Ladies and gentlemen thank you for standing by. Welcome to the Public Service Enterprise Group, second quarter 2008 earnings conference call and webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session for members of the financial community. [Operator Instructions]. As a remainder, this conference is being recorded Friday, August 1, 2008 and will be available for telephone replay for 48 hours, beginning at 1 pm Eastern today until 1 pm Eastern on August 8, 2008. It will also be available as an audio webcast on PSEG's corporate website at www.pseg.com. It's now my pleasure to turn the conference over to Ms. Kathleen Lally. Please go ahead Ma'am. [Technical Difficulty] Strong results. We are maintaining our full-year operating earnings guidance of $2.80. Our reported loss for the quarter $0.32 per share includes a charge of $490 million or $0.96 per share, which reflects our decision to recognize most of the potential risk associated with our leveraged lease tax position at this time. Although we've taken the charges associated with this issue, we preserved our option to litigate with the IRS. As I'll review in greater detail later in the call, our discretionary cash position, adjusted for potential tax payments remains robust at $2.5 billion for the 2008 to 2011 period. We received approximately $600 million from the sale of SAESA in July after taking into account tax payments. And with the improved credit outlooks for PSEG, PSE&G, and Holdings, our credit ratings are in line with our objectives. Given the strength of this outlook, the Board has approved a share repurchase program of up to $750 million to be executed during a period of 18 months. The financial recognition of a substantial percentage of our potential tax risk and the sale of most of our international assets over the past year have allowed us to clarify our business risk and place our focus on our core businesses. The share repurchase authorization is recognition the Company has a strong business, financial, and liquidity position. And the Board's belief that repurchase of our shares may represent the best return for shareholders at this time. Slides 5 and 6 outline the difference between operating earnings, and the income from continuing operations, as well as net income for the second quarter 2008, and the six-month period ended June 30, 2008. As you can see on slide 8, the improvement in operating earnings for the second quarter of 2008 to $0.64 per share from $0.55 per share, it was due to the improved performance of PSEG Power, which reported operating earnings of $0.47 per share compared to $0.37 per share last year. PSE&G reported operating earnings of $0.10 per share, a decline from $0.12 per share earned in '07 second quarter. Energy Holdings reported a slight decline in operating earnings for the second quarter to $0.08 per share versus $0.09 per share over a year ago. A reduction in debt during '07 reduced parent company related expenses in the quarter to $0.01 per share from $0.03 per share over a year ago. We provided you with the waterfall charts on slides 10 and 11 which take you through the net changes in the year-over-year operating earnings by major business for the quarter, and year-to-date. I'll now touch on each company in more detail. PSEG Power reported operating earnings for the second quarter, $0.47 per share compared with $0.37 a share a year ago. The improvement in earnings was driven by re-contracting, as well as, realization of capacity prices under PGM's reliability pricing model for the full quarter versus only a month in last year's second quarter. Recall that RPM pricing was implemented on June 1, 2007. These items added $0.10 per share to Power's earnings. Earnings comparisons were also aided by gains related to positions taken in natural gas or in the year to hedge our fuel cost exposure. This added $0.08 per share earnings; it was expected to roll off during the remainder of the year. Higher pricing was also supported by a 7.6% increase in production. The nuclear fleet continues to run well operating at a capacity factor of 90.5% during the second quarter, bringing the fleet's year-to-date capacity factor to 92.3%. Salem 2, 57% owned and operated by Power, completed its refueling and steam generated replacement outage in 58 days returning to service on May 8. This ranked as the second shortest steam generator replacement outage in the history of the U.S. nuclear industry. The unit's operating capacity increased by 11 Megawatts for our share upon its return to service. We also completed the Hope Creek extended power uprate of 125 Megawatts. The combined cycle fleet continues to respond well to market conditions. Output increased 36% during the second quarter. Generation from our core fleet declined during the