公共服務電力與天然氣 (PEG) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Brent and I am your event operator today. Welcome everyone to today's conference, Public Service Enterprise Group first quarter 2016 earnings conference call and webcast. At this time all participants are in a listen-only mode.

(Operator Instructions)

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 PSEG's call this morning.

As you are aware, we released our first quarter 2016 earnings statements earlier today. The release and attachments are posted on our website at www.pseg.com under the investors section. We also posted a series of slides that detail operating results by company for the quarter. Our 10-Q for the period ended March 31, 2016, is expected to be filed shortly. Please read the full disclaimer statement and the comments we have on the difference between operating earnings and GAAP results.

As you know, the earnings release and other matters that we will discuss in today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. Although we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if our estimate changes, unless of course we are required to do so. Our release also contains adjusted non-GAAP operating earnings as well as adjusted EBITDA for PSEG Power.

Please refer to today's 8-K or our other filings for a discussion of the factors that may cause results to differ from management's projections, forecasts, and expectations, and for a reconciliation of operating earnings and adjusted EBITDA to GAAP results. I would now like to turn the call over to Ralph Izzo, Chairman, President, and Chief Executive Officer of Public Service Enterprise Group and Joining Ralph on the call is Dan Cregg, Executive Vice President and Chief Financial Officer.

At the conclusion of their remarks it will be time for your questions. Thank you.

Thank you, Kathleen. Good morning everyone and thank you for joining us today.

PSEG delivered solid results for the first quarter in the face of rather mild winter temperatures and low prices for natural gas and energy. Earlier this morning, we reported operating earnings for the first quarter of 2016 of $0.91 per share versus operating earnings of $1.04 per share in last year's first quarter. Extreme temperature differences between the first quarter of this year and the first quarter of last year provide the backdrop for this quarter's operating results. The first quarter of 2016 was 10% warmer than normal, and the fifth warmest on record.

The month of March in particular, was extremely mild with heating degree days 25% lower than normal. Weather for the first quarter was also 27% warmer than the first quarter of 2015, but last year was the coldest on record. Our results were strong in the face of this headwind.

PSEG's execution on its expanded capital investment program continues to provide a growing source of earnings. PSEG's expected to invest $3 billion in 2016 as part of its five-year, $12 billion capital program. Transmission is the largest part of PSEG's effort, representing 60% of planned spending. PSEG's investment program and a continued focus on controlling costs will help drive our forecasts for double-digit growth in PSEG's 2016 operating earnings.

PSEG's execution of our capital program is expected to yield best in class growth rate in rate base of 8% per year for the five-year period ending 2020. PSEG continues to develop a pipeline of investment opportunities that also meet New Jersey's policy objectives and have customer support. As for PSEG Power, it has been focused on operating in an environment of low gas prices for years. The availability and low price of gas and the need to meet more stringent reliability requirements has added new urgency to the Company's efforts to improve its cost structure and efficiency.

Power's capital program also represents an important response to today's market. Power's $2 billion of investment in three new combined cycle gas turbines will add approximately 1,800 megawatts of clean, reliable, and efficient capacity to its fleet. Construction of the Keys plant in Maryland and the Sewaren unit in New Jersey are on schedule to meet their 2018 operating dates. Bridgeport Harbor is expected to be available for a 2019 commercial operation date.

The addition of this new capacity will transform Power's fleet. Power's baseload nuclear capacity will be complemented by a flexible, low-cost fleet of combined cycle gas units capable of responding to the market. The fleet's carbon footprint is also expected to decline with the addition of the new clean gas-fired capacity as nuclear generation continues to represent approximately 50% of the fleet's output. As I said, we remain focused on operating efficiently and safely.

PSEG Power has made judicious reductions in its nuclear workforce, and is working closely with the industry to identify additional means of reducing its cost structure to assure the availability of this clean nuclear resource well into the future. Our goal is to capture these savings for the year to help offset the impact of low gas prices on earnings. Separately from operations, we were very pleased with some recent actions in defense of competitive markets.

