Public Service Enterprise Group Incorporated · NYSE:PEG
Public Service Enterprise — Morgan Stanley 15th Annual Global Electricity and Energy Conference (April 2008)
62 slides from Public Service Enterprise's conference presentation, Apr 3, 2008
Slide 1: Morgan Stanley 15th Annual Global Electricity and Energy Conference
Exhibit 99 Public Service Enterprise Group Morgan Stanley 15th Annual Global Electricity and Energy Conference April 2, 2008
Slide 2: Forward-Looking Statement
Forward-Looking Statement Readers are cautioned that statements contained in this presentation about our and our subsidiaries’ future performance, including future revenues, earnings, strategies, prospects and all other statements that are not purely historical, are forward-looking statements for pu
Slide 3: GAAP Disclaimer
GAAP Disclaimer PSEG presents Operating Earnings in addition to its Net Income reported in accordance with accounting principles generally accepted in the United States (GAAP). Operating Earnings is a non-GAAP financial measure that differs from Net Income because it excludes the impact of the sale
Slide 4: PSEG Overview
PSEG Overview Tom O’Flynn Executive Vice President and Chief Financial Officer - PSEG President and Chief Operating Officer – PSEG Energy Holdings
Slide 5: Our platform …
Our platform … Major electric generation Stable electric and gas Redeployment of capital company with 13,300 distribution and through the sale of MW of base-load, transmission company international assets. intermediate and load rated top quartile for Focused on managing following capability reliabil
Slide 6: Our focus is to maximize benefits from existing assets …
Our focus is to maximize benefits from existing assets … Operational Regulatory and Growth with Excellence Market Environment Manageable Risk Maintain strong Regulatory Processes embedded balance sheet mechanisms in place throughout the providing supporting best-in- organization on how opportunity t
Slide 7: Major influences on business environment remain
Major influences on business environment remain: Infrastructure Climate Change Capacity Needs Requirements Capital investment in PSEG Power’s base- coal fleet to meet Significant new environmental load nuclear assets transmission capital well situated in carbon requirements program to improve mainta
Slide 8: Improving operational practices and participating in market design discussions
We are continuing to improve operational practices and participate in market design discussions … Fossil fleet adopted operating model based on Operational Nuclear’s success Excellence Goal is to maintain (at a minimum) operating capability of nuclear fleet at 90% capacity factor PSE&G pursuing pilo
Slide 9: Improved processes and investment …
Improved processes and investment … 2007 -2011 : $2,400 CAGR: 2.1% $2,200 $2,000 $1,800 2007 2008 2009 2010 2011 … are expected to control the rate of growth in operating expenses. 9
Slide 10: Operating Earnings by Subsidiary
Improved processes, markets and well-positioned assets … Operating Earnings by Subsidiary 8% Growth $2.80 - $3.05 $2.71* 45 - 60 115 $1.73* 1,040 - 1,140 Holdings 161 949 Power 515 262 376 350 - 370 PSE&G (66) (63) (15) - (10) Parent 2006 2007 2008 … allowed us to meet our commitments to earnings gr
Slide 11: Spending for the next four years …
Spending for the next four years … $10.0 Capital Expenditures $8.0 $ 7.3B $6.0 $ 4.5B $4.0 $2.0 $0.0 2007 Forecast* 2008 Forecast** (2008 – 2011) (2008 – 2011) PSEG Power PSE&G PSEG Energy Other Holdings … has increased primarily at PSE&G to support growth strategy. * As per 2006 10-K 11 ** As per 2
Slide 12: Financing capability improved with discretionary cash expected to reach $3 billion
PSEG’s financing capability has improved with forecasted discretionary cash expected to reach $3 billion … PSEG Use of Cash $15.0 $3.0B Discretionary Cash $10.0 Shareholder $1.5 – $2.0B Dividend Debt Reduction $5.0 Investment $0.0 Forecast* Forecast (2008 –2011) (2008 –2011) … supporting our growth
Slide 13: PSEG Power's capital program
PSEG Power’s capital program 2007 2008 2009 2010 2011 2006 10-K $584 $626 $516 $527 $198 ($ millions) 2007 10-K $562 $890 $675 $620 $430 ($ millions) Program focused on meeting environmental commitments, capital associated with new capacity ($500M) and exploring the opportunity for new nuclear to im
