Public Service Enterprise Group Incorporated (PEG)

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Public Service Enterprise Group Inc. (PEG)

Analyst Conference

March 01, 2013 8:00 am ET

Executives

Kathleen A. Lally - Vice President of Investor Relations

Ralph Izzo - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of PSEG Power LLC, Chairman of Public Service Electric & Gas Company, Chief Executive Officer of PSEG Power LLC and Chief Executive Officer of Public Service Electric & Gas Company

Ralph A. LaRossa - President of Pse&G and Chief Operating Officer of Pse&G

Randall E. Mehrberg - Executive Vice President of Strategy & Development, Chief Operating Officer of Pseg Energy Holdings Llc and President of Pseg Energy Holdings

Caroline D. Dorsa - Chief Financial Officer and Executive Vice President

William Levis - President, Chief Operating Officer and Director

Shahid Malik - President

Analysts

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Gregg Orrill - Barclays Capital, Research Division

Presentation

Kathleen A. Lally

Good morning. We're going to get started in a minute. Good morning. I know it's a very busy season, and we appreciate you all being here with us this morning, both at the Waldorf Astoria and on the webcast. I'm Kathleen Lally, Vice President of Investor Relations for Public Service Enterprise Group. We have a very full morning for you. We tend to do a very thorough review of our businesses and provide you with an outlook for growth over the next several years, particularly in terms of the utilities capital program, take you out longer than we normally have in the past and provide a very thorough review of the financial picture of how our -- and the corporation as a whole. So we hope you stay with us.

So we're going to start with Ralph Izzo, Chairman, President and CEO. Ralph is going to -- we're going to hold questions for Ralph until the end of the morning. Ralph Izzo will be followed by the President of PSE&G, Ralph LaRossa; and then Randy Mehrberg of PSEG Energy Holdings. They will take questions at the end of their -- at the end of Randy's comments. After that concludes, we'll have a short break for about 15 minutes, and we will then proceed to discuss PSEG Power's business, Bill Levis, President and Chief Operating Officer of Power will do a review of his business; and he'll be joined by Shahid Malik, President of Energy Resources & Trade. They will take Q&A jointly at the end of Shahid's comments. And then shortly after the Q&A, Caroline Dorsa, Executive Vice President and Chief Financial Officer, will provide a review of the company's earnings and cash picture for 2013 and into 2015. Caroline will be followed by a short summary from Ralph Izzo, and they will take Q&A together at the end of the day. Again, a very thorough review of the PSEG, which we hope you will find informative.

I'm now going to turn the program over to Ralph Izzo.

Ralph Izzo

I saw my General Counsel gagging because we didn't refer to the forward-looking statement and the GAAP discussion. So good morning, everyone. It's great to be here with you again for our Annual Meeting. And it is a fascinating phenomena to watch, whether it was at the church or an employee meeting how the front row is always empty and you eventually do fill in. So please, welcome to come on up and spend some time with us.

As Kathleen pointed out, we have lots to talk about today, and I think we're going to be giving you some information that is new. It's not necessarily news, but it is more detail over the -- as it pertains to longer-term outlook for the company and the Utility, in particular. And we'll create a context for you in terms of the Utility capital program with respect to the overall company financial picture that will provide a level of detail and fulsomeness that we haven't provided in the past. And I think you'll walk away feeling quite good about it. I certainly feel quite good about it, and I'm eager to get started in that regard.

So a little bit about our philosophy at the company, if I may, and then we'll get into some of the numbers. It all begins at PSEG with our employees, without question, and we are beyond fortunate to have the cast of employees that we do have. And it is often said that while we still have not crossed the bridge, whereby the first 2 words out of our mouth when we meet with employees is anything other than good morning or good afternoon. But certainly the third and fourth words when we meet with employees are operational excellence. And as a matter of fact, some people accuse me maybe of the first 2 words being operational excellence and the third and fourth being good morning.

But we -- in present of our employees, where there's the 91.1% capacity factor at our nuclear plants or the 1.7% forced outage rate at our combined cycles or the 58-minute Kd results or the quality of our proxy statement or the accuracy of our press releases that throughout the company, operational excellence is first and foremost on our minds.

