public serviceenterprise group Bank of America

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public serviceenterprise group Bank of America

  1. 1. Public Service Enterprise Group Bank of America Investor Meetings June 24-26, 2008
  2. 2. 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 purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance they will be achieved. The results or events predicted in these statements may differ materially from actual results or events. Factors which could cause results or events to differ from current expectations include, but are not limited to: • Adverse Changes in energy industry, policies and regulation, including market rules that may adversely affect our operating results. • Any inability of our energy transmission and distribution businesses to obtain adequate and timely rate relief and/or regulatory approvals from federal and/or state regulators. • Changes in federal and/or state environmental regulations that could increase our costs or limit operations of our generating units. • Changes in nuclear regulation and/or developments in the nuclear power industry generally, that could limit operations of our nuclear generating units. • Actions or activities at one of our nuclear units that might adversely affect our ability to continue to operate that unit or other units at the same site. • Any inability to balance our energy obligations, available supply and trading risks. • Any deterioration in our credit quality. • Any inability to realize anticipated tax benefits or retain tax credits. • Increases in the cost of or interruption in the supply of fuel and other commodities necessary to the operation of our generating units. • Delays or cost escalations in our construction and development activities. • Adverse capital market performance of our decommissioning and defined benefit plan trust funds. • Changes in technology and/or increased customer conservation. For further information, please refer to our Annual Report on Form 10-K, including Item 1A. Risk Factors, and subsequent reports on Form 10- Q and Form 8-K filed with the Securities and Exchange Commission. These documents address in further detail our business, industry issues and other factors that could cause actual results to differ materially from those indicated in this presentation. In addition, any forward-looking statements included herein represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if our estimates change, unless otherwise required by applicable securities laws. 2
  3. 3. 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 of certain non-core domestic and international assets and costs stemming from the terminated merger agreement with Exelon Corporation. PSEG presents Operating Earnings because management believes that it is appropriate for investors to consider results excluding these items in addition to the results reported in accordance with GAAP. PSEG believes that the non-GAAP financial measure of Operating Earnings provides a consistent and comparable measure of performance of its businesses to help shareholders understand performance trends. This information is not intended to be viewed as an alternative to GAAP information. The last slide in this presentation includes a list of items excluded from Net Income to reconcile to Operating Earnings, with a reference to that slide included on each of the slides where the non-GAAP information appears. These slides are intended to be reviewed in conjunction with the oral presentation to which they relate. 3
  4. 4. PSEG Overview Tom O’Flynn Executive Vice President and Chief Financial Officer - PSEG President and Chief Operating Officer – PSEG Energy Holdings
  5. 5. 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 portfolio and following capability service in mature potential investment in operating in attractive service territory in New renewables. markets in the Northeast Jersey. with operating control of additional 2,000 MW of capacity in Texas. 2007 Operating $949M** $376M** $115M** Earnings: 2008 Guidance: $1,040M - $1,140M $350M – $370M $45M – $60M … provides earnings stability, multiple growth opportunities and substantial cash flow. 5 * 2007 capacity ** See page 65 for Items excluded from Net Income to reconcile to Operating Earnings
