Public Service Enterprise Group Incorporated · NYSE:PEG
Public Service Enterprise — Edison Electric Institute Annual Finance Committee Meeting 2008
63 slides from Public Service Enterprise's conference presentation, May 22, 2008
Slide 1: Public Service Enterprise Group
Public Service Enterprise Group Edison Electric Institute Annual Finance Committee Meeting Waldorf=Astoria May 21, 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 … Stable electric and gas Redeployment of capital Major electric generation distribution and through the sale of company with 13,300 transmission company international assets. MW of base-load, rated top quartile for Focused on managing intermediate and load reliability providing lease p
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- Significant new coal fleet to meet load nuclear assets transmission capital environmental well situated in carbon program to improve requirements constr
Slide 8: We are continuing to improve operational practices and participate in market design discussions …
We are continuing to improve operational practices and participate in market design discussions … Goal is to maintain (at a minimum) operating Operational capability of nuclear fleet at 90% capacity factor Excellence Goal is to maintain (at a minimum) operating capability of nuclear fleet at 90% cap
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.
Slide 10: Improved processes, markets and well-positioned assets …
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 515 376 350 - 370 PSE&G 262 (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 ** As per 2007
Slide 12: PSEG's financing capability has improved with forecasted 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 i
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 $1.0 to Parent credit measures $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) Received FERC approval for CWIP in rate base and 125 bps adder to ROE on $600M - $650M Susquehanna line – base ROE increased
Slide 17: At PSE&G, cash flow will be primarily directed towards attractive 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 $6.0 Net Cash Dividends Flow Net to Parent Financing $0.5 $4.0 Cash from ($0.5) Ops Investments $2.0 Growing Investments ($1.
Slide 18: At Holdings, asset sales could continue to be 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* $1.2 (2008 – 2011 Forecast) Net Financing $0.9 Asset Dividends to Sales Parent $0.6 Cash from Investments** Ops $0.3 $0.0 Sources Uses Flexibility exists to finance potential Resources’ tax
Slide 19: At PSEG, we forecast $3.0B of discretionary cash through 2011
At PSEG, we forecast $3.0B of discretionary cash through 2011. Parent Sources and Uses (2008 – 2011 Forecast) $6.0 Holdings Dividend PSE&G Dividend $3.0B Discretionary Cash* $4.0 Power Dividend $2.0 Shareholder Dividend $0.0 Sources Uses Cash flow from Power is the primary driver of discretionary ca
Slide 20: Markets, assets and use of cash flow …
Markets, assets and use of cash flow … + 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%. * See page 63 for Items excluded from Net I
Slide 21: Redeploying our $3.0B of discretionary cash towards additional growth and / or share repurchases …
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 3% 10- 13% $2.80- $3.05 Holdings 45- 60 6– 8% PSE&G 350- 370 Annual Dividend Yield 3% Subsidiary 5– 7% Annual Growth 5– 7%
Slide 22: Our recent 10% dividend increase continues 100-year history of paying common 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. * Indicated annual dividen
Slide 23: PSEG's current stock price…
PSEG’s current stock price… PSE&G Energy Holdings 2008 Earnings Guidance $350M - $370M Indicative 2008 P/E Multiple 13.5x – 14.0x Book Equity Value/Share(1) $2.75 Resulting Value/Share $9.00 - $10.25/Share PSEG Power Stock Price as of 5/16/08 (per share) $42.50 Less Indicative Value of PSE&G, Energy
Slide 24: 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 25: APPENDIX
APPENDIX
Slide 26: PSEG Power
PSEG Power
Slide 27: 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 % liquid markets Pumped Storage 47 % 18% 1% Assets favorably located Coal Gas Many units east of PJM constraints Sou
Slide 28: 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 Bergen 1 Haven Linden 5-8 / Essex 9 Burlington 12 / Kearny 12 Linden 1,2 Keystone Yards Sewaren 1-4 Peach Conemaugh B
Slide 29: We have some major 2008 initiatives …
We have some major 2008 initiatives … Hope Creek Uprate Salem Steam Generator Outage NRC approved Hope Creek’s Unit 2 outage concluded extended power uprate within 58 days – on time license amendment in May $148 million (PS share) 2008 multi-year project Work to support extended 15 MW uprate (PS sha
Slide 30: 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 31: 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 32: 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 33: 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 Š $5 $20 Š $2 $20 $0 $0 $0 $0 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Est Est PJM Western Hub On-Peak Prices Gas $/MB PJM Western Hub Off-Peak Prices
Slide 34: Rising coal and natural gas prices have driven LMPs ...