And I think you'll see some numbers later on from Ralph and from Bill and from Randy and Shahid that point out that we've delivered our net promise, and that's resulted in a level of financial performance that we're quite proud of in light of the business environment we face. We've hit our earnings target. We've created a very strong balance sheet. And really the theme today is about how we're going to deploy that balance sheet into some very disciplined investments. Investments that we believe strongly are what our customers need and are demanding today. A little bit more about that in a few minutes.

I just shut it off. I told you to cover that button, and I hit it anyway. Now right about now my wife would say, "And you run nuclear plants?" But we'll leave it there for a second. So last year, 2012, I won't read you the numbers, you could see the assets and the operating earnings by company. Starting on the left side of the screen, the Utility, the usual list of accolades about its reliability, its performance, its customer satisfaction. I cannot say enough about that. But the story looking ahead is the capital program to reinvent the grids to a certain extent, and I will spend quite a bit of time focusing on that later on.

Power, the story is one we've started to shine a light on. The flexibility of the fleet, the fuel flexibility, the technology flexibility, the consistent favorable physical location, the consistent favorable environmental position of the fleet is standing as well in a very, very challenging wholesale power market. And in holdings, not only a fabulous job of derisking the balance sheet, but now it's starting to grow some fledgling businesses that are performing quite well for us, some very attractive unregulated solar energy projects.

What you can't see on this thing is that the forward button is like half the size of the device and the shut the power off is a tiny piece, but somehow my thumb seems to keep going to it. So if you'll indulge me for a moment, as I look backward, prior to looking forward. 2012, a year of significant accomplishments. For the 6th year in a row, we've hit our earnings guidance. I don't know that we didn't do it in the 7th year, but for very selfish reasons, I've only been counting 6. PSE&G now over 40% of the consolidated operating earnings of the company. Record output from our combined cycle gas turbine units, as gas has become in favor on the dispatch curve. The Utility recognizes a variety of places, fifth time in the last 8 years is the most reliable electric utility in the nation, 11th time in a row in the mid-Atlantic and a bunch of awards for its outstanding response to a myriad of storms that we've experienced in the past 15 months. And a 2-week period that was a defining event in our history, namely Superstorm Sandy, which we will have much more to say about later on.

And then a very quiet thing that we did, which I don't think we often talk about and we should. Namely that we, without event, extended the contracts of 5 of our 6 labor unions, all of the major ones, we have one major one that we didn't get to, but that doesn't come due until '14, at very, very fair and reasonable terms. And I will submit to you that one of our competitive advantages is the progressive enlightened nature of our union leadership. We are quite fortunate to share our company with them, to share an operating experience and very often a cup of coffee with these men and women who are just outstanding and true partners in running the company successfully.

Lastly on the investment front, we had some key regulatory approvals, in particular related to our transmission programs. We are expecting a decision from the Board of Public Utilities on our solar filings made last July. We're expecting to hear something by May 1 on that. We did get 400 megawatts of peakers in service ready to operate and they did operate in New Haven and in Kearny for the summer peak demand and holdings -- added to its fleet of unregulated solar projects supported by long-term PPAs.

That takes us to '13, where we are reaffirming our earnings guidance of $2.25 to $2.50 a share following last year's operating earnings of $2.44 per share. So what's different about '13 if in fact the guidance is exactly what you heard us offer in '12? Here what we've tried to show is the percentage of earnings and where they are coming from, and we've taken you back to 2009 albeit just a year after the gas price spike, which drove the commodity earnings potential of PSEG Power, where it was essentially almost 4x to 1x larger than the Utility to this year, where if you take the midpoint of the operating earnings guidance for each company, which we've publicized, you can see the Utility is half of the company and slightly larger than power.

But the story does not end in '13, and that's what today is about. We've heard you loud and clear saying, "Gee, what happens after the next 3 years?" We thought you'd get the message when we've answered that question well, for each of the past 5 years, about the next 3 years not being the end of time. But nonetheless, we'll give you a little bit more visibility out to 5 and 6 -- I think we're just going up to 5 years today.