  6. 6. 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 to class reliability to manage, operate deploy capital to enhanced by market and invest with meet shareholder dynamics excellence as the objectives for encouraging goal growth with investment reasonable risk … and build a substantial platform for ongoing growth. 6
  7. 7. 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 constrained reliability maintains critical environment infrastructure and expands capability • PSE&G pursuing investments in energy • Potential to leverage efficiency and existing brownfield renewables sites; potential for new nuclear PSEG assets are well positioned to meet the needs of customers and shareholders in a challenging environment. 7
  8. 8. 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 investments in advanced metering and back office technology NJ enacted Regional Greenhouse Gas Initiative Regulatory and (RGGI) Market Environment Draft NJ Energy Master Plan released PSEG Power exposed to heat rate expansion, gas prices and carbon SAESA – Sale announced for $870 million equity value Bid for new peaking capacity not accepted Growth with Successful RFP in CT Manageable Risk Awaiting RTEP decision on additional transmission PSE&G pursuing pilot programs to prove capabilities in deploying energy efficiency investments Hope Creek uprate and Salem steam generator adding 140MW … to support long-term growth and reliability. 8
  9. 9. Improved processes and investment … 2007 -2011: $2,400 CAGR: 2.1% $2,200 ($ millions) O&M $2,000 $1,800 2007 2008 2009 2010 2011 … are expected to control the rate of growth in operating expenses. 9
  10. 10. Spending for the next four years … $10.0 Capital Expenditures $8.0 $ 7.3B $6.0 $ Billions $ 4.5B $4.0 $2.0 $0.0 2007 Forecast* 2008 Forecast** (2008 – 2011) (2008 – 2011) PSEG Energy PSEG Power PSE&G Other Holdings … has increased primarily at PSE&G to support growth strategy. 10 * As per 2006 10-K ** As per 2007 10-K; also includes plans for PSEG Energy Holdings
  11. 11. Right set of assets, right markets at the right time … Fuel Diversity – 2007 • Low-cost portfolio Total MW: 13,300 • Strong cash generator Oil Nuclear 8% • Regional focus in competitive, 26 % Pumped liquid markets Storage 1% 18% 47 % • Assets favorably located Coal Gas – Many units east of PJM constraints – Southern NEPOOL/ Connecticut Energy Produced - 2007 – Near customers/load centers Total GWh: 53,200 • 80% of Fossil capacity has dual Nuclear fuel capabilities 54% Pumped • Integrated generation and portfolio Storage 1% 19% management optimizes asset- Gas 25% based revenues Oil 1% Coal … we continue to like the assets we have and their location. 11
  12. 12. CO2 Emissions (lbs/MWh) 0 500 1,000 1,500 2,000 2,500 3,000 Big Rivers Electric Corp NiSource Inc Vectren Corporation Ameren Edison International * Source: Energy Information Administration (2006) E.ON U.S. Dynegy Inc Hoosier Energy East Kentucky Power Coop Reliant AES Corp Allegheny Energy Inc DPL Inc Mirant Corp Buckeye Power Inc Tennessee Valley Authority American Electric Power (AEP) CMS Energy DTE Energy (Companies in PJM States) Duke Energy Old Dominion Electric Coop Power’s fleet has a low carbon profile … FirstEnergy 2006 CO2 Emissions Rate Ranking Progress Energy Dominion PPL Constellation Energy Group, Inc U S Bank National Assoc Cogen Technologies Linden Vent PSEG Exelon Corporation … which is well positioned for virtually any form of carbon restrictions. 12
  13. 13. At Power, strong cash generation and declining capital expenditures … Power Sources and Uses Power Cash Flow (2008 – 2011 Forecast) Net Cash Flow Cash $2.0 Asset from Ops Sales Incremental debt $10.0 capacity while Net Dividends maintaining target Financing to Parent $1.0 credit measures $8.0 $ Billions $6.0 $0.0 $ Billions Cash from Ops $4.0 ($1.0) Investments Declining Investments $2.0 ($2.0) $0.0 2007 2008 2009 2010 2011 Sources Uses … should result in substantial discretionary cash available to PSEG for additional growth and/or share repurchases. 13
  14. 14. 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 $1/MWh (PJM-West) $2.0 Fuel Gas ~$8.50 to $9.00/MB $ Billions Coal ~ $2.85 to $3.15/MB O&M ~ $1.0 – 1.05B $1.5 2008 Forecasted EBITDA $2.05B - $2.25B $1.0 … which will vary depending upon market drivers. 14 * Open EBITDA reflects unhedged results of Power at market prices shown above
