public serviceenterprise group 10/08/04-34-81

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public serviceenterprise group 10/08/04-34-81

  1. 1. PSEG Power Strategic Direction Frank Cassidy President & COO
  2. 2. Power Overview PSEG Power’s portfolio optimization strategy provides incremental profit opportunities while mitigating risks PSEG Power LLC PSEG Energy Energy Other Energy & Resources & & Energy Capacity Capacity Trade (ER&T) $ Related $ Products Wholesale Gas $ and PSEG PSEG & Storage Services Fossil Nuclear Gas Contracts & Storage Wholesale Electric Energy Markets • BGS • Other firm contracts Gas • Spot market Markets • Wholesale gas customers • Retail gas customers 35
  3. 3. Key Issues Issues 2004 2005 Long-Term NRC Letter Received NRC letter NRC Monitoring NRC Resolved NUCLEAR Organization CNO Transition Organizational Stability Operational Excellence O&M +$50 million +$50 million Mean/Top Quartile Capacity Factor 85% 91% 89-92% CapEx $150-200 million $150-$175 million ~$100 million Forced Outage-Coal 11% 10% 7% FOSSIL O&M Efficiency Base $5 million $25 million Playbook Developed Implemented Realized CapEx $350-400 million $150-$175 million ~$100 million Realize Higher Market Prices Market Prices Contracted ER&T Contract Diversification Diversification BGS Margins Increased Origination & Market Liquidity Trading Augment Staff 36
  4. 4. Key Issues NRC Letter Received NRC letter NRC Monitoring NRC Resolved NUCLEAR Organization CNO Transition Organizational Stability Operational Excellence O&M +$50 million +$50 million Mean/Top Quartile Capacity Factor 85% 91% 89-92% CapEx $150-200 million $150-$175 million ~$100 million Forced Outage-Coal 11% 10% 7% FOSSIL O&M Efficiency Base $5 million $25 million Playbook Developed Implemented Realized CapEx $350-400 million $150-$175 million ~$100 million Realize Higher Market Prices Market Prices Contracted ER&T Contract Diversification Diversification BGS Margins Increased Origination & Market Liquidity Trading Augment Staff 37
  5. 5. Key Issues Issues 2004 2005 Long-Term NRC Letter Received NRC letter NRC Monitoring NRC Resolved NUCLEAR Organization CNO Transition Organizational Stability Operational Excellence O&M +$50 million +$50 million Mean/Top Quartile Capacity Factor 85% 91% 89-92% Issues 2004 2005 Long-Term CapEx $150-200 million $150-$175 million ~$100 million FOSSIL Forced Outage-Coal 11% 10% 7% O&M Efficiency Base $5 million $25 million Forced Outage-Coal 11% 10% 7% Playbook Developed Implemented Realized FOSSIL O&M Efficiency Base $5 million $15 million CapEx Playbook $350-400 million $150-$175 million ~$100 million Developed Implemented Realized CapEx $350-400 million $165 million $100 million Realize Higher Market Prices Market Prices Contracted ER&T Contract Diversification Diversification BGS Margins Increased Origination & Market Liquidity Trading Augment Staff 38
  6. 6. Key Issues Issues 2004 2005 Long-Term NRC Letter Received NRC letter NRC Monitoring NRC Resolved NUCLEAR Organization CNO Transition Organizational Stability Operational Excellence O&M $50 million +$50 million Mean/Top Quartile Capacity Factor 85% 91% 89-92% CapEx $150-200 million $150-$175 million ~$100 million Forced Outage-Coal 11% 10% 7% FOSSIL O&M Efficiency Base $5 million $25 million Playbook Developed Implemented Realized CapEx $350-400 million $165 million $100 million Issues 2004 2005 & Long-Term ER&T Realize Higher Market Prices Market Prices Contracted Contract Diversification Diversification BGS Margins Realize Higher Market Prices Market Prices Contracted ER&T Increased Origination & Market Liquidity Trading Augment Staff Contract Diversification Diversification BGS Margins Increased Origination & Market Liquidity Trading Augment Staff 39
  7. 7. PSEG Power Business Objectives • Nuclear Operations – Operate safely – Improve capacity factor – Upgrade assets – Operate at industry mean O&M levels • Fossil Operations – Operate safely and predictably – Implement industry best practices – Reduce O&M • ER&T Operations – Realize value of diverse electric and gas asset portfolio 40
