Welcome to the Public Service Enterprise Group second quarter 2007 earnings call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, august 1, 2007. it is now my pleasure to turn the conference over to Kathleen Lally, Vice President of Investor Relations. Please go ahead ma'am.

Thank you very much, and good morning to everyone. We appreciate your participation in our Earnings Call today. I will be shortly turning the call over to Tom O'Flynn. Tom, as you know is PSEG's Executive Vice President and Chief Financial Officer , and President of PSEG's Energy Holdings. Before we begin, however, I just need to make a few points. We issued our earnings release this morning. In case you have not seen it, a copy of the release and related attachments are posted on our website, www.pseg.com, under the investor section. We have also posted a series of slides that detail the operating results for the quarter. We expect to file our second quarter 10-Q at the SEC today. But I also want to mention, that as we indicated in the Form 8-K files last Friday, that along with our second quarter Form 10-Q, we will be filing an amendment to our fist quarter 10-Q that re-states Energy Holding's first quarter balance sheet, to correct a miss classification of some holdings debt as long term. A debt of 207 million senior issued, that will mature in February 2008, should have been classified as current. There is no affect on reported first quarter results of operations or cash flow. In today's earnings webcast, we will discuss our future outlook and I must refer you to our forward-looking disclaimer. Although we believe our forecasts are based on reasonable assumptions, we can give you no assurance that they will be achieved. The results or events, forecasts in our statements today may differ materially from actual results or events. The last word on any of our businesses is as contained in the various reports we file with the SEC. As a reminder, our guidance speaks as of the date it is issued.…

Thanks Kathleen, good morning. I would also like to thank all of you for joining us. I want to first express Ralph Izzo's regrets of not being able to join us this morning, scheduled for meeting, will normally be available for these quarterly updates. We are very pleased with our second quarter earnings. Operating earnings for the quarter increased 69% to $1.15 per share from $0.68 per share in the second quarter in 2006. Increases in operating earnings for the second quarter were the operating earnings for the first half of 2007 to $2.47 per share. This represents a 63% improvement over operating earnings of $1.52 per share reported in the first six months of 2006. The results for the quarter reflect continued strong operations with in a constructive environment which supported results for 2007's first half and should have a continued positive impact on earnings in the second half of the year. Broadly speaking, PSEG Power benefited from a low loss of below markets contracts and lower operations and maintenance expenses. PSE&G, a regulated electric and gas, transmission and distribution utility, continues to benefit in a rate increase implemented during the forth quarter of 2006, an increase in demand, as well as normal weather. And PSEG Energy Holding reported a modest decline in earnings in the quarter due to a lengthy outage at Bio Energy, an Italian bio-mass generation facility. The quarter provided PSEG with progress in several arenas. We are meeting our targets for operating earnings, we are meeting our commitment to maintain and enhance system reliability by supporting major expansion of our transmission system. Moving forward on plans to achieve independent operations of our nuclear plants by year end. We are drafting our responsibilities under New Jersey's clean energy program. We are also addressing opportunities for long-term…

Thank you, sir. (Operator Instructions) One moment please for the first question. And our first question comes from the line of Daniel Eggers of Credit Suisse Securities. Please proceed.

Good morning. On the capacity auction outcome, should we assume that given the fact you didn't change '08 guidance that that fell within the tolerance band of your open exposure, so we shouldn't see any change there? And along the lines of the RPM auction, given the volatility in eastern MAAC pricing from the first auction to the second -- has that caused you guys to have some pause as far as the desire to go build new generation given some relative uncertainty as far as where those prices will continue to clear?

Let me see, Dan. Take one at a time. I would say it generally fell within the tolerance band given our level of open positions. I think the expectations or -- really I would call them planning assumptions that we use in our large conference, end of March, beginning of April -- were more consistent with the second auction. I'm not sure we were in a predictive mode as much as just saying that that was what the current forward market was, and for a simple planning assumption, we were going to use that number. The first auction was in some higher levels, but as you know, we had only a modest open position. So the impact on our P&L was smaller. In terms of our view on new build, I think we've said that we are likely to wait for the first of the four to be completed to get a full deck of information. We do continue to see tightening markets. Over the long-term we do believe that new generation will need to be added, but I think its incumbent upon us to see the first four series and then also assess the zonal breakdown that may happen as you get to subpockets -- as we go out in time and then make assessments. We do -- as we look at the market, we do have excellent abilities to grow from a cash and resource standpoint, but also from a site value perspective. Virtually all our sites do have the physical capacity to grow.

