公共服務電力與天然氣 (PEG) 2013 Q3 法說會逐字稿

Good morning, my name is Brian and I will be your conference operator today. At this time I would like to welcome everyone to the Public Service Enterprise's third-quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Ms. Lally, you may begin your conference.

Thank you, Brian. Good morning, everyone. Thank you for participating in our call this morning; we understand it is a very busy day for earnings. But as you are aware, we released our third-quarter 2013 earnings statement earlier today. Both the release and attachments are posted on our website at www.PSEG.com under the investor section. We also posted a series of slides that detail the operating results by Company for the quarter and our 10-Q for the period ended September 30, 2013 is expected to be filed shortly.

I won't go through 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 the subject to various risks and uncertainties.

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 of course required to do so. Our release also contains adjusted non-GAAP operating earnings. Please refer to today's 8-K or other filings for a discussion of the factors that may cause results to differ from management 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. And joining Ralph on the call is Caroline Dorsa, Executive Vice President and CFO. At the conclusion of their remarks there will be time for your questions. I'm not going to ask that you limit yourself to one question and one follow-up, but please take note of others who may be on the call ready to ask a question. Thank you. Ralph?

Thank you, Kathleen, and thank you, everyone, for joining us today. It is hard to believe that it was a year ago when we were reporting results for the third quarter of 2012 while we were responding to the damage to our system caused by Superstorm Sandy. Our utility, PSE&G, restored service to 2.1 million customers within 10 days and PSEG Power's assets, you will recall, were severely tested as well, but performed so as to ensure that electricity was available to every one of those 2.1 million customers as they were being restored.

Now both companies in the past year have embarked on programs to strengthen their systems. But enough of the past. It is with a great sense of satisfaction, and in fact it is somewhat remarkable when looking back at what we faced at that time, that I can report to you strong operating earnings for the third quarter 2013 and in fact the nine months of 2013. And on top of that I can report to you this morning an increase in our operating earnings guidance for the full year from what had initially been $2.25 to $2.50 per share to our new guidance range of $2.40 to $2.55 per share.

So earlier this morning we reported operating earnings for the third quarter of 2013 of $0.76 per share compared with operating earnings of $0.75 per share earned in 2012's third quarter. We have delivered solid results that are consistent with our operating objectives. And once again it is due to the tireless efforts of a dedicated workforce that we are on track to meet our near- and long-term targets for capital investment and operational efficiency. And that we can raise our guidance for full-year operating earnings.

Our shareholders continue to realize the benefit to earnings from the expansion of our investment in transmission and distribution, while our customers enjoy the improvement in reliability that come along with it. PSE&G's $3.4 billion transmission investment program includes five major transmission lines that require substantial citing and logistical support, yet all projects are on time and on budget and scheduled to be operational during 2014 through 2015.

Since PSE&G began its transmission expansion program in 2009, its investment in transmission has grown to represent 28% of rate base at the end of 2012. This represents a net investment of $2.5 billion and expected to grow to represent approximately 40% of PSE&G's rate base at the end of 2015, or an investment approximating $4.8 billion. As I've already mentioned, the investment in these major transmission projects will further enhance reliability for our customers.

Shifting our attention to PSEG Power for a moment, Power made an impressive comeback restoring operations at most of its peaking generating stations to pre-Sandy levels to assure their availability during the critical summer months. And Power continues to benefit from its favorable location.

Now in the past when we referred to Power's locational value it was typically a reference to the benefits associated with assets in the east located close to load and of course this remains true. But now Power is also benefiting from our location which gives us access to low-cost gas in the Marcellus basin through our gas pipeline and storage contract.

PSE&G's residential customers are the primary beneficiaries of this contracted position. And for that reason PSE&G announced last week that it would be providing a two-month bill credit for its residential gas customers that will reduce the typical monthly bill by 33% in both November and December of this year.

However, to the extent that we have firm pipeline capacity in excess of the need for serving residential customers, this firm transportation capacity may be used, and in fact is used, to supply power generation fleet under a BPU approved agreement. Power configured as firm gas transmission capability over the past 15 years with the objective of building a network at the most liquid supply hub to support the needs of its customers. PSEG Power as a result is one of the largest shippers of gas from the Marcellus basin.

As new interstate pipelines become operational later this year they will provide an additional outlet for some of the Marcellus supply. We believe, however, that Power should continue to experience periods of higher spark spreads given PSEG Power's gas transportation condition.

Power's earnings are currently benefiting from favorable prices it receives on capacity located in PJM. We were very pleased that the US District Courts in Maryland and New Jersey ruled an amendment that preserves competitive wholesale generation markets. We believe that a competitive market is the best approach for ensuring there is a sufficient supply of electric capacity to meet customer demand at the lowest cost.

The Court's position is not expected to have an impact on markets over the near-term. PJM has and will continue to address improvements in market design. It's important, however, that the market rules are understood and the playing field is level to support new investment when needed over the long-term.

Now as I have stated already, our strong operating performance is due to the dedication shown by our employees to meeting our corporate objective. This dedication has been recognized with the recently approved enhancement to our contract to operate the Long Island Power Authority's transmission and distribution system.

