公共服務電力與天然氣 (PEG) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Jennifer and I am your event operator today. I would like to welcome everyone to today's conference call, Public Service Enterprise Group fourth-quarter 2013 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 member of the financial community. (Operator Instructions). As a reminder this conference is being recorded today, February 20, 2014 and will be available for telephone replay beginning at 1 PM Eastern Standard today date until 11:30 PM Eastern Standard on the February 28, 2014. It will also be available as an audio webcast on PSEG Corporate website at www.PSEG.com.

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

Thank you, operator. Good morning, everyone. We appreciate your participating in our call today. As you are aware, we have released our fourth-quarter and full-year 2013 results earlier this morning. The release and attachments as mentioned are posted on our website, www.PSEG.com under the investor section. We have also posted a series of slides that detail the operating results by Company for the quarter. Our 10-K for the period ended December 31, 2013 is expected to be filed shortly, usually by the end of February.

I am not going to read the full disclaimer statement or the comments we have on the difference between operating earnings and GAAP results but I do ask that you read these comments contained in our slides and on our website.

The disclaimer statement regards forward-looking statements detailing the number of risks and uncertainties that could cause actual results to differ materially from forward-looking statements 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 estimates change, unless required by applicable securities laws.

We also provide commentary with regard to the difference between operating earnings and net income reported in accordance with Generally Accepted Accounting Principles in the United States. PSEG believes the non-GAAP financial measure of operating earnings provides a consistent and comparable measure of performance to help shareholders understand trends.

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

With that, Ralph?

Great. Thank you, Kathleen and thanks everyone for joining us today. This is a great day for us following a great 2013 and an even better 2014 and beyond. So let's get into the details.

This morning we reported operating earnings for these full year of 2013 and operating earnings for the fourth quarter were $0.49 a share versus $0.41 a share in 2012 which brought results for the full year to $2.58 per share or 5.7%, almost 6% greater than 2012's operating earnings of $2.44 per share and actually was above our guidance range of $2.40 to $2.55 per share.

I hope you will agree that PSEG delivered outstanding results in 2013 on many levels and let me tell you about a few of them. What made the success particularly notable is that we did it in the wake of the damage to our equipment and facilities that we sustained from Superstorm Sandy just a year earlier.

First of all, PSEG was recognized for the 12th consecutive year as the mid-Atlantic region's most reliable electric utility and was specifically recognized by EEI for excellence in its storm response during Sandy. It seems that we are tested every year and we excel at our response each and every time.

We maintain that focus on improving reliability throughout the year, not just after the storm. PSE&G invested $1.7 billion over the past year to upgrade its transmission network. The investment is part of a long-term program that has resulted in transmission growing to represent approximately 36% of PSE&G's rate base at the end of 2013. Let me remind you it had only been 28% of the rate base at the end of 2012.

This work includes work on five major transmission lines each of which is scheduled to be operational during the course of 2014 and 2015 and each of which are on schedule and on budget.

But PSE&G's investment in transmission does not end in 2015. PSE&G was assigned construction by PJM of a new transmission project that is designed to maintain the reliability of the northeastern part of our electrical grid. This project which has an expected in-service date of June 2018 has an estimated construction cost of up to $1.2 billion.

PSE&G has also started to invest in new solar capacity under the agreement we reached with the New Jersey Board of Public Utilities in 2013 which will allow us to spend up to $446 million over a multiyear period and result in about 143 MW of new renewable energy capacity through our Solar Loan and Solar 4 All programs.

We are still awaiting a response from the BPU on our Energy Strong proposal and as you recall, we asked for approval to invest $2.6 billion over five years. The investments would strengthen PSE&G's distribution infrastructure, provided with better intelligence on system outages and improve on the reliable service expected by customers. Now we are still in active discussions with parties to the proceeding even while evidentiary hearings are scheduled for next Tuesday, February 25, 2014. I will give you fair notice that those negotiations we are required to not disclose the details of those negotiations.

Now for the year, an increase in PSE&G's capital investment as well as sensible regulatory recovery mechanisms provided for contemporaneous return of our costs and return on our costs and PSE&G's ability to control growth in its operating expenses all supported double-digit growth in PSE&G's operating earnings year-over-year.

Similarly, PSEG Power also did a superb job operating its power plants and especially bringing back units that were damaged by Superstorm Sandy. The sale of two nuclear units operated at record levels and the nuclear fleet operated over 90% capacity factor for the ninth consecutive year.

Our fossil fleet achieved top decile safety performance in 2013 as the gas-fired Linden combined cycle generation plant had record-setting output and the coal fleet responded to an improvement in dark spreads. The fleet's fuel diversity allowed its respond to changes in the market and its dispatch flexibility allowed it to overcome the impact of planned and unplanned outages and participate in the improvement in market prices throughout the year. Power continues to benefit from it favorable location.