Yes, I did it again. Thank you. So if I take a look back to where we were in 2008 and where we are in 2012, no one, no one likes to show operating numbers that have a negative first derivative. There's just no if, ands or buts, there's no way to put a happy face on that. But if you look at that $2.91 going to $2.44 in the context of $70 of PJM West around-the-clock prices compared to the $34 that we have today, I believe our strategy of making sure we get the most out of those power assets while growing the Utility has at least offset a fair amount of what would have been an otherwise very, very challenging picture. We've outperformed even our own expectations in terms of O&M growth. We have nearly tripled the transmission rate base. We took Utility distribution spending from 0 to $955 million that gets contemporaneous returns. We opened up a quasi-new line of business in terms of solar and energy efficiency to the tune of $900 million in contemporaneous return. We've maintained consistent solid performance at our combined cycle units. We reached out a few more terawatt hours of power from our nuclear plants, both in terms of running the assets better and expanding the output of Hope Creek, and we've started to grow this unregulated solar business. So a pretty good run from '08 to '12.

But the event of '12 that once again defines us, and I know I'm repeating that expression but it can't be overstated, was Superstorm Sandy. I'm not going to read the statistics to you. But I am going to ask you to indulge me for about 3 minutes as I show you a video slideshow that we plan to share with our shareholders, as well as our employees about what Sandy meant to us. Do I have to do anything, Carol or Kathleen? No? Thank heaven. Thank you. If we can show the slideshow.

[Presentation]

Ralph Izzo

So a couple of observations on that point. First of all, I cannot over emphasize how much personal sacrifice employees experience to make sure that customers came back. And while all eyes of policymakers and immediately were on customers, one thing that no one noticed, and just a huge acknowledgment here that we need to make, was that every time a circuit was restored, there was a power plant able to deliver electricity through those wires. The folks at PSEG Power were every bit as responsible for the successful and safe restoration of electricity to 2.1 million customers. There was no problem with the grid when we watched load collapsed by 80% and there was no problem with the grid, the high-voltage grid, when Power was there to respond, as customers returned back on. And that meant successfully closing Salem during some pretty nasty conditions in the Delaware River, successfully bringing back our combined cycle gas turbines, successfully bringing back our peaking units, with people working in the dark, in the cold around-the-clock. And it was just an amazing thing to watch. It was equally fun to answer personally quite a few e-mails from customers. And I will tell you, it was actually rather heartwarming, customers would write, and it's interesting to see what panics people. In some cases, it was the absence of access to life-saving equipment. In others, it was the looming early decision deadline for college applications in the absence of computer access. And whenever I would respond in every case, the response back from the customer was, "Thank you so much. I know you're hard at work."

Except one customer wrote back, "Thank you so very much for responding. But you are still, without a doubt, the worst CEO in the worst run company." Suffice to say, I did not respond the second time in that e-mail, but that was the 2-week period. So it was quite an experience. And it was something that made us think hard. And in a couple of slides, we'll talk about what that thinking led to.

Here you see a set of numbers that are business as usual. By that, I mean, what we have discussed with our colleagues at the BPU, what has been approved, what we discussed with our colleagues at PJM, what they have approved and put in the RTEP. And that's a capital program in the next 3 years that calls for a little over $6 billion in investment, 70% of which is aimed at growth; and 80% of all the investment at the Utility, the lion's share of the growth taking place at the Utility; and once again, the centerpiece of that investment being in the transmission arena. This is already approved, in the works, engineers at the headquarters working on the work packages and getting that out to the field.

Now we've talked about our $3.9 billion 10-year Energy Strong Program. And in addition to that, the $1.5 billion transmission program that we believe are essential for meeting what we're calling a new normal for our customers. And we'll give a little more detail on that in the next slide. If all of that were to occur over that multiyear period, here's what it means for the next 3 years. Okay, so I'm not forecasting 10 years. I'm just giving you out to '15. Caroline will give you a little bit more information out to '17 later on. And what you see is the 70% growth becomes 80% growth investments, and the Utility consumes 85% of that capital, and the $6.1 billion becomes $7.6 billion over the next 3-year period.

Now let me pull back a second and ask a question that I've often asked in the past of this group, but nonetheless, I want to repeat now. How many of you are our customers? Okay, fair chunk. I remember that in the past.