The contract enhancement will allow Power's energy resources and trade group to manage LIPA's electric dispatching fuel procurement needs in 2015 and provide for an increase in our management fee in 2016. The agreement remains contingent on LIPA receiving a private letter ruling from the IRS on the continued tax exempt status of its debt.

We also remain focused on securing approval for PSE&G's Energy Strong proposal. At this moment 74 municipalities and seven county governments have submitted resolutions to the Board of Public Utilities in support of our proposal. Public hearings have been held and we expect the proposal to receive careful consideration given the opportunity to improve the resiliency of the distribution system with little net impact on the customer's bill due to the coincidental expiration of various other charges.

And for the year PSE&G is on track to provide double-digit growth in earnings on increased investment in transmission as PSEG Power's results benefit from the strong locational advantages I have already described.

We made a move several years ago to use the strength of our balance sheet to invest primarily in our more stable regulated business in ways that meet customer needs us we also sought to protect the upside of our strong merchant business. Our focus is yielding returns and we are well positioned to meet the needs of our customers and to perform for our shareholders.

I will turn the call over to Carol to review our operating results in greater detail and then I will rejoin her at the end to answer your questions.

Thank you, Ralph, and good morning, everyone. I will review our quarterly operating earnings 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 2013 of $0.76 per share versus operating earnings of $0.75 per share in last year's third quarter. For the nine months ended September 30 we reported operating earnings of $2.09 per share versus $2.03 per share last year.

Slides 4 and 5 in our webcast deck provide a reconciliation of operating earnings to income from continuing operations and net income for the quarter and the year to date. We've provided as always a waterfall chart on slide 10 that takes you through the net changes in quarter-over-quarter operating earnings by major business and a similar chart on slide 12 provides you with the changes in operating earnings by each business on a year-to-date basis. I will now review each Company in more detail and I will start with Power.

As shown on slide 14, PSEG Power reported operating earnings for the third quarter of $0.43 per share compared with $0.43 per share a year ago. Power's third-quarter earnings benefited from higher PJM capacity prices, an improvement in the market price of energy, a decline in the supply cost of gas and strong operating performance. Before reviewing the earnings in detail I want to spend some time on Power's gas position.

Power currently sells wholesale natural gas under a full requirement basic gas supply service, or BGSS, contract with PSE&G to meet the gas supply requirements of PSE&G's residential customers. Power has configured its contractual arrangements with interstate pipelines over the years which amount to 1.3 billion cubic feet per day of firm transportation capacity to meet its obligations under the BGSS contract.

Approximately 46% of PSE&G peak daily gas requirement is provided from Power's firm transportation capacity, which is available every day of the year. Power satisfies the remainder of PSE&G's requirements from storage contracts, LNG, seasonal purchases and other sources of supply. The transportation contract stores gas from both from the Marcellus basin at about 0.6 Bcf per day and the Gulf Coast at about 0.7 Bcf per day. This supply is supplemented with 0.9 Bcf per day of storage deliverability from a total storage capacity of about 76 billion cubic feet.

So the primary beneficiary of these contractual arrangements, as I mentioned, is the firm utility customer. When capacity beyond daily demand and storage injections is available it may be used to serve the gas supply needs of Power's generation fleet under a BPU approved agreement.

Over the years having firm transportation contracts for gas has provided Power with direct and indirect market benefits. The firm gas contracts and Power's electric hedging strategy have allowed Power to take advantage of market volatility created by weather and supplier positions. Gas market volatility also has an impact on the electric market and can affect the value of [bases] as well as the value of ancillary services provided by Power's generation fleet.

We experienced this favorable impact on earnings of the volatility earlier this year as we have in past years in varying degrees. And you will recall we discussed this on the first-quarter call. Because production from the Marcellus basin has increased faster than the availability of infrastructure to move the gas the cost of gas from the Marcellus relative to other basins has declined in 2013, particularly since July of this year.

The cost decline has occurred at a time of low heating demand while storage was being filled to meet the needs of residential customers and the upcoming winter heating season. Excess supply is normally available in the third quarter and this year was available to meet the needs of our generating fleet.

So you should think of Power's firm transportation contracts providing benefits in the following order -- utility customers are first in line, including the need to build storage in the summer months; then to the extent supply exists in excess of these firm customer needs, Power would be able to make off system sales, a large portion of which benefit the utility customer and, lastly, provide gas for its generation fleet. Customer demand and the use of these gas assets will differ by season of the year and is largely dependent on the weather.

The ability of generation to access the low-cost Marcellus supply is more likely to occur during the summer months and the shoulder periods for the reasons I just noted. So now I will provide you with more detail behind Power's third-quarter operating earnings.

During the third quarter Power's combined cycle fleet realized spark spreads which were approximately 40% to 45% greater than what it realized in the third quarter of 2012, the direct benefit of its Marcellus position. Power's result also benefited from the favorable impact with higher overall market prices for natural gas and an improvement in PS-zone basis had on spot market prices for energy.

So combined the improvement in the wholesale price of energy and a decline in fuel cost added $0.04 per share to earnings quarter over quarter with the majority of the benefit coming from the Marcellus impact.