In particular, we were delighted with the US Supreme Court's unanimous decision affirming the fourth circuit's decision in Hughes versus Maryland. Since that decision, the US Supreme Court also dismissed the New Jersey case, allowing to stand a lower court ruling that the so-called L cap contracts are unconstitutional. A recent action at FERC is also constructive. I am referring to the orders issued by FERC earlier this week granting the complaints filed by EPSA and others, which called into question some approvals granted by the public utility commission of Ohio.

A separate complaint brought by a number of generating companies regarding the scope of the minimum offer price rule under RPM is still pending at FERC. While owners of existing assets with out of market contracts will not be directly restricted in the upcoming base residual auction regarding how they can bid the effective units, the lack of certainty regarding FERC approval of such contracts should at least neutralize some, if not all, of the incentives under the contracts to bid without regard to the units' actual cost of operations. We believe that a competitive market is the best approach for ensuring that there is a supply of electric capacity to meet customer demand at the lowest cost.

Our Company-wide efforts are focused on building an infrastructure that improves system reliability, reduces emissions, and supports the needs of customers. Our strategy is working, and it is made possible by the contribution from our dedicated employees who support our efforts in countless ways. Their focus on the mission of providing safe, reliable energy has allowed us to meet the needs of customers and shareholders. We are maintaining operating earnings guidance for the full year, of $2.80 to $3.00 per share.

Our guidance assumes normal weather for the remainder of the year. As we move forward, the weather and market conditions during the third quarter will be important for both PSEG Power and PSE&G. Current market conditions and the complete absence of a winter, require that we maintain our relentless focus on identifying cost efficiencies and maintaining strong operating performance.

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

Thank you, Ralph. Good morning, everyone.

As Ralph said, PSEG operating earnings for the first quarter of 2016 of $0.91 per share, versus operating earnings of $1.04 per share in last year's first quarter.

On slide 4, we've provided you with a reconciliation of operating earnings to net income for the quarter and we have provided you with information on slide 8 regarding the contribution to operating earnings by business for the quarter. Additionally, slide 9 contains a waterfall chart that takes you through the net changes quarter over quarter, and operating earnings by major business. And on that, I will walk through each company in more detail.

For PSE&G, shown on slide 11, we reported operating earnings for the first quarter 2016 of $0.52 per share, compared with $0.47 per share for the first quarter of 2015. PSE&G's first quarter results reflect the impact of revenue growth associated with an expansion of the capital investment program which more than offset the effective unfavorable weather conditions on electric and gas demand. Returns on PSE&G's expanded investment in transmission added $0.04 per share to earnings in the quarter, and the first quarter also benefited from the recovery of revenue on PSE&G's distribution investment under its Energy Strong program.

This increase in revenue improved quarter-over-quarter earnings comparisons by a $0.01 a share. As Ralph mentioned, weather in the first quarter was warmer than normal and significantly warmer than conditions experienced last year. The negative impact of the extreme differences in weather on gas demand and revenue quarter over quarter was largely offset by the gas weather normalization clause. A decline in electric sales in revenue, however, as a result of the extreme differences in the weather reduced quarterly earnings comparisons by $0.02 per share.

Lower taxes more than offset an increase in O&M expense due to the absence of insurance recovery of storm costs received in the year-ago quarter. These items together added $0.02 per share to quarter-over-quarter earnings. Economic indicators continued to improve. Employment in New Jersey has increased for 28 consecutive months as the unemployment rate has declined to 4.3%.

And the housing market has also experienced an improvement. However, this improvement in economic growth was outweighed during the quarter by mild weather. The variability and quarterly data for weather normalized electric and gas sales has been high, given the extreme weather conditions, making it difficult to discern a trend in demand when analyzing just the quarterly data. But data for the trailing 12 months indicates weather normalized electric sales were flat for the period ended March of 2016.

In terms of weather normalized gas demand, a 0.3% decline in sales in the first quarter was led by a 1.5% decline in heating demand from the residential sector, which also is influenced by the large weather adjustment quarter over quarter. On a trailing 12-month basis, gas sales increased by 1.8% year over year. PSE&G's capital program remains on schedule and PSE&G invested approximately $725 million in the first quarter as part of its planned $3 billion capital investment for 2016.

