Public Service Enterprise Group

   Strategic Presentation to the
   Financial Community

   October 8, 2004
   Short Hill...
PSEG Energy Holdings
Strategic Direction

   Bob Dougherty
   President and COO
Energy Holdings Profile

                    2004 Earnings       $130M - $150M
                    Total Assets        $6....
Key Objectives

• Global
  – Focus on operations
  – Dispose of assets selectively


• Resources
  – Focus on credit quali...
PSEG Global Strategic Direction
Focus on Operations

                                         Invested Capital ($2.4B)
• Capital investments going
       ...
Current Portfolio
       Earnings contribution by region – YTD 6/30/04
           Region                     EBIT *       ...
Recent Activities
• MPC, China –
  – In October 2004, Global entered into a definitive purchase and
    sale agreement to ...
Recent Activities (continued)
• Rades, Tunisia –
   – In May 2004, Global sold its majority interest for approximately
   ...
Status of Other Initiatives
• Salalah, Oman – Preparing to offer (under
  appropriate economic terms) 35% of shares
  outs...
Key Takeaways
• Focus on continuation of earnings and cash
  generation

• Selective asset monetization to reduce
  intern...
PSEG Resources Strategic Direction
Focus on Credit
                                                    • Key contributor of
    Total Assets $3B             ...
Collins Lease Termination

• In March 2004, Resources terminated its lease
  investment in the Collins generating faciliti...
Aircraft Leases
• Modest investment in aircraft leases:
  5 planes totaling approximately $57M

• Includes lease of one Bo...
KKR – Sale of Borden and Amphenol

• In September 2004, KKR announced the sale
  of Borden and Amphenol
  – Resources rece...
Key Takeaways
• Focus on continuation of earnings and cash
  generation

• Monitor credit quality of portfolio

• Consider...
2005 Guidance


$130M - $150M                                 $135M - $155M
                                              ...
2005-2009 Earnings Outlook and Drivers

                                                                     2% - 3%
   $1...
Key Takeaways
• Maintain targeted credit ratios
    – 3X cash flow coverage target

    – Covenants in debt agreements

• ...
PSEG Financial Review

  Tom O’Flynn
  Executive Vice President & CFO
Financial Objectives
Reduce Leverage

Maintain/Improve Credit Ratings

Preserve Substantial Liquidity

Generate Free Cash ...
Improving Debt/Cap Ratio
•   Converted $800 million of Power
                                                          PSE...
Financial Objectives
Reduce Leverage

Maintain/Improve Credit Ratings

Preserve Substantial Liquidity

Generate Free Cash ...
Current Ratings and Objectives
•   Re-establish A2 rating for
    Commercial Paper programs                               ...
Business Risk Improvements
PSE&G:
– Operational excellence and modest regulatory calendar provides predictable earnings
  ...
Credit Metric Summary
PSEG Power:
   – Equity investment of $300 million in 2004 reduces adjusted leverage
     (adding ba...
Ratings Summary
• Issues from recent ratings actions are being addressed:
   –   Nuclear Performance
   –   Maintenance Ou...
Financial Objectives
Reduce Leverage

Maintain/Improve Credit Ratings

Preserve Substantial Liquidity

Generate Free Cash ...
Liquidity Summary
• Modest maturities pose no market access challenges
   – No further maturities in 2004
   – PSE&G has o...
Liquidity – as of 9/30/04
                                                Expiration    Total           Primary           ...
Debt Maturity Schedule 2004-2013
                                                As of September 30, 2004
                ...
Financial Objectives
Reduce Leverage

Maintain/Improve Credit Ratings

Preserve Substantial Liquidity

Generate Free Cash ...
Growing Cash
                                                      2003 – 2008 Cash Flows

                               ...
Declining Capital Spending Trend
                       PSE&G                                                Power        ...
Updated Capital Spending (vs. 10k)
PSE&G
   – Capital spending has increased $100 million per year in 2005 and
     2006
 ...
Parent Earnings Impact
2005 Guidance – Parent Impact
•   Parent currently has $1.6
    billion of long-term debt                                 ...
Summary of Financial Strengths
• Reducing Leverage
   – Mandatory Convert adds equity in 2005
   – Significant excess cash...
Summary
  Jim Ferland
  Chairman, President and CEO
Key Business Objectives & Approach