An increase in capacity prices improved Power's quarter-over-quarter earnings by $0.11 per share. The improvement in capacity revenue and wholesale energy margins more than offset the $0.10 per share decline from quarter-over-quarter earnings from a reduction in the average price on hedged volumes. A reduction in generation volumes as a result of more normal weather and the maintenance related outage at that gas fired Bethlehem Energy Center, or BEC, reduced Power's quarter-over-quarter earnings comparison by $0.02 per share.

The major maintenance outage at the BEC, which concluded in October, resulted in an increase in Power's operating and maintenance expense exclusive of storm-related activity and reduced quarter-over-quarter earnings comparisons by $0.04 per share. Taxes and other items added about a penny per share to quarter-over-quarter earnings comparisons.

Volume declined by 5.4% in the quarter. There were more normal weather conditions and the BEC maintenance outage reduced output from the fossil fleet by 10% in the quarter. The nuclear fleet maintained its strong operating performance with an average capacity factor of 91% in the quarter and 93.2% for the nine months ended September.

While volumes were lower overall performance was strong including excellent summer availability. The combination of higher capacity prices and lower fuel costs resulted in gross margins for Power of approximately $51 per megawatt hour in the third quarter versus gross margins of $47 per megawatt hour in the year-ago period. Remember capacity prices increased to an average of $244 per megawatt day from $153 per megawatt day on June 1 of this year and those higher prices remain in effect through May 31 of 2014. Slide 19 in your deck provides detail on Power's realized gross margins.

Power continues to forecast output for both of 2013 and 2014 of between 53 and 55 terawatt hours. Output for the fourth quarter of approximately 13 to 14 terawatt hours this year is 70% to 75% hedged at an average price of $50 per megawatt hour. Of 2014's forecast output Power has hedged approximately 65% to 70% at an average price of $48 per megawatt hour.

Power has hedged approximately 35% to 40% in 2015's forecast generation of 52 to 54 terawatt hours at an average price of $48 per megawatt hour. Power's forecast of total generation output in each of the next two years is unchanged from prior guidance. The percentage of generation hedged in each of the next two years is greater than our prior forecast and the average price of energy hedged has declined by $1 per megawatt hour. The changes reflect both an upward adjustment to the forecasted BGS-related hedges as well as an increase in the percentage of energy hedged at PJM-West prices.

The data for 2014 now assumes BGS volumes of about 11 terawatt hours versus prior guidance of 10 terawatt hours as customers switching to third-party suppliers has slowed during the year. Power continues to assume BGS-related load and hedges in 2013 will represent about 12 terawatt hours of generation for this year.

Results for the remainder of the year will continue to be influenced by higher capacity prices as well as a decline in the average price of our hedges. We also continue to forecast an increase in Power's quarter-over-quarter O&M expense given a refueling outage at over 100% owned Hope Creek nuclear facility currently underway as well as the maintenance work at BEC which concluded, as I mentioned earlier, and October.

Based on the performance of Power through the year including the third-quarter we have raised the forecast range of Power's operating earnings for 2013 to $630 million to $685 million from $535 million to $600 million.

Let's now turn to PSE&G. PSE&G reported operating earnings for the third quarter of 2013 of $0.33 per share compared with $0.30 per share for the third quarter of 2012. The utility's third-quarter earnings reflect increased revenue associated with an increased level of investment. Higher transmission revenue effective on January 1 of 2013, increased quarter-over-quarter earnings by $0.04 per share.

Revenue from investments made under PSE&G's distribution capital infrastructure investment program contributed $0.01 per share to earnings in the quarter. Electric demand in the third quarter was influenced by whether, which was hotter than normal, but cooler than the weather conditions experienced in the year-ago quarter. Also demand for electricity continues to be impacted by customer conservation in a slowly improving economic environment.

Weather normalized electric sales led by the decline in the residential sector are estimated to have declined by 2.3% in the third quarter. Sales of gas, although not as important in the third quarter as the demand for electricity, increased 10.4% from year ago levels and year to date are 1.9% higher than last year. This continues the pattern we've seen this year and talked about earlier and could be reflective of customers' adjustment to an overall lower cost of gas.

You will note PSE&G announced last week that it would be providing its residential customers with a two-month bill credit that will reduce the typical monthly bill by approximately 33% in both of November and December. And this is on top of the ongoing 39% reduction in BGSS rates that have been announced over the past four years.

The net impact on earnings from weather and the change in sales was a reduction in quarter-over-quarter earnings of $0.02 per share. A slight increase in distribution related O&M and depreciation expense was offset by a decline in interest expense and other items.

PSE&G is investing $3.4 billion in transmission-related programs over the period from 2013 through 2015. This program, which as Ralph mentioned, includes five major transmission lines, remains on time and on budget. All five lines are expected to be operational over 2014 to 2015.

And PSE&G filed an annual update of its revenue requirements associated with the transmission investment program with the Federal Energy Regulatory Commission in mid-October. If accepted transmission revenue in 2014 would increase by $176 million at the start of next year. PSE&G's control of its operating expenses and recovery of its transmission investment capital on a formula rate basis should continue to allow the Company to earn its authorized return.

We're tightening our forecast of PSE&G's operating earnings for 2013 from $585 million to $600 million from the prior $580 million to $635 million. Results from the year will be influenced by a full-year increase in transmission revenue, weaker demand in the absence of the negative impact of Superstorm Sandy on sales and O&M in the fourth quarter.