Okay. Then on the CapEx update today, how much ability do you have to get prompt recovery of increased spending on the E&G CapEx? And it looks like you have part but not all of the potential PJM transmission lines in that increased guidance number?

That's fair. From a transmission standpoint, we would expect to have that be recovered. We'd expect to be filing a transmission case when we get into the middle of this. It's probably a couple years out, when we get into the meat of our filings, and that gives you construction work in progress. So we would expect to be getting current recovery on the capital on an annual basis, subject to normal FERC rules.

And then that $650 million, you have $650 million of the $1 billion, is that all for these PJM projects or some other stuff too?

It's all for PJM.

But of the three lines you talked about for $1 billion, how many of those are included in the new CapEx guidance?

Just the one is in there.

Okay. Thank you.

And our next question --

I'm sorry. Just to be clear, the numbers that we have the one major line. The Susquehanna to Roseland line. Sorry, operator. Go ahead.

Thank you, sir. Our next question comes from the line of Paul Fremont with Jefferies & Company. Please proceed. Paul Fremont - Jefferies & Company: Thanks. I guess so far you haven't provided any open EBITDA estimates; is that correct?

That's fair, we've not. Paul Fremont - Jefferies & Company: And I guess, if I were thinking about the auction results, if you had calculated an open EBITDA position back in December based on where the auctions came in, would that have improved based on where the auction came in relative to your planning parameters?

Yes. Paul Fremont - Jefferies & Company: Okay. So if I think about 2008, it's more a hedging phenomenon that maybe would result in no change to the 2008 guidance range that the company's provided?

That's fair. Paul Fremont - Jefferies & Company: Okay. Thank you very much.

Yes. If you go back, Paul, the slide that we showed at our large investor conference had a slide that showed open capacity on an annual basis. I think it went up through nine or ten. So that's fair. The numbers particularly in the first auction were higher than our planning assumption, and we realize that greater amount over time as we step into our open position. Paul Fremont - Jefferies & Company: Thank you.

And our next question comes from the line of Andrew Levy of Brencourt Advisors. Please proceed.

Good morning, guys.

Hi, Andy.

I got a bad cold today, so hopefully you can hear me. But you made a reference in your press release about the disposition of your Latin American assets. Was wondering if you could just give a little bit more detail or not as far as timing, what you're thinking there specifically, and any other type of things you could throw out as far as how the market is for selling those assets and things like that?

I think in general we've got our Electroandes -- our hydroproducer in Peru on the blocks. That's doing quite well. We're through the first round, got a number of parties participating. So we're quite upbeat about our expectations for a result there. As I mentioned a couple times in the remarks, we are more actively looking at alternatives with respect to our other major investments down there. Just as a reminder -- three T&D companies; two in Chile, SAESA and Chilquinta; and one in Lima, Peru, Luz del Sur. The markets are quite strong. Currencies are good, the financing markets are reasonably strong. They had a modest change over the last couple weeks, but nothing like what we've seen here. So those are all the facts in front of us and we're carefully evaluating whether we should think carefully about monetization of additional assets. But no decisions have been made at this time.

What do you think the timing in making that decision is -- a year, next year, sooner than that?

We don't have a specific time. Andy, we will update people as decisions are made and events occur. Though I would say that we are more actively looking now than we have in the past.

That's fair. Thanks very much.

Feel better.

Thanks.

Our next question comes from the line of Gregory Gordon of Citi Investment Research.

Thanks, good morning.

Good morning.

So 15% earnings growth, you're going to spend more on regulated infrastructure. That still leaves you with excess cash to pay down debt, potentially buy back stock and raise the dividend, so what could be bad?

Sounds good to me!

Plus you've got rising asset values in Latin America and you're monitoring the ability to potentially monetize that. Is there anything within the underlying operating profile of the company at this point where we should actually be focused on risk? In the FERC -- are these transmission lines going to be FERC regulated?

Yes.

So the rate increases you would need would go through a FERC regulatory process?

That's exactly right. The $700 million that I referenced in our current transmission investment -- our year-end -- is within PSE&G, but it is all FERC regulated. And these would all be FERC regulated and the largest of the lines that has been approved was approved by the PJM RTEP process -- would all be built under FERC regulation, exactly right.

