public serviceenterprise group 10/08/04-82-125
TRANSCRIPT
Public Service Enterprise Group
Strategic Presentation to the Financial Community
October 8, 2004Short Hills, NJ
PSEG Energy Holdings Strategic Direction
Bob DoughertyPresident and COO
3
Energy Holdings Profile
domestic and international
generation and distribution
primarily energy-related financial
investments
2004 Earnings $130M - $150MTotal Assets $6.7 billion*FFO $402 million*Recourse Debt/Cap 47%*
(*as of 6/30/04)
4
Key Objectives
• Global – Focus on operations– Dispose of assets selectively
• Resources– Focus on credit quality– Monitor tax issues
PSEG Global Strategic Direction
6
Focus on Operations
• Capital investments going forward limited to maintenance of existing business
• Emphasis on improved performance
• Opportunistic monetization of assets
Invested Capital ($2.4B)(excluding non-recourse debt)
6/30/04
Latin America(other than Chile)
32%
8% 8% 4% 16%
32%
Chile
Asia Pacific
Europe IndiaNorth
America
7
Current PortfolioEarnings 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
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
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
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
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
PSEG Resources Strategic Direction
13
Focus on Credit
• Key contributor of reliable earnings and steady cash flow
• Most of the cash return is in the form of tax benefits
• 70% of lessees investment grade
• Weighted average rating is A-/A3
Energy Leases
10%
84%
94% Lease Related
Real Estate, Transportation
& Industrial Leases
LBO & Limited Partnerships
2%Other 4%
Total Assets $3B6/30/04
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
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
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
17
Key Takeaways
• Focus on continuation of earnings and cash generation
• Monitor credit quality of portfolio
• Consider opportunistic transactions to improve portfolio credit quality
18
2005 Guidance
Key Assumptions
• No new CapEx
• Fairly stable F/X environment
• Maintain current lease portfolio
2004 Estimate Resources Global Other 2005 Estimate
$130M - $150M $135M - $155M
19
2004Estimate
2005Estimate
2006 2007 2008 2009
2% - 3%
$130M – $150M
$135M – $155M
2005-2009 Earnings Outlook and Drivers
+ Texas Market Recovery+ TIE
+ Skawina & Elcho- Eagle Point - Bridgewater
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
PSEG Financial Review
Tom O’FlynnExecutive Vice President & CFO
22
Financial Objectives
Reduce Leverage
Maintain/Improve Credit Ratings
Preserve Substantial Liquidity
Generate Free Cash Flow
23
Improving Debt/Cap Ratio• Converted $800 million of Power
non-recourse debt in 2004
• Energy Holdings debt reduced by more than $300 million through cash flow and asset monetization
• BGS securitization to provide $125 million to PSE&G
• $80 million from DRIP common stock issuance to continue
• Mandatory convert to add $460 million of equity in 2005
PSEG
57% 56% 53%
Dec 03 Dec 04 Dec 05
* Calculated consistent with PSEG Leverage Covenant excluding securitization debt and non-recourse debt.