Power's earnings in 2013 benefited from the successful management of firm gas pipeline and storage contracts which provided with access to low-cost gas in the Marcella space. The contracts primarily benefit PSE&G's residential customers who enjoyed a credit amounting to 33% against the gas bills in both November and December of 2013 and then they also enjoyed an additional credit of 25% against their February bill. We will be providing details later today about providing customers with an additional credit for the month of March.

Power has become one of the larger shippers of gas in the Marcellus basin and under a BPU approved agreement is able to supply Power's generation fleet when capacity is not needed to meet the needs of residential customers. The availability of low-cost gas continued to provide a benefit to Power's earnings in the fourth quarter on top of the benefits seen earlier in the year.

Power is moving ahead with plans to increase the output and improve the performance of its existing gas-fired combined cycle generating capacity. Power will be investing $150 million at the Bergen, Linden and Bethlehem facilities over several years to increase the operating efficiency of the turbines at each station while adding approximately 150 MW of capacity.

The investment should also lengthen the time between major maintenance programs and therefore yield attractive returns. Power's approach to managing supply risk has been affirmed during a recent period of extreme weather and volatility in the power markets. The fuel flexibility of our fleet enabled us to maintain output during this time. We successfully responded to record demand while our customers have benefited from our ability to pass along savings in gas costs.

In another area we negotiated a new 12-year amended and restated operation services agreement with the Long Island Power Authority which was effective at the start of this year. The new agreement will provide for an increase in our operating fee in 2016 and beginning in 2015, Power will provide LIPA with fuel procurement and power management services. The agreement is expected to add to our earnings, provide a platform of growth for our employees and doesn't require the commitment of financial capital.

The team at PSEG Long Island hit the ground running responding to several storms since we assumed operations and will, I am sure, provide customers with the service they require and enhance our reputation for reliability. We literally had a snowstorm on January 2, 24 hours after taking over the operations but the team is doing a fabulous job.

So we exceeded our expectations for earnings in 2013 and we expect earnings to remain strong in 2014. We are providing operating earnings guidance for 2014 of $2.55 to $2.75 per share.

Now our outlook reflects the impact of the emphasis placed on the anchor principles of our strategy. First and foremost, operational excellence which yields financial strength which we then deploy through a disciplined manner in new investments. PSE&G is building on a strong platform and providing the opportunity for a continuation of growth with an investment program that supports reliability and enhances resilience. PSE&G is expected to contribute more than half of 2014's estimated operating earnings.

PSEG Power continues to benefit from the flexibility of its fleet and a locational advantage. Recent structural changes in the gas market also favor Power given our ability to take advantage of market volatility. Power's strong financial position also allows us to respond to changes in the market. We focus on improving operating efficiency and are investing in economically attractive capacity uprates that add to our well positioned fleet.

We remain committed to containing the growth in our operating expenses. We will be aided in this regard by a reduction in pension expense which provides an ongoing benefit. The commitment to funding our pension following the market decline in 2008 and an equity oriented investment approach has brought the value of our pension at the end of 2013 to a level which is in excess of our obligations. The improvement in return on the portfolio an increase in the discount rate will result in our pension adding modestly to income in 2014, a substantial improvement from our recent experience.

And not to be overlooked, a strong investment grade credit rating and robust cash flow support our growth program without the need to issue equity.

We look ahead with optimism as demonstrated by the Board's recent decision to increase the common dividend by 2.8% to the indicative annual level of $1.48 per share. This is the 10th increase in the dividend in the last 11 years and we believe we are well-positioned to provide our investors with consistent sustainable growth in the dividend.

The strong commitment and dedication shown by our employees to our customers has been a major contributor to our success and provides me with confidence in our ability to achieve our long-term goals.

I will now turn the call over to Caroline for more details on our results and we will be available to answer your questions after her remarks.

Thanks, Ralph, and good morning everyone. As Ralph said, PSEG reported operating earnings for the fourth quarter of $0.49 per share versus operating earnings of $0.41 per share in last year's fourth quarter. Our earnings for the fourth quarter brought operating earnings for the full year to $2.58 per share versus operating earnings for 2012 of $2.44 per share.

On slide four of our deck, we have provided you with a reconciliation of operating earnings to income from continuing operations and net income for the quarter.

As you can see on slide 11, PSE&G provided the largest contribution to earnings for the quarter. PSE&G reported operating earnings of $0.29 per share compared to $0.15 per share last year. For the quarter, Power reported operating earnings of $0.23 per share compared with $0.25 per share last year. PSE&G Enterprise and Other reported a loss in operating earnings of $0.03 per share compared with operating earnings of $0.01 per share in the year-ago quarter.

We provided you with waterfall charts on slide 12 and slide 14 to take you through the net changes in quarter-over-quarter and year-over-year operating earnings by the major businesses so I will now go into more detail on each company starting with Power.

