our nuclear fleet operating at a better-than-expected capacity factor of 93% year to date.

Our Fossil fleet met the demands of the system during this summer's historically high temperatures. Our combined cycle fleet continues to reduce its forced outage rate, with all units operating during the July heat wave.

Our workforce was called upon again this past weekend in response to a northeaster that resulted in substantial damage and customer outages. We expect to restore power to approximately 95% of the 500,000 customers who lost power by this Thursday evening, and we have already restored 87% of the affected customers. I expect to have more to say about our employees' efforts in this storm during our next quarterly call.

We remain on track with our major capital programs at PSE&G and PSEG Power. Please recall that our budgets call for spending $6.9 billion over 2011, '12 and '13, with '11's capital outlays at $2.3 billion.

Our $750 million Susquehanna-Roseland 500-KV transmission project, which we are building in conjunction with PPL Energy, has been placed on a list of projects for oversight from a new federal Rapid Response Team, with the aim of coordinating and expediting the federal permitting process. This line is scheduled to be fully in-service in June of 2015.

Our other major transmission projects, the $895 million Northeast Grid Reliability Project and the $336 million North-Central Reliability Project, are in the midst of the siting approval process. The North-Central Reliability Project is scheduled to be in-service in mid-2014, with the Northeast Grid Project scheduled to be online a year later. These three projects represent 31% of our planned transmission investment program of $2.9 billion over the period 2011 through 2013.

The capital improvements will not end in the next two years. Approximately $600 million of spending on these projects alone extends beyond 2013.

The construction of new peaking capacity by PSEG Power in New Jersey and Connecticut is on schedule. These facilities, which represent approximately 400 megawatts of more efficient, clean capacity, are scheduled to be placed into operation by mid-2012. Our $270 million investment in the two new peaking units in New Jersey will replace older, less efficient units that we plan to retire in 2012.

During the past five years, we have invested more than $2 billion to replace inefficient, older generating units and to upgrade our existing facilities to meet new environmental restrictions.

PSEG is a long-time advocate of the Clean Air Act regulations. We view the EPA's recent technical adjustments to the Cross-State Air Pollution Rule, more commonly referred to as CSAPR, as favorable for our fleet.

We are also well-positioned to meet the anticipated requirements under EPA's HAPs MACT regulation, which is scheduled to be issued on December 16.

We believe these regulations are long overdue. Our experience shows that it is possible to clean the air, create jobs and power the economy all at the same time. The issuance of these regulations will also provide the industry with much-needed certainty to invest in long-lived capital-intensive projects such as power plants.

The investment we have made in our coal fleet will also maintain the fuel flexibility which has been important to power. In another important matter, litigation challenging New Jersey's attempt to subsidize generation is moving forward. The Federal District Court of New Jersey issued a ruling on October 19 rejecting the Board of Public Utilities' motion to dismiss our LCAP complaint. This action permits us to pursue all claims filed in the complaint.

The motion by the New Jersey Division of Rate Counsel to dismiss the Electric Distribution Companies' appeal of the New Jersey Board of Public Utilities' order approving the standard offer capacity agreements was also denied.

We understand and fully support the state's desire to implement policy that fosters economic growth, but the LCAP legislation will not achieve that end. We would prefer to find a solution to the challenge of economic growth that supports investment in the state and doesn't look to long-term above-market subsidies as the answer. Government interference in a market that is working, as we've seen in the past, is likely to have unintended consequences for the customer, and we have early evidence that the situation is no different this time around.

Our operating earnings for the first nine months of 2011 of $2.27 per share, while down from last year's operating earnings of $2.53 per share, were stronger than expected. We have benefited from higher-than-anticipated wholesale market rises for power and a tight control on expenses. We have also benefited from lower pension expense this year versus last year. The year-to-date results support operating earnings for the full year at the upper end of our earnings guidance of $2.50 to $2.75 per share.

I must add that although 2011 has benefited from a reduction in pension expense, recent volatility in the financial markets make it difficult to predict the year-end funded status of our pension obligation, which could result in increased pension expense in 2012. These issues aren't easy to forecast. We've seen markets improve since the end of September, notwithstanding yesterday and today's early moves.

Also, the discount rate on our pension plans is established on the last day of the year.

On another matter, during the quarter, we established a reserve against the value of our Dynegy leases. This reserve resulted in a non-cash charge of $170 million, or $0.34 per share. We fully intend to assert all claims against Dynegy, but can't be certain of success.

