公共服務電力與天然氣 (PEG) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Brent and I'm your event operator today. I would like to welcome everyone to today's conference, Public Service Enterprise Group's fourth quarter 2015 earnings conference call and webcast.

(Operator Instructions)

As a reminder, this conference is being recorded today, Friday, February 19, 2016, and will be available for telephone replay beginning at 2 PM Eastern today until 11:30 Eastern on February 26, 2016. It will also be available as an audio webcast on PSEG's corporate website at www.pseg.com.

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

Thank you, Brent. Good morning, everyone. Thank you for participating in our earnings call this morning. As you are aware, we released fourth quarter and full-year 2015 earnings results earlier this morning.

The release and attachments as mentioned are posted on our website, www.pseg.com under the Investors section. We also posted a series of slides that detail our operating results by Company for the quarter. Our 10-K for the period ended December 31, 2015 is expected to be filed shortly.

I don't go through the full disclaimer statement or the comments we have on the difference between operating earnings and GAAP results, but I do ask that you all read those 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 made therein. And although we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if our estimates change, unless of course 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 that the non-GAAP financial measure of operating earnings provides a consistent and comparable measure of performance to help shareholders understand trends.

I'm now going to turn the call over to Ralph Izzo, Chairman, President, and Chief Executive Officer of Public Service Enterprise Group. And joining Ralph on the call is Dan Cregg, Executive Vice President and Chief Financial Officer.

At the conclusion of their remarks there will be time for your questions. Given the interest in the call we ask that you limit yourself to one question and one follow-up. Thank you.

Thank you, Kathleen, and thanks, everyone, for joining us today. This morning we reported operating earnings for the full-year 2015 and I'm pleased to report that it was a year of significant accomplishments.

As you saw this morning, we reported operating earnings for the fourth quarter of $0.50 per share versus $0.49 per share earned in the fourth quarter of 2014 despite the unseasonably mild weather this past December. Results for the full year were $2.91 per share, or 5% greater than 2014's operating earnings of $2.76 per share. This is at the upper half of our guidance of $2.85 to $2.90 per share and it was also higher than the midpoint of our original guidance of $2.85 per share.

Our results reflect the benefits of excellent performance and robust organic growth which offset the impact of low energy prices on earnings. We have continued to successfully deploy our strong free cash flow into customer oriented investment programs that have supported growth. 2015's operating earnings represented a third year of growth in earnings.

Let me just mention a few of the year's highlights. PSE&G was named Electric Light & Power's utility of the year and was named the most reliable utility in the mid-Atlantic for the 14th consecutive year. But we're not resting on those laurels.

PSE&G invested approximately $2.7 billion during 2015 on programs to further enhance the system's resiliency and its reliability. During the year PSE&G placed into service key backbone transmission lines such as the Susquehanna-Roseman light as well as the Mickleton-Gloucester-Camden line which is designed to meet the needs of customers today and well into the future.

PSE&G invested over $550 million on programs under its $1.2 billion Energy Strong initiative. These programs are designed to strengthen and protect the electric and gas distribution systems from the impacts of extreme weather.

During the year PSE&G also received approval from the New Jersey Board of Public utilities to invest an additional $95 million in its award-winning energy efficiency programs and to continue the work begun under Energy Strong replacing aging cast-iron natural gas pipes. The $905 million gas system modernization program represented the 14th multi-year investment program approved by that BPU since PSE&G's last-based rate case. And this speaks to the state support of infrastructure investment that meets the needs of customers.

PSE&G's investment program, supportive recovery, revenue recovery mechanisms and tight control of O&M expenses have provided growth in PSE&G's operating earnings of approximately 13% per year for the five-year period ended 2015. During this period PSE&G's rate base expanded at a rate of 11% per year and, importantly, we have being able to support this growth as customer builds have declined.

But 2015 was not just a year of PSE&G accomplishments. PSEG Power's strong operating performance supported earnings in line with guidance for the full year despite very difficult market conditions.

The nuclear fleet operated at a capacity factor of greater than 90% for the year and accounted for 54% of the fleet's output. Power's gas-fired combustion turbine fleet set a new record for output. This improves on the prior record established in 2014. The fleet's performance is benefiting from investments that have improved its efficiency, increased its capacity and provided greater access to low-cost gas supplies.

The flexibility and diversity of Power's fleet have allowed it to provide approximately $500 million of positive free cash flow in 2015 even during soft energy market conditions. Power also plans to invest $2 billion over the next three to four years to add approximately 1800 megawatts of new, efficient, combined cycle gas-fired turbine efficiency -- turbine capacity.

The Keys Energy station which is located in southwestern [Mak] will extend Power's footprint in this core PGM market. A new efficient unit at the Sewaren station in New Jersey will replace old, inefficient steam capacity.

And after clearing the most recent capacity auction in New England, Power will construct a new 485-megawatt combined cycle unit at its existing Bridgeport Harbor Station site, giving us an enviable and growing position in both energy and capacity markets in southwestern Connecticut. The addition of these units will transform Power's Generation mix as its ownership of efficient, reliable gas-fired capacity will grow to exceed 5000 megawatts in 2019.

