Public Service Enterprise Group Incorporated (PEG) Q3 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group Third Quarter 2011 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, November 1, 2011, and will be available for telephone replay beginning at 1:00 p.m., November 1, 2011, to November 7, 2011. It will also be available as an audio webcast on PSEG's corporate website at www.pseg.com. I would now like to turn the conference over the Kathleen Lally, Vice President of Investor Relations. Please go ahead.

Thank you, Ashley. Thank you, and good morning to everyone who is participating in our earnings call this morning. As you know, we released third quarter 2011 earnings statements earlier today. And as mentioned, the release and attachments are posted on our website at www.pseg.com under the Investors section. We also posted a series of slides that detail the operating results by company for the quarter. Our 10-Q for the period ended September 30, 2011, is expected to be filed shortly. I don't intend to read the full disclaimer statement or the comments we have on the difference between operating earnings and GAAP results. But as you know, the earnings release and the other matters that we will discuss in today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. And although we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if our estimate changes unless we are required to do so. Our release also contains adjusted non-GAAP operating earnings. Please refer to today's 8-K, which contains our earnings release and attachments or other filings for a discussion of factors that may cause results to differ from management's projections, forecasts and expectations, and for a reconciliation of operating earnings to GAAP results. I would now like to turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of Public Service Enterprise Group. Joining Ralph on the call is Caroline Dorsa, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for your questions. We ask that you limit yourself to one question and one follow-up. Thanks.