24
Financial Objectives
Reduce Leverage
Maintain/Improve Credit Ratings
Preserve Substantial Liquidity
Generate Free Cash Flow
25
Current Ratings and Objectives• Re-establish A2 rating for
Commercial Paper programs at PSE&G and PSEG
• Maintain Senior Unsecured ratings of BBB/Baa1 at PSEG Power
Moody’s S&P Fitch
PSEG
Corporate Credit Rating -- BBB (N) --
Commercial Paper P2 A3 F2
PSE&G
Senior Secured A3 A- (N) A
Commercial Paper P2 A3 F2
PSEG Power
Senior Unsecured Baa1(N) BBB (N) BBB
PSEG Energy Holdings
Senior Unsecured Ba3 (N) BB- BB (N) (N) – indicates negative outlook
• Maintain Senior Secured ratings of A-/A3 at PSE&G
• Energy Holdings continues as an independent credit
26
Business Risk ImprovementsPSE&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)
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Credit Metric SummaryPSEG 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
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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
29
Financial Objectives
Reduce Leverage
Maintain/Improve Credit Ratings
Preserve Substantial Liquidity
Generate Free Cash Flow
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
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Liquidity – as of 9/30/04Expiration 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 251 293-year Credit Facility Dec-05 350 CP Support/Funding/LCs 0 350Bilateral Term Loan Apr-05 75 Funding 75 0Bilateral Revolver Apr-05 25 Funding 25 0Uncommitted Bilateral Agreement N/A * Funding 25 N/A
PSE&G 5-year Credit Facility Jun-09 600 CP Support/Funding/LCs 190 410Uncommitted Bilateral Agreement N/A * Funding 95 N/A
Energy 3-year Credit Facility Oct-06 200 Funding/LCs 39 161Holdings
Power 3-year Credit Facility Aug-05 25 Funding/LCs 0 253-year Credit Facility** Apr-07 600 Funding/LCs/CP Support 19 581
Total $2,605 $2,006
Short-term Investments $52 $2,058
** PSEG/Power Co-borrower facilityTotal Liquidity Available
32
Debt Maturity Schedule 2004-2013As of September 30, 2004
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Prin
cipa
l Mat
urin
g(in
$ M
illio
ns)
Enterprise 49 49 509 49 249Energy Holdings (Recourse) 309 507 400 544Power 500 250 800 666PSE&G 125 322 113 250 60 300 450
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Enterprise Holdings Recourse
Power
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.
33
Financial Objectives
Reduce Leverage
Maintain/Improve Credit Ratings
Preserve Substantial Liquidity
Generate Free Cash Flow
34
Growing Cash2003 – 2008 Cash Flows
Investment incl. Nuclear Fuel
@ Avg. Annual ≈ $110m
($2.5)
($1.5)
($0.5)
$0.5
$1.5
$2.5
2003 2004 2005 2006 2007 2008
$ Bi
llion
s
BGS Securitizaton
Cash from Operations
Excess Cash Available
Net Dividends Incl. DRIP @ $80m/year
through 2007
GWF Refinancing
Net Asset Sales/Return of Capital
YTD and Announced
Note: Excludes proceeds from potential asset sales
35
Declining Capital Spending Trend
0
100
200
300
400
500
600
2004
2005
2006
2007
2008
2009
$ M
illio
ns
New BusinessEnvironmental/RegulatorySystem ReinforcementFacilities Support
0
100
200
300
400
500
600
200420052006200720082009
$ M
illio
ns
RegulatoryOtherNew MWEnvironmental
0
100
200
300
400
500
600
2004
2005
2006
2007
2008
2009
$ M
illio
ns
• No new CapEx at Holdings’ level
• Capital programs are locally funded
PSE&G Power Energy Holdings
36
Updated Capital Spending (vs. 10k)PSE&G
– Capital spending has increased $100 million per year in 2005 and2006
– 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
Parent Earnings Impact
38
2005 Guidance – Parent Impact
• Parent currently has $1.6 billion of long-term debt and preferred securities outstanding
• Energy Holdings retiring a $500 million preferred stock investment by Parent (retired $225
-75
-65
-55
-45
-35
-25
-15
-5
2004 EstimatePreferred
Dividend Income Other 2005 Estimate
$ M
illi
on
million YTD)
• In 2004, Parent reduced short-term borrowings issuing $200m of Private Placement debt
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
SummaryJim FerlandChairman, 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
42
2004Estimate
2005Estimate
2006 2007 2008 2009
2005-2009 Earnings Drivers4% - 6%
$3.15 - $3.35
+ Capacity Prices
+ Texas Market Recovery
+ Skawina & Elcho
+ Improved Nuclear / Fossil Performance
+ Nuclear Uprates+ ER&T Contracts
+ Rate Relief+ Electric and Gas Sales Growth
- Midwest Plants
- Eagle Point
- Transmission Rate Reset
+ TIE
PSEG Power
PSE&G
PSEG Energy Holdings
$3.15 - $3.35
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
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 pricesdriven by worldwide demand
• Improving earnings, cash flow create opportunities in the longerterm for share repurchase or selective asset acquisition
• Visible earnings growth drivers after 2005
• Attractive dividend yield with potential for modest increases
Public Service Enterprise Group
Q & A