We continue to anticipate double-digit growth in PSE&G's operating earnings this year and through 2015 based on approved programs. And we will update you on expectations for 2014 through 2016 in February on our fourth-quarter call. Let me now turn to Energy Holdings and Enterprise.

PSEG Energy Holdings together with the parent reported operating earnings of $1 million for the third quarter of 2013 versus operating earnings of $10 million or $0.02 per share during the third quarter of 2012. Results for the quarter reflect continued monetization of assets within Holdings' portfolio and the absence of a gain on an asset sale that occurred in the year-ago quarter.

As many of you are aware, the terms of NRG Energy's recent announcement to acquire Edison Mission Energy, or EME, as part of an EME Chapter 11 reorganization would protect the entirety of Holdings' equity value in the Powerton and Joliet leverage leases. The transaction is expected to close in the first quarter of 2014.

We've adjusted our forecast of PSEG Energy Holdings and Enterprise full-year operating earnings to zero to $10 million from the prior $25 million to $35 million.

The updated guidance reflects the impact of revised estimates for legacy Holdings' portfolio and related taxes completely separate from merchant energy leases, which are expected to more than offset the benefit to operating earnings from the commercial operation of Holdings of six solar facilities in the fourth quarter.

Recall that our strategy in Holdings is to wind down the portfolio, reduce risk and sell off assets and we think we've been very successful to date in achieving this strategy.

Next I would like to briefly mention PSEG Long Island. The Board of Directors for the Long Island Power Authority, or LIPA, recently approved amendments to PSEG Long Island's original operating services agreement for LIPA's transmission and distribution system. When all regulatory approvals are received we will begin to operate under the new contract.

The revised terms are expected to add an estimated $0.04 to $0.05 per share to PSEG's earnings when fully effective in 2016 versus the original agreement which provided a run rate of earnings of about $0.03 per share.

Lastly on the financing front, we continue to be in a strong position to finance our capital program. At the end of September we had approximately $448 million in cash on hand, debt represented about 41% of PSEG's consolidated capital with debt at Power approximating 28% of its capital base. Power's cash flow remains strong and PSE&G's cash generation has improved with its ability to earn its authorized return on increased levels of capital investment.

As we've said before, we can finance our existing capital program without the need to issue equity. And we can finance and expand a capital program that includes expanding on Energy Strong related projects also without the need to issue equity. And that still leaves us with the opportunity for modest and sustainable growth in the common dividend as we look to the future.

So finally, just to reiterate, as Ralph said earlier, we are pleased to be raising our guidance for the forecasted operating earnings for the full year of 2013 to $2.40 to $2.55 per share. That concludes my remarks. And, Brian, I will now turn it over to you to introduce the Q&A.

(Operator Instructions). Kit Konolige, BGC Financial.

A couple of areas -- on the decline in demand, 2.3% in the third quarter, can you give us what that is year to date? And a little color maybe on what you think is going on there and what the outlook is going forward from here?

Yes, so year to date it was 2.7%, remember these are weather normalized numbers. And I think I have done 26 of these quarterly calls and I always get the same caveat, which is weather normalization is as much art as it is science. We had some extreme weather conditions, so trying to back that out is not always easy.

The big change this quarter was in the residential sector, that was down 2.9%. The good news, if you will, is we are primarily a commercial sector driven -- or service territory and that was down 1% in the third quarter which is a little bit stronger than -- which is less of a down than it had been prior year to date.

It is a combination of a slowly recovering economy, the unemployment levels in New Jersey are well published at about 8.2% to 8.3%. We have seen some modest recovery in housing starts but the status didn't go down as far as others in 2008 and hasn't sprung back as quickly as others, but it is a combination we think of economic factors and just greater use of energy efficiency.

And, Ralph, do you see that? Is there some kind of structural change going on here where the new normal is going to be that there is negative sales? Or do you expect this to be cyclical and bounce back? And what do you see as the say three to five year growth rate?

Yes, so what we have told regulators is that we think that certainly the old days of load growth being proportional to GDP are gone and the more recent era of load growth being half of GDP are likely to not be the case anymore. And that is an important part of why we are so insistent upon contemporaneous returns on our significant investment approach in the utility.

Remember, as you well know, Kit, PSE&G's earnings growth is not driven by load growth. Our earnings growth is triggered by reliability enhancements, infrastructure replacement and enhanced resiliency. And the old system of regulatory lag giving you some load to growth to kind of carry you until the next rate case is one that doesn't work when you have zero-ish load growth as we have been experiencing. And zero-ish is obviously being a little bit kind when we have just reported negative numbers.

So whatever the future holds in terms of load growth, which looks to be something that is less than it has been in the past, I think that buttresses our argument for the need for the clause recovery mechanism while we are making significant and necessary capital investment. So PSE&G is not about load growth, it is about rate base growth and the regulatory system has to reflect the new load growth paradigm.

Great, and one other area if I could. Can you just give us a little more color -- obviously you mentioned on Energy Strong the resolutions that have been passed by the local governments. Clearly you're getting a lot of support there. Has it become -- been mentioned at all in the gubernatorial race? And assuming it is not going to get done until after the election, what kind of timing do you think we have on getting approval?