As shown on slide 16, PSEG Power reported operating earnings for the fourth quarter of $0.23 per share compared with $0.25 per share a year ago. The results for the quarter brought Power's full-year operating earnings to $710 million or $1.40 per share compared to 2012 operating earnings of $663 million or $1.31 per share.

Power's full-year operating earnings exceeded the upper end of our guidance even if we exclude the operating earnings associated with the asset transfer we undertook at year-end from holdings to Power which I will discuss a bit later. The earnings release as well as the earnings slides 12 and 14 provide you with detailed analysis of the impact on Power's operating earnings quarter-over-quarter and year-over-year from changes in revenue and costs.

Power's fourth-quarter operating earnings benefited from higher capacity revenues, an improvement in the market price of energy on a net long position, an increase in volume and a decline in the supply cost of gas. The improvement in gross margin during the quarter nearly offset the impact on operating earnings from a larger than expected increase in O&M expense associated with both planned and unplanned outages.

Note that part of that cost included the investment for the uprate work on the combined cycle capacity at Linden which is a source as Ralph mentioned of future additional earnings power for Power.

Let's now turn to operations. Power's output increased 6.2% in the quarter from year-ago levels. For the year, output increased 1.8% to 53.5 TW hours. We saw the fleet's fuel and dispatch flexibility during the quarter and throughout the year. The nuclear fleet produced 29.5 TW hours or about 55% of total generation operating at an average capacity factor of 90.3%. Record production from Salem 2 helped offset the impact from a refueling outage related decline in output from our 100% owned Hope Creek nuclear facility. The gas-fired combined cycle fleet produced 15.9 TW hours in 2013 or about 30% of total generation.

Record setting output from the Linden station helped to partially offset the impact on production from planned major maintenance work at the Bethlehem Energy Center in New York in the second half of the year.

At the coal fleet, we saw an improvement in dark spreads so production from the baseload coal-fired stations in Pennsylvania increased 20% during the year which put [harbor's] output increase in response to higher market prices and the New Jersey stations, Hudson and Mercer, primarily operated on gas throughout the year. Overall, the coal stations provided approximately 14% of the fleet's output in 2013 or 7.3 TW hours.

As Ralph noted earlier, the gas-fired combined cycle fleet continues to benefit from its access to lower-priced gas supplies in the Marcellus basin. Power's fleet enjoys higher spark spreads than implied by observed market prices and the quarter-over-quarter impact on earnings from our spark spread advantage was not as large as experienced earlier in the year but recall this is in line with our expectations given the need to meet utility customer heating demand in the winter period.

Slides 18 and 19 provide more detail on generation in the quarter and for the year.

The combination of higher capacity prices, lower fuel costs and an increase in market prices on Power's unhedged position more than offset the impact of lower average prices on hedges resulting in gross margins for the fourth quarter of $46 per megawatt hour equivalent to the level experienced in the year-ago period. For the year, gross margins amounted to $47 per megawatt hour versus $45 per megawatt hour last year.

Slide 21 in our deck provides detail on Power's gross margin for the quarter and the year. Power is forecasting output for 2014 of 53 TW to 55 TW hours, in line with 2013's performance. Right now approximately 75% to 80% of anticipated production for the year is hedged at an average price of $48 per megawatt hour which compares with average hedge prices in 2013 of about $50 per megawatt hour. Power has hedged approximately 45 to 55 of its forecast generation in 2015 totaling 53 TW to 55 TW hours at an average price of about $51 per megawatt hour.

Power's forecast of total output over 2014 and 2015 is up slightly from our prior guidance and for 2016, Power has hedged 20% to 30% of forecast production of 53 TW to 55 TW hours at an average price of $53 per megawatt hour.

The increase in the percentage of generation hedged over 2014 and 2015 reflects the completion of the most recent basic generation service or BGS auction in New Jersey and we assume that BGS volumes represent about 11 TW hours in 2014 and 10 TW hours in 2015 compared with volumes in 2013 of approximately 12 TW hours.

The BGS auction result for PSE&G customers for the three-year period beginning June of this year and ending May 31 or 2017 was priced at $97 per megawatt hour. This contract for one-third of the load will replace the contract for $94 per megawatt hour which expires on May 31 of 2014. The latest auction is based on an average price per energy at the PJM West hub of about $38 to $39 per megawatt hour which is similar to the base price for energy seen in the past two auctions.

You can see from the hedge data that Power has maintained a consistent strategy. Baseload units were fully hedged in the current year as Power maintains open positions on its intermediate and peaking assets. This strategy allows Power to contain the risk associated with its load following contracts such as BGS while being able to participate in opportunities provided by the market.