  8. 8. PSEG Nuclear Strategic Direction Chris Bakken President & Chief Nuclear Officer
  9. 9. PSEG Nuclear: Asset Profile Hope Creek • Operated by PSEG Nuclear Salem Units 1 and 2 • PSEG Ownership: 100% • Operated by PSEG Nuclear • Technology: Boiling Water Reactor • PSEG Ownership: 57% Peach Bottom Units 2 and 3 Exelon other Co-Owner • Total Capacity: 1,049 MW • Operated by Exelon • Technology: • Owned Capacity: 1,049 MW Pressurized Water Reactor • PSEG Ownership: 50% • License Expiration: 2026 • Total Capacity: 2,275 MW • Technology: • Owned Capacity: 1,306 MW Boiling Water Reactor • License Expiration: 2016 and • Total Capacity: 2,224 MW 2020 • Owned Capacity: 1,112 MW • License Expiration: 2033 and 2034 42
  10. 10. Key Objectives • Operate safely • Improve capacity factor • Upgrade assets • Operate at industry mean O&M levels 43
  11. 11. Discussion Points • Work Environment Progress • Plant Operations • O&M 44
  12. 12. Work Environment - Current Status • NRC closed investigation • Two cross-cutting issues – Problem Identification and Resolution – Safety Conscious Work Environment • Issues being addressed • NRC concurrence with approach • Monitor progress going forward 45
  13. 13. Work Environment - Next Steps Post Public Post Post Public SCWE Meeting SCWE SCWE Meeting Metrics with NRC Metrics Metrics with NRC SEP 04 OCT 04 NOV 04 DEC 04 JAN 05 FEB 05 MAR 05 APR 05 MAY 05 HOPE CREEK OUTAGE SYNERGY SURVEY SALEM OUTAGE HOPE CREEK OUTAGE SYNERGY SURVEY SALEM OUTAGE 46
  14. 14. Industry Capacity Factors 95 89.6% in 2000 90 90.7% in 2001 Capacity Factor (%) 85 91.9% in 2002 80 90.3% in 2003 75 70 65 60 55 '80 83 '86 89 '92 95 '98 2001 47
  15. 15. PSEG Capacity Factor 100 95 C p c F c r% a a ity a to 90 85 80 75 2000 2004 2001 2002 2003 2005 2006 2007 PSEG Nuclear Industry 48
  16. 16. Plant Improvements • Reliability Improvements and Major Projects – Control rod drive mechanisms (Hope Creek – 2004-2006) – Upgrade circulating and service water systems (Salem - 2004-2006) – Vessel head replacements (Salem - 2005) – Steam generator replacement (Salem – 2008) • Uprates – Salem 1 36 MW 2004 – Hope Creek 10 MW 2004 – Hope Creek 125 MW 2006 – PB2 6 MW 2006 – PB3 6 MW 2007 – Salem 2 15 MW 2008 49
  17. 17. Capital Program Capital Expenditures - PSEG Share $180 $160 $140 $120 Millions $100 $80 $60 $40 $20 $0 2005 2006 2007 2008 2009 Expected 5-yr capital investment to be approximately $640 million 50
  18. 18. PSEG / Exelon Employee Exchange • Leverage Exelon’s Strengths – Outage Management – Equipment Reliability • Develop PSEG Employees • Positions Exchanged – Outage Management – Engineering Management – Operations Management – Project Management – Business / Financial Management 51
  19. 19. Value of Increased Nuclear Output • PSEG share of NJ output increases by nearly 3,000 GWhrs/yr by 2007 – an improvement of more than 10% over 2004 • At a $35 - $40 gross margin, the opportunity to Power is $100 - $120 million – $65 – $80 million from performance improvement – $35 – $40 million from uprates 52
  20. 20. Near-Term O&M Cost Drivers • Increased Outage Scope – Control rod drive mechanism – Reliability improvements • Upgrade of Facilities • Supplemental Labor to Address Issues • Security 53
  21. 21. Key Takeaways Nuclear has a strong plan for performance improvement, resulting in considerable financial upside to Power $45 M - $55 M O&M Uprates $35 M - $40 M Unit Performance $65 M - $80 M Pretax margin opportunity $ 145 M - $175 M 54
  22. 22. PSEG Fossil Strategic Direction Mike Thomson President
  23. 23. PSEG Fossil: Asset Profile 5121 MW 4774 MW 2396 MW Peaking (simple cycle & steam) High CCGT 46 Units in NJ/CT/PA Bergen (NJ) 1221 MW Waterford (OH) 821 MW Coal Lawrenceburg (IN) 1096 MW Variable BEC (NY 2005) 763 MW Cost Linden (NJ 2006) 1220 MW Keystone (PA) 388 MW Conemaugh (PA) 382 MW Hudson (NJ) 608 MW Mercer (NJ) 648 MW Bridgeport (CT) 370 MW Low $25 - $45/mwh $40 - $60/mwh $60 + /mwh Low High Demand On System 56