So I'm going to speak to those of you who are our customers, both as investors and analysts and as our customers today. So I will often congratulate Ralph LaRossa and his team at the Utility because they deserve it, people like John Latka, our division managers. I would argue there are none in the industry who are better at restoring customers once they are out. And in fact, throughout the Sandy and post-Sandy era, people would come to me in my community, "You must be tired, you must be exhausted having to deal with what you've had to deal with." And I say, 'Yes, I am tired. But rest assured, my most important job is making sure that Ralph LaRossa's coffee cup was filled so he could do the real work of getting customers back." And the last person you want in managing the emergency response and it was Izzo, and you wanted it to be LaRossa and he did an outstanding job. But I think Ralph would be the first person to tell you that outside of the Sandy-type events, where everybody loses power, but on the day-to-day events, which are the ones that earn us the Most Reliable Electric Utility in the Nation awards, it is not the current set of management team that are responsible for the outstanding performance of this company. It was the foresight and the thinking of teams of engineers and network designers decades ago that realized a very simple fact, that you will do better by customers if they're being fed in more than one direction. Because our network is designed in many parts, not throughout the territory, to feed customers in a different way if their primary route of getting electricity is down. So we have the switching capability and the network design that achieves better levels -- lower levels of customer interruptions in most utilities. Even with a predominantly overhead system.

After Irene, after the Halloween snow storm, after Sandy, after getting those kinds of e-mails that say, "Thank you for your message but you are the worst CEO in the business," we said, "Wait a minute. Something is going on here." Everyone is focused on demand growth slowing down, why are customers absolutely insane when they lose their power? I mean, think about that we did as a nation during Sandy. We were shipping in military transport utility trucks from across the nation to restore customers. Think of the marginal cost to restore that last customer when we were doing things like that. So while demand is growing more slowly, what's ever, ever clearer is that our lives are much more centered around the use of electricity. Call it what you want, a digital economy, a digitized society. People cannot live without the electricity in their home for a variety of reasons beyond a finite period of time. And for some people that finite period of time is measured in hours. In others, its days. But for no one is it measured in weeks.

So number one, was the massive change in our lifestyles since the forethought -- foresight that was demonstrated by the engineers of PSEG decades ago. Number 2, I happen to be a believer in climate change. I'm not saying the last 15 months is positive that we've had climate change. But I'll be darned if I'm going to be the one standing here for the next Sandy, the next Irene and if someone asks, "What have you done about that?" And my answer is nothing. So the severity of the weathers that we've experienced, weather patterns that we've experienced, the types of storms that we've experienced are clearly happening with increased frequency, whether it's climate change and due to man-made impacts or whether it's a cycle in the natural ecosystem, we're in it and its happening, and there's something that needs to be done.

So to U.S. customers, we said, "What can our customers afford and what's the maximum value we can produce for them?" And we have 2 -- we have a few opportunities here. We have a low interest rate environment. We have highly available labor. We have a declining forward price as compared to where BGS was. And equally, if not more importantly, we have a couple of components of the bill that are coming to an end. That would result in lower rates, if we just let time take its toll, and these have to do with the deregulation of the industry back in year 2000.

But if we capture the moment of all of those forces, we can literally implement this program and hold bills flat. So we've been criticized by some people and say, "Oh, you have to believe in fairy dust to think that you could spend $3.9 billion and not get paid for it." That is nonsense. Of course, we're going to get paid for it. But the customer won't be paying more than they're paying today. We've had extensive conversations with policymakers, both in the administration and in the legislates. We've talked to senior staff of the Board of Public Utilities. I'm not suggesting we've dotted I's and crossed T's by any stretch of the imagination. But I am delighted by the fact that the consistent foresight and progressive thinking at our Board of Public Utilities and in our state government realizes that this is the time to do something of this nature, and we will now spend the coming months deciding whether or not the $1.7 billion for the 40 utility substations or the $454 million to finish out our SCADA systems, et cetera, et cetera, are exactly right. I have confidence in our team that we have to take the things that are exactly right, and at the same time creating almost 6,000 jobs for the economy of New Jersey. Ralph will go through a little bit more detail on this in his presentation.

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