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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for Public Service Enterprise Group Incorporated (PSEG) and its principal subsidiaries: PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G). PSEG operates as a holding company with a diversified energy portfolio in the Northeastern and Mid-Atlantic United States, comprising wholesale energy supply (Power), regulated utility transmission and distribution (PSE&G), and other energy-related investments (Energy Holdings).

Key Financial Metrics

Segment Performance (Net Income):

• Power: $318 million (vs. $275 million in Q1 2008)
• PSE&G: $124 million (vs. $137 million in Q1 2008)
• Energy Holdings: $7 million (vs. $29 million in Q1 2008)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 3% ($129 million) driven by higher commodity prices and favorable weather impacts on gas volumes, partially offset by lower generation volumes due to economic slowdown.
• Profitability: Net income remained flat at $444 million. The increase in Power's earnings ($43 million) was offset by declines in PSE&G and Energy Holdings, primarily due to the absence of one-time tax benefits recorded in Q1 2008 related to IRS refund claims.
• Cash Flow: Operating cash flow surged 33% to $1.389 billion, largely due to increased net cash collateral receipts and counterparty receivable collections at Power.
• Liquidity: Cash and cash equivalents increased significantly from $321 million to $1.232 billion, bolstered by strong operating cash flows and the issuance of $209 million in medium-term notes.
• Debt Reduction: Total long-term debt decreased by $146 million following the redemption of $280 million in non-recourse project debt and $250 million in senior notes, partially offset by new issuances.

Guidance, Outlook, and Risks

Management Commentary: Management maintains a focus on operational excellence and financial strength. The company increased its quarterly dividend to $0.3325 per share (indicated annual rate of $1.33). PSE&G received approval for a $694 million Capital Economic Stimulus Program to accelerate infrastructure investments.

Key Risks and Contingencies:

• Environmental Liabilities: Significant exposure exists regarding the Passaic River and Newark Bay cleanup studies. Estimated costs for the Passaic River remediation range from $900 million to $2.3 billion. PSE&G has recorded a $705 million liability for MGP site remediation.
• Regulatory Compliance: New NOx emission rules in New Jersey may require the retirement of up to 2,800 MW of generation capacity by 2015. Mercury regulation changes and potential CO2 regulations under the Clean Air Act pose compliance cost risks.
• Tax Disputes: PSEG faces an ongoing dispute with the IRS regarding leveraged lease transactions. While a $355 million charge was taken in 2008, a total loss scenario could result in an additional earnings charge of $100 million to $120 million and cash exposure of up to $1.2 billion.
• Market Risk: Exposure to commodity price fluctuations is managed through hedging, though trading VaR increased slightly to $2 million as of March 31, 2009.

Investor Verification Checklist

• Environmental Accruals: Verify the sufficiency of the $705 million MGP remediation liability and the potential impact of the Passaic River cleanup cost estimates ($900M-$2.3B).
• Tax Exposure: Assess the likelihood of the IRS leveraged lease dispute resolution and the potential for additional cash payments or earnings charges beyond the 2008 reserve.
• Asset Retirement: Review the impact of new NJ NOx regulations on the potential retirement of 2,800 MW of generation capacity and associated stranded asset costs.
• Liquidity Position: Confirm the availability of the $3.45 billion in credit facilities and the ability to refinance upcoming debt maturities in a constrained credit market.
• Regulatory Approvals: Monitor the status of the Capital Economic Stimulus Program and the approval of the Mid-Atlantic Pathway Project (MAPP) transmission line.