At that time, the combined cycle gas turbine fleet will surpass the size of Power's ownership in nuclear capacity and secure Power's position as a low-cost generator with modern, flexible, clean assets that remains capable of meeting the demands for reliability in today's market.

Power also grew its investment in contracted solar energy. In 2015, Power added two projects, representing an investment of approximately $75 million in utilities scale grid connected solar energy. And earlier this year Power announced it will invest an additional $150 million in three new projects that bring its portfolio of solar projects to 240 megawatts DC of clean renewable energy.

All projects in this portfolio are under long-term contracts with credit worthy customers. So as you can see we continue to explore opportunities to expand and optimize Power's fleet, although I will add that we do not see any new generation build in the foreseeable future -- although you never say never but we don't plan any at this point in time.

Our balance sheet continues to provide us with a competitive advantage to finance our capital program without the need to access the equity markets. We ended 2015 with strong credit metrics and the extension of bonus depreciation through 2019 is expected to provide enterprise with an additional $1.7 billion of cash during this period.

Our investment program calls for a 21% increase in capital spending to $11.5 billion for the three years ended 2018 from capital investment during the three-year period ended 2015. Approximately 72% of that amount, or $8.3 billion over the timeframe will be invested by PSE&G on transmission and distribution infrastructure programs that customers require for reliability.

This level of investment is expected to yield growth in PSE&G's rate base for the three years ended 2018, of 10% per year, even after taking into account the impact of bonus depreciation on rate base. The remaining approximate 27% or $3.2 billion of expected capital investment will be made in Power.

The majority of Power's investments will be devoted to expanding its position in new, efficient, clean, gas-fired generating capacity as I mentioned already. All of which, Key, Sewaren and Bridgeport Harbor are expected to exceed our long-standing and unchanged financial returns expectations.

With our strong balance sheet we remain in position to increase our capital investment across the Company. We have a robust pipeline of opportunities and plan on providing you with an update of our five year outlook for capital spending at our annual financial conference on March 11.

In total, the investment programs that PSE&G and Power are focused on meeting customer needs and market requirements with an energy platform that is reliable, efficient, and clean. The strategy we implemented has yielded growth for our shareholders as we have met the needs of our customers.

The continued successful deployment of strong free cash flow into customer oriented regulated investment programs is expected to support 14% growth in the utilities earnings to 60% of Enterprise's 2016 operating earnings as the results for the full year are forecast at $2.80 to $3.00 per share. Our guidance for 2016 takes into account the impact on demand from the continuation of unseasonably mild weather conditions in January and early February.

The Board of Directors' recent decision to increase the common dividend by 5.1% to the indicative annual level of $1.64 per share is an expression of our confidence in our outlook, the continued growth of our regulated businesses, and an acknowledgment of our strong financial position. We see the potential for consistent and sustainable growth in the dividend as an important means of returning cash to our shareholders.

Of course none of our success would be possible without the contribution made by PSEG's dedicated workforce. I look forward to discussing our investment outlook in greater detail with you on our March 11 annual financial conference. But for now, I will turn the call over to Dan for more details on our operating results and we will be available to answer your questions after his remarks.

Thank you, Ralph, and good morning, everyone. As Ralph said PSE&G report opportunities for the fourth quarter of $0.50 per share versus $0.49 per share for the fourth quarter of 2014. Earnings in the quarter brought operating earnings for the full year to $2.91 per share, or 5.4% greater than 2014's operating earnings of $2.76 per share and at the upper half of our guidance of $2.85 to $2.95 per share.

And on slide 4 we provide you with a reconciliation of operating earnings to net income for the quarter. We've also provided you with information on slide 10 regarding the contribution to operating by business for the quarter.

And slides 11 and 13 contain waterfall charts that take you through the net changes. Quarter-over-quarter and year-over-year changes operating earnings by major business. And I'll review each Company in more detail starting with PSE&G.

PSE&G reported operating earnings for the fourth quarter of 2015 of $0.31 per share compared to $0.32 per share for the fourth quarter of 2014, and that's shown on slide 15. PSE&G's full-year 2015 operating earnings were $787 million, or $1.55 per share, compared with operating earnings of $725 million or $1.43 per share for 2014, reflecting a growth of 8.6%.

PSE&G's earnings for the fourth quarter benefited from a return on its expanded capital program which partially offset the impact of earnings from unseasonably mild weather conditions and an increase in operating expenses. PSE&G's return on an expanded investment in transmission and distribution programs increased quarter over quarter earnings by $0.03 per share.

Mild weather conditions relative to normal and relative to last year reduced electric sales and lowered earnings comparisons by $0.01 per share. Recovery of gas revenue under the weather normalization clause offset the impact on earnings of the abnormally warm weather on sales of gas, and higher expenses including pension, and other items reduced quarter over quarter earnings comparisons by $0.03 per share.

Economic conditions in the service area continue to improve. On a weather normalized basis, gas deliveries are estimated to have increased 2.1% in the quarter and 2.2% for the year. Demand continues to benefit from an improving economy and also from the impact of lower commodity prices on customers' bills.

Electric sales on a weather normalized basis are estimated to have increased by 0.8% and 0.5% for the fourth quarter and for the year, respectively. The estimated year-over-year growth on electric sales is more representative of our long-term expectations for growth.