Also as you may recall, PSE&G implemented a $146 million increase in annual transmission revenue under the Company's transmission formula rate filing which took effect this past January. This increase in revenue, adjusted to reflect the impact of bonus depreciation and updates of spending in prior years, will be reflected in PSE&G's earnings through the year. We are maintaining our forecast of PSE&G's operating earnings for 2016 of $875 million to $925 million.

Moving to Power. As shown on slide 18, PSEG Power reported operating earnings for the first quarter of $0.36 per share and adjusted EBITDA of $416 million, compared with $0.55 per share and adjusted EBITDA of $626 million for the first quarter of 2015. Adjusted EBITDA excludes the same items as our operating earnings measure, as well as income tax expense, interest expense, depreciation and amortization, and major maintenance expense at Power's fossil generating facilities.

The earnings release and slide 19 provide you with detailed analysis of the impact on Power's operating earnings quarter over quarter. We have also provided you with more detail on generation for the quarter on slide 21. PSEG Power's first-quarter results were impacted by the extremely mild weather conditions experienced this year in comparison to the year-ago period. A declining capacity revenue associated with the June 2015 retirement of the HEDD, or High Electric Demand Day peaking units at MPJM, reduced quarter-over-quarter earnings by $0.04 per share.

Lower output due to the mild weather conditions, coupled with lower average prices on energy hedges reduced quarter-over-quarter earnings by $0.09 per share. And a weather-related decline in total gas send out to commercial and industrial customers and lower prices combined to reduce quarter-over-quarter earnings on gas sales by $0.12 per share. Lower O&M expense improved quarter-over-quarter earnings by $0.05 per share, and a reduction in interest expense added $0.01 to earnings per share.

Let's turn to Power's operations. Output from Power's fleet declined 9% in the quarter as a result of the reduced demand and lower wholesale market prices. Output from the coal fleet reduced during the first quarter declined one terawatt hour from 2.5 terawatt hours in the year ago quarter, as low gas prices affected the dispatch of [call].

Output from the combined cycles declined 0.2 terawatt hours to 3.7 terawatt hours with the decline in demand. The nuclear fleet, however, experienced a 0.6 terawatt hour improvement in output, to 8.4 terawatt hours for the quarter. The fleet operated at an average capacity factor of 99.7% in the quarter, and the nuclear fleet's performance benefited from an improvement in availability at Salem, as well as an increase in capacity at Peach Bottom.

You may recall the extended power upgrade was completed at Peach Bottom last year, and this work added 130 megawatts to our share of the station's capacity. Power's gas-fired combined cycle fleet has access to low cost gas, which continues to provide it with an advantage relative to market prices. However, the lack of demand and lack of volatility in the market given the mild weather, and an excess supply of gas pressured spark spreads which were significantly lower compared to last year's levels.

Overall, Power's gross margin declined to $43.80 per megawatt hour, from $47.32 in the year-ago quarter. Power's revising its forecasted output for 2016 to 52 to 54 terawatt hours from its prior forecast of 54 to 56 terawatt hours. The updated range for output incorporates the impact of the abnormally warm weather in the first quarter. This range also incorporates an anticipated extension of the Salem 1 refueling outage.

A visual inspection during the current refueling outage of Salem 1, which began on April 14, 2016, revealed damage to a series of bolts located inside the reactor vessel. The need to conduct further testing to repair and replace the bolts is expected to extend the refueling outage. To provide context as a rule of thumb, a delay in Salem's refueling outage of 30 days would reduce generation by approximately a half a terawatt hour.

Under this scenario, nuclear fleet's capacity factor for the year would be reduced by about a 1.5% to 91% from the current forecasted capacity factor of 92.5% for the year. And the actual outage duration will be determined after ongoing inspection work is completed. As shown on slide 24, approximately 70% to 75% of anticipated production for the April to December period of 40 terawatt hours is hedged at an average price of $49 per megawatt hour.

Our open position for the remainder of 2016 is more than adequate to cover the potential for decline in output at Salem from our original forecast. For 2017, Power is hedged 50% to 55% of its forecast generation of 54 to 56 terawatt hours at an average price of $49 per megawatt hour. For 2018, approximately 20% to 25% for the forecast generation of 59 to 61 terawatt hours is hedged at an average price of $49 per megawatt hour. The forecast increase in generation in 2018 reflects the commercial operations of the Keys and Sewaren combined cycle units.