Our financial condition remains strong. We are focused on providing value to our shareholders through increased investments that earn competitive returns. We are able to focus our capital program almost exclusively on growth opportunities now that the investment we made to upgrade the environmental equipment on our generating units is behind us. And we can finance this growth without diluting our existing holdings.

I will now turn the call over to Caroline to review our operating results in greater detail.

Thank you, Ralph, and good morning. I will now review our quarterly operating results, as well as the outlook for full-year operating results by subsidiary company.

As Ralph said, PSEG reported operating earnings for the third quarter of 2011 of $0.83 per share versus operating earnings of $1.03 per share in last year's third quarter. Slides 4 and 5 provide a reconciliation of operating income to income from continuing operations and net income for the quarter and year-to-date.

We've provided you with a waterfall chart on slide 12 that takes you through the net changes in quarter-over-quarter operating earnings by major business, and a similar chart on slide 13 provides you with changes in operating earnings by each business on a year-to-date basis. So let's review each company in a little more detail, starting with Power.

As shown on slide 15, PSEG Power reported operating earnings for the third quarter of $0.51 per share, compared with $0.67 per share a year ago. Power's third-quarter earnings were affected primarily by a quarter-over-quarter decline in realized energy and capacity prices. Recall that capacity prices declined to $110 per megawatt day on June 1 of 2011 from $174 per megawatt day in the prior 12-month period. This decline reduced Power's earnings in the quarter by $0.07 per share.

A decline in energy prices under the Basic Generation Service, or BGS, contract to $94.30 per megawatt hour, also effective on June 1, from the prior contract price of $111.50 for megawatt hour, as well as the impact of other re-contracting efforts, together reduced earnings in the quarter by $0.07 per share.

Quarter-over-quarter output declined 7%, given a decline in weather-related demand versus last year. The decline in volume lowered Power's earnings comparison by $0.02 per share. Although weather conditions experienced in the third quarter were a bit above normal, the summer of 2011 was cooler than last year's record heat.

As was the case in our first two quarters, earnings comparisons at Power were also affected by an increase in depreciation expense and a decline in capitalized interest associated with the startup of the backend technologies at the Hudson and Mercer coal units. Together, these items reduced earnings by $0.03 per share.

Power has taken advantage of the flexibility available under the terms of one of its coal contracts to sell supply on the open market. The sale of coal in the third quarter of 2011, coupled with the absence of freight cancellation costs incurred in the year-ago quarter, benefited Power's third-quarter 2011 earnings by $0.03 per share.

An increase in operation and maintenance expense due to the timing of planned outages at the Fossil stations reduced earnings by $0.01 per share. Power's earnings were also affected by the absence of trading-related losses in the prior year of $0.03 per share and other miscellaneous items, which together reduced earnings by $0.01 per share.

You will notice that I didn't mention migration in the quarterly earnings comparisons. Power's third-quarter earnings comparisons were not affected by customer migration away from the BGS contract. Although the level of customer migration grew during the quarter versus year-ago levels, headroom continued to decline. The reduction in headroom is a function of both the decline in the average price charged customers under the BGS rate, as I just mentioned, as well as an increase in the market price of power. Therefore as a result of those two factors, an increase in net migration with a decrease in the cost of each migrated customer, migration resulted in no net impact on earnings quarter-over-quarter.

Customer migration represented an estimated 33% of BGS volumes at the end of the third quarter of 2011 compared with about 26% at the end of September 2010. And note that on a sequential quarter basis, migration is essentially flat.

Due to a slowing in the rate of growth of customer migration, a continuation of the pattern witnessed earlier in the year, we've lowered our full-year estimate of customer migration to an average of 32% to 33% from the prior estimate of 34%. Our updated estimate also assumes year-end customer migration levels of about 33% to 35% versus our previous forecast of 37% to 39%.

The net impact of lower hedge prices for capacity and energy, offset in part by higher wholesale market prices and lower fuel costs than experienced a year ago, resulted in a $3.00 per megawatt hour or about 5.5% reduction in Power's gross margin rate during the quarter to approximately $54.00 per megawatt hour.