PSE&G implemented a $146 million increase in transmission revenue under the Company's transmission formula rates for 2016 on January 1. PSE&G's investment in transmission grew to $5.7 billion at the end of 2015, or 43% of the Company's consolidated rate base of $13.4 billion at year end.

As you know, transmission revenues are adjusted each year to reflect an update of data that was estimated in the transmission formula rate filing. The adjustment for 2016, which we will file in mid-2017, will include the impact of the extension of bonus depreciation which was executed after our transmission formula rate filing.

This adjustment will reduce transmission revenue as filed by about $27 million, but we will accrue that for accounting purposes in anticipation of the reduction of revenue as we report our 2016 results.

We are forecasting growth in PSE&G's operating earnings for 2016 to range of $875 million to $925 million. And the forecast reflects the benefits of continued growth in PSE&G's rate base and a decline in pension expense.

Turning to Power as shown on slide 19, Power reported operating earnings for the fourth quarter $0.19 per share compared to $0.18 per share a year ago. The results for the quarter but Power's full-year operating earnings to $653 million or $1.29 per share compared to 2014's operating earnings of $642 million or $1.27 per share.

Power's adjusted EBITDA for the quarter and the year amounted to $235 million and $1.563 billion respectively which compares to adjusted EBITDA quarter of 2014 of $271 million in adjusted EBITDA for the full year of 2014 of $1.584 billion. The earnings release as well as earnings slide and pages 11 and 13 provide you with a detailed analysis of the impact on Power's operating earnings quarter over quarter and year-over-year from changes in revenue and costs.

And we've also provided more detail on generation for the quarter and for the year on slide 21 and 22. Power's operating earnings in the fourth quarter reflect the impact of strong hedging a tight control and operating expenses which offset an anticipated declining capacity revenue and the impact of unseasonably warm weather on wholesale energy prices.

A declining capacity revenue associate with the May 2015 retirement of the high electric demand day or HEDD peaking capacity in PJM reduced quarter over quarter earning comparisons by $0.04 per share. An increase in average price received on energy hedges coupled with a decline in fuel costs more than offset the impact on earnings from a reduction in gas sales. In these two items together netted to a quarter-over-quarter improvement in our earnings of $0.02 per share.

Power's OEM expense for the quarter was unchanged relative to year ago levels. An increase in depreciation expense and other miscellaneous items was more than offset by the absence of a charge in the year ago quarter resulting in a net improvement in quarterly earnings comparisons of $0.03 per share.

Turning to Power's operations, Power's output during the quarter was in line with year ago levels. For the year, output increased 2% to 55.2 terawatt hours from a level of production achieved by the fleet in 2015 represented the second highest level of output in fleet's history as a merchant generator. Both were supported by improvements in the fleet's availability and efficiency.

The nuclear fleet operating leverage capacity factor of 90.4 for the year, producing 30 terawatt hours or 54% of total generation. Efficient commodity cycle gas turbine capacity was rewarded in the market with an increase in dispatch levels and Power's CCGT fleet set a generation record during the year as each of the Lyndon Station and Dublin energy centers set individual records.

Output from the combined cycle fleet grew 11% to 18.4 terawatt hours or 33% of total output during the year. Lower market demand for our coal units reduced output from those stations to 5.8 terawatt hours for the year or 11% of output and lastly the fleet's peaking capacity produced just under one terawatt hour or 2% of output for the year.

Power's gas fired combined cycle fleet continues to benefit from its access to lower price gas supplies Marcellus region. And for the year, gas from the Marcellus supplied 75% of the field requirements for the PGM gas-fired assets. This supply supports higher sports spreads implied by market pricing and allowed Power to enjoy fuel cost savings in the fourth quarter similar to the levels it enjoyed in the year ago quarter despite weak energy prices.

And for the full year Power enjoyed positive spreads relative to the market, and year-over-year realized parts spreads in 2015 were lower than what was realized in 2014 given the decline in energy prices. Overall Power's gross margin improved slightly to $38.83 per megawatt hour in the fourth quarter versus $37.40 per megawatt hour of the year ago quarter.

And for the year Power's gross margin amounted to $42.25 per megawatt hour versus $42.41 per megawatt hour last year. On slide 24 provides detail on Power's gross margins for the quarter and for the year.

Power's expecting output for 2016 to remain unchanged at 54 to 56 terawatt hours. Following the completion of the basic generation service or BGS auction in New Jersey earlier this month, Power has 100% of its 2016 base load generation hedged.

Approximately 70% to 75% of Power's anticipated total production is hedged at an average price of $51 per megawatt hour. And Power has hedged approximately 45% to 55% of its forecast generation of 2017 of 54 to 56 terawatt hours at an average price of $50 per megawatt hour.

Looking forward to 2018, Power's forecasting improvement in output to 59 to 61 terawatt hours with the commercial startup in mid-2018 of the Keys and Sewaren stations that Ralph mentioned earlier. Approximately 15% to 20% of 2018's output is hedged at an average price of $54 per megawatt hour and Power assumes PGS volumes will continue to represent approximately 11 to 12 terawatt hours of deliveries. And this number is very consistent with the 11.5 terawatt hours of deliveries we saw in 2015 under the PGS contract.