Thank you, Kathleen. And thank you, everyone for joining us today. Earlier this morning, we reported operating earnings for the third quarter 2011 of $0.83 per share compared with operating earnings of $1.03 per share earned in 2010's third quarter. We achieved solid operating earnings for the third quarter in spite of daunting challenges. Our biggest challenge remains the low price of electricity. The effects of our earnings are realized primarily through reductions in BGS and RPM prices effective on June 1 of this year. During the quarter, however, we were also faced with the need to respond to the biggest storm to hit our service territory in our 108-year history. We experienced a historic number of customer outages and level of system damage in the wake of Hurricane Irene. As usual, our employees met the challenge. Thousands of employees from around the entire enterprise banded together with a common purpose: to help our customers when they needed us most. Utility counted on and received the assistance of everyone in PSEG who could lend a much-needed hand. The employees of PSEG Power also met the challenge. Their efforts to maintain the material condition of our generating units assured their availability during that critical time. Our 3 New Jersey nuclear units remained online during the hurricane and that strong storm performance was typical of the quarter as a whole. The Hope Creek nuclear station operated at a 97 capacity -- 97% capacity factor during the quarter, resulting in our nuclear fleet operating at a better-than-expected capacity factor of 93% year-to-date. Our fossil fleet met the demands of the system during this summer's historically high temperatures. Our combined cycle fleet continues to reduce its forced outage rate with all units operating during the July heat wave. Our workforce was called upon again this past weekend, in response to a north-easter that resulted in substantial damage and customer outages. We expect to restore power to approximately 95% of the 500,000 customers who lost power by this Thursday evening. And we have already restored 87% of the affected customers. I expect to have more to say about our employees' efforts in this storm during our next quarterly call. We remain on track with our major capital programs at PSE&G and PSEG Power. Please recall that our budgets call for spending $6.9 billion over 2011, '12, and '13, with '11's capital outlays at $2.3 billion. Our $750 million Susquehanna-Roseland 500 KV transmission project, which we are building in conjunction with PPL energy, has been placed on a list of projects for oversight from a new Federal rapid response team, with the aim of coordinating and expediting the Federal permitting process. This line is scheduled to be fully in-service in June of 2015. Our other major transmission projects, the $895 million Northeast grid reliability project and the $336 million north-central reliability project, are in the midst of the siting approval process. The north-central reliability project is scheduled to be in service in mid-2014 with the Northeast grid project scheduled to be online a year later. These 3 projects represent 31% of our planned transmission investment program of $2.9 billion over the period 2011 through 2013. And the capital improvements will not end in the next 2 years. Approximately $600 million of spending on these projects alone extends beyond 2013. The construction of new peaking capacity by PSEG Power in New Jersey and Connecticut is on schedule. These facilities, which represent approximately 400 megawatts of more efficient, clean capacity, are scheduled to be placed into operation by mid-2012. Our $270 million investment in the 2 new peaking units in New Jersey will replace older, less efficient units that we plan to retire in 2012. During the past 5 years, we have invested more than $2 billion to replace inefficient, older generating units and to upgrade our existing facilities to meet new environmental restrictions. PSEG is a long-time advocate of the Clean Air Act Regulations. We view the EPA's recent technical adjustments to the Cross-State Air Pollution Rule, more commonly referred to as CSAPR as favorable for our fleet. We are also well-positioned to meet the anticipated requirements under EPA's HAPs/MACT regulation, which is scheduled to be issued on December 16. We believe these regulations are long overdue. Our experience shows that it is possible to clean the air, create jobs and power the economy, all at the same time. The issuance of these regulations will also provide the industry with much-needed certainty to invest in long lived capital intensive projects such as power plants. The investment we have made in our coal fleet will also maintain the fuel flexibility, which has been important to power. In another important matter, litigation challenging New Jersey's attempt to subsidize generation is moving forward. The Federal District Court of New Jersey issued a ruling on October 19, rejecting the Board of Public Utilities' motion to dismiss our LCAPP complaint. This action permits us to pursue all claims filed in the complaints. The motion by the New Jersey, Division of Rate Counsel, to dismiss the electric distribution company's appeal of the New Jersey Board of Public Utilities order, approving the standard offer capacity agreements was also denied. We understand and fully support the state's desire to implement policy that fosters economic growth. But the LCAPP legislation will not achieve that end. We will prefer to find a solution to the challenge of economic growth that supports investment in the state and doesn't look to long-term, above-market subsidies as the answer. Government interference in a market that's working, as we've seen in the past, is likely to have unintended consequences for the customer, and we have early evidence that the situation is no different this time around. Our operating earnings for the first nine months of 2011 of $2.27 per share, while down from last year's operating earnings of $2.53 per share, were stronger than expected. We have benefited from higher than anticipated wholesale market prices for power and a tight control on expenses. We have also benefited from the lower pension expense this year versus last year. The year-to-date results support operating earnings for the full year at the upper end of our earnings guidance of $2.50, $2.75 per share. I must add that although 2011 has benefited from a reduction in pension expense, recent volatility in the financial markets make it difficult to predict the year-end funded status of our pension obligation, which could result in increased pension expense in 2012. These issues aren't easy to forecast. We've seen markets improve since the end of September, notwithstanding yesterday and today's early moves. Also, the discount rate on our pension plans is established on the last day of the year. On another matter, during the quarter, we established the reserve against the value of our Dynegy leases. This reserve resulted in a non-cash charge of $170 million or $0.34 per share. We fully intend to assert all claims against Dynegy, but can't be certain of success. Our financial condition remains strong. We are focused on providing value to our shareholders through increased investments that earn competitive returns. We're able to focus our capital program almost exclusively on growth opportunities, now that the investment we made to upgrade the environmental equipment on our generating units is behind us. And we can finance this growth without diluting our existing holders. I'll now turn the call over to Caroline, to review our operating results in greater detail.