  15. 15. PSE&G operates in an attractive market … KEY: 3rd • NJ is ranked nationally in personal COMBINED ELECTRIC & GAS TERRITORIES ELECTRIC TERRITORY income per capita GAS TERRITORY • Mid-Atlantic ReliabilityOne Award winner six years running N • Solid regulatory relationships on traditional W E S utility matters Transmission Statistics (12/31/07) Historical Annual Load Growth Projected Annual Load Growth Network Circuit Billing Peak (MW) Miles 2003-2007 2008 - 2012 1,429 10,378* 1.3% 1.4% *Billing Peak includes adjustment for Voltage Reduction Electric and Gas Distribution Statistics (12/31/07) Historical Annual Projected Annual Electric Sales and Gas Sold Load Growth Load Growth and Transported Customers 2003-2007 2008 - 2012 Electric 2.1 Million 44,709 GWh 1.6% 1.0% Gas 1.7 Million 3,502 M Therms (0.2%) 0.4% … and through a disciplined capital allocation process has become a recognized leader in delivering safe and reliable service. 15
  16. 16. PSE&G’s capital program focused on improving reliability 2007 2008 2009 2010 2011 2012 5-year capital program: $3.0B 2006 10-K June 2007 10-Q 5-year capital program: $4.1B 5-year capital program: $5.3B 2007 10-K PSE&G Rate Base ($ millions) 2007 Actual 2012 Base Plan Transmission 830 2,240 Gas 2,240 3,060 Electric 3,330 4,900 TOTAL $6,400 $10,200 16
  17. 17. PSE&G’s capital program • Rate base growth supported by investment in new 500kV lines to improve reliability ($900M) and upgrade of sub- transmission system ($250M) Transmission • Received FERC approval for CWIP in rate base and 125 bps adder to ROE on $600M - $650M Susquehanna line – base ROE increased by 50 bps for membership in RTO. • Investments focused on improving customer support, Electric and enhancing efficiency and upgrading infrastructure Gas • Expect to file electric and gas rate case in 2009 with rates Distribution effective in 2010 • Future investment associated with meeting State energy efficiency and renewable goals dependent on receiving regulatory support before committing new capital, e.g. New $550M investment budgeted for AMI Programs • BPU approved $105M investment in solar in April 2008 as part of $225M capital investment program 17
  18. 18. At PSE&G, cash flow will be primarily directed towards attractive reinvestment opportunities. PSE&G Cash Flow PSE&G Sources and Uses (2008 – 2011 Forecast) $1.5 Cash from Ops $6.0 Net Cash Dividends Net Flow to Parent Financing $0.5 $ Billions $4.0 $ Billions Cash from ($0.5) Investments Ops $2.0 Growing Investments ($1.5) $0.0 2007 2008 2009 2010 2011 Sources Uses Modest dividends to the Parent are expected to continue as PSE&G grows its asset base. 18
  19. 19. 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 Earnings* 2008 Guidance - Operating Earnings $ 45M - $60M $ 115M Two 1,000 MW CCGT‘s 22% in Central Texas (South Zone) 1 1 in West Texas Texas Merchant Texas Generation Merchant Generation 22% PSEG 25% Resources PSEG 49% 49% Resources Chile & Peru Other US 56% Distribution Generation Two companies sold 17% 17% 19% in 2007. SAESA in Disc Ops. Other US Generation 12% ~390MW owned in 86% of the portfolio is CA, HI, NH 12% in energy-related fully contracted leveraged leases … with improved stability. 19 * See page 65 for Items excluded from Net Income to reconcile to Operating Earnings
  20. 20. 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 transactions. Under a total loss scenario, after tax interest of $195 million would become due • In 2008, may decide to litigate. It is also possible that we may re- measure our reserve levels for these transactions in the near-term and record a material charge to earnings … LILO / SILO potential tax liability manageable within key credit metrics. 20
  21. 21. 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 Dividends to $0.9 Parent Asset Sales $ Billions $0.6 Investments* Cash from Ops $0.3 $0.0 Sources Uses Flexibility exists to finance potential Resources’ tax liability. 21 * Investments exclude Intercompany loans.
  22. 22. At PSEG, we forecast $3.0B of discretionary cash through 2011. Parent Sources and Uses (2008 – 2011 Forecast) $6.0 Holdings Dividend PSE&G Discretionary Dividend $3.0B Cash* $4.0 $ Billions Power Dividend $2.0 Shareholder Dividend $0.0 Sources Uses Cash flow from Power is the primary driver of discretionary cash. 22 * Forecast includes some use of cash to meet potential IRS tax liability.