The hedged data for 2016 continues to assume PSEG's hedges representing 11 to 12 terawatt hours. As we mentioned to you last quarter, there are items included in the average hedge price which influence Power's revenue but don't support Power's gross margins. Our average hedge price for the remainder of 2016 reflects an increase in cost elements such as transmission and renewables associated with serving our full requirement hedge obligations.

The increase year over year and these non-margin revenue items is approximately 1 to 2 megawatt hours. We continue to forecast operating earnings for Power in 2016 of $490 million to $540 million. And the forecast for operating earnings represents adjusted EBITDA of $1.32 billion to $1.4 billion for the full year, which compares to $1.563 billion of adjusted EBITDA in 2015.

Now I'll briefly address as well, Enterprise and others operating results. For the first quarter we reported operating earnings of $0.03 per share compared with operating earnings of $0.02 per share last year in the first quarter. The increase in operating earnings quarter over quarter reflects contractual payments associated with the operation of PSEG Long Island, and certain items that PSEG Energy holdings.

We continue to forecast full year operating earnings for 2016 from PSEG Enterprise and other of $60 million. Finally, with respect to financings and other, PSEG closed the quarter with $592 million of cash on the balance sheet with debt at the end of March representing 44% of our consolidated capital. During the quarter PSE&G issued $850 million of securities consisting of $300 million of five-year notes at 1.9%, and $550 million of 30-year notes at 3.8%, while redeeming $171 million of long-term debt.

We remain in a position to finance our current capital program without the need for the issuance of equity. We continue to forecast operating earnings for the full year of $2.80 to $3.00 per share.

That concludes my comments and I will now turn the call back over to the operator for your questions.

(Operator Instructions)

Your first question from Neel Mitra with Tudor Pickering.

Good morning.

Good morning, Neil.

I just had a quick question on the lower generation in the first quarter from the milder weather? Is that actually a net negative, or a positive? Because you could not run your fleet and then procure the power at a lower cost to fulfill the financial hedges?

So the hedges are supplied at a lower cost, even though we have locked in the price. So that's good news. As you know, we are naturally long.

So whenever demand is down, that creates a drag for power. There is a more modest drag on the utility. It has a weather normalization on the gas business, but no such thing on the electric business. So reduced demand due to mild weather would create slight drag there.

So the open position on Power is hurt because it's not running as much? Is that the way to look at it?

Yes.

That's right. Lower dispatch prices, you have lower -- less amount of run time.

Okay. And second question. I know you have a small stake in the PennEast pipeline, can you remind us when you have that going into service? And then, there has been recent reports on a possible delay, what your thoughts are on that?

Yes. So we have a 10% position. We are now forecasting late 2018.

And what were you forecasting earlier?

Late 2017.

Okay. Great. Thank you.

You're welcome, Neel.

Your next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead.

Good morning.

Good morning, Paul.

On the Salem plant, and I apologize, I heard you talk about it, but I just want to make sure I understood it. How long is the extended outage that you guys are now expecting?

So we don't know yet, Paul. The outage started, I think it was April 14, and that would have been a fairly standard refueling outage. We normally don't give dates on that for obvious reasons due to market sensitivity.

We are in the middle right now of doing some testing to see how many of the bolts are damaged. So until we finish that, we won't know exactly how long the outage is. But I should point out, even when we know, we typically don't announce that to the marketplace.

Okay. You are still looking at how many bolts, or what percentage of bolts have problems?

That's right.

And is there any bleed through to any other units, do you think or any other sort of sense about this?

Clearly, Salem 2, we did inspect Salem 2 in 2015. This is an industry problem. It's been around, I think, since 1998. This is not something that is unique to us or unheard of before.

But Salem 2 passed visual inspection in 2015. And Salem 1 was scheduled to have the more intrusive inspection in 2019, but we're a couple years ahead of schedule there. I'll just remind you, Salem 2 is six years younger than Salem 1, to the extent this is a degradation over time, that should have an influence.

Okay. Thank you so much.

No problem.

Your next question comes from the line of Michael Weinstein with EBS. Please go ahead.