Thank you, Ralph, and good morning. I'll now review our quarterly operating results, as well as the outlook for our full-year operating results by subsidiary company. As Ralph said, PSEG reported operating earnings for the third quarter of 2011 of $0.83 per share versus operating earnings of $1.3 per share in last year's third quarter. Slides 4 and 5 provided reconciliation of operating income to income from continuing operations and net income for the quarter and year-to-date. We've provided you with a waterfall chart on Slide 12 that takes you through the net changes in quarter-over-quarter operating earnings by major business and a similar chart on Slide 13 provides you with changes in operating earnings by each business on a year-to-date basis. So let's review each company in a little more detail starting with Power. As shown on Slide 15, PSEG Power reported operating earnings for the third quarter of $0.51 per share compared with $0.67 per share a year ago. Power's third quarter earnings were affected primarily by a quarter-over-quarter decline in realized energy and capacity prices. Recall that capacity prices declined to $110 per megawatt day on June 1, 2011, from $174 dollars per megawatt day in the prior 12-month period. This decline reduced Power's earnings in the quarter by $0.07 per share. A decline in energy prices under the Basic Generation Service, or BGS contract, to $94.30 per megawatt hour, also effective on June 1 from the prior contract price of $111.50 per megawatt hour, as well as the impact of other re-contracting efforts together reduced earnings in the quarter by $0.07 per share. Quarter-over-quarter output declined 7%, given the decline in weather-related demand versus last year. The decline in volume lowered Power's earnings comparison by $0.02 per share. Although weather conditions experienced in the third quarter were a bit above normal, the summer of 2011 was cooler than last year's record heat. As was the case in our first 2 quarters, earnings comparisons at Power were also affected by an increase in depreciation expense and a decline in capitalized interest associated with the start up of the back-end technologies at the Hudson and Mercer coal units. Together, these items reduced earnings by $0.03 per share. Power has taken advantage of the flexibility available under the terms of one of its coal contracts to sell supply on the open market. The sale of coal in the third quarter of 2011, coupled with the absence of freight cancellation costs occurring in the year -- incurred in the year-ago quarter benefited Power's third quarter 2011 earnings by $0.03 per share. An increase in operation and maintenance expense due to the timing of planned outages at the fossil stations reduced earnings by $0.01 per share. Power's earnings were also affected by the absence of trading-related losses in the prior year of $0.03 per share, and other miscellaneous items, which together reduced earnings by $0.01 per share. You'll notice that I didn't mention migration in the quarterly earnings comparisons. Power's third quarter earnings comparisons were not affected by customer migration away from the BGS contract. Although the level of customer migration grew during the quarter versus year ago levels, headroom continued to decline. The reduction in headroom is a function of both the decline in the average price charged customers under the BGS rate that I just mentioned, as well as an increase from the market price of Power. Therefore, as a result of those 2 factors, an increase in net migration with a decrease in the cost of each migrated customer, migration resulted in no net impact on earnings quarter-over-quarter. Customer migration represented an estimated 33% of BGS volumes at the end of the third quarter of 2011, compared with about 26% at the end of September, 2010. And note that on a sequential quarter basis, migration is essentially flat. Due to a slowing in the rate of growth of customer migration, a continuation of the pattern witnessed earlier in the year, we've lowered our full-year estimate of customer migration to an average of 32% to 33% from the prior estimate of 34%. Our updated estimate also assumed year-end customer migration levels of about 33% to 35% versus our previous forecast of 37% to 39%. The net impact of lower hedge prices for capacity and energy, offset in part by higher wholesale market prices and lower fuel costs than experienced a year ago, resulted in a $3 per megawatt hour or about 5.5% reduction in Power's gross margin rate during the quarter to approximately $54 per megawatt hour. As I mentioned earlier, total output was 7% lower in the quarter. Power's PJM-based assets, which provided about 90% of the output generated in the quarter experienced the 5% decline in output. The decline is primarily the result of more normal weather experienced in this quarter compared with the abnormally warm weather in the year-ago quarter. And the dispatch of our fossil generation has also been affected by an increase in the operating costs at our New Jersey-based coal stations following the start up of the back-end technology. As a result of these 2 factors, our coal units experienced a reduction in output of 19% but our combined cycle units experienced only a 6% reduction in output during the quarter, from the relatively high levels of output in the year-ago period. The nuclear fleet experienced an improvement in output. Power's nuclear fleet operated at an average capacity factor of 90.6% during the third quarter compared to an average capacity factor of 89.4% in the year-ago quarter. The Hope Creek station, which we own fully, operated at a 97% capacity factor in the quarter. Hope Creek's performance more than offset a reduction in output at the Salem station. Salem's performance was affected by high levels of debris in the Delaware River following Hurricane Irene, and a 5-day outage of Salem 2, to repair a coolant leak. Power, in addition to selling excess coal supply on the market, has restructured the coal supply contract for Bridgeport Station to more closely matched supply with future coal requirements. The sale of supply added about $0.03 per share to Power's earnings in the third quarter and provided about $0.06 per share to Power's operating results for the first nine months of the year. Our current coal supply is adequate to meet demand expectations and we don't anticipate this level of sales continuing into 2012. As I just mentioned, the dispatch of our coal units in 2011 has been affected by a reduction in demand relative to year-ago levels and an increase in the operating cost of our New Jersey-based coal units with the installation of the back-end technology. If we take a moment to analyze dispatch economics solely on the basis of cost of fuel, our gas units are dispatched before our coal units, when gas is about $4 to $4.50 range per mmBTU. The additional cost of the back-end technology increases this dispatch break-even analysis by about $0.75. This change in operating costs, coupled with the decline in weather-related demand were the primarily reasons behind a reduction in output from our coal units. The availability of our combined cycle capacity provides flexibility for us to meet demand in the most economic way. We estimate the CSAPR rules would increase the cost of operating unscrubbed coal units in the region by a similar amount and would increase the costs of operating a clean coal unit, but by only a fraction of that