          2005          2006         2007          2008         2009

        • FERC T...
2005-2009 Earnings Drivers
                                                                                 4% - 6%


    ...
Dividend Prospects

• Long History of Dividend Payments
  – Uninterrupted annual dividend since 1907
  – Modest increase i...
Key Takeaways
•   Attractive portfolio balance between regulated and non-regulated
    businesses
•   Well-run utility wit...
Public Service Enterprise Group

   Q&A
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public serviceenterprise group 10/08/04-82-125

  1. 1. Public Service Enterprise Group Strategic Presentation to the Financial Community October 8, 2004 Short Hills, NJ
  2. 2. PSEG Energy Holdings Strategic Direction Bob Dougherty President and COO
  3. 3. Energy Holdings Profile 2004 Earnings $130M - $150M Total Assets $6.7 billion* FFO $402 million* Recourse Debt/Cap 47%* (*as of 6/30/04) primarily energy- domestic and related financial international investments generation and distribution 3
  4. 4. Key Objectives • Global – Focus on operations – Dispose of assets selectively • Resources – Focus on credit quality – Monitor tax issues 4
  5. 5. PSEG Global Strategic Direction
  6. 6. Focus on Operations Invested Capital ($2.4B) • Capital investments going (excluding non-recourse debt) forward limited to 6/30/04 maintenance of existing North business Asia India America Europe Pacific 4% 8% 16% • Emphasis on improved 8% performance 32% 32% • Opportunistic monetization of assets Chile Latin America (other than Chile) 6
  7. 7. Current Portfolio Earnings contribution by region – YTD 6/30/04 Region EBIT * Compared to ’04 Plan North America $64 At Plan Latin America 70 Above Plan Asia Pacific 8 Above Plan Europe 20 Above Plan India and Oman 10 At Plan Total Global EBIT** 172 Above Plan * Includes Global’s share of net earnings, including Interest Expense and Income Taxes, for investments accounted for under the equity method of accounting ** Excludes HQ G&A 7
  8. 8. Recent Activities • MPC, China – – In October 2004, Global entered into a definitive purchase and sale agreement to sell its 50% equity interest to BTU Power for approximately $220 million – The sale is expected to close within 60 days and is expected to be earnings neutral • Texas Independent Energy, Texas – – Acquired for a nominal price the 50% of TIE held by its former partner, a subsidiary of TECO Energy; transaction expected to be modestly accretive to PSEG's earnings – Managing the plants to take maximum advantage of opportunities provided by a rebounding Texas energy market 8
  9. 9. Recent Activities (continued) • Rades, Tunisia – – In May 2004, Global sold its majority interest for approximately $43 million – The agreement was approved by the lenders, Tunisian government and Marubeni Corp • Luz del Sur, Peru – – In April 2004, Global and Sempra jointly sold 12% of Luz del Sur stock in a tender offer bringing PSEG’s ownership from 44% to 38% – The sale netted approximately $30M to PSEG Global • GWF Energy, California – – Reduced ownership to 60% and netted $14 million in February 2004 through selldown of approximately 15% ownership interest to partner 9
  10. 10. Status of Other Initiatives • Salalah, Oman – Preparing to offer (under appropriate economic terms) 35% of shares outstanding on Omani stock exchange in Q1 2005 consistent with terms of concession agreement • SAESA, Chile – Preliminary work underway on bond refinancing • Kalaeloa, Hawaii – 20MW of upgrades in progress; PPA amendments underway • Regulatory update – Planned rate case in Chile; Tax pass-through issue in Brazil favorably resolved 10
  11. 11. Key Takeaways • Focus on continuation of earnings and cash generation • Selective asset monetization to reduce international exposure over next 5 years • Explore private versus public sale opportunities to generate maximum economic value 11
  12. 12. PSEG Resources Strategic Direction