Power's operating earnings for 2013 and 2012 now reflect the inclusion of its 50% equity interest in a partnership that owns and operates the Kalaeloa generating facility in Hawaii and its wholly-owned interest in PSEG Solar Source, both of which were transferred from Energy Holdings in 2013. These assets provided $0.03 per share of operating earnings in 2013 and are included in Power's reported results compared with operating earnings in 2012 for the same assets of $0.04 per share.

So Power's operating earnings for 2013 of $710 million would have exceeded the upper end of our guidance of $685 million even if these assets had not been included in our results.

Power's operating earnings for 2014 are forecast at $550 million to $610 million. Results for the full year will be influenced by a $2 per megawatt hour reduction in the average price of energy hedges and a decline in our average PJM capacity price on June 1 of this year to $167 per megawatt day from the historically high level of $244 per megawatt day.

I am sure you will recall that Power's capacity price is essentially steady for the next three years given the results of already completed capacity auctions through mid-2017. Power's fuel cost should continue to benefit from firm gas transportation agreements providing access to low-cost Marcellus gas supply and O&M should compare favorably with the results of 2013 given the decline in pension expense and ongoing cost control.

Let me now turn to PSE&G. PSE&G reported operating earnings for the fourth quarter of 2013 of $0.29 per share compared with $0.15 per share for the fourth quarter of 2012 as we show on slide 26.

PSE&G's full-year 2013 operating earnings were $612 million or $1.21 per share compared with operating earnings of $528 million or $1.04 per share for 2012, a growth rate of 16%. Power's earnings for the fourth quarter reflect the benefit of an increase in revenue associated with a greater level of capital investment and a decline in O&M expense relative to the prior year period which as you recall included Superstorm Sandy related restoration expenditures.

An increase in transmission revenue improved the quarter-over-quarter earnings contribution by $0.04 per share and for the year, PSE&G's investment in transmission increased earnings by $0.14 per share. In 2013, our $1.7 billion investment in transmission increased the percentage of rate base in transmission of 28% last year to 36% at the end of 2013.

PSE&G's O&M declined during the quarter given comparisons against the year-ago period which included Sandy-related restoration expenditures and the decline in O&M increased quarter-over-quarter earnings comparisons by $0.04 per share.

Demand for electricity and gas during the quarter was influenced by weather which was slightly colder than a year ago. Also weather normalized demand for gas continues to show improvement. The impact on quarter-over-quarter earnings from the improvement in demand and weather was about $0.01 a share. Earnings comparisons in the quarter also improved by about $0.04 per share due to reduction in taxes and the absence of a tax related change in reserves recognized in the prior year. All other items contributed about $0.01 per share to earnings.

Economic conditions in PSE&G's service territory appear to have stabilized and exhibit signs of slow recovery. On a weather normalized basis, electric sales are estimated to have improved in the quarter by 2.7% and for the year, weather normalized sales declined by 1.5%.

It is too early to get excited about the improvement in weather normalized sales in the quarter given the comparisons against a period impacted by Sandy-related outages. Gas deliveries however, continue to point to improved demand as a result of still low commodity prices and slowly recovering economic conditions. On a weather-normalized basis, gas deliveries increased 2.7% in the fourth quarter and now for the year total an increase of 2.2%.

PSE&G's operating earnings for 2014 are forecast at $705 million to $745 million and this implies that even at the low end of the range we are forecasting at least 15% growth in PSE&G's operating earnings.

PSE&G's growth in 2014 will continue to benefit from its ability to earn a return on its expanded investment in transmission. The Federal Energy Regulatory Commission approved an agreement which provides for an annual increase in transmission revenue of $171 million under the Company's formula rate filing and this increase became effective on January 1 of this year.

Results will also reflect the recovery of capital costs associated with PSE&G's investment in solar and a reduction in pension expense as well as ongoing expense control is expected to result in a year-over-year reduction in O&M.

As Ralph indicated, PSE&G's significant transmission investment program is on time and on budget and will be providing you with an updated forecast of PSE&G's capital expenditures for 2014 through 2018 at our annual financial conference on March 7 of this year.

Let me now turn to Enterprise and Other. Enterprise and Other reported a small operating loss for the fourth quarter of $11 million or about $0.03 per share compared to operating earnings of $6 million or $0.01 per share in the fourth quarter of 2012. The results for the fourth quarter brought the full-year 2013 to an operating loss of about $13 million or $0.03 per share compared with 2012's operating earnings of $45 million or $0.09 per share.

The results for the quarter and the full year have been restated simply to reflect the distribution to PSEG Power of the 50% equity interest in the partnership that owns the Kalaeloa generating facility as well as the wholly-owned interest in Solar Source.

Operating earnings on the remaining portfolio however were affected by a decline in lease income as well as an adjustment to the tax basis of the portfolio which together reduced quarter-over-quarter earnings by $0.03 per share.