Rising coal and natural gas prices have driven LMPs ... $90 Central Appalachian Coal ($/Ton) $10.0 Natural Gas Henry Hub ($/MMbtu) $9.5 $80 $9.0 $70 $8.5 $60 $8.0 $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) $
Slide 35: 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 36: Through the new capacity constructs, and repricing at market prices …
Through the new capacity constructs, and repricing at market prices … Power’s capacity is located in three Northeast markets. NE NY Total Capacity 13,300MW (~ 1,000 - 1,500 MW under RMR) PJM The RPM Auction to date has provided strong price signals in PJM. Delivery Year ($MW/Day) Zones 2007 / 2008 2
Slide 37: 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 38: Power's hedging program provides near-term stability from market volatility …
Power’s hedging program provides near-term stability from market volatility … Contracted Energy Power has 100% $80 % sold contracted for a 75% (left Price considerable scale) (right percent of its 50% scale) $70 output over the 25% next three years at increasing 0% $60 2008 2009 2010 2011 prices. Es
Slide 39: 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.
Slide 40: 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 i
Slide 41: Regional Greenhouse Gas Initiative (RGGI)
Regional Greenhouse Gas Initiative (RGGI) Cooperative effort by Northeast states to design a regional cap-and-trade program to reduce carbon dioxide (CO2) RGGI emissions Full participants – CT, MA, MD, ME, NH, VT, States ME NY, NJ, RI, and DE VT Observers – PA, DC, and Eastern Canadian NH Provinces
Slide 42: The RGGI cap shows headroom…
The RGGI cap shows headroom… Affected Sources Forecast CO2 Emissions vs. RGGI Cap (Ten RGGI States, Actuals through 2007) Fossil fired electric generating units 200 with a capacity of 25 megawatts Historical CO2 RGGI Cap (MW) and larger Emissions 190 Targets and Timing 180 Three-year compliance peri
Slide 43: RGGI's CO2 pricing projections…
RGGI’s CO2 pricing projections… $10 $8 $6 $4 $2 $0 2009 2011 2013 2015 2017 2019 2021 2023 2025 RGGI - ICF Base RGGI - ICF Base (Rev. Oct-06) …reflect moderate prices, based on the headroom in the cap.
Slide 44: Operational improvements and recontracting in current markets …
Operational improvements and recontracting in current markets … Gross Margin ($/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.
Slide 45: 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 Capacity ~ $60 - $65/KW-yr $10/KW-yr ~ $120M (~ $165 - $178/MW-day) ~ $69 - 73/MWh Energy ~ $40M (PJM-West) $1/MWh $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 46: PSE&G
PSE&G
Slide 47: PSE&G operates in an attractive market …
PSE&G operates in an attractive market … NJ is ranked 3rd nationally in personal income per capita Mid-Atlantic ReliabilityOne Award winner six years running Solid regulatory relationships on traditional utility matters Transmission Statistics (12/31/07) Network Circuit Historical Annual Load Growth
Slide 48: 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 Linden VFT
Slide 49: 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 FERC approved Incentive rate filing: Branchburg 12
Slide 50: RGGI enabling legislation was signed into law in January 8.
RGGI enabling legislation was signed into law in January 2008. 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 determine utility participation and the mechanisms for recov
Slide 51: Even with our planned investments, delivery prices to customers ...
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 52: PSEG Energy Holdings
PSEG Energy Holdings
Slide 53: 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 54: 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 55: 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 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 $25M (after-tax) per year Cash flows will decrease modestly as the
Slide 58: PSEG Resources – Traditional lease investments
PSEG Resources – Traditional lease investments 2008-2035 Pre-tax Book Property Lease Country Agreement Start Residual Cash Flow* Investment Type Termination ($ millions) ($ millions) USA Reliant Power Plant Mar-98 2026 & 2034 Y 423 300.2 USA Dynegy Power Plant Mar-98 2035 Y 362.3 259.8 USA EME 2 Pow
Slide 59: Leveraged leases under challenge by IRS
Leveraged leases under challenge by IRS PSEG’s Energy Holdings’ Resources Subsidiary has $1.5 billion invested in LILO / SILO type lease transactions. Have been in discussions with the Office of Appeals of the IRS. Recorded $904 million in deferred taxes through March 31, 2008 related to these trans
Slide 60: PSEG
PSEG
Slide 61: PSEG's generating portfolio is well positioned …
PSEG’s generating portfolio is well positioned … PSEG Power PSEG Global PSEG 2007 Total Capacity 2007 Total Owned Capacity 2007 Total US Generation 13,300 MW 2,400 MW 15,700 MW Open Capacity NY CA NE NE = Texas + Other NY Other PJM PJM Texas PSEG Power PSEG Global PSEG 2007 Energy Produced 2007 Ener
Slide 62: PSEG's generation portfolio provides attractive cash …
PSEG’s generation portfolio provides attractive cash … Combined fleet represents 15,700 MW of competitive generation Assets are positioned in four attractive merchant markets Growth opportunity available Existing assets positioned for incremental growth Site expansion capability PSEG Generation PSEG
Slide 63: Items Excluded from Net Income to Reconcile to Operating Earnings
Items Excluded from Net Income to Reconcile to Operating Earnings ($ 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