  23. 23. 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 161 949 515 Power 376 350 - 370 262 PSE&G (66) (63) (15) - (10) Parent 2006 2007 2008 … allowed us to meet our commitments to earnings growth as we also reduced balance sheet and international risk. 23 * See page 65 for Items excluded from Net Income to reconcile to Operating Earnings
  24. 24. Markets, assets and use of cash flow … + 8 - 9% + 8 - 9% $3.05 - $3.35 $2.80 - $3.05 $2.71 $1.73 2008 2009 2006 Operating 2007 Operating 2010E 2011E Guidance Guidance Earnings* Earnings* … should continue to drive annual earnings guidance growth of 8 - 9%. 24 * See page 65 for Items excluded from Net Income to reconcile to Operating Earnings
  25. 25. 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 6 – 8% 45 - 60 PSE&G Annual 350 - 370 Dividend Yield ≈ 3% Subsidiary 5 – 7% Annual Growth 5 – 7% 1040 - 1140 Power “Discretionary Cash” – Annual Growth / Share Repurchases ≈ 3% Parent (15) – (10) 2011 2008 2009 2010 Subsidiary Earnings Annual Growth 5 – 7% … drives our Consolidated earnings growth rate resulting in a total shareholder return between 10 – 13%. 25
  26. 26. Our recent 10% dividend increase continues 100-year history of paying common dividends. $1.50 Dividend per Share ? $1.29 * % 10 $1.25 + $1.17 $1.14 $1.12 $1.00 2005 2006 2007 2008 2009E Payout 63% 66% 43% 44% 40 – 50% Ratio Payout objective of 40 – 50% provides opportunity for growth with earnings. 26 * Indicated annual dividend rate
  27. 27. PSEG’s current stock price… PSE&G Energy Holdings 2008 Earnings Guidance $350M - $370M Book Equity Value/Share(1) $2.75 Indicative 2008 P/E Multiple 13.5x – 14.0x Resulting Value/Share $9.00 - $10.25/Share PSEG Power Stock Price as of 6/12/08 (per share) $46.14 Less Indicative Value of PSE&G, Energy Holdings $11.75 - $13.00 Implied PSEG Power Value (per share) $33.14 - $34.39 Implied Power Enterprise Value $19.8B - $20.4B Implied EV as a Multiple of: 2008 EBITDA 9.2x – 9.9x Open EBITDA 7.1x – 7.8x Plus $10 Carbon 6.6x – 7.3x Plus $20 Carbon 6.2x – 6.8x (1) Excludes incremental value of Texas generating assets (2,000 MW of combined cycle capacity) and potential tax liability at Resources … implies a low valuation for PSEG Power. 27
  28. 28. Fitting the pieces together - PSEG value proposition PSEG well-positioned in current business environment Process improvement programs support efforts to: - maintain reliability - control costs - provide value to the customer Asset mix provides opportunities in attractive markets Strengthened balance sheet supports capital investment Return of cash to shareholders through dividends provides discipline to investment process Earnings growth and yield offer opportunity for double digit shareholder returns of 10 – 13% 28
  29. 29. APPENDIX
  30. 30. PSEG Power
  31. 31. Power’s assets along the dispatch curve … Nuclear National Park Coal Sewaren 6 Dispatch Cost ($/MWh) Mercer 3 Kearny 10-11 Combined Cycle Burlington 8-9-11 Steam Edison 1-2-3 GT Peaking Essex 10-11-12 New Haven Linden 5-8 / Essex 9 Bergen 1 Burlington 12 / Kearny 12 Linden 1,2 Yards Keystone Sewaren 1-4 Creek Conemaugh Hudson 1 Peach BEC Hudson 2 Bridgeport Bottom Hope Bergen 2 Salem Creek Mercer1, 2 Illustrative Baseload units Load following units Peaking units Energy Revenue X X X Capacity Revenue X X X Ancillary Revenue X X Dual Fuel X X Nuclear CF 90% to 92% Coal CF 85% to 90% 50% to 70% Combined Cycle CF 30% to 50% Peaking CF 2% to 10% … position the company to serve full requirement load contracts. 31
  32. 32. Our five unit nuclear fleet … Hope Creek • Operated by PSEG Nuclear Salem Units 1 and 2 • PSEG Ownership: 100% • Operated by PSEG Nuclear • Technology: • Ownership: PSEG - 57%, Boiling Water Reactor Exelon – 43% Peach Bottom Units 2 and 3 • Total Capacity: 1,061MW • Technology: • Operated by Exelon Pressurized Water Reactor • Owned Capacity: 1,061MW* • Total Capacity: 2,304MW • PSEG Ownership: 50% • License Expiration: 2026 • Owned Capacity: 1,323MW* *125MW uprate available for 2008 summer run • Technology: Boiling Water Reactor • License Expiration: 2016 and 2020 • Total Capacity: 2,224MW • Owned Capacity: 1,112MW *15MW uprate available for 2008 summer run • License Expiration: 2033 and 2034 … is a critical element of Power’s success. 32