Sure, Kit. So you'll remember that two of the last three major storms occurred within one week of Election Day, they were Superstorm Sandy and the Halloween snowstorm of 2012 and the third storm I am thinking of is Irene, which was in August. So mayors and elected officials know only too well the inconvenience and problems associated with local residents being without power.

So as a result we have had these 81 jurisdictions, a combination of counties and municipalities rally to show up at public hearings which went extremely well I would characterize it in the month of September and early October. But it wasn't limited to local jurisdictions that showed up in support; we had strong support from a myriad of business associations, hospital associations and labor unions.

The schedule now calls for evidentiary hearings to take place, I believe it is in February or the beginning of March. So on a fully litigated track this won't be resolved until the end of March, end of first quarter. But we remain hopeful that we can settle this because the conversations with the staff have been very, very reasonable. I mean this is a big investment and they are asking good questions about engineering studies and expectations for what might be the range of costs associated with some of the proposals we have made.

I am not aware of comments that have been made by the candidates. I think early on the governor said he expects the BPU to give this a full and thorough review, kind of the sort of reasonable or rational [project] that you would expect from this governor, just in light of the complexity of it, and the fact that he has a full BPU that is supposed to look after this. And I don't believe it has hit the radar screen of his opponent I am looking around the room here and everyone is shaking their head no. So I don't think I missed the article that might have mentioned it.

So seeing that -- we are still hopeful that we will come to some settlement agreement around the end of the year. And as long as you allow me to define the end of the year as possibly including January, I feel very confident of that. That is where things stand right now.

Great, thank you.

Dan Eggers, Credit Suisse.

I guess thanks for all of the detail on the gas positioning and kind of the benefit you guys are seeing from basis differentials. But, Carolyn, I prefer to think about this a little more. What is the full-year benefit you guys are seeing if you got about $0.04 in the third quarter if you look at kind of the basis over the year? How much cumulative benefit have you guys seen this year?

Thanks, Dan. So you remember some of the things I said in my remarks. Because of the way in which our contract structure works and the primary benefit goes to the PSE&G residential customer, you are going to see us get these benefits when they are available in those sort of shoulder seasons or seasons where the residential customer doesn't need a lot of heat, like the summer. So we saw the Marcellus prices really come down this summer. That was sort of the single biggest drop we saw, and that lies immediately right into our shoulder summer period.

So the $0.04 I just described in this quarter, the majority of it is coming from the Marcellus, is the quarter in which you saw the gas to electric benefit from Marcellus have the biggest impact on us this year. So that is the way to think about it from sort of a gas to electric has primarily been this quarter. And you wouldn't expect to see on the gas to electric a lot of benefit in the winter because the benefit is going -- the pipeline is going to the residential customer.

That being said, remember, in the first quarter we talked about the fact that some of the volatility that was happening in gas given our position and given our ability to sell off capacity in all system sales when there isn't need actually contributed $0.04 per share quarter over quarter in the first quarter, but that was not the gas to electric, right?

That was the BGSS itself in terms of the ability to recover our fixed cost, which we hadn't in the first quarter of 2012, because you may remember it was so mild that winter. So the way to think about it going forward, the way I will encourage you to think about it is you will see us to the extent that this differential persists -- and again, we don't know how long it will persist but we have probably the single best positioning to garner it when it persists -- it is going to be in shoulder period or summer period where the residential customer doesn't have that gas demand.

We didn't see it as much this spring because that Marcellus price drop really happened in July. So going forward I would encourage you to look for it in the sort of spring and fall periods, so shoulder period. But from gas to electric it has been this quarter that you have really seen it come through the P&L.

I think one of the other things we have noticed, Dan, that has been quite favorable, and is difficult to quantify, is that to the extent that that benefit is not available to Power that is because residential gas demand is high, which would tend to mean that we have some severe weather conditions which benefit our Power and the utility in other ways.

And to the extent that there is not a strong demand, which would suggest that there is a weather condition that is not beneficial to Power and the utility, then the basis differential seems to expand, which offsets that negative outcome. So there is also this kind of natural hedge phenomenon taking place that seems to work to our favor.

Okay so just (inaudible) a $0.04 benefit if spreads stayed where they are today, kind of in the second quarter we could replicate something like we saw in the third quarter of this year because that would be another low gas demand period. Is that a reasonable way of thinking about things?

I don't want to forecast a specific, right, because it depends on what happens to that differential. And of course recognizing, as we said, there are some lines that are coming in, right, into the New York region, the (inaudible) line, the Williams line. So not certain how that basis will actually move in the future, but to the extent the basis is there we think we are well positioned to capture it. But I wouldn't want to get specific on a number because that all depends on weather conditions and everything else.

Okay, that is fair. And I guess just along those lines, is that going to -- with this opportunity or maybe more obvious if not an opportunity -- are you guys going to reevaluate how you hedge the gas generation in the future, maybe the structuring of the hedges or the magnitude of the hedges?

I don't think so, Dan, for this reason, right, because you think about where I was citing the benefit, it is the spark spreads widening that we received, the realized spark spread at that 40% to 45% level. Remember as we look at our hedged table, as we always break out for you, the base load versus the intermediate, this combined cycle, that is a part of the stack that you see as do very little hedging in advance of the current year.