  24. 24. Key Objectives • Continue positive results in safety and environmental stewardship • Consistently keep the breakers closed • Capture O&M efficiencies 57
  25. 25. Continued Success in Key Areas OSHA Rate 9 • Safety 8 7 – Significant improvement 6 in OSHA rate since 5 4 1990 3 2 1 0 1990 1995 2000 1990 1995 2000 2004 Super Region Generation Company NOx Emissions (lbs/MWh) (2002) • Environmental 5 – Consistently one of the 4 Power cleanest generators in 3 the Super Region 2 1 0 58
  26. 26. Revenue Enhancement Opportunity Fossil Generation at Market Prices • Fossil plays an integral part in ($ million) Power’s profitability 500 450 Maintenance • Opportunity exists to further 400 Planning & 350 enhance margin contribution to Execution 300 Power Operating 250 Performance 200 • Points of attack: 150 Market Based Revenues 100 – Address existing issues 50 – Rigorous preventative 0 maintenance program 2003A 2004F 59
  27. 27. Fossil Value Enhancement Plan $95 m • Improved unit performance - $60-$70 million $75 m • Capture O&M efficiencies in execution of planned maintenance - $15-$25 million Current Performance Existing Fleet 2004 60
  28. 28. Fossil Value Enhancement Plan Playbook • Improved unit $95 m • Benchmarking performance • Reduced costs • Best Practices - Operations - Chemistry - Maintenance $75 m - Training Gap Analysis • Areas for Current Performance improvement identified • Site specific Existing Fleet 2004 61
  29. 29. Fossil Value Enhancement Plan • Improved unit $95 m performance • Reduced costs 36 Month Plan • Establish the actionable priorities and responsibilities for Playbook implementation $75 m • Actions target specific operating & productivity metrics • Plant investment and operations tied to asset Current Performance mission • Integrated into performance management and compensation plans Gap Playbook Analysis Existing Fleet 2004 62
  30. 30. Fossil Value Enhancement Plan $95 m • Improved unit performance • Reduced costs Focus on Hardware • Fix known problems now $75 m • Material condition assessments • Strengthen reliability centered maintenance • Improve outage management Current Performance • Environmental stewardship • Asset rationalization 36 Month Plan Gap Playbook Analysis Existing Fleet 2004 63
  31. 31. Fossil Value Enhancement Plan $95 m • Improved unit performance Focus on People • Reduced costs • Safety • Training $75 m • Performance management & accountability Hardware • Compensation Current Performance 36 Month Plan Gap Playbook Analysis Existing Fleet 2004 64
  32. 32. Fossil Value Enhancement Plan Leading Indicators • Improved unit $95 m • Bridgeport performance Harbor 3 2004 summer capacity factor • Reduced costs • Hudson 2 Second best run ever People $75 m • Mercer Recovery from contractor failure • Bergen 2 Availability increase Hardware • Peaking All time high Current Performance • Safety Numerous milestones 36 Month Plan Gap Playbook Analysis Existing Fleet 2004 65
  33. 33. Fossil Value Enhancement Plan $95 m • Improved unit performance - $60-$70 million People • Capture O&M efficiencies in $75 m execution of planned maintenance - $15-$25 million Hardware Current Performance 36 Month Plan Gap Playbook Analysis Existing Fleet 2004 66
  34. 34. PSEG ER&T Strategic Direction Steve Teitelman President
  35. 35. Energy Resources & Trade (ER&T) Business Profile Single point accountability for gross margin optimization ER&T Wholesale Portfolio Fuel Asset Commodity Management Supply Backed Trading Risk Market/Business Management Development 68
  36. 36. Portfolio Management – Operational Strategy • Maximize cash in the short term relative to unit cost, availability, spot price, fuel price and import capability • Portfolio provides opportunities to seek structured transactions that provide higher margins • Understand and influence the development of fair market rules • Same proven business model for 5 years 69