As I mentioned earlier, total output was 7% lower in the quarter. Power's PJM-based assets, which provided about 90% of the output generated in the quarter, experienced a 5% decline in output. The decline is primarily the result of more normal weather experienced in this quarter compared with the abnormally warm weather in the year-ago quarter. And the dispatch of our Fossil generation has also been affected by an increase in the operating costs at our New Jersey-based coal stations following the startup of the backend technology.

As a result of these two factors, our coal units experienced a reduction in output of 19%, but our combined cycle units experienced only a 6% reduction in output during the quarter from the relatively high levels of output in the year-ago period.

The nuclear fleet experienced an improvement in output. Power's nuclear fleet operated at an average capacity factor of 90.6% during the third quarter compared to an average capacity factor of 89.4% in the year-ago quarter. The Hope Creek Station, which we own fully, operated at a 97% capacity factor in the quarter. Hope Creek's performance more than offset a reduction in output at the Salem Station. Salem's performance was affected by high levels of debris in the Delaware River following Hurricane Irene and a five-day outage at Salem 2 to repair a coolant leak.

Power, in addition to selling excess coal supply on the market, has restructured the coal supply contract for the Bridgeport Station to more closely match supply with future coal requirements. The sale of supply added about $0.03 per share to Power's earnings in the third quarter and provided about $0.06 per share to Power's operating results for the first nine months of the year.

Our current coal supply is adequate to meet demand expectations, and we don't anticipate this level of sales continuing into 2012.

As I just mentioned, the dispatch of our coal units in 2011 has been affected by a reduction in demand relative to year-ago levels and an increase in the operating costs of our New Jersey-based coal units with the installation of the backend technology. If we take a moment to analyze dispatch economics solely on the basis of the cost of fuel, our gas units are dispatched before our coal units when gas is about $4.00 to $4.50 range per MMBtu.

The additional cost of the backend technology increases this dispatch breakeven analysis by about $0.75. This change in operating costs, coupled with a decline in weather-related demand, were the primary reasons behind a reduction in output from our coal units.

The availability of our combined cycle capacity provides flexibility for us to meet demand in the most economic way.

We estimate that CSAPR rules would increase the cost of operating unscrubbed coal units in the region by a similar amount, and would increase the cost of operating a clean coal unit, but by only a fraction of that amount. We think the market is responding well to the potential for increased emission costs and Power is well-placed to participate over the long term.

As shown on page 19, Power's output for the remainder of 2011 is hedged approximately at 80% levels, at an average price of $68 per megawatt hour. For 2012, hedges are in place for approximately 50% to 55% of expected total 2012 generation of the 58 terawatt hours at an average price of about $63 per megawatt hour.

For 2013, approximately 25% to 30% of expected total generation of 57 terawatt hours is hedged at an average price of $61 per megawatt hour.

Remember that when we refer to our hedge prices, BGS prices are full requirements less capacity; other hedges are at block prices, not full requirements. And BGS represents about a third of 2012's hedge value and about a half of 2013's hedge value.

Let's turn now to PSE&G. PSE&G reported operating earnings for the third quarter of 2011 of $0.30 per share compared with $0.30 per share for the third quarter of 2010, as we show on slide 24. PSE&G's results were affected by increased capital investment and the cost of responding to hurricane-related outages.

An annualized increase in transmission revenue of $45 million effective on January 1 of this year added $0.01 per share to results. A return on investments made under capital adjustment clauses supporting investments in renewables and electric and gas infrastructure programs added $0.02 per share to earnings. These improvements to earnings were offset by an increase in operation and maintenance expenses. Storm-related costs associated with Hurricane Irene and higher tree-trimming expense in the quarter amounted to about $0.03 per share.

This cost offset a reduction in pension-related costs, resulting in a net increase in O&M expense of about $0.01 per share.

An increase in depreciation expense and the absence of gains in the year-ago quarter reduced earnings by $0.02 per share.

PSE&G service territory experienced days of record-breaking temperatures during the month of July. And although temperatures reached new highs during several days, the number of hours in the quarter experiencing peak temperatures was lower than the levels experienced in the year-ago period. As a result, weather had little impact on PSE&G's quarter-over-quarter earnings comparisons.

Weather-normalized sales remain weak as residential customers conserve in response to economic conditions. For the quarter, we estimate weather-normalized sales declined by about 2.7%, resulting in a decline in weather-normalized electric demand of about 1.7% for the first nine months of the year.