  13. 13. Focus on Credit • Key contributor of Total Assets $3B reliable earnings and 6/30/04 steady cash flow LBO & Limited • Most of the cash return Real Estate, Partnerships Transportation 2% is in the form of tax Other 4% & Industrial Leases benefits 10% 84% Energy • 70% of lessees Leases investment grade • Weighted average rating 94% Lease Related is A-/A3 13
  14. 14. Collins Lease Termination • In March 2004, Resources terminated its lease investment in the Collins generating facilities – Received $184M of cash – Original investment - $136M – Earned over 5% after tax vs. 8% proforma – Reduced Resources and PSEG’s overall risk exposure – Recorded loss of $17M in 2004 14
  15. 15. Aircraft Leases • Modest investment in aircraft leases: 5 planes totaling approximately $57M • Includes lease of one Boeing 767 to United – Exposure - $15M – No earnings being recorded – Aircraft is being used by United – Awaiting final United restructuring plan 15
  16. 16. KKR – Sale of Borden and Amphenol • In September 2004, KKR announced the sale of Borden and Amphenol – Resources received cash distributions totaling approximately $26M – Transactions will result in a pretax gain of $1.7M – Remaining investment in KKR reduced to approximately $18M 16
  17. 17. Key Takeaways • Focus on continuation of earnings and cash generation • Monitor credit quality of portfolio • Consider opportunistic transactions to improve portfolio credit quality 17
  18. 18. 2005 Guidance $130M - $150M $135M - $155M Key Assumptions • No new CapEx • Fairly stable F/X environment • Maintain current lease portfolio 2004 Estimate Resources Global Other 2005 Estimate 18
  19. 19. 2005-2009 Earnings Outlook and Drivers 2% - 3% $130M – $150M $135M – $155M 2004 2005 2006 2007 2008 2009 Estimate Estimate + TIE + Texas Market Recovery + Skawina & Elcho - Eagle Point - Bridgewater 19
  20. 20. Key Takeaways • Maintain targeted credit ratios – 3X cash flow coverage target – Covenants in debt agreements • Debt repurchases of $41M in Q2 at premium • Current portfolio is cash flow and earnings positive • Substantial cash flow available for distribution to PSEG • Monetize at our pace…consistent with cash and earnings needs of PSEG while providing appropriate distribution of funds to debt and equity investors • Earns meaningful returns for the shareholders 20
  21. 21. PSEG Financial Review Tom O’Flynn Executive Vice President & CFO
  22. 22. Financial Objectives Reduce Leverage Maintain/Improve Credit Ratings Preserve Substantial Liquidity Generate Free Cash Flow 22
  23. 23. Improving Debt/Cap Ratio • Converted $800 million of Power PSEG non-recourse debt in 2004 • Energy Holdings debt reduced by more than $300 million through cash flow and asset monetization 57% 56% 53% • BGS securitization to provide $125 million to PSE&G • $80 million from DRIP common Dec 03 Dec 04 Dec 05 stock issuance to continue • Mandatory convert to add $460 million of equity in 2005 * Calculated consistent with PSEG Leverage Covenant excluding securitization debt and non-recourse debt. 23
  24. 24. Financial Objectives Reduce Leverage Maintain/Improve Credit Ratings Preserve Substantial Liquidity Generate Free Cash Flow 24
  25. 25. Current Ratings and Objectives • Re-establish A2 rating for Commercial Paper programs Moody’s S&P Fitch at PSE&G and PSEG PSEG Corporate Credit (N) -- BBB -- Rating • Maintain Senior Unsecured Commercial P2 A3 F2 Paper ratings of BBB/Baa1 at PSE&G PSEG Power (N) Senior Secured A3 A- A Commercial P2 A3 F2 Paper • Maintain Senior Secured PSEG Power ratings of A-/A3 at PSE&G Baa1 ( N ) (N) Senior Unsecured BBB BBB PSEG Energy • Energy Holdings continues Holdings (N) (N) as an independent credit Senior Unsecured Ba3 BB- BB (N) – indicates negative outlook 25