Slide 14: At Power, strong cash generation and declining capital expenditures
At Power, strong cash generation and declining capital expenditures … Power Cash Flow Power Sources and Uses Net Cash (2008 – 2011 Forecast) $2.0 Asset Cash Flow Sales from Ops Incremental debt $10.0 Net capacity while Dividends Financing maintaining target credit measures to Parent $1.0 $8.0 $0.0 $
Slide 15: PSE&G's capital program focused on improving reliability
PSE&G’s capital program focused on improving reliability 2007 2008 2009 2010 2011 2012 2006 10-K 5-year capital program: $3.0B June 2007 10-Q 5-year capital program: $4.1B 2007 10-K 5-year capital program: $5.3B PSE&G Rate Base ($ millions) 2007 Actual 2012 Base Plan Transmission 830 2,240 Gas 2,240
Slide 16: PSE&G's capital program
PSE&G’s capital program Rate base growth supported by investment in new 500kV lines to improve reliability ($900M) and upgrade of sub- Transmission transmission system ($250M) Seeking FERC approval for CWIP in rate base and 150 bps adder to ROE on $600M - $650M Susquehanna line – if approved, capita
Slide 17: At PSE&G, cash flow directed towards reinvestment opportunities
At PSE&G, cash flow will be primarily directed towards attractive reinvestment opportunities. PSE&G Cash Flow PSE&G Sources and Uses $1.5 Cash from (2008 – 2011 Forecast) Ops Net Cash Dividends Flow Net to Parent Financing $0.5 Cash from ($0.5) Ops Investments Growing Investments ($1.5) 2007 2008 20
Slide 18: At Holdings, asset sales a significant source of cash in 2008
At Holdings, asset sales could continue to be a significant source of cash in 2008. Holdings Sources and Uses (2008 – 2011 Forecast) $1.2 Net Financing $0.9 Asset Dividends to Sales Parent $0.6 Cash from Ops Investments* $0.3 $0.0 Sources Uses * Investments exclude Intercompany loans. Holdings plans
Slide 19: At PSEG, we forecast $3.0B of discretionary cash
At PSEG, we forecast $3.0B of discretionary cash through 2011. Parent Sources and Uses (2008 – 2011 Forecast) $6.0 Holdings Dividend PSE&G Holdings cash Dividend generated Discretionary (remaining asset $3.0B Cash $4.0 sales and cash ops) less cash earmarked for potential Power renewable Dividend in
Slide 20: Markets, assets and use of capital …
Markets, assets and use of capital … + 8 - 9% + 8 - 9% $3.05 - $3.35 $2.80 - $3.05 $2.71 $1.73 2006 Operating 2007 Operating 2008 2009 2010E 2011E Earnings* Earnings* Guidance Guidance … should continue to drive annual earnings guidance growth of 8 - 9%. 20 * See page 62 for Items excluded from Net
Slide 21: Our returns have improved…
Our returns have improved… PSEG 25 ROE 20 15 ROIC 10 5 0 2006 2007 2008 2009 2010 2011 Note: Calculations exclude the effects of non-recurring items … and are forecast to remain strong on larger capital base. 21
Slide 22: Redeploying our $3.0B of discretionary cash
Redeploying our $3.0B of discretionary cash towards additional growth and / or share repurchases … + 8 – 9% Annual Growth Discretionary Cash Total Shareholder Return Annual Growth 10 - 13% 3% $2.80 - $3.05 Holdings 45- 60 6 – 8% PSE&G 350 - 370 Annual Dividend Yield 3% Subsidiary 5 – 7% Annual Growt
Slide 23: Recent 10% dividend increase continues 100-year history of dividends
Our recent 10% dividend increase continues 100-year history of paying common dividends. $1.50 ? $1.29 * $1.25 $1.17 $1.14 $1.12 $1.00 2005 2006 2007 2008 2009E Payout Ratio 63% 66% 43% 44% 40 – 50% Payout objective of 40 – 50% provides opportunity for growth with earnings. 23 * Indicated annual divi
Slide 24: PSEG's current stock price…
PSEG’s current stock price… PSE&G Energy Holdings 2008 Earnings Guidance $350M - $370M Indicative 2008 P/E Multiple 12.5x – 13.5x Book Equity Value/Share(1) $2.75 Resulting Value/Share $8.75 - $10.00/Share PSEG Power Stock Price as of 3/26/08 (per share) $39.31 Less Indicative Value of PSE&G, Energy
Slide 25: Fitting the pieces together - PSEG value proposition