  33. 33. We have completed 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 • 15 MW uprate (PS share) 2008 available for 2008 summer • 125 MW uprate available for run 2008 summer run INPO Assessments Hope Creek Salem Corporate … that will drive value for years to come. 33
  34. 34. 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 Steam / Peaking 4,300 25,000 Right Assets – Right Location 20,000 • Fuel diversity • Technical diversity 15,000 ` • Near load centers 10,000 Operation of 2,000 MW Texas Portfolio 5,000 • Shared best practices • Leverage scale 0 2004 2005 2006 2007 … through a low-cost portfolio in which the majority of the output is from coal facilities. 34
  35. 35. 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 Combined Cycle 3,150 GWh 30,000 Peaking / Steam 4,300 20,000 10,000 Strong Performance 0 • Continued growth in output 2004 2005 2006 2007 • Improved fleet performance Year Nuclear Coal CC Peaking/Steam … we are expanding the output of our existing fleet. 35 * 2007 capacity
  36. 36. Power’s eastern coal plants are in the right areas … System Interface Coal Units Capacity (MW) Bridgeport Harbor 3 3 Bridgeport Harbor Hudson 2 558 Mercer 1&2 648 Hudson 2 Hudson 2 Bridgeport 372 Mercer1 & 2 Mercer 1&2 Total 1,578 Power’s New Jersey coal units are Power is also making considerable mid-merit, with capacity factors investments beyond the pollution averaging 50% to 60%. control facilities for its coal assets. … and after capital investments, anticipate increased capacity factors. 36
  37. 37. 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 improve the fleet’s reliability and performance. 37 * Forecast capital spending associated with new peaking could be lower than amount indicated.
  38. 38. Power market dynamics … On-Peak Versus Gas Off-Peak Versus Coal $/MWh $/MB $/MWh $/MB $8 $80 $100 $20 $80 $15 $6 $60 $60 $10 $4 $40 $40 $5 $2 $20 $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 Coal $/MB … have led to stronger electricity prices both on-peak and off-peak. 38 * Forward prices as of 6/2/08
  39. 39. Rising coal and natural gas prices have driven LMPs ... Central Appalachian Coal ($/Ton) Natural Gas Henry Hub ($/MMbtu) $110 $11.0 $100 $10.5 $10.0 $90 $9.5 $80 $9.0 $70 $8.5 $60 $8.0 $50 $7.5 $40 $7.0 07 07 07 7 08 7 7 8 8 l- 0 -0 -0 -0 -0 v- p- n- n- ar ay ar ay Ju No Se Ja Ja M M M M 2009 2010 2011 2009 2010 2011 Electric PJM Western Hub RTC Price ($/MWh) On Peak Heat Rate Expansion (MMbtu/MWh) $85 10.5 $80 10.0 $75 $70 9.5 $65 9.0 $60 $55 8.5 07 07 07 7 08 7 07 8 08 l- 0 -0 -0 - p- n- n- - - ov ar ay ar ay Ju Se Ja Ja M M N M M 2009 2010 2011 2009 2010 2011 … and this trend may continue. 39 * Forward prices as of 6/2/08
  40. 40. The implementation of carbon legislation will address the critical issue of global warming … By Fuel Type Coal CTs CC Carbon tons/MWh 1.0 0.6 0.4 PSEG Power Generation by Fuel Price ($/MWh) 2007 Total GWh: 53,200* @$10/ton $10.0 $6.0 $4.0 Nuclear @$20/ton $20.0 $12.0 $8.0 @$30/ton $30.0 $18.0 $12.0 54% Pumped Dispatch curve implication @ $20/ton** Storage On margin $/MWh Impact 1% 19% 25% (Illustrative) ($/MWh) Gas Coal Coal 50% $20.0 $10.0 CTs 10% $12.0 $1.2 Oil 1% Gas CC 40% $8.0 $3.2 Nuclear 0% $0.0 $0.0 Total 100% $14.4 … and will put additional upward pressure on energy prices. * Excludes 2,000MW of combined cycle generation in Texas under PSEG Power’s operating control. 40 ** For illustration purposes – potential impact of CO2 on power prices with current dispatch – not an indication of net effect on income.