We will no longer be reporting separately the results for Energy Holdings. They management team has successfully monetized non-core assets in the portfolio and significantly reduced financial risks. The focus going forward will be on managing the remaining assets in the lease portfolio.

For 2014, operating earnings are forecast to fall within the range of $35 million to $40 million. Going forward, the fee associated with the operating contract for PSEG Long Island will be reported as part of Enterprise along with the results for the remaining lease portfolio.

Next I would like to spend just a minute talking about pension. We did close 2013 with the value of our pension assets in excess of our PBO obligations. The improved return and higher discount rate will as Ralph mentioned, have a favorable impact on pension expense this year and going forward. In fact we estimate there will be a positive impact on income in 2014 and in future years in compared to the previous year's expense of $110 million. We will not need to make any cash contributions to our pension trust this year as well.

The benefit to earnings is essentially equally shared between PSE&G and PSEG Power and we will provide you with a deeper multiyear view of the impact on O&M from the improved outlook on pension at our March 7 investor meeting.

Lastly, a word on our financing capability. We remain in a strong position to finance our capital program. At the end of 2013, we had approximately $493 million of cash on hand and debt represented approximately 42% of PSEG's consolidated capital with debt at Power approximating 31% of its capital base.

Power's free cash flow remains strong and PSE&G's cash generation has improved from its ability to earn its authorized return on increased levels of capital investment and of course, we will provide you with an update of our capital program at our annual financial conference but the message on equity issuance will be the same. We can finance our robust long-term capital program without the need to issue equity.

We are guiding to strong operating earnings for 2014 of $2.55 to $2.75 per share. This outlook is our best guidance for the full year but I will note that it does not reflect any specific weather conditions related to January consistent with our practice of not incorporating weather into our guidance until we go through the summer season.

The dividend was recently increased by 2.8% to the indicative annual level of $1.48 per share and we believe we can provide shareholders with consistent and sustainable growth in the dividend going forward. We will provide more detail on our outlook at our annual financial conference on March 7.

So with that I will now turn it back to Jennifer and we will be happy to take questions.

(Operator Instructions). Travis Miller, Morningstar.

Good morning. Thanks. I was wondering real quick if you could give some thoughts on that dividend policy. You've obviously got a strong balance sheet, you've got some pretty good visibility into earnings at least certainly for next year and perhaps the following year, good cash flow generation. I was wondering what the thought is in terms of using some more of that cash flow capacity to perhaps increase the dividend at a faster rate?

So, Travis, as you know, we don't have a target number in terms of percentage payout or percentage growth rate. It is a variety of factors, it is where the earning is coming from, how stable are they, how predictable are they, where are we in the commodity cycle? So we word that we continue to hold onto is that looking at all of that where power prices are, where the market is predicted to be, where our capital program is at the utility that investors do have the opportunity for consistent and sustainable growth in the dividend and I would rather not be held to a specific number at this point.

Okay, understand. Real quick what is the LIPA contribution for the 2014 guidance?

It is $0.02 to $0.03 for 2014 and that is up basically in $0.02 increments until we get to 2016 where it is about $0.07 or $0.08.

Great. Thanks so much.

Brian Chin, Merrill Lynch.

Good morning. Just a clarification on the ongoing pension question. The $110 million number you referenced as the year-over-year benefit from 2013 into 2014, that is included in guidance, is that right?

No, that is a great question, Brian. Let me clarify that. So the $110 million was our net of capitalization so therefore what impacts the P&L. That was our pension expense in 2013 so in 2014, you are actually going to see pension income instead of having $110 million in expense, you are going to see pension income and the turnaround on a year-on-year basis is a $0.15 improvement from the impact of pension going from expense last year of $110 million to income in the teens that you are going to see in this year's numbers split evenly between the businesses, so a $0.15 year-on-year improvement.

We expect to see pension income as we forecast out during the business plan so you are going to see a continuation of value driven from pension as opposed to the history we have had in the last few years of significant pension expense.

So just add to that, Caroline. Brian, it is not a step up and then a step back down in subsequent years. It is just a resetting of the level of pension in this case no longer burdened on the income statement but a benefit but we will incorporate that in all of our other O&M forecasts in our March 7 meeting.

Okay, understood. I understand that you are going to give more quantitative color on the ongoing effect of that at the analyst meeting but in terms of just qualitatively what is going on beyond 2014, the reason why there is an ongoing effect there is because assumedly some degree of asset returns and adjustment in your discount rate that would cause an ongoing pension income in future years. Is that sort of a right way to think about that or is there an amortization effect that is taking place?

The right way to think about this, Brian, is we make long-term assumptions for returns on our investment portfolio. We make the same long-term assumptions going forward that we have made prior, right, you know from our disclosures. We assume an 8% return on our asset investments. We just continue to assume that same return.