Fitting the pieces together - PSEG value proposition PSEG well positioned in current business environment Process improvement programs support efforts to: - maintain reliability - control costs - provide value to the customer Asset mix provides opportunities in attractive markets Strengthened balanc
Slide 26: APPENDIX
APPENDIX
Slide 27: PSEG Power
PSEG Power
Slide 28: Right set of assets, right markets at the right time …
Right set of assets, right markets at the right time … Low-cost portfolio Fuel Diversity – 2007 Total MW: 13,300 Strong cash generator Oil Nuclear Regional focus in competitive, 8% 26 % Pumped liquid markets Storage 47 % 18% 1% Assets favorably located Coal Many units east of PJM constraints Gas Sou
Slide 29: Power's assets along the dispatch curve …
Power’s assets along the dispatch curve … Nuclear National Park Coal Sewaren 6 Mercer 3 Combined Cycle Kearny 10-11 Steam Burlington 8-9-11 GT Peaking Edison 1-2-3 Essex 10-11-12 New Haven Linden 5-8 / Essex 9 Bergen 1 Burlington 12 / Kearny 12 Linden 1,2 Keystone Yards Sewaren 1-4 Peach Conemaugh B
Slide 30: We have delivered strong nuclear performance …
We have delivered strong nuclear performance … Total Nuclear Output O&M Total Incurred Cost (000 GWh) ($ millions) $589 $567 $564 $554 $542 29.2 28.5 28.8 27.4 24.8 2004 2005 2006 2007 2008 Target 2004 2005 2006 2007 2008 Target … while reducing cost of operations. 30 Note: Values represent Salem/Ho
Slide 31: We have some major 2008 initiatives …
We have some major 2008 initiatives … Hope Creek Uprate Salem Steam Generator Outage Work to support extended Unit 2 outage commenced power uprate largely March 11 (Unit 1 complete) completed in 2007 $148 million (PS share) Technical issue under review multi-year project at NRC 15 MW uprate (PS shar
Slide 32: Through our ongoing focus on operational excellence …
Through our ongoing focus on operational excellence … Total Power Output (GWh) 60,000 A Diverse 13,300 MW Fleet 50,000 Nuclear 3,500 40,000 Coal 2,350 30,000 Combined Cycle 3,150 20,000 Peaking / Steam 4,300 10,000 Strong Performance 0 Continued growth in output 2004 2005 2006 2007 Year Improved fle
Slide 33: Fossil operations contribute to earnings …
Fossil operations contribute to earnings … Total Fossil Output A Diverse 9,800 MW Fleet (MW) (GWh) Coal 2,350 30,000 Combined Cycle 3,150 25,000 Steam / Peaking 4,300 Right Assets – Right Location 20,000 Fuel diversity 15,000 ` Technical diversity Near load centers 10,000 Operation of 2,000 MW Texas
Slide 34: Power's eastern coal plants are in the right areas …
Power’s eastern coal plants are in the right areas … System Interface Coal Units Capacity (MW) Bridgeport Harbor 3 Hudson 2 558 Mercer 1&2 648 Hudson 2 Bridgeport 372 Mercer 1&2 Total 1,578 Power’s New Jersey coal units are Power is also making considerable mid-merit, with capacity factors investmen
Slide 35: Power market dynamics …
Power market dynamics … On-Peak Versus Gas Off-Peak Versus Coal $/MWh $/MB $/MWh $/MB $100 $20 $80 $8 $80 $15 $60 $6 $60 $10 $40 $4 $40 $5 $20 $2 $20 $0 $0 $0 $0 2004 2005 2006 2007 2008E 2004 2005 2006 2007 2008E PJM Western Hub On-Peak Prices Gas Prices PJM Western Hub Off-Peak Prices Coal Prices
Slide 36: Rising coal and natural gas prices have driven LMPs ...
Rising coal and natural gas prices have driven LMPs ... Central Appalachian Coal ($/Ton) Natural Gas Henry Hub ($/MMbtu) $90 $9.0 $80 $8.5 $70 $8.0 $60 $7.5 $50 $7.0 $40 $6.5 2009 2010 2011 2009 2010 2011 Electric PJM Western Hub RTC Price ($/MWh) On Peak Heat Rate Expansion (MMbtu/MWh) $75 10.5 $70
Slide 37: As policymakers are looking to reduce CO2 emissions …
As policymakers are looking to reduce CO2 emissions … Estimated Impact of Carbon Prices on Energy Prices and on Power’s EBITDA $35 $30 $800 $25 $600 $20 $15 $400 $10 $200 $5 $0 $0 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 ($/Ton) The diversity of the portfolio makes Power well positioned to capture valu
Slide 38: Capacity prices in PJM have cleared above Net CONE
Capacity prices in PJM to date have cleared above Net Cost of New Entry (“CONE”) … $300 Proposed Gross Cost of New Entry $250 Potential increase in Proposed Net Gross Cost of CONE Cost of New New Entry Entry $200 Auction pricing for most of Power’s assets $150 Net Cost of New Entry $100 '07/'08 '08/
Slide 39: Power's fleet diversity and location ...