In early October, PSE&G filed at the FERC for an increase in transmission revenues under its formula rate mechanism. If approved, PSE&G's transmission revenues would increase $94 million on an annualized basis, effective January 1 of next year.

The request reflects in part the forecast stepup in PSE&G's transmission-related capital spending and related costs.

PSE&G filed an incentive rate filing at FERC on October 31 of 2011 for the Northeast Grid Project. The filing requests approval for recovery of construction work in progress, or CWIP, in the rate base, 100% of abandonment costs and an incentive return on equity of 100 basis points.

PSE&G also filed at the New Jersey BPU for approval to defer expenses incurred during the quarter in response to Hurricane Irene. PSE&G expensed $13 million of hurricane-related restoration costs in the quarter, and requested approval to defer $29 million of incremental costs, with recovery at a future date. The deferrals represent one-time extraordinary costs such as mutual aid, and they are consistent with our prior practice.

Let me now turn to PSEG Energy Holdings. Holdings reported operating earnings of $0.01 per share for the third quarter of 2011 versus operating earnings of $0.05 per share during the third quarter of 2010. The decline in operating earnings for the quarter reflects the absence of gains in the third quarter of 2010 from the termination of leases and the absence of revenues from asset sales.

Let me just spend a moment on Dynegy. Our results for the third quarter reflect a full reserve for Energy Holding's $264 million equity investment in the lease receivable from subsidiaries of Dynegy Holdings LLC. The reserve resulted in an after-tax, non-cash charge against PSEG's earnings in the third quarter of $170 million or $0.34 per share.

In the event of nonpayment of the lease obligations, Energy Holdings intends to fully assert its claims against Dynegy Holdings, or DH, its directors and Dynegy affiliates, including its claims under a tax indemnity agreement designed to protect Energy Holdings from adverse tax consequences should the lease structure not be maintained and should any cash taxes be due.

Please keep in mind that this reserve is non-cash, but it does reflect the full extent of the charge of any future possible cash payments.

Let me spend just a moment on financings. PSEG ended the third quarter with slightly more than $1.2 billion in cash. Cash at quarter-end reflects receipt of the proceeds from the sale of Odessa, which occurred in July. Also cash tends to be higher at the end of the third quarter, reflecting the impact of demand in the seasonally strong third quarter.

Power and PSE&G's operating cash flows have also improved in 2011 due to a decline in tax payments related to the benefits of bonus depreciation. As we mentioned last quarter, we are still on track to receive about $800 million of cash in 2011 related to bonus depreciation, and our cash position reflects receipt of that on an ongoing basis.

Power and PSE&G both took advantage of low interest rates last quarter. During the quarter, Power issued $500 million of new debt, consisting of $250 million of 2.75% senior notes due in September of 2016 and $250 million of 4.15% senior notes due in September of 2021.

PSE&G issued $250 million of three-year medium-term notes at 0.85%. These financings, of course, also improved quarter-end cash on hand.

At the end of September, debt represented 43.8% of PSEG's total capitalization and 38% of Power's capitalization, providing the Corporation with significant financial flexibility to meet capital requirements and seek new opportunities without any need to issue equity.

Although we are not ready to discuss 2012 guidance, which you know we always do on our fourth-quarter earnings call, there is one other thing we would like you to keep in mind as you look ahead, and that is pension expense.

Pension costs are affected by returns on the portfolio and interest rates. As Ralph earlier mentioned, both key variables have experienced a great deal of volatility within a period of months. Pension expense will be affected by the year-end values for both. And recall that we don't smooth our year-end asset values for purposes of calculating next year's expense.

This potential for a year-over-year increase in pension expense would differ from the assumption that we've shown in our investor material that pension expense would decline slightly in 2012 from 2011 levels. Again, too early to forecast, but I just want to point that out as we come toward year-end.

That said, for 2011, given the strength of operating results for the first nine months, as Ralph indicated, we expect operating earnings for the full year to be at the upper end of our guidance range of [$2.50] to $2.75 per share this year.

With that, I will turn it back over to Ashley for your questions.

(Operator Instructions) Dan Eggers, Credit Suisse.

Good morning. Ralph, I know you talked about it a little bit earlier in the call, but clearly, New Jersey seems to have a pretty high focus on getting new generation built in the state, kind of independent of what happens with the LCAP process.

Can you just talk a little more about kind of positioning in alternatives that either the state might pursue to try and get generation built, or things that you guys think you could do in conjunction with PJM to try and get generation built, while keeping the constructive competitive framework from RPM in place?