  41. 41. Through the new capacity constructs, and repricing at market prices … Power’s capacity is located in three Northeast markets. NE NY Total Capacity 13,300MW* (~ 1,000 - 1,500 MW under RMR) PJM The RPM Auction to date has provided strong price signals in PJM. Delivery Year ($MW/Day) 2008 2009 2010 / 2011 Zones $38-41/KW-yr / 2008 2007 2008 / 2009 2009 / 2010 2010 2011 / 2012 $49-51/KW-yr $56-60/KW-yr Eastern MAAC* $197.67 $148.80 $191.32 $174.29 $110.00 MAAC --- --- $191.32 (a) $174.29 $110.00 Rest of Pool $40.80 $111.92 $102.04 $174.29 $110.00 * Majority of Power’s assets (a) – includes APS … Power expects to maintain strong margins. 41 * 2007 capacity
  42. 42. 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 $111.50 Increase in Capacity Markets/RPM $102.51 $98.88 • Ancillary services Volatility in Market Increases Risk Premium • Capacity • Congestion ~ $43 • Load shape ~ $32 ~ $41 $65.41 • RECs • Transmission $55.59 $55.05 • Risk premium ~ $21 ~ $18 ~ $21 Round the Clock $68 - $71 $58-$60 $67 - $70 PJM West $44 - $46 $36 - $37 $33 - $34 Forward Energy Price 2003 2004 2005 2006 2007 2008 … has enabled successful participation in each BGS auction and cushioned customer impacts. 42 * BGS prices reflect PSE&G Zone
  43. 43. Power’s hedging program provides near-term stability from market volatility … Contracted Energy Power has 100% $80 contracted for a nuclear output % of coal and % sold considerable (left 75% Price $/MWh scale) percent of its (right 50% $70 scale) output over the next three years 25% at increasing 0% $60 prices. 2008 2009 2010 2011 Estimated impact of $10/MWh PJM West around the clock $0.01 - $0.02 $0.04 - $0.10 $0.15 - $0.45 $0.30 - $0.70 price change* ($/share) Contracted Capacity The pricing for 100% $200 most of Power’s % of capacity $/MW-day 75% $150 capacity has been Price (right fixed through May scale) 50% $100 of 2011, by virtue % sold (left of the completed 25% $50 scale) auctions in PJM 0% $0 Estimated impact of and NE. 2008 2009 2010 2011 $30/MW-day capacity price change* $0.00 - $0.01 $0.00 - $0.01 $0.00 - $0.01 $0.05 - $0.15 ($/share) … while remaining open to long-term market forces. 43 * As of February 2008; Assuming normal market commodity correlations
  44. 44. While nuclear fuel was volatile during 2007 … Historical and Contracted Nuclear Fuel Cost $10 $8 $6 $/MWh $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. 44
  45. 45. Power has contracts for supply of its coal through 2010 … Coal Output 18,000 12,000 Total Output GWH Hedged 6,000 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 fuel choices. 45
  46. 46. The Regional Greenhouse Gas Initiative (RGGI) … • Cooperative effort by Northeast states to design a regional cap-and-trade program to reduce carbon dioxide (CO2) emissions RGGI – Full participants – CT, MA, MD, ME, NH, VT, NY, States NJ, RI, and DE ME – Observers – PA, DC, and Eastern Canadian Provinces and New Brunswick VT NH • Timeline NY – April 2003 process proposed by Governor Pataki MA – 2003 – 2006 – Stakeholder process CT PA RI – December 20, 2005 Final 7 state MOU NJ – March 23, 2006 – Draft Model Rule MD – August 15, 2006 – Final Model Rule & amended Participating States MOU DE – 2007-2008 – State level adoption Observer States – First RGGI allowance auction September 2008 – January 1, 2009 – Implementation … is a potential influence on market prices. 46