Hi, Ralph. How you doing?

Good.

Recently we saw Con Ed enter agreements to purchase gas storage and pipeline assets in Pennsylvania and New York. We have also seen other large utilities making large acquisitions of gas assets and utilities. Given the PennEast interest you have already, what is your view of the current market for gas-related acquisitions? And what's your own interest in expanding further?

I would say our interest in expanding further is low to zero. In terms of our position in PennEast, quite candidly, every gas LDC in New Jersey has a position in that, and we just thought that it was important to help participate in bringing those consumer benefits to our gas customers. As you know, PSE&G has almost two million gas customers.

It's a really different business, Michael. I serve on a board of a company that's involved in the pipeline business, I think we are good at the knitting that we do and I would like to stick to that. I am not second-guessing others. Please don't misinterpret. They have their own unique reasons for moving in that direction. Typically, the corporate structure is different, they're mostly MLPs, they have a fairly different financial proposition and they are not without their challenges nowadays, as well.

So that may be great time to buy in. There is a raft of siting challenges associated with this. We are experiencing that in PennEast. There was a major pipeline, I'm sure you're aware of, in New York state that recently had an unpleasant surprise.

Its a very challenging business with fairly different DNA than what we have in our Company. And I like the DNA and the match that our Company has with the operations that we're responsible for.

Does the current PEs in the gas utility space on the LDC space, does that also put you off in terms of future opportunities?

That's a different subject, but the short answer to that is yes. I mean, I understand that debt is fairly inexpensive, Dan hopefully impressed you with the numbers he reported for our utility. You could make acquisitions accretive at very, very attractive premiums to the target.

But the question we always ask ourselves is, just because money is relatively inexpensive, what are the alternate uses for that? Simply paying a very, very rich premium and still having accretion may not be your best choice. And we've been very clear. Our priorities are, number one, organic growth, and number two, supporting the dividend. And then number three would be share repurchase.

As I have said to many people, paying a 20 plus PE to someone seems to me to be a bad idea when I know a great company that is trading at a 14 or 15 PE, that has the ticker symbol of PEG. Again, I hopefully -- this is second-guessing and critical of other's decisions, but those are the ones I'm comfortable for us.

One last question. In terms of the partnership with Vectren for competitive transmission and MISO, do you see any other opportunities to partner with other local utilities for similar types of partnerships?

I can't disclose any that we haven't publicly disclosed. But that is an approach that we are eager to pursue. I think that there is a lot of value to be had by combining forces with someone who understands the local transmission grid and system, with our expertise now having put over $2 billion to work on an annual basis for a good number of years in terms of cost and schedule management on transmission construction.

I am very proud of our team and the work that they have done. But we don't know the system everywhere the country. To the extent that we can combine our project management skills and our construction management know-how with people's systems knowledge, that's a win-win for everyone.

Your next question comes from the line of Travis Miller with Morningstar. Please go ahead.

Hi, thank you.

Hi, Travis.

Wanted to think a little more about this $0.12 on the lower gas sendout and fixed cost recovery business. How much is that just pure volume and how much is there something else there, either margin contractions there or some other factor there that might not be directly weather-related?

I ask Dan if he knows the split between the two. My short answer is it's a combination of both.

That's right. Travis, the best way to try to think about where we are from the $0.12 impact that we saw this quarter, is if you were look at each of the last couple of quarters, you would have seen last year and the year before there was a $0.05 and a $0.04 benefit that we picked up additively over the last two quarters. So it's very much the absence of a winter which has impact both on pricing and on volumes.

I think the volumes were down about a third, and when you have that impact, as well as a margin compression, we really also didn't see much volatility which doesn't help in that market. They were all contributions to the delta you saw for this quarter.

Great. That's helpful. And then, Ralph, without too much of a dissertation here --(Laughter) You guys have put a lot of eggs in the transmission basket certainly previously, and for the next three to five years. What are your thoughts on storage and how that might disrupt the transmission plans or alternatively offer you guys investment opportunities that wouldn't be in transmission, but could be in storage?

Sure. I am still sort of smarting from your suggestion that I am a bit long-winded, Travis. (Laughter)

I am interested in the dissertation, just not this morning.