amount. We think the market is responding well to the potential for increased emission cost, and Power is well-placed to participate over the long term. As shown on Page 19, Power's output for the remainder of 2011 is hedged approximately at 80% levels at an average price of $68 per megawatt hour. For 2012, hedges are in place for approximately 50% to 55% of expected total 2012 generation of 58 terawatt hours at an average price of about $63 per megawatt hour. For 2013, approximately 25% to 30% of expected total generation of 57 terawatt hours is hedged at an average price of $61 per megawatt hour. Remember that when we refer to our hedge prices, BGS prices are full requirements less capacity, other hedges are at blocked prices, not full requirements. And BGS represents about 1/3 of 2012's hedge value and about 1/2 of 2013's hedge value. Let's turn now to PSE&G. PSE&G reported operating earnings for the third quarter of 2011 of $0.30 per share compared with $0.30 per share for the third quarter of 2010, as we show on Slide 24. PSE&G's results were affected by increased capital investment and the cost of responding to hurricane-related outages. An annualized increase in transmission revenue of $45 million, effective on January 1 of this year added $0.01 per share to results. A return on investments made under capital adjustment clauses, supporting investments and renewables and an electric and gas infrastructure program added $0.02 per share to earnings. These improvements to earnings were offset by an increase in operation and maintenance expenses. Storm-related costs associated with Hurricane Irene and higher tree trimming expense in the quarter, amounted to about $0.03 per share. This cost offset a reduction in pension related costs resulting in a net increase in O&M expense of about a $0.01 per share. An increase in depreciation expense and the absence of gains in the year-ago quarter reduced earnings by $0.02 per share. PSE&G's service territory experienced days of record-breaking temperatures during the month of July, and although temperatures reached new highs during several days, the number of hours in the quarter experiencing peak temperatures was lower than the levels experienced in the year-ago period. As a result, weather had little impact on PSE&G's quarter-over-quarter earnings comparison. Weather-normalized sales remain week as residential customers conserve in response to economic conditions. For the quarter, we estimate weather-normalized sales declined by about 2.7%, resulting in a decline in weather-normalized electric demand of about 1.7% for the first 9 months of the year. In early October, PSE&G filed at the FERC for an increase in transmission revenues under its formula rate mechanism. If approved, PSE&G's transmission revenues would increase $94 million on an annualized basis, effective January 1 of next year. The request reflects in part, the forecast step-up in PSE&G's transmission-related capital spending and related costs. PSE&G files an incentive rate filing at FERC on October 31, 2011, for the North East grid project. The filing request approval for recovery of construction work in progress are quick in the rate base, 100% of abandonment cost and an incentive return on equity of 100 basis points. PSE&G also filed at the New Jersey BPU for approval to defer expenses incurred during the quarter, in response to Hurricane Irene. PSE&G expensed $13 million of hurricane-related restoration cost in the quarter and requested approval to defer $29 million of incremental costs with recovery at a future date. The deferrals represent one-time extraordinary costs such as mutual aid and they're consistent with our prior practice. Let me now turn to PSEG Energy Holdings. Holdings reported operating earnings of $0.01 per share for the third quarter of 2011 versus operating earnings of $0.05 per share during the third quarter of 2010. The decline in operating earnings for the quarter reflects the absence of gains in the third quarter of 2010, from the termination of leases and the absence of revenues from asset sale. Let me just spend a moment on Dynegy. Our results for the third quarter reflect a full reserve for Energy Holdings' $264 million equity investment in the lease receivable from subsidiaries of Dynegy Holdings LLC. The reserve resulted in an after-tax, noncash charge against PSEG's earnings in the third quarter of $170 million or $0.34 per share. In the event of nonpayment of the lease obligation, Energy Holdings intends to with -- fully assert its claims against Dynegy Holdings or DH, its directors and Dynegy affiliates, including its claims under a tax indemnity agreement designed to protect Energy Holdings from adverse tax consequences, should the lease structure not be maintained and should any cash taxes be due. Please keep in mind that this reserve is noncash, but it does reflect the full extent of the charge of any future possible cash payment. Let me spend just a moment on financings. PSEG ended the third quarter with slightly more than $1.2 billion in cash. Cash at quarter end reflects receipt on the proceeds from the sale of Odessa, which occurred in July. Also, cash tends to be higher at the end of the third quarter, reflecting the impact of demand in the seasonally strong third quarter. Power and PSEG's operating cash flows have also improved in 2011 due to a decline in tax payments related to the benefits of bonus depreciation. As we mentioned last quarter, we are still on track to receive about $800 million of cash in 2011 related to bonus depreciation and our cash position reflects receipt of that on an ongoing basis. Power and PSE&G both took advantage of low interest rates last quarter. During the quarter, Power issued $500 million of new debt consisting of $250 million of 2.75% senior notes due in September of 2016 and $250 million of 4.15% senior notes due in September of 2021. PSE&G issued $250 million of three-year medium-term notes at 0.85%. These financings, of course, also improved quarter end cash on hand. At the end of September, debt represented 43.8% of PSEG's total capitalization and 38% of Power's capitalization, providing the Corporation with significant financial flexibility to meet capital requirements and seek new opportunities without any need to issue equity. Although we're not ready to discuss 2012 guidance, which you know we always do on our fourth quarter earnings call, there was one other thing we'd like you to keep in mind as you look ahead and that's pension expense. Pension costs are affected by returns on the portfolio and interest rates. As Ralph earlier mentioned, both key variables have experienced a great deal of volatility within a period of months. Pension expense will be affected by the year-end values for both, and recall that we don't smooth our year end asset values for purposes of calculating next year's expense. This potential for year-over-year increase in pension expense would differ from the assumption that we've shown in our investor material, that pension expense would decline slightly in 2012 from 2011 levels. Again, too early to forecast, but I just want to point that out as we come towards year-end. That said, for 2011, given the strength of operating results for the first 9 months, as Ralph indicated, we expect operating earnings for the full year to be at the upper end of our guidance range of $2.50 to $2.75 per share this year. With that, I'll turn it back over to Ashley for your questions.

