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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007, for Public Service Enterprise Group Incorporated (PSEG) and its principal subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power), and PSEG Energy Holdings L.L.C. (Energy Holdings). PSEG operates as a holding company with four reportable segments: PSE&G (regulated utility), Power (wholesale generation and trading), and Energy Holdings (international investments and leveraged leases).

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 6% year-over-year, driven by higher commodity prices and volumes in the PSE&G and Power segments.
• Profitability Surge: Net income increased 41% to $1.11 billion. This was primarily due to strong performance in the Power segment (Net Income of $736 million vs. $394 million in 2006) resulting from higher energy prices and improved margins.
• Discontinued Operations: The 2006 period included a significant $228 million gain on the disposal of discontinued operations (Poland assets). The 2007 period reflects a loss of $17 million from discontinued operations, primarily related to the sale of the Lawrenceburg facility and Electroandes.
• Asset Write-downs: Write-downs of assets decreased significantly from $263 million in 2006 (related to the RGE sale) to $12 million in 2007 (related to Venezuelan investments).
• Cash Position: Cash and cash equivalents increased by $296 million to $421 million, supported by strong operating cash flows and proceeds from asset sales.

Guidance, Outlook, and Risks

• Outlook: Management expects margin improvements to continue for Power as higher prices for nuclear and coal-fired generation are realized. PSE&G anticipates positive impacts on revenues from new transmission line construction projects.
• Asset Sales: Energy Holdings completed the sale of Electroandes (Peru) in October 2007 for approximately $390 million. An agreement was also reached to sell interests in Chilquinta (Chile) and Luz del Sur (Peru) for approximately $685 million, expected to close by year-end.
• Regulatory Risks: PSE&G faces ongoing regulatory proceedings regarding the Basic Gas Supply Service (BGSS) rates and the Societal Benefits Clause (SBC). Power is subject to environmental compliance costs, including a $1.2 billion project for emissions controls at Mercer and Hudson plants.
• Market Risks: Power is exposed to commodity price volatility. Higher market prices have increased unrealized losses on derivative contracts, recorded in Accumulated Other Comprehensive Loss (OCL).
• Contingencies: Significant environmental liabilities exist regarding the Passaic River and Newark Bay cleanup, with costs potentially ranging from hundreds of millions to billions of dollars. Additionally, Energy Holdings faces tax risks related to leveraged lease transactions challenged by the IRS.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the net cash proceeds and final tax implications of the Electroandes and Chilquinta/Luz del Sur sales.
• Environmental Reserves: Review the adequacy of reserves for the Passaic River cleanup and the $1.2 billion emissions control projects at Power's coal plants.
• Derivative Exposure: Assess the potential impact of the $201 million after-tax unrealized losses on commodity derivatives currently held in OCL on future earnings.
• Regulatory Rate Cases: Monitor the outcome of the BPU proceedings regarding PSE&G's BGSS rates and the $130 million dispute over the Market Transition Charge (MTC).
• IRS Audit Status: Track the resolution of the IRS audit regarding leveraged lease tax deductions, which could result in significant tax liabilities if disallowed.