It deserved a comment. Yes. As luck would have it, I literally just came from a presentation two weeks ago by a director of Long's Berkeley Labs on storage, and his claim -- don't ask me his name because I don't remember. He is probably easy to look up. Is that we're at least a factor of two away from grid connected storage that makes economic sense.

And what he has found is that translates into anywhere from a 10 to 20-year timeframe. Of course when you are talking about material signs, research events, it's difficult to put up with precision. We are agnostic, Travis, about what hardware one puts in place to serve customers.

I don't care if it's copper wire, superconducting ceramic wire, lead acid batteries, lithium batteries, flow batteries, I am running out of technologies. I'm blathering and I am starting to tread on dissertation timeframes. But, we would be more than happy to pursue things that have economic merit that provides the reliability our customers are demanding.

Good Cliff's Notes version.

Thanks.

Thank you very much.

Your next question comes from the line of Greg Gordon with Evercore ISI. Please go ahead.

Thanks. You know, my questions have been asked and answered. Thank you.

Thanks, Greg.

Your next question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead.

Same here. Thank you, though.

Your next question comes from the line of Gregg Orrill with Barclays. Please go ahead.

Yes. Thank you.

Hi, Gregg.

Just around the hedges at Power. You know, you increased some of the hedges over the last quarter. Just wondering where you stand with -- where you would normally be at this point, how you were thinking about that?

So, Gregg, as you know, we try not to outguess the forward market. We do, however, we've said in the past, there is a tendency in the market to take a data point from 48 hours ago and a data point from 24 hours ago and extrapolate it for the next three years. And sometimes that emotional response is not as well informed by fundamentals as we'd like.

But we always stay within certain guidelines. We allow our team to drift up a little bit if we think the market is being a bit bullish, and we allow them to drift down if we think the market is being overly bearish. You'll recall, in April of 2014 it was the former. We said we could go ahead and hedge a little bit towards the up side, since the market was being somewhat bullish.

And it's pretty safe to conclude that right now we are drifting towards the bottom of our guideposts, just given the anomalously warm winter we had and the bearishness that's crept into the market. Having said that, that bearishness is not totally unjustified given where gas storage levels are.

The other thing to think about, too, Gregg, is that for the BGS auction, to the extent that's a contribution across our hedge horizon, that auction usually takes place every year in February. So you see a little bit of a pickup in that regard in the first quarter's change.

Fair point. Okay. Thank you.

Thank you.

Your next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead.

Hi, Ralph. Thanks for taking my question. Congrats to a good start on the year.

Can you, on the Salem issue, can you talk a little bit about other plants over the years that have seen similar issues in weather? Any of those turned into any more major related items, or is having issues with kind of baffle bolts a very standard, very common occurrence? I have to be very honest, as a non-nuclear engineer, the word baffle bolts is a little baffling to me.(Laughter)

Thanks, Michael, for the question, I'm glad you asked it. To my knowledge, D.C. Cook had an issue in 2010, Indian Point had an issue starting a month or so ago. There have been a handful, I think six or eight European plants.

These are not -- to my knowledge, these are not life-threatening issues. They are literally 800 bolts typically that secure these metal plates, we call them baffles, to the reactor vessel. And they are under pressure. There is a pressure gradient because of the high temperature steam that flows through the holes in these baffles.

You get a mechanical stress, in our case, I think we have 832 bolts. It's typical of pressurized water reactors. That's why I mentioned earlier, to Paul's question, that we would have to look at Salem 2 again at its next refueling outage, although it passed a visual inspection in 2015.

It would not be an issue for Oak Creek because that's a boiling water reactor. I don't want to suggest anything other than we have to complete the inspection. But none of the prior instance has this been an issue that has threatened the plants going forward -- integrity or anything of that nature.

Got it. And coming to the regulated side, the E&G, you know, as you guys do most years at your Analyst Day, you lay out a CapEx forecast that obviously shows in year three through five somewhat of a decline from years one through two.

Can you talk about the things, your goals in 2016 in terms of actually -- I don't want to call it backfilling, but the types of projects that you could see showing up in the 2018 to 2020 timeframe that might keep CapEx at a more similar level to 2016 and 2017 or even at a higher level? What are the types of projects? What do you have do from the regulatory construct process to get those approved?