So, for example, it is about 10% hedged, that whole category right now for next year. That is typically what you see us optimize in the year. So to the extent that we see combined cycle has opportunities here, those opportunities are still going to be available to us and we are going to hedge in essentially the same way for that part of the stack, which is in the year. And in the year is where we tend to have some visibility.

Okay, great. Thank you for clarifying that, I appreciate it.

Neel Mitra, Tudor Pickering.

I just wanted to understand the contract structure of the Marcellus gas at Power. Is the way to look at it that the firm pipeline capacity cost is borne by the PSE&G rate payers? And the off system sales, when the gas isn't needed for them, kind of accrues to Power as a variable cost with no operating cost associated with it?

Good question. So the cost of the pipeline is passed through to the residential customer, so it is not a net cost of Power. So the residential customer is covering the full cost of distribution, as you would expect. Nor is the pass through of the gas to the residential customer a profit center for Power. It simply goes through to the residential customer.

When there is excess beyond what the residential customers need then we have the ability to make off system sales. And when we make those off system sales the value that is garnered there is shared with the PSE&G customer, in the fact the majority goes to the PSE&G customer and then there is a small amount that is left for Power.

So think of Power as providing this on a pass-through basis to the customer, customer covers the cost, Power doesn't make money on the actual throughput. Then to the extent there is excess there is value garnered from the off system, the majority goes to the customer, residential customer and a minority of that comes to the bottom line for Power.

Okay, great. So is the way we should think about it is that as these contracts kind of roll off you will re-contract them just from the perspective that PSE&G needs Marcellus gas to supply at LDC and customers? Or is it more of a kind of a speculative bet that Marcellus pricing is lower?

No. So it is -- so a good question as well. It's not a speculative bet. So if you remember I think Ralph said this in his remarks, we set up this network of our contracting about 15 years ago and it was designed and developed to cover the PSE&G load from liquid sources. So it is not speculative but it is also not short-term, these are actually very long-term Evergreen like contracts that we have rights to together with the contracts we have for storage. The entire design was to support our PSE&G customers.

The real story and the story we have been telling this quarter is, as has always been the case, when the customer needs our lower and the excess can be used for PSEG power we do that. It turns out this summer that that has turned out to be very beneficial because of Marcellus. But the original design and purpose, which has been for many years and will continue to be for many years, is to pass this value through to our customers and then if there is excess, and only then if there is excess, we use it for PSEG Power.

Okay, great. Thank you very much.

Julien Dumoulin-Smith, UBS.

So switching topics a bit, if you will, I wanted to focus quickly on this switching phenomenon you described. And I suppose the question is, is it that just fundamentally the offers out there are just less competitive and there is less headroom in a rising capacity price environment? Or is it rather that we are reaching some sort of floor and customer migration and there is something of customer lethargy to be explained (technical difficulty)?

Julien, as you know, we are not in the retail business, but our response would be that this is probably a combination of those two. That your most price-sensitive customers are the first to go and now just having folks switch is a bit more of a challenge. A decline in BGS prices, so our headroom has been single-digit delta throughout the year. And that headroom has to be something that your cost of customer acquisition lives under. So that is not a business, as I said, we are in. But I think it is a combination of two things you mentioned.

And just to be clear, what level of switching did that correspond to for 2014; I'm not sure I caught that.

As a percentage basis?

Yes, if you don't mind.

Yes, a percentage basis, we don't forecast that any longer. But I can tell you the numbers that we see in terms of this is the overall aggregate switching from BGS, right, or in that sort of mid/high 30 percentage point range and that has not really changed in the past few quarters.

So, we used to try to track it every quarter and give you targets for it. What we think makes more sense is to give you those targets we now give you for BGS, which, as you may remember from my remarks, we just raised by 1 terawatt hour for next year. So it is just not coming through to be that much more switching.

And the reason really is, as Ralph said, the headroom just isn't that large. Whatever the retailers are doing on those dynamics and their profitability obviously a question for them. But it appears to have leveled out and, of course, as BGS prices have come down, right, the average price came down $1 when we started this year's BGS season given what was rolling off and rolling on. There is just not that much difference.

And then looking at the Long Island opportunity here, just to think about perhaps beyond the fees that you could receive here. Could you be a little bit more explicit about the investment opportunities, perhaps rate based-like or otherwise, that you could earn on?

Sure. So, Julien, so as Carol and I tried to point out, the $0.03 in 2014 grows to $0.07 or $0.08 by 2016. And then there is a provision in the contract that requires that we propose a concept -- and it really is just a concept -- by July 1 of 2014 on a utility 2.0.

But what is interesting about it is that it describes in the contract in words that are similar to many of the things that PSE&G has done successfully in New Jersey under various clause mechanisms. And those are renewable energy resources, energy efficiency and behind the meter services.

So we have a team of people looking at that. That is not something that we can forecast a number right now or even a timeframe. But a proposal is due from us to the LIPA Board by July 1 of next year. And we are excited about that because there are some good things we've been able to do for customers in New Jersey that we would like to do for customers on Long Island and I'm sure they get fair treatment from the competition for doing so.