quarter. Results versus last year were impacted by scheduled outage work at several fossil stations, in particular, Hudson, to improve long-term reliability. This work resulted in an increase in operating and maintenance expense of $0.04 per share. Earnings comparisons were also affected by higher depreciation expense of $0.01, higher interest expense associated with an increase in collateral requirements, also $0.01. And market related decline in the value of some securities held by Power's nuclear decommissioning trust or Energy fund which was also $0.01. Power's margin per megawatt hour represents an important means of evaluating operating results. As you can see on slide 16, gross margins improved in the second quarter to $54 per megawatt hour from $47 per megawatt hour in last year's second quarter. Looking at margins for the first half of the year to $53 per megawatt hour, and keeping us on track to achieve an improvement in margins during 2008. Power's EBITDA for the quarter improved to $481 million versus $370 million a year ago, bringing EBITDA for the first six months of '08 to $1.028 billion, also keeping us on track to meet our full-year target for EBITDA of $2.05 billion to $2.25 billion. Higher prices for energy and capacity compared to last year are expected to continue to support our forecasted improvement in Power's '08 margins in operating earnings. This improvement in pricing is expected to be offset somewhat by higher fuel costs, as well as an increase in operating and maintenance expenses. For instance, the Mercer Station is scheduled to undergo the lengthy outage in late 2008 related to the addition of back-end technology to meet nox [ph] requirement. The Power markets have obviously been extremely volatile. This appears to be the result of convergence of issues affecting the market, including very strong commodity prices and uncertain macroeconomic outlook and unfilled environmental requirements which have all contributed to a very dynamic market. Natural Gas is currently trading slightly in access of level seen in March of this year, after reaching levels in June that were 25% to 30% higher than were the market as recently traded. Power prices have reacted in a similar fashion. As a reminder, PSEG Power entered 2008 which hedges covering its anticipated coal and nuclear generation for the year. Including additional hedges put in place for this year, Power has currently its hedges in place for 2009 representing approximately 85% to 95% of its anticipated coal and nuclear generation, with approximately 45% to 55% of coal and nuclear generated hedged in 2010. Power largely remains open to the market in 2011 with hedges in place representing 15% to 25% of anticipated coal and nuclear generation. It's been our practice to hedge our fuel position as we contract our output. Our fuel has hedged nicely longer than our positions on coal and nuclear generation. Nuclear fuel is termed up for 2011; coal is contracted for a period modestly longer than the power of sales I just went through. Approach to hedging our output has typically provided more stability to our cash and earnings than were dependant on short-term market pricing. We continue to feel comfortable with our forecasted open EBITDA for Power of $2.6 billion to $2.8 billion. The last of the transitional RPM capacity auctions was held by PGM in May of 2008. As you may know, new generating capacity that Power bid into the auction is not clear. We do however, remain committed to building new capacity provided reasonable RPM pricing, and expect to bid in the May 2009 auction. In the meantime, we believe that [inudible] detailed analysis of RPM released on June 30, will serve as a vehicle for PGM's review of the capacity auction process. The report recommended basic design elements of RPM to be maintained, but made some recommendations to enhance effectiveness. Now turning to PSE&G. PSE&G reported operating earnings for the second quarter of $0.10 per share compared with $0.12 per share of a year ago. The results for the quarter were affected by a number of factors. A decline in demand for gas reduced earnings by $0.01 per share. A lower peak, due to a cooler summer in 2007, resulted in an expected decline in transmission revenues, also $0.01 per share. Operating and maintenance expenses increased 1.8% this quarter, less than the rate of inflation. This increase also reduced earnings by $0.01 a share. These items were partially offset by lower amortization expense and other items which improved earning comparisons by $0.01. PSE&G's guidance already reflects a modest decline in transmission where we used to lower… results will also reflect an increase in financing costs associated with higher capital outlays, and higher operating and maintenance expenses