Sure. There are a whole host of them, Michael. There is ongoing renewable portfolio standard commitments that could result in some additional solar work. There are a couple of special projects that we haven't named publicly on the distribution system that involve major customers that would benefit the entire customer base, that we will be pursuing.

There is always new and additional work that comes out of the PGM RTET; that's the kind of thing you'll see us looking at and potentially announcing in 2016. However, the major backfill in the out years of the plan won't be announced in 2016 because they are pretty new, and that will be a continuation of our gas system modernization plan and a continuation of Energy Strong. The reason we won't announce those in 2016 is because we are only a year and a half into Energy Strong, and we're only six months into GSMP; and those were both three year programs, give or take a few months, on some unique aspects of them.

So you're right to say that we have historically backfilled the years four and five. I think there is a very high probability we will do the same this time. But I think that in terms of the goals for 2016, it will be more, some significant distribution projects that we have and potentially some solar work that -- to keep the state on its RPS targets, you will see us pursuing in the near term.

Got it. Thank you, Ralph. Much appreciated.

You're welcome.

Your next question comes from the line of Praful Mehta with CitiGroup.

Thank you. Hi, guys.

Hi.

So quickly on the storage point. I know it was an interesting debate and you have made a bunch of relevant points. That was really thoughtful. I am trying to understand. You are mentioning storage more from a transmission perspective. Taking back the storage more from a generation perspective, if you didn't have the standard 20-year window horizon as you talked about, how would you think of the implications for your gas fleet and just generally for the markets in general? If you did think storage was coming whenever, 10 years, 20 years down the road, how do you see the implications for the power generations for your fleet and just generally in the US?

I think there are three uses for storage. Right? One is to the extent that one has some localized distribution reinforcement that can be more economically achieved through storage rather than substation enhancement. Second, would be your classic arbitrage between peak and off-peak power, which has become less of an economic driver nowadays, just given the abundance of natural gas.

Third, could be sort of a similarity to that, which is to offset the intermittency associated with renewables. But in terms of using batteries as peakers, I think that if you just have to take a look again at the dollars per KW. My goodness, gas engines just keep getting more and more efficient and storage seems to be losing in that race to keep up with them.

I think there are multiple applications. I didn't mean to suggest that we only would consider one. What I was trying to point out is, whether the application is the supply side, or whether it's a customer reliability side or whether it's providing peaking services, other ancillary services -- we don't have a religious fervor around one technology or another. We look at them all the time.

Fair enough. That's really helpful. And then secondly, from an M&A perspective, there is a number of generation assets clearing the market and potentially more coming, and you have talked about at some point, the separation as well.

So how do you figure all that in? Are you looking to get to the critical mark, is there an opportunity here to acquire some assets and get to a critical mark where you think you can, at some point separate? How are you thinking about that opportunity right now?

Yes. No. I mean, that's pretty much what we have told the world, right, that we see three very tangible, tactical reasons for remaining integrated. It's the financial synergies between Power's cash generation and Utility's cash needs. It's the customer build synergies between the customer the power serves and the customers that PSE&G serves.

Power's prices go down, PSE&G's distribution rates go up, quite candidly. Last, but not least, is the benefits of scale associated with the corporate support functions. And as Power continues to pursue growth opportunities outside PGM East, the first two issues become less important, right? You have more customers that are not PSE&G customers that we will be serving in New England and in your state.

You have more need for Power's funds from operations going to Power as opposed to going over to the Utility. And as both companies get bigger, then corporate support synergies become less on a percentage basis. And the reason why I say outside of PGM East, is because we are pretty much preempted from making any acquisitions within PGM East.

Given the slow growth and demand, we are not big fans of Greenfield Development PGM East. You've quickly run into an oversupply situation. Having said all of that, we have demonstrated that we're pretty bad at acquiring assets.

By that I mean, we seem to have a more conservative view of where the market is going and are consistently outbid. Keys being the one expectation to that, which I believe, was largely because of our confidence in our ability to manage construction risks, that perhaps some of the others did not possess and some of the portfolio benefit it brought to us in performance of PGM West. We look all the time at generation assets.