Great, and then lastly, not to beat up the subject one more time. But on the gas issue looking towards 2014 rather than 2013, I presume a full year of wider gas basis to positive. But meanwhile you could have some offsets from new gas infrastructure reducing that basis, is that the right -- a fair way to characterize a full year impact in 2014?

Yes, I think that is very fair, Julien. I guess the way that I think about this all in is don't know what the basis will turn out to be, obviously that is determined by the market. Obviously we serve our residential customers first. But we have a large position, as you saw from what we put in this slides here, right, of 0.6 Bcf per day of shale supply. So we have nice opportunity.

And to the extent that that opportunity presents itself in terms of a differential, we think we're actually pretty optimally positioned to take advantage. And so, in those periods where the customers need the PSE&G are low, to the extent that basis is still there we are going to be able to capture it.

So I think all in that is the way I would encourage you to think about it. We can't predict it anymore than you can predict it. But when it is there to be garnered we garner it, we garner it first for our E&G customers but after that we garner it for Power and we are pretty pleased about that opportunity of positioning, which wasn't developed for that reason, but has now given us a real opportunity.

Great, thank you very much for the time.

Greg Gordon.

Guys, your balance sheet capacity is still quite robust and all the more so bolstered by the strong performance you are seeing in PSEG Power. If you don't get approval for the full $3.8 billion of Energy Strong, would that spare balance sheet capacity then be redeployed into perhaps a more robust growth in the dividend?

So, Greg -- so we maintain that our number one priority is reinvesting in the business. So as you know, in addition to Energy Strong we have some transmission resiliency programs that we are in pursuit of with PJM. So you would see us make sure that we are exhausting all regulated growth opportunities.

Then we have been talking to PJM, as has everyone else, and very publicly about the 2012 RTEP enhancements that were pushed forth. That was grandfathered on the FERC order 1000, so those projects would come to us as an incumbent. We have proposed some products coming out of artificial island as on FERC order 1000 basis as well.

So I am running through a laundry list of regulated utility investments that are beyond Energy Strong, but of course our primary focus right now is over the near-term getting Energy Strong. Having said that, yes, number two on the hit parade is the dividend. And then number three on the hit parade in anticipation of somebody else following up would be share repurchase. But I would put far and away number one is reinvesting in the business and then number two would be dividend growth.

Great, two more questions. First is with the decision on LCAPP, does that change your calculus on whether or not you would bid (inaudible) into the next PJM base residual auction?

No -- well, so partially, right. I mean what it does is it reduces the risk of a competitively bid unit having challenges come through subsidized plants. We would do the same kind of return analysis, we use the forward price curve for the near-term and then we use our fundamental models over the longer term and then we have our own internal hurdle rate that I think we have been implying in a fairly disciplined way. So those numbers have to pass muster first and foremost.

And then of course there is the qualitative discussion which is all around well, gee, what do we think the rules will be like X years from now? And the recent court decisions help mitigate some of that risk, but they don't help in terms of the market fundamental.

By the way, Greg, at risk of beating a dead horse I want to go back to your first question. Even with all of the Energy Strong and transmission opportunities that we see, at the risk of stating the obvious, the balance sheet is strong enough to support modest and sustained growth in that dividend. Just your question was sort of without those things would you do more? And I was just pondering in that vein earlier.

No, that was clear. Thank you. Last question, is the lack of load growth in the service territory perhaps to some degree related to the very high degree of rooftop solar penetration you have in the state? And if so, can you comment on trends in further penetration of distributed generation, mainly rooftop solar? And I guess that dovetails with the commentary on how (technical difficulty) markets are performing.

Yes, so clearly all of these things are a contributing factor. To Kit's point before, I mean there is energy efficiency, there is lack of a very strong and robust economic response, there is distributed generation. I think we are still the number one developer of solar energy in the state. And when the program is finished it is about 200 megawatts if it is still 180 megawatts, with the capacity factor of about 12%.

So from an energy sales point of view, it is really fairly miniscule, which is kind of a challenge, right, around solar that when you take that numerator, which is sizable in terms of capital invested and you divide by energy output, which is not so sizable you get a pretty high cost of solar electricity.

Which is something that we were very clear with our regulators that in pursuit of these RPS (inaudible) that one has to be mindful of the rate impact to the customer from a point of view cents of per kilowatt hour. So short answer of course would be yes, it is a contributor. Longer answer would be if you do the arithmetic it is not that big of a contributor.

And going forward do you see penetration continuing at the current sort of rate? Or do you see solar investment, both from utilities like yourself and independents declining?

Yes, I think that the real challenge -- that is a tough question to answer. The real challenge is if we are determined to live by the renewable portfolio standard. Then the question I would pose to the policymaker is when we originally test that standard it is under the assumption that as we nurture the industry in the early stages it would then achieve certain economic efficiencies, either in the form of lower cost of panels or in the form of higher efficiency rates that it would become kind of self-sustaining.

And (inaudible) prices would come down and probably the ITC would go away at the federal level. We have seen those panel prices come down but it has not come down -- those prices have not come down enough to be economically competitive with $4 gas. And I think you are beginning to see the first example of that reflected in our own solar filing, right? We went in and asked for $800 million plus over five years and we got $440 million over three years.