associated with programs that maintain PSE&G's higher level of reliability. In May, PSE&G filled for a 20% increase in base prices for gas commodity supply. Our increase is consistent with requests made by other utilities in the State. This is a significant increase and we continue to monitor the impacts of commodity price increases and other economic conditions on our sales of both, electricity and natural gas. Year-to-date on a normalized basis, we've experienced a decline of 0.6% in residential electric sales, residential gas sales have declined by more than 1.5%. In July, PSE&G petitions prefer a formula rate treatment on its existing and future transmission of investments to be effective on October 1st of this year. The request is based on a proposed ROE of 11.68%, and provide for a forward-looking rate design that's similar to what the FERC has approved for other utility companies. The first rate year would be October 1, 2008 through December 2008, with subsequent rate years running on a calendar basis. If the mechanisms and protocols are approved, the annual reset and true-ups of rates will take effect on January 1st of each year. Looking to PSEG Energy Holdings, Holdings reported operating earnings of $37 million, $0.08 per share for the second quarter 2008 versus operating earnings of $47 million or $0.09 per share during the second quarter of 2007. Operating earnings, exclude the lease related charges as well as the financial results of SAESA. Holdings operating earnings for the quarter are largely influenced by the performance of Holdings Global subsidiary. The Texas generating units, in particular Guadalupe, are benefiting from strong demand and higher prices. Higher prices and stronger pricing added $0.06 per share to earnings. The increase in forward spark spreads in 2008 second quarter, compared to the decline posted in the year ago period, led to mark-to-market losses in the second quarter which reduced earnings comparisons by $0.05 per share. Global's earnings comparisons were also affected by international asset sales which closed during 2007. The absence of this income in 2008 reduced earnings comparisons by $0.03 per share. The availability of Bioenergie in 2008 improved earnings comparisons by $0.02 per share in the second quarter. Lower financing costs added $0.02. A higher tax rate partially offset these gains reducing Global's earnings comparisons by $0.03. Holdings Resources subsidiary reported a $0.01 per share improvement. The improvement was a result of a lower tax rate, $0.02 per share which offset a decline in lease income of $0.01 per share. PSEG Energy Holdings operating earnings is expected to decline in 2008 versus 2007. The outlook however, is stronger than forecast earlier on the year, given the strength of the Texas Power markets on Global's profitability, which is expected to more than offset the reduction in estimated lease income from resources. We now forecast an improvement in EBITDA for the Texas assets in 2008 to $125 million to $145 million. This compares to the prior forecast of 2008 EBITDA of $85 million to $105 million. High natural gas prices and demand are leading to stronger spark spreads which is more than offsetting the impact of added wind resources in West Texas on the dispatch of natural gas-fired generating assets. Over the long-term, a desperate generating asset could benefit from the recent approval of scenario two under the CREZ [ph] transmission build up program by the Public Utility Commission in Texas. The additional transmission capability and visioned under this program would improve the dispatch of our facilities. The 2008 outlook for Holdings Global subsidiary also reflects the loss of earnings for the full-year from the sale of Chilquinta and Luz del Sur, which were sold in December of last year. The outlook for '08 will also be affected by resources decision to recognize a substantial charge in the second quarter related to the IRS challenge of certain leveraged leases. This however, will result in a $30 million decline in Resources income during the second half of the year versus prior expectations. Holdings closed on a sale of SAESA on July 24th of this year. After-tax proceeds from the sale, amount to approximately $600 million. With its sale, Holdings International portfolio is limited to three small investments with an equity value of approximately $120 million. Now in more detail on the leases. There are several pending tax cases involving other taxpayers with leverage lease investments similar to ours that are being challenged by the IRS. To-date, two cases have been decided at the trial court level in favor of the government, and a third case involves a jury decision that is currently being contested. An appeal of one of these decisions