Our average hedged position at this point in time represents a slightly smaller percentage of output hedged versus what you saw a year ago. At that time Power was able to take advantage of market prices influenced by the colder than normal weather conditions of last winter. Average hedged pricing includes the impact of recently concluded PGS auction and the auction for the three-year period beginning June 1, 2016 ending May 31, 2019 was priced at $96.38 per megawatt hour in the PSO.

This contract for one-third of the load will replace the 2013 contract for $92.18 per megawatt hour, which expires on May 31, 2016. We do remind you from time to time that there are items included in the average hedged price which influence Power's revenue but don't support Power's gross margin.

Our average hedged price for 2016 of $51 per megawatt hour reflects an increase in the cost development such as transmission and renewables associated with serving our full requirements hedge obligations. And based on our current hedged position for 2016, each $2 change in spark spreads would impact earnings by about $0.04 per share.

Power's operating earnings for 2016 are forecasted at a range of $490 million to $540 million. That forecast includes an adjusted EBITDA of $1.320 billion to $1.4 billion. Forecast reflects a year-over-year decline in capacity revenues associated with the May 2015 retirement of the [AGDD] peaking capacity.

Operating earnings for the year will also be influenced by the re-contracting in hedges at lower average price at a decline in gas sales. And most of the decline in Power's operating earnings forecast for the full-year 2016 is expected to be experienced in the early part of 2016.

With respect to Enterprise and other, we reported operating earnings in the fourth quarter of $4 million which compares to a loss in operating earnings of $4 million or $0.01 per share for the fourth quarter of 2014, and results for the fourth quarter brought full-year 2015 operating earnings to $36 million or $0.07 per share compared with 2014 operating earnings of $33 million or $0.06 per share. The difference in quarter-over-quarter operating earnings reflects the absence of the prior year tax adjustments as well as other parent related expenses in 2015.

For the year PSE&G Long Island's earnings contribution to $0.02 per share was in line with expectations and looking forward to 2016 operating earnings for PSE&G, Enterprise another are forecast at $60 million.

Next I want to provide an update on our pension. Beginning with 2016 PSE&G has elected to measure service an interest cost for pension and other post retirement benefits by applying the specific spot rates along the yield curve to the plan's liability cash flows rather than the prior use of a single weighted average rate.

We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plan's liability cash flows to the corresponding spot rates in the yield curve. Change does not affect the measurement of the plan obligations. We estimate this change will reduce 2016 pension and OPEB expense by approximately $34 million and $13 million, respectively, net of amounts capitalize, from what would have been without this change.

Of on a year-over-year basis the pension and OPEB expense is expected to decline by $25 million from 2015 level of expense. We ended 2015 with 91% of our pension obligations funded and a minimal need for cash funding of obligations over the next several years.

With respect to our financial condition, it remains strong. We closed 2015 with $394 million of cash on hand and debt representing 43% of our consolidated capital position and debt at Power representing 27% of our capital base. PSEG capital program for the three years ended 2018 is currently expected to approximate $11.5 billion. This represents a 21% increase over the level of capital invested over the prior three-year period, as PSE&G and Power focus on modernizing their infrastructure to meet the needs of today's marketplace.

We have ample capacity to finance our current capital program. In addition, we estimate the change in bonus depreciation is Ralph mentioned will provide an additional $1.7 billion of cash through 2019 with most of this cash received over the three years ending 2018. And of this amount $1.2 billion of the cash will be at PSE&G and $500 million will be at Power.

As mentioned, our forecast for double-digit growth in PSE&G's rate base through 2018 does take into account the impact of bonus depreciation on rate base. And we plan to provide an updated five your view of capital spending at the annual conference on March 11.

Regarding earnings for 2016 of $2.80 to $3.00 per share in line with a 2015 operating results as forecast growth that PSE&G onsets the impact of lower energy prices on Power's operating earnings. The Company remains on solid footing and we continue to focus on operational excellence and remain disciplined in our approach to investment strategy and maintain our financial strength.

The common dividend was recently increased 5.1% to the indicative annual level of $1.64 per share and we believe we can provide shareholders with consistent and sustainable growth in the dividend going forward. And with that we are ready to answer your questions.

Ladies and gentlemen we will now begin the question and answer session for members of the financial community.

(Operator Instructions)

Jonathan Arnold, Deutsche Bank.

Good morning, guys.

Morning, Jonathan.

A couple of questions on the change in pension accounting methodology, can you just give -- is this designed to bring you more into line with standard practice or something -- can you just give us some perspective around what drove that change?

I think it will probably increasingly look more like standard practice. In applying an interest rate we had normally done a weighted average rate which is across all of the cash flows, and some recent determination has been made that in looking at the yield curve and the timing of your actual payments and the timing of the interest by virtue of the shape of the yield curve, a more accurate method was to apply the near-term interest rates to the near-term cash flows, and the longer-term interest rates to the longer-term cash flows.

So we've been looking at this for a while and in addition to being a more accurate method, I think you'll start to see this more and more in others.

Your sense is that others are not -- haven't adopted this yet, but you think it will go that way, is that what you're saying?