We have an -- I was about to say anti-coal bias. That sounds very political and I didn't mean it that way. But just given the direction of the environmental regulation, you won't see us taking a look at any coal expansions in terms of new assets.

We do look in our target markets, which would be the rest of PGM, New England, and New York state. We just have to get it the right price. And we are going to remain disciplined in what that means for us.

Got you. That's really helpful. Thank you so much.

Your next question comes from the line of Asher Kahn with Visium Asset Management. Please go ahead.

Good morning. And good results. Can I just ask you one thing which Energy mentioned -- why their outage has lasting a little bit longer is that they didn't have the equipment on site. I didn't know what that meant exactly. But I wanted to ask you, Ralph, do you have the stuff on site to replace so that won't cause a longer outage?

Hi. So the equipment is not routinely on site. But we are in the process right now of securing that equipment while we do the ultrasonic testing. This is a highly -- my tongue got tied -- highly irradiated area inside the reactor vessel. But we are in conversations with at least two vendors who claim to be able to help us do the work and we are confident we will be able to bring them on site. I mean, as I said, there is at least ten other reactors that had this issue in the past.

I understand. I was just trying to understand -- they were saying their delay was caused by equipment not being on site.

Yes. I think there is a robotic device that needs to go in and change out the bolts and replace those that are -- that failed the ultrasonic testing. It's not something you can send a person into the vessel.

Okay.

From a critical path perspective, too, the inspections that are ongoing now need to take place first. We have some time off the critical path to be able to secure that kind of equipment.

Okay. I appreciate it. Thank you.

Your next question comes from the line of Shahriar Pourreza, Guggenheim Partners.

Questions were answered. Thank you.

Thanks.

Your next question comes from the line of Michael Goldenberg with Luminous. Please go ahead.

Good morning.

Hi, Michael.

Hi. I wanted to ask a question about your 2018 hedging. It wasn't clear, if I look at previous quarters, it seems you hedged very little, about 5% of the output. But if I do the math, I get about a $30 or $31 incremental hedging price. Not understanding if that's the price, or I'm doing something wrong there?

And your comparison is what, Michael?

Versus Q4. Sorry. Q4, you were a certain percentage of $54 and now a certain percentage of $49. I am trying to do the simple math, I get incremental hedging down at $31.

We'd have to go through the individual math. Maybe we can follow up with you on that. But you have a range of output where you are within a high or low band.

So it's going to vary. I know that some of that 2018 output is going to come from BTS, who tends to have a higher price, and then we run a lower price environment as well. So it's going to be some mix of that.

Got it. Thank you.

(Operator Instructions)

Your next question comes from the line of Ben Budish with Jefferies. Please go ahead.

Hi, everybody. Good morning.

Hi, Ben.

I wonder if I'm reading into your comments, that you made at the beginning of the call, too much about the importance of Q3. It seems like you are guiding us to the low end of the range, and I am curious if a strong Q3 might get us back to the midpoint, or maybe we are looking at sort of below the bottom end and a strong Q3 gets us back within? Is there any more color you can give on that?

Ben, the range is the range. Historically, what we do is after Q1 we don't modify our numbers or push people up or down and live with the range. After Q2 we may move a nickel one way or the other, if we think there's a definitive bias one way or another.

In terms of verbally guiding. And then typically after Q3, if there's a need we tighten the range one way or the other. With so we're $2.80 to $3.00. It was a tough winter.

And we have got a lot of focus on our operations and our cost efficiencies and the range always assumes that the rest of the year is normal weather. We never assume that the weather is going to suddenly do something different than what the weather service predicts as a normal year.

Okay. Great. Thank you.

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

Thank you, Brent. So thank you, everyone for being on the call. And the main message I hope you took away is my favorite message, which is steady as she goes.

We have a utility capital program that's proceeding as planned. Power construction programs which we combine cycle units is on schedule and on budget. Operations are strong through the enterprise and the balance sheet is as solid as ever.

Kathleen and Dan have some travels in the next couple of weeks. The three of us have some travels in the next couple of months. Hope we get to see most, if not all, of you during those travels. Thanks a lot and we will talk soon.

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