was recently affirmed. Based on these developments and the status of discussions with the IRS, we've taken the following actions in the second quarter. We've increased our interest reserve by $135 million. This is an after-tax charge reflecting the income taxes. We re-calculated the return assumed on our lease investments to take into account new assumptions on the timing of cash flow to be received from the leases. This adjustment resulted in an after-tax charge of $355 million, consisting in a reduction of revenue of $485 million, offset by a reduction in taxes of $130 million. The net effect of these two items is a charge to the income in the quarter of $490 million or $0.96 per share. The $355 million reduction in income associated with the lower return on a lease investment portfolio will be recognized as income over the remaining lives of the leases as total income received from the leverage lease investment is unaffected by changes in cash flow timing. Slide 28 provides a view of the timing on this income recognition. As you can see, we expect approximately 75% of this income to be recognized over the period 2013 to 2022. Our decision anticipates that we'll pay $300 million to $350 million in 2008 in taxes, interest and penalties claimed by the IRS for the 1997 to 2000 audit cycle. And subsequently comment litigation to recover a refund. Our reserve levels assume a total cash out flow of $900 million to $950 million over the next two to three years. This includes the $300 million to $350 million we anticipate paying in 2008. At the end of June, our deferred tax liability in interest related to the deficiency amounted to $957 million and $209 million respectively, totaling $1.16 billion. In addition, penalties related to deficiency were $147 million. We believe Holdings is in a position to meet its financial requirements from internal sources of cash. It's important to say that PSEG believes that its lease investments are fully consistent with Resources long standing business model, and its focus on Energy related assets of the type which PSEG has traditionally owned and operated. PSEG currently forecasts $2.5 billion of discretionary cash over the 2008 to 2011 period versus our prior forecast of $3 billion. This figure assumes a higher than originally forecast payment that is now $900 million to $950 million in lease-related taxes during this timeframe. A revised figure on discretionary cash also reflects an increase in funds from asset sales. Keep in mind, the major influences on our forecasted discretionary cash are commodity prices and capital expenditures. Our forecasted capital spending includes growth-related spending on areas that may not materialize, for example, spending on renewables at Holdings, and PSEG spending plans related to such items as AMI. On the other hand, although we attempt to be conservative in our view of commodity prices, the dramatic decline in prices would have a negative impact on cash. We saw a substantial increase in commodity prices during the second quarter, which required Power to post additional margins given its hedged positions on the forecasted energy sales. We entered this period with substantial liquidity. We however, reinforced our capital position with increases to our credit facilities amounting to $350 million. At the end of June, we had $1.55 billion of liquidity available to PSEG Group of Companies. Since the end of the second quarter, our collateral postings at Power have declined by $1.3 billion to $800 million, with the decline in commodity prices. With this decline, available liquidity for the PSEG Group of Companies is approximately $3.1 billion. Lastly, we are obviously pleased to announce that the Board of Directors has approved a share repurchase program of up to $750 million. This approval provides the repurchase to occur during the 18 month period. Our business risk profile has improved over the past year. We sold the majority of our international assets at very good values. We've recognized most of the risk associated with our lease related issue. We paid down the debt to parent company, and our credit ratings are in line with our objectives. Our share repurchase program represents our commitment to making investments that provide the best available return to shareholders, taking into account opportunities to grow the business. We feel very confident about our financial and operating position. Our lease charge has clarified our financial risk. Strong operations and our approach to hedging support our cash position. Our balance sheet is strong and we are focused on improving our returns to shareholders. With all that, I'll now open it up to questions. Thomas M. O'Flynn: Operator, Elizabeth, we're available for questions at this time. Question and Answer