Yes, so our intel from talking to our advisors is we're probably somewhere between 30%, 40%, 50% or so of companies are pursuing and a bunch of the others are investigating the same. We've seen some of this from some of the releases that we've seen from others as well.

Okay. And can you give us a sense -- is the change we're seeing in 2016 something that all else equal just persists into 2017, just a change of basis one piece? And secondly, can you pass out the impact to the utility versus Power?

On the second piece it's about half and half is the general way to think about it. And with a yield curve that rises over time you will see a moderation of the benefit of this method over time, but remaining positive based upon all the current assumptions in place through the balance of the five-year plan period. It remains positive but declines over time.

Okay, and can I just throw one other topic -- as the Enterprise, the uptick in 2016, is that mostly the Long Island contract?

That's correct, John.

We missed the answer. Great, thank you.

Keith Stanley, Wolfe Research.

Hi, good morning. The $11.5 billion of CapEx over 2016 to 2018, if you take 72% of that at the utility, it seems like utility CapEx for 2016 to 2018 is about maybe I don't know, $750 million higher than what you showed in a chart at EEI. Can you just confirm if I'm reading that right and if so in what areas are you investing more money now over the next three years?

Keith, the answer is you are correct and we will detail not only that, but the full five years on March 11. But it's the same areas we have been. It's largely transmission related and there's an element of Energy Strong in there as well. But we'll give you the details of that as well as any new initiatives that we plan to pursue in the five-year time horizon on March 11.

Okay. And one other one, what ROE are you assuming at the distribution business at PSE&G in 2016 and what ROE did you earn at distribution last year?

Remember our ROEs are a blend of an allowed base ROE of 10.3 and then a myriad, 14 to be exact, of various programs that we have had approved since then that range from 9.75 to 10.3 but with a couple of them also the beneficiary of investment tax credit in some of the solar programs. So we are earning our allowed return but you have to do some of the parts so to speak of each of those programs.

So netting out some of those programs you earn 10.3 on, call it core distribution last year, and you're just assuming that you're earning precisely your allowed return and that's what you're saying you earned last year?

So on the core distribution, yes the 10.3, and on Energy Strong we're going to earn 9.75 and on solar (inaudible) we're going to earn 10, and on energy efficiency we're going to earn 9.75 -- so that's what I'm trying to point out. And because of -- to varying degrees contemporaneous nature of the returns we do stick to those -- we do accomplish those objectives.

Okay, thank you.

Julien Dumoulin-Smith, UBS.

Hi, good morning, can you hear me?

Yes, Julien.

Excellent. So I want to go back a little bit to the latest BGS auction and ask if you could elaborate a little bit on what exactly drove the year-over-year results? And perhaps at least our perception of a reduction in the risk premium -- can you elaborate kind of what the dynamics that you saw?

Some of the bigger pieces, Julien, are fairly transparent from what you can see from a market perspective. I think we saw a little bit of a decline in the energy prices which is kind of where you start as a baseline for the auction. And then probably the couple other areas where you see the biggest change is against that decline is you've seen a bump on the transmission side and you've seen a bump related to some of the green costs that are involved.

You can track the green costs through the New Jersey SRECs and you can track the transmission. In fact, I think the BPU even sends out some of the transmission costs that ultimately get embedded in. And finally the last big piece which is also fairly transparent is the capacity piece and those auctions take place in advance by virtue of their three-year forward market and the BGS three-year forward market take place in advance of the BGS auction, so those are your biggest movers.

There's other pieces obviously in there, there's ancillary and different components, but those are the biggest pieces that you see related to the changes.

But just coming back -- clearly some of those big changes move in year-over-year but at least from our calculations it seems as if even adjusting for that there might have been a little bit less of a premium there. I'd just be curious.

We don't really talk necessarily about what kind of a premium you would see in a product but I think you can -- most of those pieces are transparent enough that you can build up and see what the elements of them are and I think on balance you're seeing a bit of a decline on the energy side and you're seeing a bit of a roll up coming out in the other direction related to both transmission [and green].

Got it. Fair enough. Maybe going back to the last question a little bit more about the utility regulatory, how are you thinking about trackers in a post [rate] case scenario as you think about rolling at least the legacy programs in the base rates, et cetera. Can you kind of talk about perhaps what the subsequent [role] might look like?

Sure. While we are pleased with the success we've had, Julien, over these past seven or eight years with these programs, we have been talking to staff about in particular the gas program which clearly has a multi-decade run that it would need to do all of the work that the system requires of it. I'm talking about replacing the cast-iron -- that we'd like to break away from this incremental approach and into more of a long-standing approach if for no other reason that it would be beneficial to develop the infrastructure, primarily people, that one needs to sustain these programs.

So right now the way we run the programs is we work with contractors and we bring in the folks that are needed and we enter into this conversation six months before the program expires. But will we need more? I'm not quite sure. Well, we have to wait until (inaudible). When can you find out? I'll get back to you as soon as possible.

And that's not the way we typically run a 110-year-old Company. We like to have training programs bringing people in as an apprentice, and have them climb the technical ladder and have a nice long career and that's a much more efficient way to use customer rates.

