PSE&G 2005 Annual Report Download - page 12

10 PSEG 2005
selectively monetizing investments when it makes
good business sense. In keeping with this strategy,
PSEG Resources – the passive investment arm of
PSEG Energy Holdings – concluded an agreement in
December 2005 to sell its interest in the coal-fired
Seminole Generation Unit 2 in Florida. This sale resulted
in an after-tax gain of approximately $43 million. It also
produced significant cash proceeds, which we used
along with cash generated from PSEG Global to reduce
debt and further enhance PSEG Energy Holdings’
financial position.
We are continuing with our program of reducing exposure
to international markets when attractive opportunities are
available. In January 2006, PSEG Global reached an
agreement to sell its interests in the Skawina and Elcho
power plants in Poland. The sale is expected to generate
net cash proceeds of about $300 million, an amount in
excess of book value.
A Bright Outlook for PSEG
Looking ahead, our expectations for improving earnings
are driven largely by our cost-effective nuclear and coal
units in the current high commodity price environment.
These units represent more than 80 percent of PSEG
Power’s expected annual output and an even larger por-
tion of its profitability. Their economics have become
even more favorable compared to higher-cost natural
gas units, which often set the price of electricity.
Moreover, PSEG Power has already termed up at attrac-
tive prices most of its expected 2006 nuclear and coal
generation output, and has increased the volume of its
contracted generation through 2007 and 2008.
Based largely on PSEG Power’s fundamentally strong
position, we expect a continuation of our company’s
robust earnings performance in 2006. Longer term,
we expect earnings growth at PSEG to be in excess
of ten percent in 2007 and 2008. This reflects realistic
assumptions, including that PSEG Power’s fleet
continues to operate well and that PSE&G obtains
reasonable outcomes in its regulatory proceedings.
An Even Brighter Future with Exelon
While our outlook remains bright as a stand-alone
company, we have a unique opportunity to create
an even stronger platform for long-term success by
combining with Exelon.
The strategic reasons for the merger remain compelling.
The closing of the merger will provide PSEG with asset,
geographic and regulatory diversification; scale in the
merchant generation business; and the ability to achieve
excellent nuclear performance on a par with that of
large nuclear fleet operators such as Exelon.
Risk reduction is a particularly important objective of the
merger. The new combined company will have utilities in
three major metropolitan areas and an electric generating
fleet across a multi-state region. This larger footprint will
reduce the concentration of risks we face as a company
operating one U.S. utility within a single state and relying
on a relatively small number of power plants for most of
our generation revenues.
The completion of the merger will also substantially
reduce execution risk as we work to sustain and
further strengthen the improvements in our nuclear
performance. It will enable us to integrate our nuclear
operations with Exelon’s. This will be an important step –
indeed, a key one – toward achieving nuclear excellence.
The improved long-term nuclear performance we
expect as a result of the merger should significantly