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session for members of the financial community. [Operator Instructions]. One moment please for our first question. Our first question comes from the line of Paul Fremont from Jeffries. Please go ahead. Thomas M. O'Flynn: Thank you. Go ahead Paul, good morning.

Good morning, thank you very much. Thomas M. O'Flynn: Good morning, Paul.

Just to sort of understand the charge that you took relates only to a portion of the leases that are in dispute, that would be for the cycle '97 through 2000. So should we assume that as you go through the audits, that you're going to have to make this decision again with respect to any possible disputes relating to other audit years? Thomas M. O'Flynn: No, Paul. There are a lot of moving parts in it. I think from an overall cash position, if you think about, we took a charge that represents the vast majority of the risk associated. If you think about the $900 million or so, that I say that we expect to pay… we've also got to deposit that we made last December, a voluntarily deposit of $100 million. So we… this charge represents a number that would be a very high ratio, the number would look a lot like $1 billion over the 1.16. In other words, 1.16 is our current exposure.

Okay. Thomas M. O'Flynn: Our cash expectation is in line with our accounting charge. And that total cash cost is about $1 billion. See, if you want to divide $1 billion by the 1.16, you get up with a pretty high percentage number. In terms of then… so the 490 is the accounting impact, the 900 and 950 plus the 100 is the cash impact, that's how we're giving them both to you. Then the question is, well how might the 900 to 950 be paid out? We believe that in a litigated scenario, it would be paid out over a two to three-year period, it may also look like that over a sale scenario. The first payment might be 300 to 350 that would represent the '97 to 2000 audit. There would be a subsequent payment potential for the '01 to '03 audit, that could be in '09 and another piece in '10 or '11. So that may be more detailed but that's… we just broke out the audit because that would be… the 300 to 350 is the first of the 900 to 950. But all of that money has been recognized in the accounting statements, that's the 490. And in our cash forecast, our cash forecast between now and '11 assume a very conservative 900 to 950 cash cost will go out.

And then just sort of as a follow-up. Should we assume at this point that a settlement with the IRS is unlikely? And that the more likely path is that you proceed to litigation or is there still a possibility here of a settlement? Thomas M. O'Flynn: I wouldn't want to rule it out but our expectations that litigation is more likely.

Thank you.

Thank you. Our next question comes from the line of Paul Patterson from Glennrock Associates. Please go ahead.

Hi, guys. Thomas M. O'Flynn: Hi. Kathleen A. Lally: Good morning, Paul.

Just to make sure, I understand, the 490's, the earnings impact, the 900 to 950 is the cash flow impact going forward? Thomas M. O'Flynn: That's exactly right Paul.

Okay. And the 490, other than the cash flow impact due to the lack of cash as a result of these payments. The expected earnings impact has pretty much been taken care of by this write-off, right? Thomas M. O'Flynn: Well, there is a onetime event, the 490.

Right. Thomas M. O'Flynn: We did say, there is about $0.10 to $0.12 a year of earnings drained for the next… for '08, '09 and '10. So it's going to be about half of that this year. That's about $0.06, I know you said $30 million which is about $0.06. And then it will be about $0.10 to $0.12 in '09 or '10, that number will get cut in about half in '11 and '12. That's a combination of… you re-run the leases and the earnings change around, it's also cost of money.

Okay. And then… Thomas M. O'Flynn: And then Paul, as I just say, it cuts down, it's by few cents as we look out four or five years, and then it's starts to reverse because as I try to explain those complicated issue, I may not have done a good job. The majority of the 490 write-off is from a timely cash flow. There was an interest fees but the other majority, the 355 is an after-tax charge. And ultimately those come back over the next 10 to 20 years.

Okay. And that's on slide 28, I guess, is that the way to think of it? Thomas M. O'Flynn: Yes.

Okay. And then I guess when you were talking about the discretionary cash flow, what's sort of offsetting this tax payout is greater than expected asset sales. Is that correct? Thomas M. O'Flynn: That's the biggest piece. I would say when we talked, when we provided our $3 billion number back in March, we did have a number in there for some tax risk and it was consistent with our FIN-48 position at that time. So there was a number in there. It was obviously not nearly as large as the number that we've now got in there. So it was a number… it obviously got bigger up to the 9 to 950, it was offset by some proceed on asset sales. So net-net, we're moving the cash with 3 to 2.5.

Okay. And the asset sales, is that because you're selling more assets or the proceeds are higher because you're getting a better price for the assets than you previously expected? Thomas M. O'Flynn: The latter. We had used to be honest, a very conservative value for SAESA. And there is also one other investment in Resources, that we've been looking at selling that we were using a conservative number for.

Okay. Then just finally on the quarter, there is about $0.08 cents mark-to-market gain as I calculate it sort of year-to-date, about $0.03 cents for the quarter. Are you guys expecting that to reverse? Thomas M. O'Flynn: Yes, we do expect that Power… and it's unusual, Power does most of their… stuff is either hedge accounting and normal purchase and sales. So we don't get mark-to-market, that is virtually all into a year. So it was things that were positive in '08, if positive first half will roll off and be negative. So net-net to be neutral. And it was simply that, obviously as we buy fuel for our plants, we burn a lot of gas rather than buying forward gas we bought some options.