  26. 26. Business Risk Improvements PSE&G: – Operational excellence and modest regulatory calendar provides predictable earnings and cash flow PSEG Power: – Successful in securing 12- and 36-month contracts in the 2004 BGS auction – BGS auctions and other contracts/positions have termed up sales consistent with the 75% or more objective – Minimal near-term commodity risk – Multi-year BGS auctions spread market timing impacts – Construction completed in Midwest; BEC and Linden plants nearing completion PSEG Energy Holdings: – Executing strategy to opportunistically monetize assets – Meaningful cash flow and earnings contributions – Cash to Enterprise of $375 million YTD (common dividends and preferred redemptions) 26
  27. 27. Credit Metric Summary PSEG Power: – Equity investment of $300 million in 2004 reduces adjusted leverage (adding back basis adjustment) to approximately 45% – FFO interest coverage averages in the mid-4x range for 2005-2006 – Positive free cash flow in 2005 and beyond available to further delever and improve interest coverage PSE&G: – Targeting leverage of 53% (includes short-term debt and long-term debt due within a year; excludes securitization debt) Energy Holdings: – Interest coverages averaging 3.0x PSEG: – Consolidated leverage targeted in low-mid 50% range and interest coverage in the range of 3.5x – 4.0x 27
  28. 28. Ratings Summary • Issues from recent ratings actions are being addressed: – Nuclear Performance – Maintenance Outage at Mercer – Transmission Issues – Trading Revenues • Emphasis on reducing business risk continues • Strengthening cash flows support improving interest coverages and delevering 28
  29. 29. Financial Objectives Reduce Leverage Maintain/Improve Credit Ratings Preserve Substantial Liquidity Generate Free Cash Flow 29
  30. 30. Liquidity Summary • Modest maturities pose no market access challenges – No further maturities in 2004 – PSE&G has only $125 million of maturing debt in 2005 – Power does not have another maturity until 2006 – Holdings does not have another recourse debt maturity until 2007 • PSEG and PSE&G extended the maturities and increased the capacity of credit facilities – PSEG/PSEG Power replaced $600 million of 364-day facilities with three-year and four-year facilities totaling 1.05 billion – PSE&G replaced $400 million from 364-day and 3-year facilities with a $600 million 5-year facility • PSEG and PSE&G have maintained access to commercial paper markets subsequent to A3 rating by S&P 30
  31. 31. Liquidity – as of 9/30/04 Expiration Total Primary Usage at Available Liquidity Company Facility Date Facility Purpose 9/30/2004 9/30/2004 PSEG 4-year Credit Facility Apr-08 $450 CP Support/Funding/LCs $0 $450 5-year Credit Facility Mar-05 280 CP Support 251 29 3-year Credit Facility Dec-05 350 CP Support/Funding/LCs 0 350 Bilateral Term Loan Apr-05 75 Funding 75 0 Bilateral Revolver Apr-05 25 Funding 25 0 Uncommitted Bilateral Agreement N/A * Funding 25 N/A PSE&G 5-year Credit Facility Jun-09 600 CP Support/Funding/LCs 190 410 Uncommitted Bilateral Agreement N/A * Funding 95 N/A Energy 3-year Credit Facility Oct-06 200 Funding/LCs 39 161 Holdings Power 3-year Credit Facility Aug-05 25 Funding/LCs 0 25 3-year Credit Facility** Apr-07 600 Funding/LCs/CP Support 19 581 Total $2,605 $2,006 Short-term Investments $52 Total Liquidity Available $2,058 ** PSEG/Power Co-borrower facility 31
  32. 32. Debt Maturity Schedule 2004-2013 As of September 30, 2004 $1,600 $1,400 Principal Maturing $1,200 Enterprise Holdings (in $ Millions) Recourse $1,000 Power $800 $600 $400 $200 PSE&G $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 49 49 509 49 249 Enterprise 309 507 400 544 Energy Holdings (Recourse) 500 250 800 666 Power 125 322 113 250 60 300 450 PSE&G Note: PSEG Energy Holdings also has near-term non-recourse debt maturities and amortizations of $59m in 2004, $61m in 2005, $245m in 2006 and $245m in 2007. 32
  33. 33. Financial Objectives Reduce Leverage Maintain/Improve Credit Ratings Preserve Substantial Liquidity Generate Free Cash Flow 33
  34. 34. Growing Cash 2003 – 2008 Cash Flows BGS Securitizaton Net Asset Sales/ $2.5 Return of Capital YTD and Announced GWF Refinancing Cash from $1.5 Operations $ Billions Excess Cash $0.5 Available Investment ($0.5) incl. Nuclear Fuel @ Avg. Annual ≈ $110m Net Dividends ($1.5) Incl. DRIP @ $80m/year through 2007 ($2.5) 2003 2004 2005 2006 2007 2008 Note: Excludes proceeds from potential asset sales 34