So I think that program in particular could be a template for the type of ongoing things we want to do. A close second to that as you may recall in Energy Strong we had put forth a ten year plan that got approved for three years and some of the cleaner technologies whether it's solar or energy efficiency that will be needed to meet the state's own renewable portfolio standard or what eventually becomes of CPP and whatever reincarnation that takes. I think all lend themselves to more programmatic and long-standing programs that we can anticipate and rationally equip ourselves to execute.

So those conversations are going on with the Board staff now, and to their credit their response is well, you should have confidence. You've come in 14 times, and 14 times we said yes -- and that's true. So the question is how much of an investment risk are you willing to make in equipment and training programs and people when the yes is pretty much assured, but has different forms -- half the program, half the duration, and maybe three quarters of the run rate. It's a very constructive dialogue right now, to be continued.

Great. Thank you so much, guys.

Thanks, Julien.

Praful Mehta, Citigroup.

Hi, guys.

Morning.

Morning. My question firstly you guys sit in a very interesting spot where you own all three assets, coal, gas and nuclear, and it's interesting the trends you highlight with gas capacity factors increasing, coal reducing. My question is how are you thinking about asset lives of these three classes of assets given the market conditions you see now? And what does that mean in terms of leverage levels that you're comfortable with for the Power business?

One of the things that is equally important to the fuel diversity of our assets is the technology diversity and performance features of our assets.

So obviously gas, we have some combined cycle gas turbines which once upon a time (inaudible), which are looking more and more like base load. But we also have a pretty robust and healthy peaking fleet and similarly in our coal assets we have Keystone Conemaugh, which are roughly described as baseload and [Candelia], Hudson, Mercer and Bridgeport stations have become more peaking with Hudson and Mercer having the additional flexibility being able to run on gas.

So it's not just a question of fuel diversity, it's what part in the dispatch queue the asset can play and whether it starts, stops features and in that respect our diversity is -- serves us well. Now you probably picked up that we would anticipate retiring the Bridgeport Harbor coal unit in five years provided that we are successful at securing the permits for the new 500 minus combined cycle units at Bridgeport Harbor which we don't anticipate any difficulties in doing so given the community benefits agreement we've achieved with some important stakeholder groups in Bridgeport.

And I'll let Dan finish up on the leverage at Power but once again our base FFO to debt expectations are 30% and we'll give you more details when we see you in March but we were well north of that prior to bonus depreciation and with bonus depreciation that number has gotten even bigger, but Dan do you want to say anything?

Yes, the only thing I would add is obviously from a credit perspective Power's FFO to debts are well above the 30% threshold that we have with the rating agencies to hold our existing rating. So that's not something that we get concerned about at all, we have an awful lot of financial strength there. But I think as you do look forward, we will see a shift in fleet and maybe that's kind of what your question is getting at.

We've got three new efficient combined cycle plants and if you look backwards I said in some of my remarks that we have some of our [AGTD] units. Those were older peaking units that were retired from environmental purposes and they're going to be replaced by new efficient combined cycle clean gas units. So the fleet really will take on a different look into the future and will be more efficient and will have a better profile and be more competitive.

Got you. So as you see that fleet profile changing are you seeing leverage levels kind of match that in terms of increasing given the quality of the new gas fleet that you're kind of bringing on?

I think we'll see some leverage increase by virtue of the spend that we will have but I think we will remain well above where we need to from a rating agency perspective. The debt capacity at Power is extremely strong and is expected to remain that way.

And bonus depreciation helps on that side, too. On the Power side of the Business we have the benefits of bonus depreciation without the detriments of any rate base reduction.

Yes, absolutely, got it. And then secondly it's a more philosophical question. As you think about the fate of Power with the consolidated business, is there at any point of view that this business needs to be a stand-alone entity or do you kind of see this more as part of the consolidated business in the next two, three-year timeframe as well?

So as I've said before, I do see over time, you're not going to get me to pick a time frame. I see these businesses separating. The strategic flexibility of both would be enhanced by doing that.

Some of the tactical benefits of keeping them together right now, which is the financial synergy, the financial complement that Power provides to the utility. We've talked about Power's new plants but for the past five years and for the next five years it looks like the utility will be out-spending Power almost three to one, and Power is a great source of equity for that with its funds from operations.

Secondly, the complement that Power and utility provide on the customer bill is a huge advantage to us, and the support cost synergies that exist with the two companies are a big advantage to us as well. But as Power grows in New England, as it grows in New York state and other places, it will need to use its own FFO for investment opportunities and that free cash flow that remains to help utility will be decreased.

There will be more customers that it will be serving outside of the utility's territory so that complementary nature will decrease, and as they both grow, the corporate overhead -- vital functions that corporate support groups provide will be a smaller piece of the overall operating budget. So I think over time the tactical benefits of staying together decrease, and the strategic advantages of separating will increase. But we're not there today. So -- yet again, continue.

That's really helpful, and I know you're not talking timing but I guess the benchmark or at least the milestones as we look for is those three factors in terms of the strategic benefits and that I guess reduces in terms of the fit then the probability or likelihood of some timing of separation increases. Is that a fair assessment?

So a qualified yes to that. There's no magic date. There are a host of parameters one looks at. What are the market dynamics, what's the composition of the shareholder base?