Okay great. And then just finally, you said whether adjusted sales I think were down, retail sales, I don't know if I got that correctly, I'm sorry. Thomas M. O'Flynn: You got it correct.

How much were they down? Thomas M. O'Flynn: Whether adjusted residential sales which are really the things we watch more closely were down 0.5% in electricity year-to-date.

Okay. Thank you, sir. Thomas M. O'Flynn: Okay.

Thank you. Our next question comes from the line of Ronald Kahn from Barclays Global Investors. Please go ahead. Mr. Kahn, your line is open. Mr. Kahn? Thomas M. O'Flynn: Perhaps we should move on, Mr. Kahn can call back if he still has questions.

Our next question comes from the line of Greg Gordon from City Investment Research. Please go ahead.

Thanks, good morning. Thomas M. O'Flynn: Good morning.

You pointed out that one of the things that drove better quarterly performance was performance of your gas plants? Thomas M. O'Flynn: Yes.

You manage those plants, if I'm correct. You purchased the gas and sold the power in the short-term markets, right? So they are not part of the long-term hedging program, right? Thomas M. O'Flynn: They are Greg to the extent that we sell our load into them. I mean, the reason we talk, for the most probably, we talk about longer term hedging, we talk about coal and nuclear because that's the majority of our margin. To the extent in the BGS, it's at BGS we did sell and hedge our way through so that we had sold Power forward such that we would… we basically sell into our natural gas stack. So when we do that, then at a reasonablable point in time within doing that, we then procure the gas.

Okay. So the extent you have… Thomas M. O'Flynn: We would, I'd say Greg to the extent that we looked out long-term sparks out two, three, four years and thought that they were at a good value, we could certainly sell sparks forward. But to-date, we've not seen sufficient value in the forward spark market to do that.

So you do utilize them to serve loads to the extent they are bundled, because you have a hedge that's a low serving hedge? Thomas M. O'Flynn: Yes, exactly.

You hedge out some of the gas? Thomas M. O'Flynn: Yes.

But the remaining piece you would just sell at prevailing sparks in the short-term market, right? Thomas M. O'Flynn: Yeah, but even then I mean, if we don't buy the gas and we are respectively in the day market and the short-term markets, then they are still being dispatched at short-term gas prices. Obviously, to the extent we have the gas at contracted different than market, we can make different decisions on the gas versus the plants. But the bottom line is, I think the plants are running more, which is they are more in the middle of the fairway of what PJM is needing for keeping the system going on a daily bread and butter basis. So…

What type of sparks present are you seeing on the… what did you see on the assets in the quarter? Thomas M. O'Flynn: So just on capacity, we've seen capacity factor go up. And this is really Bergen and Linden and the big drivers in the PS area, they've gone up 5% to 10%. Sparks, we've seen them be in the… depends on the weather. But generally in the $20 to $30 range… I've got mid-to-high 20s in April. May, it was mid-teens. June, it was up about $45 to $50. So it obviously it's…

And I assume the cycling, so you're giving the on peak, those are on peak rates, right? Thomas M. O'Flynn: Yes.

Okay. Thomas M. O'Flynn: That's right. I said they're running most of the time on peaks half the time and their capacity factor is around half. So they're most of the time on peak, they're running.

Great. Thank you.

Thank you. Our next question comes from the line of Daniel Eggers from Credit Suisse Securities. Please go ahead.

Hi, good morning. Thomas M. O'Flynn: Good morning.

Just thinking about the share repurchase program, and then the Board's comments that buying back shares might be the best return obviously you guys have from an investment profile perspective. How are you going to look at the CapEx for going to be laid out so far to make decisions on when to buy shares and when maybe to put-off or cancel CapEx projects? Thomas M. O'Flynn: Yeah, I think in general Dan, as we look at our business horizon over the… between now and 2011, we've got a large CapEx program that's consistent with what we told people in March, and not too different than what the Q was. At the same time we do have some discretionary CapEx is probably $500 million to $600 million. Or it's a little more than that, but I haircut the PSE&G numbers because those are really… that's the thing about the impact on dividends that changes in CapEx could have. And the reason to do that is that there is certain business that we look at possibly growing, but as before we make any investment, commit to any investment, we're obviously going to look at the value of the returns, the risk profile, the shareholder value accretion that such an investment would yield. And we'll look at that relative to our stock at the time. Or just in… kind of more broadly, our assessment on how to deploy our share repurchase capability is going to be based on our yield, sort of yield cash or obviously, conditions in the market that could be both financial such as stock market reaction, commodity market certainly, change in the commodity markets relative to changes in our stock value will have an impact. And then lastly, our ability to deploy or not deploy capital into discretionary CapEx, or other investments that could be attractive.