We look at the discount rate from the forward curve, that is the way everybody looks at it, right? So you set it from wherever you land and when we look at it going forward, we are just looking at the forward curves. So the discount rate went up for this year from last year. Last year it was 4.2%, this year it is 5%, that is just taken right off the curves at the end of 2013.

So with the really steady as she goes set of assumptions about rate of return which we have set at 8 and the discount rate which we just use from the forward curve, very significant turnaround we see between 2013 and 2014 comes from the fact that in 2013, our trust returns 20% and that comes from having that sustained equity oriented allocation, about 70% equity. And you will see if you look at our historical that has been sustained for the past few years. We take a long-term view. And because we don't smooth the year-end asset values -- you remember there's two types of smoothing and pension -- there is the gain and loss smoothing -- everybody does that.

But the ending assets, most companies' smoothing ending asset value -- in other words what value you will provide that 8% return to in your current year -- most companies use a five-year average. We use the actual value at the end of the prior year. So the fact that we had 20% return gives us that benefit as we come into 2014 purely from where the market put our assets at the end of 2013.

Thank you very much.

Kit Konolige, BGC.

Good morning. So it would appear if I heard this correctly that the 2014 guidance benefits relative to 2013 actual by $0.15 from the pension, correct?

That is correct.

Okay. So in other words basically all of the improvement and let's say the midpoint of 2014 versus 2013 is due to that pension improvement?

Well, there are a lot of obviously different dynamics going on in the businesses as well though I wouldn't want you to just focus on one item and not focus on the others. We've got significant increases assumed in PSE&G part of which comes from the year-on-year for pension but it is much more than that.

We also have huge benefits from the transmission investment offset by the decline in the hedge prices. So we just need to be careful that we don't just pick one thing that looks like a $0.15 change and say that is only thing that isn't washing out.

Absolutely, understood. A lot of moving parts. The transmission improvement was $0.14 2013 versus 2012. Did I get that down right?

Yes, that is right.

And can you give us a sense of at PSE&G 2014 versus 2013, is the transmission improvement going to be similar to that and what should we think of in terms of the benefit from the solar investment year-over-year?

We have always told you so far that we have a $171 million increase in transmission revenues. The piece that you are missing is what is the increase in transmission O&M. We will give a little bit more information on March 7. The Solar [440] is a three-year program and you should assume that that is pretty evenly distributed over the year.

Okay.

(multiple speakers) a return at a 10% ROE and a 51% equity ratio (multiple speakers).

Okay, great. My final question on Energy Strong, there was an article in New Jersey Spotlight about I guess their indication was that there seemed to be a bid ask of about $1 billion from the staff and $1.9 billion that you guys had come down to. Are you in a phase -- let me just ask it this way -- are you in a phase of negotiating about a number for Energy Strong at this point and are other issues basically settled?

So, Kit, when that article appeared, there was an appropriate and very stern letter that came out of the presiding office of the BPU chastising all participants but in particular whoever was responsible for that leak which was not us, that such conversations in public would not be tolerated and sanctioned. Unnamed would be enforced afterward so I don't even really want to come close to answering your question other than to say yes, there was an article.

I knew that already.

I know you did.

Let me just follow up on that. Ralph, you have been saying all along that you expect a settlement in Energy Strong. Are you still confident that there will be a settlement rather than a full proceeding on Energy Strong?

Yes I am. But I was clearly wrong on the date. I thought we would have it done by the end of January and I obviously missed that timeframe. I am still optimistic. Everyone recognizes the importance of the work that is being proposed but the devil is in the details.

Great. Thank you.

Paul Patterson, Glenrock Associates.

Just to follow-up on the transmission, this Bergen to Linden line and just all of the improvements that you guys have been doing there, should we think about any potential risk to the LDA breakout?

No, Paul, so most of the transmission work that does have impacts you have seen already in the way they have been reflected in the RPM auctions so the two biggest projects that had an effect were Susquehanna-Roseland in terms of its transfer capability from Eastern MAAC into PS Zone and then the -- the overall PS Zone and then the Northeast grid and its transfer capability between PS Zone and PS North.

I forget the exact number. I think I saw was about 1500 MW and I think Northeastern was 400 or 500 I don't remember -- 200 to 300 Kathleen is telling me. So those projects have had an effect and that is fully reflected in the price. This latest project is pretty much wholly within PS North and the [ISO] seam so this is a stability issue across the PJM and New York ISO seam.

Okay, so no [QTU] or anything else that you see out there as being a problem?

No, I don't.

Okay. Then just finally just on taxes for the 2014 guidance, could you just tell us what we should be expecting there?

I hope Caroline can.

So we haven't given a specific effective tax rate but I think it is fair to assume you will see tax rate kind of similar to what we have seen in Power over the past period close to 40%. And the utility obviously as solar installations go into effect give a little bit of an ITC. So there is a little bit of a tax rate benefit. Won't be quite as high as Power but pretty much steady, nothing really dramatically different going on there.