[Operator Instructions] And your first question comes from the line of Dan Eggers would Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Ralph, I know you talked it a little bit earlier in the call, but clearly New Jersey seems to have a pretty high focus on getting new generation built in the state, kind of independent of what happens with the LCAPP process. Can you just talk a little more about what kind of position in alternatives that the state might pursue to try and get generation built or things that you guys think you could do in conjunction with PJM to try and get generation built while keeping the constructive, competitive framework for RPM in place?

Sure, Dan. So, I know there's been a lot of attention paid to this issue and it's really -- you've accurately summarized the way in which it's portrayed. I do have a slightly different view of it, however. I believe, what the state is trying to do, and what the governor particularly, is trying to do is make New Jersey as competitive as it can possibly be. So new generation is really a means by which New Jersey's Power prices will be more competitive with the region. And in the conversations we have been having with policymakers is that there are certain things New Jersey cannot compensate for. We cannot compensate for our population density. We cannot compensate for our lack of indigenous fuel. We cannot compensate for our environmental regulations, which are more progressive or aggressive, depending upon your perspective and others. Having said that, if we can work together to make markets even more efficient by reducing the risk for investors and therefore, on a risk-adjusted basis, make investments flow more readily so that power plants get built when needed, and you see less of the differentiation other than the factors I mentioned a moment ago, then I think everybody wins. And that's the kind of conversation we're having with folks right now. So, that's leading to specific discussions around how interconnections are planned. What is the timeframe of which RPM prices future capacity. What are the constraints that should or should not be placed on access to new shale gas deposits in the region. So I think, as long as we stay focused on meaningful improvements in competitive markets and steer away from counterproductive subsidies of government that interfere with markets, there's a wealth of opportunities to find common ground.

