PSEG presented its strategic direction for its Energy Holdings and Resources divisions. For Energy Holdings, the objectives are to focus on continued earnings and cash generation from existing international generation and distribution assets, selectively dispose of assets over 5 years to reduce exposure, and explore both private and public sale opportunities. For Resources, the objectives are continued earnings and cash flow from its primarily investment-grade energy lease portfolio and to monitor credit quality. PSEG aims to reduce leverage, maintain investment-grade credit ratings, preserve liquidity, and generate free cash flow across its businesses.
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. Key Objectives
⢠Global
â Focus on operations
â Dispose of assets selectively
⢠Resources
â Focus on credit quality
â Monitor tax issues
4
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. Current Portfolio
Earnings contribution by region â YTD 6/30/04
Region EBIT * Compared to â04
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 Globalâs 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. Recent Activities
⢠MPC, China â
â 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
â The sale is expected to close within 60 days and is expected to
be earnings neutral
⢠Texas Independent Energy, Texas â
â 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
â Managing the plants to take maximum advantage of
opportunities provided by a rebounding Texas energy market
8
9. Recent Activities (continued)
⢠Rades, Tunisia â
â In May 2004, Global sold its majority interest for approximately
$43 million
â The agreement was approved by the lenders, Tunisian
government and Marubeni Corp
⢠Luz del Sur, Peru â
â In April 2004, Global and Sempra jointly sold 12% of Luz del
Sur stock in a tender offer bringing PSEGâs ownership from
44% to 38%
â The sale netted approximately $30M to PSEG Global
⢠GWF Energy, California â
â Reduced ownership to 60% and netted $14 million in February
2004 through selldown of approximately 15% ownership
interest to partner
9
10. Status of Other Initiatives
⢠Salalah, Oman â 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 â Preliminary work underway on bond
refinancing
⢠Kalaeloa, Hawaii â 20MW of upgrades in progress;
PPA amendments underway
⢠Regulatory update â Planned rate case in Chile;
Tax pass-through issue in Brazil favorably resolved
10
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
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. Collins Lease Termination
⢠In March 2004, Resources terminated its lease
investment in the Collins generating facilities
â Received $184M of cash
â Original investment - $136M
â Earned over 5% after tax vs. 8% proforma
â Reduced Resources and PSEGâs overall risk
exposure
â Recorded loss of $17M in 2004
14
15. Aircraft Leases
⢠Modest investment in aircraft leases:
5 planes totaling approximately $57M
⢠Includes lease of one Boeing 767 to United
â Exposure - $15M
â No earnings being recorded
â Aircraft is being used by United
â Awaiting final United restructuring plan
15
16. KKR â Sale of Borden and Amphenol
⢠In September 2004, KKR announced the sale
of Borden and Amphenol
â Resources received cash distributions totaling
approximately $26M
â Transactions will result in a pretax gain of $1.7M
â Remaining investment in KKR reduced to
approximately $18M
16
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. 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. 2005-2009 Earnings Outlook and Drivers
2% - 3%
$130M â $150M
$135M â $155M
2004 2005 2006 2007 2008 2009
Estimate Estimate
+ TIE + Texas Market Recovery
+ Skawina & Elcho
- Eagle Point - Bridgewater
19
20. Key Takeaways
⢠Maintain targeted credit ratios
â 3X cash flow coverage target
â 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 paceâŚconsistent 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
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
25. Current Ratings and Objectives
⢠Re-establish A2 rating for
Commercial Paper programs Moodyâs 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) â indicates negative outlook
25
26. Business Risk Improvements
PSE&G:
â Operational excellence and modest regulatory calendar provides predictable earnings
and cash flow
PSEG Power:
â Successful in securing 12- and 36-month contracts in the 2004 BGS auction
â BGS auctions and other contracts/positions have termed up sales consistent with the
75% or more objective
â Minimal near-term commodity risk
â Multi-year BGS auctions spread market timing impacts
â Construction completed in Midwest; BEC and Linden plants nearing completion
PSEG Energy Holdings:
â Executing strategy to opportunistically monetize assets
â Meaningful cash flow and earnings contributions
â Cash to Enterprise of $375 million YTD (common dividends and preferred
redemptions)
26
27. Credit Metric Summary
PSEG Power:
â Equity investment of $300 million in 2004 reduces adjusted leverage
(adding back basis adjustment) to approximately 45%
â FFO interest coverage averages in the mid-4x range for 2005-2006
â Positive free cash flow in 2005 and beyond available to further
delever and improve interest coverage
PSE&G:
â Targeting leverage of 53% (includes short-term debt and long-term
debt due within a year; excludes securitization debt)
Energy Holdings:
â Interest coverages averaging 3.0x
PSEG:
â Consolidated leverage targeted in low-mid 50% range and interest
coverage in the range of 3.5x â 4.0x
27
28. Ratings Summary
⢠Issues from recent ratings actions are being addressed:
â Nuclear Performance
â Maintenance Outage at Mercer
â Transmission Issues
â Trading Revenues
⢠Emphasis on reducing business risk continues
⢠Strengthening cash flows support improving interest
coverages and delevering
28
30. Liquidity Summary
⢠Modest maturities pose no market access challenges
â No further maturities in 2004
â PSE&G has only $125 million of maturing debt in 2005
â Power does not have another maturity until 2006
â Holdings does not have another recourse debt maturity until 2007
⢠PSEG and PSE&G extended the maturities and increased the
capacity of credit facilities
â PSEG/PSEG Power replaced $600 million of 364-day facilities with three-year
and four-year facilities totaling 1.05 billion
â 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. Liquidity â 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. 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
34. Growing Cash
2003 â 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 â $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. 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 Holdingsâ level
System Reinforcement New MW ⢠Capital programs are
Environmental locally funded
Facilities Support
35
36. Updated Capital Spending (vs. 10k)
PSE&G
â Capital spending has increased $100 million per year in 2005 and
2006
â Infrastructure replacement
PSEG Power:
â Capital spending has increased between $125 million and $150 per
year from 2005 through 2007
â Delay of Linden plant, back-end environmental control costs at
Keystone/Conemaugh, and incremental capex at Nuclear
PSEG Energy Holdings:
â Consolidated capital spending of $40 - $50 million per year in 2005
and beyond
36
38. 2005 Guidance â 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. Summary of Financial Strengths
⢠Reducing Leverage
â Mandatory Convert adds equity in 2005
â Significant excess cash flow enables further delevering
⢠Focusing on Credit Ratings
â Addressing concerns and committed to maintaining and/or
improving
⢠Preserving Substantial Liquidity
â Extended maturities and increased capacity
⢠Strengthening Free Cash Flow
â Improving Cash from Operations
â Construction nearing completion
39
40. Summary
Jim Ferland
Chairman, President and CEO
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
43. Dividend Prospects
⢠Long History of Dividend Payments
â Uninterrupted annual dividend since 1907
â Modest increase in January, 2004
⢠Ability to continue modest increases
â Improved cash flow
â Reasonable payout ratio
â Important to shareholders
â Subject to Board of Directors approval
43
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