Sure, Dan. I know there has been a lot of attention paid to this issue, and it is really -- you've accurately summarized the way in which it is portrayed. I do have a slightly different view of it, however.

I believe what the state is trying to do, and what the governor in particular is trying to do, is make New Jersey as competitive as it can possibly be. So new generation is really a means by which New Jersey's power prices will be more competitive with the region. And the conversations we've been having with policymakers is that there are certain things New Jersey cannot compensate for. We cannot compensate for our population density. We cannot compensate for our lack of indigenous fuel. We cannot compensate for our environmental regulations, which are more progressive or aggressive, depending upon your perspective, than others.

Having said that, if we can work together to make markets even more efficient by reducing the risk for investors, and therefore on a risk-adjusted basis make investment flow more readily so that power plants get built when needed, and you see less of a differentiation, other than those factors I mentioned a moment ago, then I think everybody wins.

And that is the kind of conversation we are having with folks right now. So that is leading to specific discussions around how interconnections are planned, what is the timeframe over which RPM prices future capacity, what are the constraints that should or should not be placed on access to new shale gas deposits in the region. So I think as long as we stay focused on meaningful improvements in competitive markets and steer away from counterproductive subsidies of government that interfere with markets, there is a wealth of opportunities to find common ground.

Kit Konolige, Ticonderoga.

Good morning, guys. Question on another area where there has been litigation, the power markets. Can you update us on your sense of the outlook for any decisions by the courts or EPA on CSAPR, or on HAPs MACT for that matter?

We are talking here about the implementation of the Clean Air Act amendments of 1990. They have been promulgated by EPA. They've been contested in the courts, candidly, all too often by colleagues in our industry, although they've been contested by others as well. They've been up and down the judiciary system. I believe they've been at the Supreme Court at least once. I think that's accurate.

And now EPA is narrowing the oscillations in terms of re-promulgation of rules, and we are confident that they will stick. And I think others are confident they will stick. At last count, I believe EEI had 48 gigawatts of coal retirements that had been announced, which is a clear indication that people expect the CSAPR rules and the HAPs MACT rules to be final in some close form that approximates the proposed rules.

As you know the CSAPR rules are final. There were some technical changes made to them recently. Yes, there are a couple of states who believe they were surprised -- I can't speak for them -- who have filed lawsuits. In general, however, we've been quite supportive. We've actually supported these rules for quite some time and have been outspoken in the fact that we have coal units, we've made the investments and we are ready to compete, and others should be ready to do the same.

And if I can follow in that general area, I think Caroline mentioned that -- if I wrote it down correctly -- that markets are responding well to higher environmental requirements or the prospect or the likelihood. Can you guys give us any color on your view of forward power markets with regard to environmental, whatever the impacts are? Just some sense of the next few years, what you've been seeing.

As I mentioned, we did see the markets respond. In fact, if you recall when the CSAPR rules came out, you saw market prices move up about $2.00. And then you are seeing some of that -- at least our sense is you see that when you look out across the forward curve. Of course, we don't forecast beyond the forward curve, so I wouldn't say that we have a crystal ball on that.

We think that about -- perhaps maybe two thirds or so of the price move might be factored into what we see in the forward curve. At the end of the day, people like to see rules go final. So if prospects are good, final rules are better. And of course, we look forward to the HAP MACT rules, as Ralph mentioned, being issued in December.

So we think we see some of that in the forward curve. We think we see it sustained. But of course we need to see those final rules issued for HAP MACT in, we hope, December.

Good. Thank you.

Travis Miller, Morningstar.

Good morning. I wanted to ask on customer migration, I think in the past -- correct me if I'm wrong -- you guys have talked about $0.01 per share for every 1% of customer migration. Given what you saw in the quarter, is there an update to that or can we still generally think about that going forward?

Good morning, Travis. Thanks for your question. I'm glad you asked it, because I think one of the things that we've been talking a lot about is the fact that when you think about migration and its impact on our earnings, you have to think about two parts; not just the amount of migration or how many customers have moved, but in fact what that cost you. What is the difference in what they pay if they are in BGS versus they are not in BGS.

So in prior years, that difference, which we call the headroom, has been a relatively larger number -- in fact, much larger than it is today. And that was the result of the fact that BGS prices were still coming off higher levels and there was also still a summer premium, which now is actually only in one of the remaining years of BGS prices, as well as lower prices in the market. So that differential was bigger.