Your next question is from the line of Kit Konolige with Ticonderoga.

A question on another area where there's been litigation, the Power markets. Can you update us on your sense of the outlook for any decisions by the courts or EPA on CSAPR on our HAPs/MACT for that matter?

It's, Ralph again. We are talking here about the implementation of the Clean Air Act amendments of 1990. They have been promulgated by EPA. They've been contested in the courts candidly, all too often by colleagues in our industry. Although they have been contested by others as well. They've been up and down the judiciary system. I believe they've been at the Supreme Court at least once. I don't -- I think that's accurate. And now EPA is narrowing the oscillations in terms of re-promulgation of rules. And we're confident that they will stick. And I think others are confident they will stick. At last count, I believe EEI had 48 gigawatts of coal retirements that have been announced, which is a clear indication that people expect the CSAPR rules and the HAPs/MACT rules to be final in some close form that approximates the proposals. As you know, the CSAPR rules are final. There were some technical changes made, some recently. Yes, there are a couple of states who believe they were surprised, I can't speak for them, who have filed lawsuits. In general, however, we have been quite supportive. We've actually supported these rules for quite some time and have been outspoken in the fact that we have coal units, we've made the investments and we are ready to compete, and others should be ready to do the same.

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

So, as I mentioned, we did see the markets respond. In fact, if you recall when the CSAPR rules came out, you saw market prices move up about $2. And then you are seeing some of that. At least our sense is you see that when you look out across the forward curve. Of course, we don't forecast beyond the forward curve. I wouldn't say that we have a crystal ball on that. We think that about, perhaps maybe, 2/3 or so of the price move might be factored into what we see in the forward curve. At the end of the day people like to see rules go final, right? So prospects are good, final rules are better. And of course, we look forward to the HAPs/MACT rules as Ralph mentioned, being issued in December. So, we think we see some of that in the forward curve. We think we see it sustained. But of course, we need to see those final rules issued for HAPs/MACT and we hope, December.

Your next question is from the line of Travis Miller with Morningstar.

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

Thanks for your question. I'm glad you asked it because I think one of the things that we've been talking a lot about is the fact that when you think about migration and its impact on our earnings, you have to think about 2 parts. Not just the amount of migration or how many customers have moved, but in fact, what that cost you. What is the difference in what they pay if they're in BGS versus if they are not on BGS. So in prior years, that difference, which we call the headroom, has been a relatively larger number. It's that much larger than it is today, and that was the result of the fact that BGS prices were still coming off higher levels and there was also still a summer premium, which now is actually only one of the remaining years of BGS prices, as well as lower prices in the market. So, that differential was bigger. And when you have a bigger differential, then as you lose the customer or you lose a customer or a group of customers, that cost you dollars for each customer that leaves. The reason that I said that the migration amounts that we have this year, quarter-over-quarter in fact, don't result in any EPS quarter-over-quarter comparisons, is that while you still have some incremental customers moving, and we saw that move from about 26% to about 33%, the headroom is so much lower than it was. It's lower than last year and in fact, it's only about 1/4 of the level it was when we first saw migration really take hold in the summer of 2009. So what happens is, when you have an incremental amount of customers moving but in fact, every customer, including those who have already left you cost you less and you run out the math, sort of a price x quantity if you will, we end up now in the circumstance with a slowing level of migration on top of a lower headroom amount for everyone who's migrated, leading to 0 impact quarter-over-quarter. You might think of this in a sense in the extreme. If you had a 0 headroom, if the prices effectively converged, we would be indifferent as to where the customers were because the impact for us would be the same in terms of dollars. So we watched the headroom come down. It means, every customer, if you will, is worth less on a differential basis, and that's why I wouldn't use the estimates we had given in past years because they are related to past levels of headroom.

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

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

Your next question is from Paul Fremont with Jefferies. Paul B. Fremont - Jefferies & Company, Inc., Research Division: It looks as if there's some margin improvement that's taking place particularly in New England and New York. What -- can you give an indication given the fact that gas prices were low both quarters, as to what's driving that particularly in New England?

