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. 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. 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. 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. 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. 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
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. 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. 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. 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. 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. 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
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. 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. 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 - $175 M
54
24. Key Objectives
• Continue positive results in safety and
environmental stewardship
• Consistently keep the breakers closed
• Capture O&M efficiencies
57
25. Continued Success in Key Areas
OSHA Rate
9
• Safety 8
7
– Significant improvement 6
in OSHA rate since 5
4
1990 3
2
1
0
1990 1995 2000
1990 1995 2000 2004
Super Region Generation Company NOx Emissions
(lbs/MWh) (2002)
• Environmental 5
– Consistently one of the 4
Power
cleanest generators in 3
the Super Region
2
1
0
58
26. Revenue Enhancement Opportunity
Fossil Generation at Market Prices
• Fossil plays an integral part in ($ 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. 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. 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. 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. 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. 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. 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. 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
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. 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. 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. 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. 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. 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. 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. 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