So what I need to assume that the $500 million plus of discretionary CapEx needs to be put-off to support the buyback or if you could lay the CapEx so that it means you could spend, you can buyback even more stock? Thomas M. O'Flynn: It's the latter. If we have about say five to six, if we did not pursue those investments, we would have five to six more share repurchase pattern.

Okay, got it. And then, it seems like there is a decent amount of planned maintenance and kind of planned work going on. It feels like it's more than what we normally see. Is that one, a correct assessment? And two, if so, should we be assuming that continues on over the next couple of years? Thomas M. O'Flynn: I think it's really Hudson and Mercer related. And keep in mind that these are two plants that have been older coal plants. We are putting back ends on for the back end for… and that scrubbers and making them fully environmentally compliant with everything, favorably with the exception of carbon. Mercer was spending about $500 million, Hudson $725 million, so as a part of that there are some outages to prep for those. And there are some maintenance associated with those plants as we do those back ends. So Mercer is done with that late '09 and early '10, and Hudson is late '10. But those are baked into our numbers. These are… it is important to say that the work we're doing is not different than what was anticipated and what was baked into our guidance in forecasting everything else.

With the lease decision all else, do we need to think about carving out the dime or so of earnings over the next couple of years out of previous expectations, given the settlement you announced today? Thomas M. O'Flynn: Yeah, that's fair, that's something that will be a head wind for us. The $0.05, $0.06 this year, and then $0.10 to $0.12 for each of the next couple of years and as I think I told Paul, we catch down at about $0.05 and $0.03 I'm thinking them to look out in those levels out thereafter. So all other things being equal, that's a head wind. Obviously there is different moving parts, and we'll do our best to define ways to offset that.

Okay. Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Vic Khaitan from Dutch Investment Management. Please go ahead Sir.

Hi, I've got two questions. One on the IRS related settlement talk. Looks like this amount you have taken charge, could we assume that that is the amount you are willing to settle for? Or is that the amount which you think is the most likely… liability you might have? Thomas M. O'Flynn: Yeah, Dick, I guess technically it's within 48. You do a very complicated probability weighted series of events and based on that probability distribution, once you get to a scenario that's more than 50% likely then that's the result that happens. So that's a technical answer. I'd say that we think our case still has some strong merits to it. There have obviously been some three cases gone the other way with financial counterparties, we think our position as an operating company puts us in better stead. That being said, I think we want to be mindful of the FIN 48 guidelines, and also be conservative and try to put it behind us at least from a financial discipline standpoint. So from where it is on the books, it's actually largely provided for from where we are on our cash position as we've talked to you about discretionary cash. We're baking in a pretty… obviously, a very large number, that is the vast majority of the exposure, baking that in as a cost. So we talk to you about our cash availability, it is after assuming we make very substantial payments.

So, could I understand then that, is IRS willing to set with you or they are not interested in settling, just going through litigation? Thomas M. O'Flynn: I think we have had… as obviously some settlement discussions, it wouldn't be fair for me to characterize the bid [ph] on that but I think as I said that earlier, we expect… I wouldn't want to rule out settlement, we expect litigation as the more likely path which would say that there is a bid in the asking, there is a meaningful difference in the… at the settlement table.

I see. One more question, Tom. On this open EBITDA you mentioned $2.6 billion or $2.8 billion. Is that based on current prices or is that more like a anticipation on your part or how do you come up with that open EBITDA calculation? Thomas M. O'Flynn: We've been in the conference room for a couple of hours so the market may have moved a lot as you know. But it's generally based on what I call mid-July numbers. It's certainly not... we're not expecting numbers to move up to their peak of where they were in last few days of June. But it's based on what I think it was kind of mid-July numbers.

