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CFOs speak out: Growth Strategy for the 21st Century

For The 21st Century
Fortnightly Magazine - October 2004

2005 and 2006, and also some improvement in the markets. PSEG Power is in our unregulated generation company-about 14,000 MW. All of our generation is unregulated and was separated out back in 1999. Our vertically integrated utility was divided in two. The transmission and distribution went to PSE&G, our regulated company, and all of the generation went to an unregulated wholesale company, PSEG Power, which is primarily in the Pennsylvania-New Jersey-Maryland market, with a few thousand megawatts in surrounding regions.

How do you view the dividend?

TO: We think a solid dividend with modest growth is at the core of a utility investment profile. For us, our yield is about 5.25, and our payout based on our guidance will be mid to high 60s this year (that's dividend over earnings). We have very strong cash flows, which should improve quite a bit in 2005 as our capital expenditure program in power gets cut by one-half or more.

What do you think of the energy trading business?

TO: We do not have aspirations of broadening energy trading beyond our core PJM and surrounding regions. We don't want to go national. We don't want to go international. We want to trade in energy commodities in PJM and the surrounding areas where we already have an active portfolio. That may include electric, gas, emissions, transmission rights or fixed transmission rights [FTRs]. It may include a broad set, but that is all in the sandbox in which we currently play.

Is energy trading today the moneymaker that it was marketed as in the late 1990s?

TO: We never marketed [ER&T] in that way. I will say that we have seen some reduced volumes and reduced number of participants in some of the commodities that we participate in. We are seeing some financial firms come in. We think our trading business will make the same amount this year as it did last year. Incremental value of our ER&T unit in 2004 is $150 million, which includes transmission rights, the BGS auction, and trading, among other things. This figure is about 10 cents less per share than we had expected in 2004. So, from 2003 to 2004 it was basically flat. In prior years we had seen a modest year-over-year increase.

S&P recently revised your company's outlook to negative from stable, citing "erratic performance at the nuclear fleet over the past few months and a protracted maintenance outage at the Mercer coal-fired plant that diminished availability, transmission constraints that have dispatch and cost implications, and expectation that trading revenues will not be robust as expected." Do you agree with S&P's position and how does the company hope to rectify the situation?

TO: We are disappointed that S&P did that but we understand that they had to take a view. The primary focus has been the availability of our nuclear plant. We had targeted our capacity factor this year for 90 percent. Now we expect it to be about 86 percent. This year and next we will see investment into our nuclear facilities. So, the bulk of that availability