Are there other triggering events that could accelerate one's point of view of what the tactical benefits are now greatly reduced. So I don't mean to be long-winded on it but you ask a very complicated question albeit wrapped in some shroud of simplicity that the Board of Directors looks at on a regular basis. So I'm just giving you kind of a general point of view on that. But it's fraught with detailed analysis on a pretty regular basis by us.

Got you. Very helpful, thank you so much.

Michael Lapides, Goldman Sachs.

Hey, guys, congrats on a good year. A couple of questions and these may be for Dan because some of them are kind of a little bit down in the weeds or in the nitty-gritty.

Can you talk to us about the earnings or EBITDA contribution that maybe Power gets from things like trading or doing some of the optimization as part of the LIPA deal? And can you talk to us about the overall earnings Power you expect to get over time from the broader LIPA O&M services contract?

So even though Dan can answer that, I want to point out that I try to pay attention to these things.

Totally understood, Ralph. (laughter)

So Power's trading group is about $0.01 a share for LIPA and all in LIPA is going to grow to about $0.07 or $0.08 so I think the share will be probably closer to $0.05, and then stepping up to $0.07 or $0.08 -- $0.05 or $0.06 the share, closer to $0.07 or $0.08 next year. But Dan, go ahead and tell him I'm wrong.

Right order of magnitude.

Order of magnitude? (laughter)

It will be $0.07 next year across the Enterprise, but there's just a small piece of that call it a $0.01 or so that's at the Power side of the Business where that's coming from.

Got it. And do you get a significant margin from things like ancillary revenues or ancillary services in PJ [horizon] in New England; just trying to think about the components not just within BGS but within your broader margin at Power?

I don't have an ancillary number in front of me, Michael, I don't know that we kind of provided the breakdown of all the different components of how Power makes money. Far and away the biggest pieces are your capacity margin and your energy margin. There's a host of different elements that we work our way through as we manage a portfolio as a whole.

I mean if you're kind of talking somewhere in the bucket of $0.05 a share or something like that on ancillaries that's probably an order of magnitude number. But we haven't broken out a lot of the pieces beyond the biggest pieces, which I think gets folks most of the way home. If you look at your capacity margins we're very transparent about that math and provide that within the Investor Relations decks that we end up pulling together and the same with respect to the energy side of the business.

Got it. And finally when we think about the combined cycle fleet at Power I mean you've seen a significant uptick in terms of how much they can run.

Just curious from a physical standpoint, what do you think the -- I guess I'll use the word maximum output level. How high do you think they can physically run from a capacity factor standpoint versus where they've been running for the last 12 to 24 months?

I don't think that there is a physical limit to what they can do. I mean they're ultimately going to be taken off-line for maintenance just like any other facility would. But there's nothing that stops those plants from running as long as they are [called].

There's not a refueling outage like you'd see a nuclear plant where you have to shut the unit down to refuel it, but periodically there is major maintenance that goes on at these facilities where the unit needs to be worked on. But I think we'll have the advantages as well with the new units that we have of having a kind of clean and new unit that won't have that effect for a period of time when it starts up.

Don't forget, Michael, we've also had a couple significant improvement programs on our combined cycles. We've improved the gas path which has actually allowed us to stretch out the major maintenance cycles and modestly improve the heat rates.

And I'll double check the numbers, we'll certainly show them in March, but I think our forced outage rates have dropped even while our capacity factors have gone up, which is always a great sign right it just means that we're taking better care of the machines. So they're running at about 65% to 66% capacity factor now. You never want to promise 100% on any mechanical device but I've not picked up from any of our team that they're worried about us overtaxing these units.

Got it. And then last one, Ralph, just a little curious, your thoughts on the impact if any of the Ohio PPA contracts and what that means for the competitive market dynamics and design in PJM?

Yes, so it depends on how that's structured. Clearly there was a situation in New Jersey under what we call the old cat law where the statute mandated that winners of those contracts bid at zero and clear the auction and that was just an egregious attempt to crush artificially capacity prices in the region.

So we are participating in an industry group in Ohio to make sure that whatever is agreed upon doesn't artificially move the market in a way that disadvantages participants who don't have the protection of these contracts. I'd like to think that Ohio has been a long-standing supporter of competitive markets and whatever gets structured out there gets structured in that way.

But while I'd like to think that we're going to carefully monitor what actually is decided to maximize the chance that that is indeed what happens.

Got it. Thanks, Ralph, thanks, Dan. Much appreciated, guys.

Gregg Orrill, Barclays.

Thank you. I was wondering if you could revisit the topic of bonus depreciation? I think you said that $1.3 billion at PSE&G and $1.7 billion overall, was that 2015 to 2018, first of all?

The $1.7 billion is $1.2 billion to the utility and $500 million to Power, and that runs you out through 2019. That comes through 2018.

Okay. Part of that at the utility you are going to be accruing into the next case, is that generally the way you're going to deal with the bonus depreciation accounting at the utility?

I think the way to think about it, Greg, is to the extent of transmission, the impact of that will come through on a contemporaneous basis so we will -- while bonus was approved after we filed our formula rate for the 2016 year, we know that it is there and will accrue that from accounting perspective and we will do that true up in future filings. But as we go forward you'll see that true up every year with respect to the transmission piece of the bonus.