So, sure, Paul. Keep in mind for -- particularly for New England, if you look at the margin there, as I mentioned, we did the coal sales this quarter and those coal sales fall into the results that we have for New England. So that's really the biggest driver of the difference that you see. Not much going on in New York, but New England is going to be driven by coal. And as I mentioned, we had coal sales this quarter. We also had a little bit in the earlier quarters. So as I said, $0.06 for the year to date, $0.03 quarter-over-quarter. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And can you give us major milestones in the LCAPP court case?

There is no schedule that's been published on that, Paul, so the 2 beneficial outcomes we've seen are the denial of the motion to dismiss of the BPU -- on the part of the Federal court, of the BPU motion to dismiss. And then the denial of the rate payer advocate's motion to dismiss on the EDC case. But there is no scheduled time for the court to act. We are in discovery, however, right now. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And then the next thing to look for is scheduling the trial date?

Yes. I mean, there's lots of things to look to, right? I mean there's -- from the court point of view, that's accurate. But I think that you'll want to look at PJM's filing of how it's going to respond to the Mopar implementation at the end of November, you'll want to look to the early part of next year where PJM publishes the parameters for the RPM auctions. There are various motions that we will be filing in the litigation that you would look to in the coming weeks and months. So there's a continuous stream of activity. I don't think there is any one date that one wants to latch on. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And sort of the last question there. Perhaps the, I guess, they filed to reverse the interconnect charges with the FERC. Do they need to win on that in order to bid in the upcoming auctions?

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

Your next question is from Jonathan Arnold with Deutsche Bank.

Just on the coal sales and then -- could you break down, Caroline, at all, this $0.03 item. Was it primarily the sales or more weighted to the absence of cancel freight costs and is there any ongoing expectation around those canceled freight expenses as you move forward into the coming quarters?

Right. Sure, Jonathan. So, it's primarily the sales relative to the cancellation. We had cancellation costs last year in the third quarter because we still actually have those charges. We actually restructured the agreement midyear this year so we no longer have those costs. So really, what you're seeing, most of what you've got here is the sales, about 3/4 of it or so is the sales relative to the cancellation charges. In terms of going forward as I've mentioned, we have adequate supplies of coal. And since we have the restructured agreement that no longer has the cancellation charges if we don't want to take shipments, we are in a better position. That being said, because we have made the sales that we've made to date, we really shouldn't think about that as really being anything material as we come into 2012 in terms of future sales.

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

Right. In the first 2 quarters, kind of spread-out between the 2 quarters. We highlighted that this year -- this quarter because it was just $0.03 just for this quarter.

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

Right. So in terms of capital, as you know, and as Ralph mentioned in his remarks, we do have $2.3 billion in capital expenditures for the year. To date, we've spent about $1.5 billion in capital, so we still have a good chunk to go. It typically gets a little bit more weighted to the final quarter of the year as we typically ramp-up. In terms of really beyond that, I think, keep in mind we're just continuing to look for new opportunities. And then next year we have some debt coming due. We have some maturities happening both at Power and the utility, so we have some flexibility there. What we really did in addition to the sale of Texas, of course, which you know is new for this quarter, we really took advantage of market rates and I think we've got good levels for the debt, and that just gives us lots of flexibility, and then we can reconfigure our financing plan going forward, knowing about our upcoming maturities.

Your next question is from Jack D'Angelo with Catapult Capital.

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

Sure. Yes, it's been challenging this year. I think, earlier in this year, we thought we were seeing the bottom and perhaps same things turn up, but things have continued to be a challenge for the state. As it is obviously for the country. So the numbers that I mentioned in my remarks were the -- are estimates of weather-normalized and of course, that is more art than science. But we do see downtrends on a weather-normalized basis. We do think people are conserving more, maybe not turning on the air conditioner, quite as quickly in the heat of the summer. We'll see what happens when we get into the heating season. In terms of employment data, we do see a little bit of good news in looking at data, August versus August from 2011 versus 2010, seem to see some upturn in net employment in the state. But again, I'm talking 10,000, 15,000 in total. What appears to be some private sector benefit offset by some decreases at the government level. But if you look at things like housing starts or jobless claims, they seem to be bouncing around that level. It's not inconsistent with what we saw last year. So things don't appear to be getting worse. From the economic perspective, they don't appear to be turning around. We do think we're seeing that manifest in what customers are doing in trying to conserve, before they turn on the air conditioner or use a little bit more power. So it's not getting worse, but unfortunately, you can't really say that we see it getting a lot better at this point.