Power’s fleet diversity and location ... Market Perspective – BGS Auction Results Increase in Full Requirements Component Due to: Increased Congestion (East/West Basis) Full Requirements Increase in Capacity Markets/RPM $111.50 Volatility in Market Increases Risk Premium $102.51 $98.88 Ancillary ser
Slide 40: Power's hedging program provides near-term stability
Power’s hedging program provides near-term stability from market volatility … Contracted Energy Power has 100% $80 % sold contracted for a 75% (left scale) Price considerable (right scale) percent of its 50% $70 output over the 25% next three years at increasing 0% $60 prices. 2008 2009 2010 2011 Es
Slide 41: While nuclear fuel was volatile during 2007 …
While nuclear fuel was volatile during 2007 … Historical and Contracted Nuclear Fuel Cost $10 $8 $6 $4 $2 $0 2004 2005 2006 2007 2008 2009 2010 2011 Contracted … Power’s hedging strategy has mitigated market price increases, with 100% hedged through 2011. 41
Slide 42: Power has contracts for supply of its coal through 2010 …
Power has contracts for supply of its coal through 2010 … Coal Output 18,000 12,000 Total Output 6,000 Hedged Coal 0 2008 2009 2010 2011 Percent coal hedged as 85-95% 75-85% 55-65% of Feb. 15th, 2008 … and after installation of pollution control equipment, Power anticipates increasing flexibility in
Slide 43: Operational improvements and recontracting in current markets …
Operational improvements and recontracting in current markets … Gross Margin ($/MWh) $60 $40 $20 $0 2005 2006 2007 2008E 2009E 2010E 2011E Hedged Energy Unhedged Energy Hedged Capacity Unhedged Capacity … are expected to drive continued increases in Power’s gross margin. 43
Slide 44: Power's open EBITDA is approximately $2.6 - $2.8 billion …
Power’s open EBITDA is approximately $2.6 - $2.8 billion … $3.0 EBITDA Assumption Sensitivity Impact $2.5 ~ $60 - $65/KW-yr Capacity $10/KW-yr ~ $120M (~ $165 - $178/MW-day) ~ $69 - 73/MWh Energy $1/MWh ~ $40M (PJM-West) $2.0 Fuel Gas ~$8.50 to $9.00/MB Coal ~ $2.85 to $3.15/MB O&M ~ $1.0 – 1.05B $1
Slide 45: PSE&G
PSE&G
Slide 46: PSE&G operates in an attractive market …
PSE&G operates in an attractive market … KEY: NJ is ranked 3rd nationally in personal COMBINED ELECTRIC & GAS TERRITORIES ELECTRIC TERRITORY income per capita GAS TERRITORY Mid-Atlantic ReliabilityOne Award winner six years running Solid regulatory relationships on traditional N W E S utility matter
Slide 47: By 2018, NJ's load is expected to grow by 4,000 MW …
By 2018, NJ’s load is expected to grow by 4,000 MW … Projects to NJ Projects to NY 2008-2018 NJ Summer Peak • PSEG’s evaluation of Annual Growth Rate = 1.8% • The Neptune HVDC project (685 the proposed backbone MW) connecting Sayreville to transmission projects: Long Island • Northern 500kV • The Li
Slide 48: Transmission opportunities will require substantial deployment of capital
Transmission opportunities will require substantial deployment of capital. Transmission Growth • PJM approval was received for the $600-$650 million Susquehanna to Roseland line in October 2007 Siting and permitting process underway Jefferson Roseland Incentive filing submitted to FERC for: Branchbu
Slide 49: RGGI enabling legislation signed into law in January 2008
RGGI enabling legislation was signed into law in January 2008. It enables the utility to begin work with the BPU … Section 13 of the RGGI Law permits utilities to invest and/or offer programs in renewables, conservation and energy efficiency – The BPU will be adopting rules and regulations to determ
Slide 50: Even with planned investments, delivery prices ...