Similarly, with elements related to Energy Strong, with elements rated to GSMP, all the clause related updates, will take place as we file those contemporaneous and near contemporaneous filings, and then the balance of what's left which really sits with the base amount or PSE&G that will await the next rate case.

Got it. Thank you.

You got it, Greg.

Travis Miller, Morningstar.

Hi, thank you. I was wondering if you guys look across your entire CapEx program both Power and PSE&G, what parts of that make you most nervous? And either nervous that you would not meet the budget that you've set out or nervous that you wouldn't meet either the allowed returns or the hurdle rates that you set out for those projects?

If we're nervous about anything, Travis, we make sure we take action to fix it so that we don't stay nervous, but I know you know that. I guess I'd say the biggest things that we pay attention to are regulatory and environmental mandates that don't add to the return expectations of our shareholders and quite candidly on occasion don't really benefit customers commensurate with the costs that need to be put into it.

But other than that, as you well know, we show up at a lot of places to make acquisitions and to expand our asset base and invariably lose, so I don't think anyone would ever accuse us of being bullish or undisciplined in how we spend our money. And the good news is that most of that environmental spending is behind us.

So we've talked a lot about hey -- we're building three combined cycle units and let's make sure we have the team in place to manage those because they're not all within a city block of each other -- we've got one in Maryland, one in New Jersey, one in Connecticut, and I probably spent an hour and half yesterday with our head of fossil talking about what his needs are and how we can make sure that those are met.

So, I'd say in general, it's mandates that don't produce the customer or shareholder benefit that the regulator thinks they do. Fortunately most of those are behind us and to the extent that if we didn't respond to the expanded construction program in Power, I would be nervous about that, but we are responding. And I guess the proof that I put forth for you on that is we have quadrupled in the past five years that transmission program and we've delivered those projects on schedule and on budget.

Okay, that's great, and Ralph, one more. You mentioned the word retail in the past and I was wondering if you could update if that's still in the lexicon?

Yes. But it remains in the lexicon as a defensive move to help us make sure we can be more effective in managing our basis risk and Keys is going to go a long way to that. It's not a retail play, so there are things we can do other than retail, but we are disciplined and cautious as you know I'm not a big fan of the retail business.

I think everybody falls in love with it in a declining price environment that's typically when you can make a lot of money in retail. It's when prices rise and people are cut short for whatever reason that life isn't quite so pleasant. So we would look at it purely as a small part of our output purely for defensive purposes and managing basis risks and we're still looking at that and working on that.

Great, thanks so much.

Stephen Byrd, Morgan Stanley.

Hi, good morning.

Good morning, Stephen.

I wondered if you could lay out what the year-end rate base was for transmission and then for the utility overall?

I don't have that number.

I think [13.4] is the number we provided for utility and I think 43% of that was transmission.

Got it. Thank you very much. And on solar you've been continuing to grow there; how do you see sort of the overall market opportunity there, ability to achieve further growth in solar?

Stephen we've seen -- as I think you're aware we have carved out for ourselves kind of a modest sized portfolio, really it's the 250 megawatts-dc I think consist of 14 or 15 projects. These things range in size from like 5 megawatts to 50 megawatts and many more closer to 5 than to 50, and we have very rigid return expectations. They are supported by 25 to 30 year PPAs and they meet those return expectations.

Generally those returns are not available in some of the larger projects and we've developed a couple partners who are really good about bringing us opportunities that they know we can execute on. So, they are willing to work with us.

I do see that continuing to grow. It's mostly driven by state RPSs and I don't think we have baked in a number in terms of what size that will be. So when we talk about our capital program there isn't a dollar of those projects in there, yet if I look back over the past three or four years we're pretty consistently doing anywhere from $100 million to $200 million of those projects.

Great. Thank you very much.

I'm sorry, please go ahead.

I was going to say I think that brings us to the end. I'm going to turn the call back over to Ralph at this time.

Thanks, Kathleen. So looking forward to seeing you all hopefully in two weeks. But really, I hope there are three key points you take away from what Dan and I talked about today.

First of all we are generally excited about Power's positioning. We've long had low-cost nuclear and we've had a pretty good highly efficient combined cycle fleet, but in three years we're going to have just an outstanding, highly efficient combined cycle fleet. And all of our assets are going to be well-positioned, and I mean well-positioned in a broader sense of the word.

They'll be near load, they'll be clean, they'll be diverse fleet and we'll continue to look at opportunities to improve upon that fleet, but you really should recognize that we've talked for a long time now about these three new units and I don't foresee any circumstances at present that would suggest any additional new build on the horizon for us.

The second point is the utility growth continues. We average 13% growth over the last five years and if you just take our 15 results in the midpoint of the utility guidance for 2016, we're going to grow at 14%. And yet utility bills will go down yet again this year because of the expiration of some charges.

The utility will represent [60%] of earnings at the midpoint and it's doing stuff that is very important to customers and we'll just continue marching along that path. So we had a good year is the final point, and I think you'll find that when we get together on March 11 that the next five years look even better. So I look forward to explaining that further when we see you in New York. Thanks, everyone.

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