And I think based on conversations I had with policymakers that was kind of a reflection of we can't do this forever. We need to start seeing some of those expectations be realized in terms of the economic viability of the technology. And that makes perfect sense. I mean it's just -- I am a huge solar fan, we have invested over $1 billion in solar. But we can't keep doing this at the price point that it has been achieving and do it at the RPS levels that we hope to see in 2020 or 20 (technical difficulty).

Thank you very much. Take care.

Paul Fremont, Jefferies & Company.

So if I look at the -- you are expecting I think $85 million to $95 million of uplift at PSEG Power versus where you had been previously. If I look at the $0.04 in the third quarter and then the other gas-related item in the first quarter that makes up roughly I guess $70 million. So, what makes up -- would gas in some way, shape or form also make up the remaining piece of the $85 million to $95 million, or is that coming from somewhere else?

You correctly pointed out the factors that we've highlighted and which we talked about today, gas in the first quarter and in terms of BGSS and then the $0.04 this quarter. Remember that one of the things we have also talked about during the year is we have had some higher market prices than original expectations. So, on a year-over-year basis that has given us some uplift a little bit different than what we expected.

So prices have come up and you see that of course across the fleet in every quarter offset by the hedges but a little bit more positive than our expectations. So I think it has been -- we have got great operational performance, now we do and expect that but it certainly comes through. We did have weather that was warmer than normal this summer, cooler than last year but warmer than normal. And you know we always plan on normal weather.

So when you put all those factors together with the benefit we've actually seen on those specific things that I've called out and you've just called out, that is overall what really lifts us across the fleet. So it is a confluence of factors that have all worked in our direction, but of course which we have been able to take advantage of because of our good operational performance.

And then if I look at the BGSS volumes, I guess on a steady state throughout the year, roughly 75% is residential, roughly 25% is nonresidential. Would you not get the benefit for the nonresidential portion even in the winter month in terms of pipe usage?

So the -- just to clarify, right, for the residential customer, right, it is a pass-through cost, so there is no profitability kind of either way relative to that. And for the commercial customer that uses some of that gas in the territory I think we have gone specifically into all of that.

But really think of it as in general it is sort of a formula based on market prices and a competitive market. So I wouldn't look to that frankly as a significant source of overall earnings going forward, think of that as a little bit more on just a competitive market base.

Still not sure -- in terms of my question, my question just relates specifically to winter months. So in other words, in winter months should we allocate some benefit because there is a roughly 75/25 split where 25% of the volumes at least are going to customers on which you are able to make a margin?

Yes, that is right. So again, a competitive sort of market-based approach for BGSS for the nonresidential customer. I just want to be sure just to distinguish between the residential and non residential because there isn't margin in the structure for the residential customer.

There is some margin for us under the contract for the nonresidential customer. But again, I wouldn't look to that as a significant source of earnings and that is something we've been getting overall all the time. Right, that is something that has been baked into our numbers, so baked into our year on year.

Right, but the -- I think the price differential in the Marcellus is a recent phenomenon, but what you are saying is even in months where you are at peak usage you are still -- there will still be benefit that is essentially going to benefit PSEG Power --

Yes.

-- from the lower cost gas?

That is right, that is exactly right. Yes.

And then if I look at third quarter, I would assume third quarter would be less of a profit opportunity for you than fourth quarter because you also are dedicating a certain amount of pipe to storage delivery, correct?

So we are dedicating pipe to storage delivery, as I mentioned. But keep in mind, you have got some going into storage but you don't have the residential customer draw. So actually from -- if you are just looking at the issue of what kind of benefit does Marcellus give to the combined cycle, the best opportunities for that are in the shoulder period where the customer demand, residential PSE&G customer, is pulling less of the pipe, right.

So we definitely are filling storage, we absolutely do that. But given the flow that we have, that you have seen in the slides in our deck, we fill the storage but we still have extra room. And so we typically fill the storage earlier in the summer months and then when the storage is eventually filling up you have that extra flow on the pipe we can use it for our own generation or we can sell that pipe capacity to others.

So I would say when you think about the gas pipeline and the benefit you think about that potential benefit for us is the least in the winter and the most in the seasons other than the winter because you have got the least draw on the one class of utilization of the pipe that isn't a profit opportunity and that is the PSE&G residential customer.

And then my last question just has to do with -- for the LIPA contribution you say it is $0.03 in 2014 going to $0.07 to $0.08 in 2016. So in 2015 should we just pick something like a nickel contribution? In other words -- I assume it goes up from the $0.03 but not quite to the $0.07 to $0.08?

That is exactly right. You should add another $0.02 to that (inaudible).

Thank you very much.

I think, operator, that brings us to the noon hour and I know everyone is busy with earnings calls today. So if, Ralph, you have --.

Yes. So, thanks, Kathleen. So hopefully you noticed that Carol and I and the team are quite pleased with our quarter. We are pleased with the year to date. And moreover, we're greatly encouraged by our opportunity and the fact that we have the financial strength to take advantage of those opportunities and, again, have demonstrated the execution when the opportunities come our way. So we hope to see you all at EEI, thank you for joining us today.

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