Even with our planned investments, delivery prices to customers ... Electricity Gas 2007-2012 Growth = 0.7% 2007-2012 Growth = 1.4% 8.00 Inflation = 2.1% 0.60 Inflation = 2.1% 6.8 0.48 Transmission 0.45 5.5 0.42 5.1 0.40 4.00 Distribution 0.20 0.00 0.00 2007 2012 2007 2007 2012 2007 Regional Regiona
Slide 51: PSEG Energy Holdings
PSEG Energy Holdings
Slide 52: Holdings' portfolio has a diverse asset base . . .
Holdings’ portfolio has a diverse asset base . . . Two businesses focused on maximizing value of existing investments $45M - $60M projected 2008 operating earnings contribution ~ 55% of earnings from Resources ~ 45% of earnings from Global, targeting no international exposure by 2009 2007 Operating
Slide 53: Texas assets are a driver of Global's results.
Texas assets are a driver of Global’s results. Two 1,000MW combined cycle facilities - Two of the most efficient gas-fired plants in Texas, constructed in 2001 - Forced outage rate less than 2% Market Environment: Odessa Bilateral forward market Midland Day ahead balancing and ancillary services bid
Slide 54: Due to market uncertainty …
Due to market uncertainty … 100% Texas CCGT Generation Output 80% 2008 Hedged 60% Spark Spread $20-22/MWh 40% 20% 0% 2008 2009 2010 2011 Natural Gas: +/- $7M +/- $11M +/- $14M +/- $16M +/- $1/MMBtu* Heat Rate: +/- $15M +/- $22 M +/- $ 22 M +/- $ 27 M +/- 500 Btu/KWh* Key drivers behind decision to r
Slide 55: Uncertainties relating to future Texas market dynamics …
While there are a number of uncertainties relating to future Texas market dynamics … Market PSEG Nat Gas Reserve Spark Capacity EBITDA NYMEX Margin Spread Factors ($M) 2004 $5.42 25% $11.97 50.4% $48 2005 6.34 17% 16.52 54.6% 93 2006 10.82 16% 19.42 54.4% 130 2007 6.76 15% 19.04 48.7% 104 2008 8.50
Slide 56: As renewable opportunities emerge …
As renewable opportunities emerge … Emerging aggressive RPS National Renewable Portfolio Standards (RPS) targets in core PSEG markets create an opportunity PSEG is well positioned to participate Familiarity with infrastructure development, asset management, energy policy, project financing and power
Slide 57: Resources is focused on managing its current investment portfolio
Resources is focused on managing its current investment portfolio … 2007 Adoption of FIN 48/FSP 13-2 Changes accounting methodology to record reserves Results in lower lease revenues and higher interest expense totaling approximately $25M (after-tax) per year Cash flows will decrease modestly as the
Slide 58: Resources continues to monitor its tax risks …
Resources continues to monitor its tax risks … PSEG position: IRS disallowed deductions in November 2006 (as part of 1997-2000 audit) PSEG has been in dialogue with the IRS Ultimate resolution expected to take several years In December 2007, PSEG made $100 million deposit to mitigate financial risk
Slide 59: PSEG
PSEG
Slide 60: PSEG's generating portfolio is well positioned …
PSEG’s generating portfolio is well positioned … PSEG Power PSEG Global PSEG 2007 Total Capacity 2007 Total Owned Capacity 2007 Total US Generation 13,300 MW 2,400 MW 15,700 MW Open Capacity NY CA NE NE Other Texas NY + = Other PJM PJM Texas PSEG Power PSEG Global PSEG 2007 Energy Produced 2007 Ener
Slide 61: PSEG's generation portfolio provides attractive cash …
PSEG’s generation portfolio provides attractive cash … Combined fleet represents 15,700 MW of competitive generation Assets are positioned in four attractive merchant markets Growth opportunity available Existing assets positioned for incremental growth Site expansion capability PSEG Generation PSEG
Slide 62: Items Excluded from Net Income to Reconcile to Operating Earnings
Items Excluded from Net Income to Reconcile to Operating Earnings ($ millions) (EPS) Years Ended Dec. 31, Years Ended Dec. 31, 2007 2006 2007 2006 Merger related Costs: PSE&G $ - $ (1) $ - Enterprise - (7) (0.02) Total Merger related Costs $ - $ (8) $ - $ (0.02) Impact of Asset Sales: Loss on Sale o