  37. 37. Portfolio Management - Net Position Power’s objective is to contract over 75% of its planned generation for the next 18-24 months Total Fleet Monthly RTC GWh Position 7,000 6,000 5,000 4,000 GWh 3,000 2,000 1,000 - 2004 2005 2006 2007 Nuclear Baseload Coal Intermediate Coal CC Steam / CT Contracted Load & Sales Contracted Load 70
  38. 38. Portfolio Management – Fuel Strategy Assets Strategy • Gas throughput • Maximize value relative to the spark spread • Gas storage capacity • Fuel switch to extract value • Coal contracts • Hedge coal, oil and gas relative to • Oil storage capacity contracts and hedges • Emissions credits • Utilize wholesale gas system for balancing fuel consumption and • Generation assets/ option value contracts • Trade fuels (gas, coal and oil) in • Gas contracts conjunction with the portfolio • Transmission rights position • Modify fuel inventory to maximize value 71
  39. 39. Fuel Strategy - Coal Source of Supply Continuity of Supply 7 100% 90% 6 South 80% America Indonesia 5 70% 6% 24% 60% Million Tons 4 70% 50% 3 40% 30% 2 Domestic 20% 1 10% - 0% 2005 2006 2007 2008 Keystone Conemaugh Bridgeport Harbor Year Mercer Hudson Contracted 72
  40. 40. Branchburg Impact on Pricing Branchburg had a dislocational effect on pricing in PJM which was not fully offset by Financial Transmission Rights Average RTC Prices ($/mwh) 80 Branchburg Derating 70 60 50 40 30 20 2 3 4 M2 M3 M4 Ja 2 Ja 3 Se 2 Se 3 4 N2 N3 02 03 04 -0 -0 -0 -0 -0 -0 -0 -0 l-0 l-0 l-0 0 0 p- p- n- n- n- ar ar ar ay ay ay ov ov Ju Ju Ju Ja M M M Load Generation 73
  41. 41. ER&T Historical Performance ER&T’s diverse portfolio has provided growth through varying market conditions, with an increasing reliance on lower risk products ER&T Margins ($ millions) 200 180 Asset Based Margins 160 - Greater predictability 140 120 100 80 60 Trading 40 -Reduced market making 20 opportunities 0 -Shift from fundamental 1997 1998 1999 2000 2001 2002 2003 2004 to financial players Est. Reduced market exposure at ER&T is aligned with shifting market conditions 74
  42. 42. Attractive Future Pricing Environment Replacement of existing contracts at current higher market prices could yield incremental earnings of $0.75 to $1.00 per share PJM Western Hub Round-The-Clock Forward Prices $60 $50 Current market prices Current market prices ~ $45/mwh Contracted prices ~ $37/mwh $40 Price delta $ 8/mwh $/MW h Generation volume 40,000 gwh Pre- tax margin $320 million $30 BGS After tax margin $190 million BGS Auction 3 EPS Impact $0.80 Auction 2 $20 BGS Auction 1 $10 0 1 2 3 4 Ja 0 Ja 1 Ja 2 Ja 3 Ap 0 Ap 1 Ap 2 Ap 3 Ap 4 Oc 0 1 Oc 2 3 4 r -0 r -0 r -0 r -0 r -0 t -0 t -0 t -0 t -0 0 0 0 0 0 l-0 l-0 l-0 l-0 l-0 n- n- n- n- n- Ju Ju Ju Ju Ju Oc Oc Ja 75
  43. 43. Summary and 2005 Outlook Frank Cassidy
  44. 44. 2005 Guidance – Power $335M - $385M $300M - $350M 2004 Estimate Replacement New MW O&M & Depr NDT 2005 Estimate Power & Branchburg 77
  45. 45. 2005 Assumptions • Natural gas prices $6.30/mmbtu • RTC Energy (PJM West) $45/mwh • East/West differential $2.30/mwh • Capacity Prices $10/kw-yr • Nuclear Capacity Factors 91% 78
  46. 46. Sensitivity of 2005 Assumptions • Natural gas prices +/- $1/mmbtu $.01 • RTC energy (PJM West) +/- $5/mwh $.08 • Capacity prices +/- $5/kw-yr $.04 • East/West differential +/- $2/mwh $.03 • Nuclear capacity factors +/- 1% fleet $.03 • 2005 BGS auction prices +/- $1/mwh $.01 • Coal prices +/- $10/ton $.02 79
  47. 47. 2005-2009 Earnings Outlook and Drivers 10% - 14% $335M - $385M $300M - $350M 2004 2005 2006 2007 2008 2009 Estimate Estimate + Improved Nuclear / Fossil Performance + ER&T Contracts + Nuclear Uprates + Capacity Prices - Midwest Plants 80
  48. 48. Key Takeaways • Power’s forecast has considerable upside • Nuclear – Enhanced capacity factor $65 - $80M – O&M $50M – Uprates $35 - $40M • Fossil – Unit performance $60 - $70M – O&M $15 - $25M • ER&T – Contract repricing at current prices $320M 81
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