And when you have a bigger differential, then as you lose a customer or you lose a customer or a group of customers, that costs you dollars for each customer that leaves.

The reason that I said that the migration amounts that we have this year quarter-over-quarter in fact don't result in any EPS quarter-over-quarter comparisons is that while you still have some incremental customers moving -- and we saw that move from about 26% to about 33% -- the headroom is so much lower than it was. It's lower than last year, and in fact, it is only about a quarter of the level it was when we first saw migration really take hold in the summer of 2009.

So what happens is when you have an incremental amount of customers moving, but in fact every customer, including those who've already left you, cost you less, and you run out the math -- sort of a price times quantity, if you will -- we end up now in the circumstance with a slowing level of migration on top of a lower headroom amount for everyone who has migrated leading to zero impact quarter-over-quarter.

You might think of this in a sense in the extreme, if you had zero headroom, if the prices effectively converged, we would be indifferent as to where the customers were because the impact for us would be the same in terms of dollars. So we watched the headroom come down. It means every customer, if you will, is worth less on a differential basis. And that is why I wouldn't use the estimates we had given in past years, because they related to past levels of headroom.

Okay. Thanks a lot. One quick follow-up then. If you guys project customer migration either shrinking or getting larger, would that affect your bidding strategy into the BGS?

No, it wouldn't, because we don't bid into BGS thinking about that. We bid into BGS based on the parameters of course that we are given in terms of the composition of the customers, as well as our expectation for forward prices, capacity, and the other risk premium that we don't get into on the call for competitive reasons.

Okay. Great. Thank you very much.

Paul Fremont, Jefferies.

It looks as if there is some margin improvement that is taking place, particularly in New England and New York. What -- can you give an indication, given the fact that gas prices were low both quarters, as to what is driving that, particularly in New England?

Sure, Paul. Keep in mind, particularly for New England, if you look at the margin there, as I mentioned, we did the coal sales this quarter, and those coal sales fall into the results that we have for New England. So that is really the biggest driver of the difference that you see.

Not much going on in New York. But New England is going to be driven by coal. And as I mentioned, we had coal sales this quarter. We also had a little bit in the earlier quarter, so as I said $0.06 for the year to date, $0.03 quarter-over-quarter.

Can you give us major milestones in the LCAP court case?

There is no schedule that has been published on that, Paul. So the two beneficial outcomes we've seen are the denial of the motion to dismiss of the BPU -- on the part of the federal court of the BPU motion to dismiss, and then the denial of the ratepayer advocate's motion to dismiss on the EDC case. But there is no scheduled time for the court to act. We are in discovery, however, right now.

Then the next thing to look for is scheduling the trial date?

There is lots of things to look to, right? I mean, there's -- from the court point of view, that is accurate. But I think that you want to look at PJM's filing of how it's going to respond to the MOPR implementation at the end of November. You want to look to the early part of next year, where PJM publishes the parameters for the RPM auction. There are various motions that we will be filing in the litigation that you would look to in the coming weeks and months.

So there is the continuous stream of activity. I don't think there's any one date that one wants to latch on to.

Sort of the last question there, for Hess, I guess they filed to reverse the interconnect charges with the FERC. Do they need to win on that in order to bid in the upcoming auctions?

I believe you are referring to Hess's filing at FERC, and I am in no position to comment on what they need or don't need. PJM sets the planning parameters, we operate the assets, and we will operate those assets in the best interest of the customer base and the reliability that PJM is accustomed to delivering.

Thank you.

Jonathan Arnold, Deutsche Bank.

Good morning. On the coal sales, could you break down, Caroline, at all, this $0.03 item? Was it primarily the sales, or were more weighted to the absence of cancel rate costs? Is there any ongoing expectation around those canceled rate expenses as you move forward into coming quarters?

Sure, Jonathan. So it is primarily the sales relative to the cancellation. We had cancellation costs last year in the third quarter because we still actually had those charges. We actually restructured the agreement midyear this year so we no longer have those costs.

So really what you are seeing -- most of what you've got here is the sales -- about three quarters of it or so is the sales relative to the cancellation charges.

In terms of going forward, as I mentioned, we have adequate supplies of coal. And since we have the restructured agreement that no longer has the cancellation charges if we don't want to take shipments, we are in a better position. That being said, because we have made the sales that we've made to date, really shouldn't think about that as really being anything material as we come into 2012 in terms of future sales.