Great. Thanks a lot.

Jonathan Arnold, Deutsche Bank.

Good morning. Can you just first on the hedging, I noticed that the pricing on the 2015 hedge has gone up a little bit. Can you give us some sense -- is that primarily BGS, is there something else going on in there? Is it peak weighted or just whatever you could give me there. And then any flavor on what the composition of the 2016 hedge is on the baseload?

Sure, so you are right, Jonathan, on 2015 a big driver here from our prior disclosure is the impact of BGS. So BGS goes in at about a low teens impact on the total hedge book for 2015 because the most recent auction of course puts a full-year of BGS in there. And so that is the biggest driver of a change in the hedge percentage and the change in the hedge price because remember we put BGS in there at about -- at the BGS price less capacity so it has an impact as you go into 2015 on a full-year basis and then raise the price from $48 to $51 per our last quarter disclosure.

For 2016, BGS has an impact in there as well and the book for 2016 per your question is about a third BGS and about two-thirds West Hub hedges. As we go out further, BGS is a heftier piece of the total hedge book than it is near-term because it tends to be what you can really do on a long-term basis.

Okay, great. Secondly, can you give us any insight how the portfolio behaved in this January and early February pricing blowout? Was it a net positive, was it neutral and how you have thought about that in the context of guidance?

So we did not factor that into the guidance we have just given you for 2014, Jonathan, but I can tell you this, the unit has performed well. Our gas team was able to get the fuel we needed. There were times when we were running on kerosene and not on natural gas but the assets were up and running. We had Linden down for a few days because we were finishing out the AGP, the advanced gas path. But no, we had solid operational performance, manage the fuel situation very well and did not factor that into our 2014 guidance.

Kathleen reminded me this morning I forgot already it is only 51 days so far, 314 to go so she didn't want me to get ahead of myself.

So you just basically have done it as of year-end?

That is correct. That is exactly right.

Which is what we have done every (multiple speakers).

Okay. Then just sort of finally as we think about this sort of 2014 number and the pension and the other moving parts, and I don't know if this is something you will talk about now or not, but do you see 2015 and 2016 as kind of flat to up type of trajectory netting everything together or is there still kind of hedge rolloff headwind, etc. kind of offsetting some of the positives you have on the upside of the business?

Jonathan, we are not going to give guidance for the out years. We will at the conference remind folks and I will just do it at a high level here of what the utility rate base growth will be and how that translates to earnings. We will re-present -- we will present to you data that I think most of you know about RPM because that does carry us certainly through 2016. We will discuss the hedge book to the extent that further detail is needed. So what we don't do is try to outguess the forward price curve and that is the part that keeps us from giving you precision in the out years. We are going to give you an O&M growth rate.

So other than the changes in the forward price curve and how we are able to dynamically hedge which is something that I think we are all learning to understand is the advantaged power, those two limitations keep us from giving you even a plus or a minus for the out years and we are going to give you five years of utility capital this time around as well.

Not asking you to second-guess the curve but if you assume the curve, can you go there?

The reason why I would not want to do that is I think that limits us to a bias of understating our potential. Our naturally long position with our diverse asset fleet both in terms of fuel and in terms of dispatchability has allowed us to benefit from the volatility quite nicely and the greater that volatility, the greater the benefit for us and that is a theme we have been trying to educate the investor community about for the past 18 months or so. And I think we want to make sure we don't shortchange ourselves by simply saying the current prediction is a spark of X and therefore that is all you should bake into our numbers.

Thank you.

Ashar Khan, Visium.

Can I just -- what we should expect at the conference, would you be in a position at that time to give us the sort of question in terms of Energy Strong, would that be done by then or not done by then? I am just trying to see how are you going to address what is in rate base for the utility for the next five years?

I obviously did a mea culpa already on predicting it by the end of January so I'm not going to invite a second opportunity to be wrong or beat my chest over being right by predicting a date and then not living up to it. We are in active negotiations. The hearings begin on Tuesday or Monday I forget the 25th so believe me, there is no one on this call who wants that done sooner but not without the right terms and conditions for our shareholders and our customers.

So I can't predict if we will have more details for you. Suffice to say that we will do what we have done in the past. We will tell you here is what has been approved and what is definitely happening and to the extent that there are open questions, we will tell you what those additional open questions could yield.

Okay. Caroline, just one based on what you had provided earlier and I know pensions has provided an uplift. But you had still said that going up till 2016 year-over-year even starting from 2014 the way I understood it that the utility company could still show double-digit EPS growth without Energy Strong. If I am understanding that right, that should still be the case, right, from a 2014 to 2016 timeframe?

Yes, that is correct.

