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)

27

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

28

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

31

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