Okay. And was what you did earlier in the year, I guess there was another $0.03, similar in makeup?

Right, in the first two quarters, kind of spread out between the two quarters. We highlighted it this quarter because it was $0.03 just for this quarter.

Okay. If I may, on one other topic. You have a reasonably high cash balance currently versus -- I guess part of that may be seasonal. Is there some CapEx timing? And then just how should we think about what the plan is for deployment?

In terms of capital, as you know and as Ralph mentioned in his remarks, we do have $2.3 billion in capital expenditures for the year. To date, we've spent about $1.5 billion in capital, so we still have a good chunk to go. It typically gets a little bit more weighted to the final quarter of the year, as we typically ramp up.

In terms of really beyond that, I think keep in mind we are just continuing to look for new opportunities. And then next year, we have some debt coming due. We have some maturities happening, both at Power and the utility, so we have some flexibility there.

What we really did in addition to the sale of Texas, of course, which you know was new for this quarter, we really took advantage of market rates. And I think we got good levels for the debt, and that just gives us lots of flexibility. And then we can reconfigure our financing plan forward, knowing about our own upcoming maturities.

Thank you.

Jack D'Angelo, Catapult Capital.

Good morning. Can you just comment a little further on the weather-normalized sales trends you're seeing at PSE&G, kind of your thoughts on the local economy, and maybe when you see the sales trend turning the corner back towards a growth trajectory?

Sure. You know, it has been challenging this year. I think earlier in this year we thought we were seeing the bottom and perhaps seeing things turn up. But things have continued to be challenged for the state, as it is obviously for the country. So the numbers that I mentioned in my remarks were our estimate of weather-normalized, and of course that is more art than science.

But we do see a downtrend on a weather-normalized basis. We do think people are conserving more or maybe not turning on the air conditioner quite as quickly in the heat of the summer. We'll see what happens when we get into the heating season.

In terms of employment data, we do see a little bit of good news in looking at data, August versus August, from 2011 versus 2010; seem to see some upturn in net employment in the state. But again, I'm talking 10,000, 15,000 in total. Appears to be some private-sector benefit, offset by some decreases at the government level. But if you look at things like housing starts or jobless claims, they seem to be bouncing around at levels not inconsistent with what we saw last year. So things don't appear to be getting worse. From the economic perspective, they don't appear to be turning around. And we do think we are seeing that manifest in what customers are doing in trying to conserve, before they turn on the air conditioner or use a little bit more power.

So it's not getting worse, but unfortunately, can't really say that we see it getting a lot better at this point.

So when we think about '12, probably pretty flat to what you guys are seeing in '11?

It is hard to forecast all the way out, but I wouldn't forecast a lot of growth at this point, given where we are.

Okay. Thanks and congrats on a great quarter.

Michael Lapides, Goldman Sachs.

Real quick, just on the pension commentary, how should we get our arms around what this means for O&M, as how much pension expense is as a percent of your total O&M? And you guys have been one of the better companies in terms of managing total O&M across-the-board. What kind of -- how should we think about the sensitivities of pension cost relative to total O&M contributions going forward?

You may recall, Michael, when we were talking about pension expense a couple of years ago, we talked about it moving up after 2008 to levels in 2009 of about $160 million for total pension expense.

It has come down significantly since 2009 into '10 and '11, so you are looking at numbers that are around the level slightly less than, say, $100 million or so.

The real question for us is at levels slightly less than $100 million in total for the Company, how do we think about the year on year. So if you think back to our investor materials, we had the bar charts where we show total O&M and then we show pension as a piece of total O&M. In those bar charts, we were expecting to see a small decrease in pension expense on a year-on-year basis when we looked at it. But given where we are now and given how things have changed, I think it is hard to think about being certain of a small decrease. Because when we think of where both interest rates are, lower interest rates increase pension expense, as you know, as well as lower returns, which increase pension expense, that puts a challenge there.

So total O&M for us, you may recall, when you looked at our numbers, we were looking at total O&M for this year of about $2.1 billion, and we were talking about kind of flat over the '10 to '13 period. If pension expense is a little less than $100 million out of that, you've got to think of it next year as maybe being a little higher than that.