  35. 35. Declining Capital Spending Trend PSE&G Power Energy Holdings 600 600 600 500 500 500 400 400 400 $ Millions $ Millions $ Millions 300 300 300 200 200 200 100 100 100 0 0 0 04 05 06 07 08 09 04 05 06 07 08 09 04 05 06 07 08 09 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 New Business Regulatory • No new CapEx at Environmental/Regulatory Other Holdings’ level System Reinforcement New MW • Capital programs are Environmental locally funded Facilities Support 35
  36. 36. Updated Capital Spending (vs. 10k) PSE&G – Capital spending has increased $100 million per year in 2005 and 2006 – Infrastructure replacement PSEG Power: – Capital spending has increased between $125 million and $150 per year from 2005 through 2007 – Delay of Linden plant, back-end environmental control costs at Keystone/Conemaugh, and incremental capex at Nuclear PSEG Energy Holdings: – Consolidated capital spending of $40 - $50 million per year in 2005 and beyond 36
  37. 37. Parent Earnings Impact
  38. 38. 2005 Guidance – Parent Impact • Parent currently has $1.6 billion of long-term debt Preferred and preferred securities 2004 Estimate Dividend Income Other 2005 Estimate outstanding -5 -15 • Energy Holdings retiring -25 $ Million a $500 million preferred -35 stock investment by -45 Parent (retired $225 -55 million YTD) -65 -75 • In 2004, Parent reduced short-term borrowings issuing $200m of Private Placement debt 38
  39. 39. Summary of Financial Strengths • Reducing Leverage – Mandatory Convert adds equity in 2005 – Significant excess cash flow enables further delevering • Focusing on Credit Ratings – Addressing concerns and committed to maintaining and/or improving • Preserving Substantial Liquidity – Extended maturities and increased capacity • Strengthening Free Cash Flow – Improving Cash from Operations – Construction nearing completion 39
  40. 40. Summary Jim Ferland Chairman, President and CEO
  41. 41. Key Business Objectives & Approach 2005 2006 2007 2008 2009 • FERC Transmission Rate Case • Electric Distribution Rate Case • Continued Capital Investment for Safe, Reliable Service • Strengthen Nuclear and Fossil Operations • Reposition Power Contracts • Capitalize on Improving Market Fundamentals • Manage for Earnings and Cash Flow • Execute Plans To Selectively Monetize Assets • Use Cash to Retire Debt, Strengthen Credit • Secure and Potentially Increasing Dividends • Opportunity for Share Repurchase, Selective Asset Acquisition 41
  42. 42. 2005-2009 Earnings Drivers 4% - 6% $3.15 - $3.35 $3.15 - $3.35 2004 2005 2006 2007 2008 2009 Estimate Estimate PSEG Power + Improved Nuclear / Fossil Performance + ER&T Contracts + Nuclear Uprates + Capacity Prices - Midwest Plants PSE&G + Electric and Gas Sales Growth + Rate Relief - Transmission Rate Reset PSEG Energy Holdings + Texas Market Recovery + TIE + Skawina & Elcho - Eagle Point 42
  43. 43. Dividend Prospects • Long History of Dividend Payments – Uninterrupted annual dividend since 1907 – Modest increase in January, 2004 • Ability to continue modest increases – Improved cash flow – Reasonable payout ratio – Important to shareholders – Subject to Board of Directors approval 43
  44. 44. Key Takeaways • Attractive portfolio balance between regulated and non-regulated businesses • Well-run utility with strong reliability record and predictable earnings and cash flow • Well-located generating fleet, positioned to benefit from improving market conditions and improved nuclear / fossil operations • Nuclear fleet positioned to benefit from high fossil fuel prices driven by worldwide demand • Improving earnings, cash flow create opportunities in the longer term for share repurchase or selective asset acquisition • Visible earnings growth drivers after 2005 • Attractive dividend yield with potential for modest increases 44
  45. 45. Public Service Enterprise Group Q&A

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