But is it realistic to assume you can achieve those open EBITDA? That's what I was really getting at. Thomas M. O'Flynn: No, we think it's very reasonable. There is obviously a lot of volatile in the market, but the numbers there are very consistent. Since we gave the number out in March, obviously there was certainly, from our time in the market when open EBITDA would have been higher. And so, we were asked a few times whether we wanted to update things and we would rather stick to a number that stays away from some of the upswings and downswings in the market. But in terms of mid-July numbers, I think we're still comfortable.

Okay. Thank you very much. Thomas M. O'Flynn: In general, I'd say Vick, as we look at the market, obviously gas prices have come up. As we look add sparks and darks, there are some lower numbers than we think makes sense, the care ruling caused quite a fall-off in the market. And we think some of that may naturally correct itself.

Okay. Thank you.

Thank you. Our next question comes from the line Shalini Mahajan from UBS Securities. Please go ahead.

Thanks and good morning. Vick did ask my question, open EBITDA but, I was just wondering Tom, and I apologize because I guess I did step off the call, so I'm not sure if you addressed that. But if you can just maybe talk a little bit about the Texas market and your outlook on spark spreads, both on the western and southern zone that you operate your plans in? Thomas M. O'Flynn: Actually Shalini, I was not asked about the Texas market. We're generally doing very well at Guadalupe, and not as well as Odessa. Sparks are strong at Guadalupe and capacity factors above 50%. Sparks are in the high 20s, sort of 26 to 29 sort of zone would be our expectation which would be quite a pickup from where they were last year that was probably more like mid-teens. And that plans to run at capacity factor is about 50%. So it does cycle quite a bit generally, it's running on the peaks and that one on the off peaks. Odessa, sparks have declined modestly from about $20 to $16, $17, but we are losing hours. That plant used to run similarly to Odessa, sort of 50% to 55%, it's now running more like 35%, getting backed down by wind. So that's been the biggest disappointment for us in Texas, it's just losing capacity factor at Odessa which is in the west. So just now I clarify, Guadalupe is by San Antonio in south, Odessa is in the west, right in middle of a lot of wind. We were encouraged by the credit decision to put multi-billion dollars of transition going from west over to the bigger load centers. And we're hopeful that it improves Odessa's capacity factor or be it not for few years until that stuff gets built.

Okay. And then, we saw a huge spikes in Texas in May to mid-June. Is there… I mean have you guys isolated, were you able to take advantage of that and could you isolate the positive impact on your earnings from that? Thomas M. O'Flynn: We were able to take advantage of it, hat was at Guadalupe. Within the month,, there were certainly couple of months where we were up… I think at Guadalupe, $15 million or something in that range.

Okay. Thomas M. O'Flynn: But if you think about the… we moved just for the year. We moved our EBITDA up, considerably by $40 million. And that Odessa was down, is down somewhat. So Guadalupe has gone up by more than that amount. Probably Guad is up 50, and Odessa is down 10. We did do some '09 hedging during some attractive periods in the market, too.

Okay. So when you say that Guadalupe is going to be up $50 million, $15 million was just positive impact coming from the second quarter, and rest is the strength in stock spread that you see for the rest of the year, is that a fair way to think about it? Thomas M. O'Flynn: Yeah, that is probably fair.

Okay. Thomas M. O'Flynn: And then of course, when we say that, we use the time to realize some and then we also did some incremental forward sales within '08.

Okay. Great, thanks so much Tom. Thomas M. O'Flynn: Okay.

Thank you. Ms. Lally, there are no more questions at this time. You may continue with your presentation or closing remarks. Kathleen A. Lally: I think that's it, operator. If there are no further questions, we appreciate the interest shown by everyone on our call. And if you do have any other questions, please feel free to call into Investor Relations, and the material should all be available to on our website. And the IR number is 973-430-6565. Thank you. Thomas M. O'Flynn: Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We do thank you for your participation. And we ask that you please disconnect your lines.