Okay, okay. Thank you so much.

You are welcome.

Julien Dumoulin-Smith, UBS.

Good morning. So a quick first question, I will try. In terms of at least the first 60 days here of the year -- first couple of months -- can you give us any ballpark in terms of what that means for you versus plan?

Caroline, I tried to say no. It is your turn.

I tried, I swear.

We can't give you ballpark, Julian, because we just obviously just put out the guidance et al, but I think as Ralph said, we performed well and we've had other periods where when opportunities present themselves we capture them and we captured what was available to us here.

But we will be on the phone with you not too long from now doing the first quarter it seems in April. But I think you should expect that we are able to do the kind of things that our terrific ER&T group is able to do which is take advantage of opportunities when they present themselves because our operations and our assets run really well. But beyond that, I think we will just wait for the first quarter results.

Julian, I do respect the desire for that information. We have two nuclear refueling outages ahead of us. We have a summer season that is at least as important as the winter season so there is a lot of territory ahead of us before we start taking something to the bank.

Let me jump onto the last question a little bit and ask you in terms of you have the $1 billion and the $2 billion -- in terms of aggregate CapEx at the utility, you talked about earnings growth but for the next few year period, is there an ability to accelerate other spend that you would have otherwise put into Energy Strong should it come out at the lower and if you get what I'm saying? Is there some level of flexibility?

And maybe let me just hit at this a little bit differently. How are you thinking about Energy Holdings spending in the context of perhaps greater balance sheet latitude and getting more involved on more contracted assets on that side?

So we do continue to invest on contracted assets on the Energy Holding side but it is modest compared to what is going on in the utility and while I do want Energy Strong for all of the reasons we have articulated in the past, the critical issue in the utility has been and continues to be transmission.

So whether it is the Bergen-Linden 345 KV line, that was a $1.2 billion add. Now that is a gross number. We will detail for you the net impact of that because some projects have been canceled. Whether it is the possibility of the Artificial Island bid that we made along with six other bidders so we don't know who will win that; the fact that PGM is going to have an open window in April on FERC order 1000 Project.

So there are -- there have continued -- we have consistently been able to find important reliability-based investments to deploy our balance sheet in the utility and I just think given the uncertainty in the market about where assets get built, how power generation assets get built and where they get shut down that those opportunities will continue to appear before us and Caroline will add to that.

One other thing, Julian, I think we have a robust capital program. We've talked about a lot going on including the potential for Energy Strong is filed and the other thing that we will talk about in March as we always do and you would expect from our results and our cash and balance sheet position is everything we have talked about has the potential for going forward including Energy Strong, none of that takes away our entire investment capacity.

So there is more investment capacity to put to work on either good projects at the utility, additional transmissions, things like uprates at Power. There is opportunity to do even more because we have run the balance sheet and had so much free cash flow coming from both businesses. So even the things that you know will still have more do room to do more things as these opportunities that Ralph identified potentially come forward to us.

I will take that as a general yes. Great. Thank you.

Neel Mitra, Tudor Pickering.

Good morning. In the past you guys have detailed a slide with the amount of exports that you have from New Jersey to New York and I think the last time you put one out was about 2500 MW. Ralph, can you kind of talk about maybe how that number has changed and maybe more specifically over the last year and what projects are perhaps in the backlog that could increase the exports out of New Jersey?

Neel, we haven't broken that number out in a number of years. I'm kind of trying to remember when the last time was that we did break that out. I know we have some -- it has been at least three years I'm being told. So I know we have some energy and capacity sales over a VFT line that goes over to New York. We do some spot transactions but I don't know that we break out our Power book to that level of specificity.

I am guessing more kind of on the utilities side.

Oh, on the utilities side. (multiple speakers)

You talked about --

The utility isn't building any transmission into New York City. Perhaps -- I hope I didn't misspeak before the 345 KV is a reliability issue that affects the seam but it is all inside New Jersey.

It is all inside of New Jersey. Okay, great. Second, with the uprates, the 150 MW, are you considering any other kind of expansions at Power? I know in the past you have talked about maybe (inaudible) or (inaudible) brownfield additions. Are those off the table right now are you happy with the 150 MW?

Right now we have two major projects underway. We have an uprate of about 140 MW at Peach Bottom and we have the advanced gas path and right now that is all that we have planned.

Okay, great. Thank you.

So thanks everyone for participating in the call. We had a terrific 2013. It was terrific operationally, financially, meeting the needs of the New Jersey Energy Master Plan and we firmly expect that we are going to build on that in 2014 and beyond. We will share some more details with you on March 7. We hope you are able to join us then in New York.

I am told by Kathleen in celebration of the winter we had, we may actually have some sleigh rides and hot chocolate for people but hopefully we will have the beginning of some spring weather when we see you on March 7. Thanks for being here today and we will see you soon.

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