  47. 47. The RGGI cap shows headroom … • Affected Sources – Fossil fired electric generating units CO2 Emissions vs. RGGI Cap with a capacity of 25 megawatts (Actuals through 2007) (MW) and larger 200 RGGI Cap Actual & • Targets and Timing Forecast CO2 190 – Three-year compliance periods CO2 (millions of short tons) 180 with the first running from 2009- 2011 170 – Stabilization of CO2 emissions at 160 recent levels through 2015 (~188 million tons per year) 150 – Achieve a 10% reduction of CO2 Actual Projected 140 emissions below recent levels by 2019 130 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 – This translates into ~13% reduction below 1990 levels or ~35% reduction from BAU levels by 2020 … when viewed in comparison to historical emissions. 47
  48. 48. RGGI’s CO2 pricing projections … $10 $8 $/Ton (Nom inal) $6 $4 $2 $0 2009 2011 2013 2015 2017 2019 2021 2023 2025 RGGI - ICF Base RGGI - ICF Base (Rev. Oct-06) … reflect moderate prices, based on the headroom in the cap. 48
  49. 49. Operational improvements and recontracting in current markets … Gross Margin ($/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. 49 * As of February 2008
  50. 50. PSE&G
  51. 51. PSE&G’s base investment plan … • Regulated electric transmission, electric and gas distribution system • Characteristics • FERC regulation for electric transmission (formula rates) • NJ BPU regulation for electric and gas distribution • Managing recovery lag on electric and gas distribution investments PSE&G Rate Base 2012 Base Plan 2007 Actual Rate Base = $10.2 B Rate Base = $6.4 B Gas Distribution Gas 30% Electric Distribution Transmission Electric 35% 13% Transmission 22% Electric Distribution 52% Electric Distribution Equity Ratio ~ 48% 48% … coupled with fair regulatory treatment provides a solid foundation for projected future earnings growth from 2008 – 2012 of 7 - 8%. 51
  52. 52. By 2018, NJ’s load is expected to grow by 4,000 MW … Projects to NJ Projects to NY 2008-2018 NJ Summer Peak Annual Growth Rate = 1.8% • PSEG’s evaluation of • The Neptune HVDC project (685 MW) connecting Sayreville to the proposed backbone Long Island transmission projects: • The Linden VFT project (330 • Northern 500kV MW) connecting Linden to route into Jefferson Staten Island and Roseland • The Bergen O66 project (670 • Central 765kV route MW) connecting Bergen to into Deans ConEd's West 49th Street substation • Southern 500kV route into Salem • The Bergen Q75 project (1,200 MW) connecting Bergen to ConEd's West 49th Street substation • Linden S104 project (200 MW) connecting Linden to Goethals Total Import Total Export Capability Capability ~ 5,000 MW ~ 3,100 MW … yet the net import capability into NJ is only increasing by ~1,900 MW indicating need for additional generation, DSM or transmission imports requiring RTEP investment. 52 Sources: Imports: PSE&G Estimates; Exports: PJM 2008 Regional Transmission Expansion Plan; and Load Growth: PJM 2008 Load Forecast Report

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