So on a base of about $2.1 billion, you're looking at a number that is a little less than $100 million or somewhere around there for next year. Can't give you a better estimate because we can't set it until we get to the end of the year.

Do you believe you have other opportunities to offset pension expense in O&M, elsewhere within the broader O&M budget?

Obviously, as you know and we've talked about before, we do our O&M budgeting on a bottoms-up basis, really looking at every site, every part of the organization. But when you think about the kind of swings that pension expense can provide when you have, for example, the markets being up almost 8% or 9% when we were in the May timeframe to the S&P being down about 4% by the end of September, and now in positive territory by the end of October; those kinds of things and combined with very sharp moves in rates make it pretty hard to overcome what could be pension expense volatility by the end of the year. Not that we aren't continuing to try, but that is why we want to flag it for you now because it might be something that becomes a higher number in 2012 versus our expectations of O&M, and net higher than we would have otherwise been able to offset.

Thank you. Much appreciated, Caroline.

Dan Eggers, Credit Suisse.

I just had one more question around kind of resource supply. One of the issues in the environmental rules is that you have those peakers that are supposed to be retired at the end of '15. Are you guys making any progress as conversations moving forward as far as maybe extending the useful life of those, just to help keep the cost for New Jersey customers down a bit over the next few years?

We still have an application in front of the DEP. Candidly, time is getting short for the DEP to respond to that and us to be able to have confidence to keep them in the next RPM auction. The trade-off there is just what you said. Clearly, keeping those peakers in would have the maximum benefit for customers in terms of keeping capacity prices down. However, they are not the finest units from the point of view of ground-level ozone and NOX emissions, and therein lies the trade-off that the state is grappling with.

So I would say that we won't know the final outcome of that until early -- or at the latest, middle of the first quarter of next year. The application is still alive, but we don't have a clear answer as yet.

Okay. Thank you.

Ashar Khan, Visium.

Ralph, just going over the Federal District Court case, is it fair to assume that the case should be decided before the next auction?

No, Ashar, I don't think we should make any assumptions about the schedule on the case. The judge has the information and he is proceeding as he deems appropriate, and we are not putting ourselves in a position to predict timetables.

Okay, but let me ask you another way. If the participants take part in the next auction and the case hasn't been decided, we would have claims against them if we win the case and they have taken part in the auction. Is that fair to say?

I think that, speaking for myself, not speaking for others, I would not want to enter into an expectation that my contract is going to be allowed to continue for the 15 years until that case is decided. But that is speaking for myself.

And we actually approach the LCAP process with that as a consideration, but others may have a completely different point of view as to whether or not those contracts will continue to be honored.

Okay, and do you have anything -- information whether we are going to have any more hearings or anything on this going forward until the end of the year?

No, as far as I know, the BPU held a hearing a few weeks ago, and there is discussion of a likely staff recommendation on how to proceed sometime in the mid-December timeframe. And that is all that I believe has been stated publicly; at least that's all that I am aware of has been stated publicly.

Okay, okay. Thank you so much.

Brian Chin, Citigroup.

Asked and answered. Thank you.

Gregg Orrill, Barclays Capital.

Thanks. The recommendations in the MOPR case PJM is going to make, would those be effective for the next auction, do you think, or is there really no way to know that at this point?

You never want to say something with 100% certainty, Gregg, but I am fairly confident that anything PJM does in the November timeframe or soon thereafter would be with the intention of having it effective in the next RPM of May. Yes, I'd put a high degree of confidence on that.

Okay, and in terms of New Jersey legislation, do you see anything getting done this year that would affect you?

No, I do not, not legislatively.

Okay, thank you.

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

Thank you, Ashley. For those of you who have joined us, I extend once again my thanks for being with us. And I sincerely hope you are as pleased as we are with our operating earnings through the third quarter and our expectations for where we believe the year will end.

Similarly, I hope you are as gratified as we are that our environmental strategy appears poised to deliver anticipated benefits.

Now, to be sure, while the first nine months have been strong and the long-term strategy appears to be paying dividends, there are some challenges that remain. And chief among them are ensuring the continued functioning of competitive wholesale markets free of government's discriminatory subsidies.

But as I mentioned a moment ago, I believe these challenges are manageable with ongoing dialogue. And I can assure you, if you're not aware of that already, we are quite actively engaged in that ongoing dialogue.

So we look forward to seeing you next week at EEI, and thank you for being with us today. Take care.

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