Okay. So when we think about '12, probably pretty flat to where -- to what you guys are seeing at '11?

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

Your next question is from the line of Michael Lapides with Goldman Sachs.

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

Sure. So you may recall, Michael, when we we're talking about pension expense a couple of years ago, we talked about it moving up after 2008 to levels in 2009 of about $160 million for total pension expense. It's come down significantly since 2009 into '10 and '11 so you are looking at numbers that are around the levels slightly less than say, $100 million or so. The real question for us is, at levels like less than $100 million in total for the company, how do we think about the year-on-year? So if you think back to our investor materials, we had the bar charts where we show total O&M and then we show pension as a piece of total O&M. In those bar charts, we were expecting to see a small decrease in pension expense on a year-on-year basis, when we looked at it. But given where we are now and given how things have changed, I think it's hard to think about being certain of a small decrease. Because when we think of where both interest rates are -- lower interest rates increase pension expense as you know, as well as lower returns, which increase pension expense -- that puts the challenge there. So total O&M for us, you may recall, when you looked at our numbers, we were looking at total O&M for this year of about $2.1 billion and we were talking about kind of flat over the '10 to '13 period. The pension expense is a little less than $100 million out of that. Got to think of it next year as maybe being a little higher than that. So on a base of about $2.1 billion, you are looking at a number that's a little less than $100 million or somewhere around there for next year. Can't give you a better estimate because we can't set it until we get to the end of the year.

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

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

Your next question is from Dan Eggers with Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: I just have one more question around kind of resource supply. One of the issues in the environmental rules is that you have those peakers that are supposed to be retired at the end of '15. Are you guys making any progress in these conversations moving forward as far as maybe, extending the useful life of those just to help keep the cost in New Jersey customers down a bit over the next few years?

So Dan, we still have an application in front of the DEP. Candidly, time is getting short for the DEP to respond to that and us to be able to have confidence to keep them in the next RPM auction. The trade-off there is just what you said. Clearly keeping those peakers in would have the -- a maximum benefit for customers in terms of keeping capacity prices down. However, they are not the finest units in the point of view of ground-level ozone and OX emissions and therein lies the trade-off that the state is grappling with. I'd say that we won't know the final outcome of that until early or at the latest, middle of the first quarter of next year. The application is still alive but we don't have a clear answer yet.

Your next question is from Ashar Com [ph] with Bizium [ph].

Ralph, just playing over the Central District Court case. Is it fair to assume that, once that the case should be decided by just before the next auction?

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

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

I'd think that speaking for myself, not speaking for others, I would not want to enter into an expectation that my contract is going to be allowed to continue for the 15 years until that case is decided. But that's speaking for myself and we actually approached the LCAPP process with that as a consideration. But others may have a completely different point of view as to whether or not those contracts will continue to be honest.

And do you have anything, information whether we're going to have any more hearings or anything on this going forward 'til the end of the year?

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

Your next question is from Gregg Orrill with Barclays Capital.

The recommendations in the Mopar case PJM is going to make. Would those be effective for the next auction you think? Or is there really no way to know that at this point?

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

And then in terms of New Jersey legislation. Do you see anything getting done this year that would affect you?

No, I do not. I do not, not legislatively.

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

Thank you, Ashley. So, for those who have joined us, I extend once again, my thanks, for being with us, and I sincerely hope you're as pleased as we are with our operating earnings through the third quarter, and our expectations for where we believe the year will end. Similarly, I hope you're as gratified as we are that our environmental strategy appears poised to deliver anticipated benefits. And we have to be sure while the first 9 months have been strong and the long term strategy appears to be paying dividends, there are some challenges that remain and chief among them are ensuring the continued functioning of competitive wholesale markets free of government's discriminatory subsidies. But as I mentioned a moment ago, I believe these challenges are manageable with ongoing dialogue and I can assure you, if you're not aware of that already, we are quite actively engaged in that ongoing dialogue. So we look forward to seeing you next week at EEI, and thank you for being with us today. Take care.

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

Thank you.