Okay. I've got a more general question for you. I'm looking around in Illinois where there was just a really meaningful rate subsidy agreed to by the unregulated generating companies. There's a very high profile due diligence on market design and on the corporate structure of the major utility down in Maryland. Pennsylvania has started to go to reset market pricing for some of its utilities for when their contracts expire, but you've got a special session of the legislature there in November on energy issues. To what degree are you monitoring the willingness of the government in New Jersey to continue to sort of bide its time here and wait for the market structure to signal the generation is going to be built before they throw up their hands and say -- look, we need to intervene here in a way to get new capacity and/or cap prices? It just seems to me that this is sort of a serious issue that's permeating in other deregulated markets that hasn't come back full circle in New Jersey and it's of some concern.

Clearly, those are things that we watch. What I say is we've had a process here in New Jersey that seems to be working. The BGS has been going since 2002. It's evolved a little bit from one year to three-year. It's a very competitive process that includes obviously our sales, the physical players, a number of financial players and I think each time it's occurred in the last few Februaries, there's been a collective agreement that the process is working and getting the most competitive price for power. Yes, prices have gone up, but that's a function of constraining markets and largely increasing natural gas prices. We are -- as happens every year in New Jersey, there is a period of review of some of the details around the BGS. I believe that's going on now. Sometimes that's tweaked the contract here and there and done other modest things. We're not aware of anything material we expect to come out of that, but that's just a part of the review that any good set of regulators and companies go through on a regular basis. So bottom line on some of the other things, we think that -- yes, we're aware of them. But we've had a process that's been going on for a while and it's also produced a very gradual change in prices, allowing customers to modestly change their expectations and influence the behavior. In terms of new generation, Dan asked this earlier. There are certainly -- as we look out on the horizon, we think that new generation will be required. We think that the RPM is constructive and it is defining capacity prices. We're careful to make a forecast of any specific RPM. It's a little easier to forecast the end of the season in a baseball season rather than an inning or a game, but we do think the net result is that new capacity will be needed, the RPM will support construction and that will happen. It may well happen by us being a contributor to that process. The other thing, Greg, in general I think we – Hudson, in our commitment to New Jersey, Hudson is $700 million. That's a very strategically located 600 megawatt coal plant, but it is also very key to the reliability of the state. And as we made that commitment that we announced a couple weeks ago, a big part of that was we thought that would be constructive to the reliability requirements and integrity of the overall supply picture. So we think that by stepping up in ways like that, we think that demonstrates our commitment to the overall picture.

Thanks, Tom.

Okay.

And our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed.

Good morning.

Good morning.

Just some really basic questions. One was, the 2.6% increase in combined cycle output, what caused that?

I think it's a little bit as the supply requirements come up that the gas -- particularly Bergen and Linden -- become a bigger part of the supply requirements. So it's essentially Linden and Bergen being dispatched to higher levels as the system requires. And Paul, we did have some reduction -- I believe it's back in attachment 12 -- we did have some reduction in some of our coal output in New Jersey. So the absence of some of our coal production may have caused some of that increased requirement from the gas side.

Okay, I see. Okay, I got you. Then on the Texas spark spread, you mentioned weather. When you're looking forward towards 2008 and what have you, are you seeing any decrease or from gas prices or anything we should be aware of going forward on that? I know it's a small part of the business, but I was just wondering.

No, it's an important part of the business. Part of last year was that Texas weather was very hot. It wasn't a normal operating year -- certainly a very good operating year, but we weren't expecting to it repeat. I think we were clear even back in our investor conference, I think we said our EBITDA was going to go down $25 million or so from '06 to '07, just sort of a return to normal periods. In general, I think the year-to-date spark spreads are $16 to $16.50 this year versus about $19 to $19.50 last year, so that's about $12 million EBITDA contribution. Going forward, we see the sparks as being more constant the next couple of years. Gas is a little bit liquidated. We do see a flat to -- essentially a flat outlook.

Okay. Let me ask you, just following up on Andy's question -- you have an attachment 10, the investment that you have in Chile and Peru, and I believe that includes Electroandes. And I was wondering, when we're thinking about your actual monetization of this, could you give us any flavor for what we should thinking about in terms of a tax basis? Just was wondering how that actually might -- how we might think about that. In other words, if you were to get the actual amount that you invested, for instance, what would the tax impact be, just from a hypothetical perspective? What should we think about in terms of a tax basis?

I would generally say, Paul, without getting into all the details here -- I would generally say our tax basis is less than our book basis. So if we sell it for book, we could have a gain on sale from a tax position. Or put another way, we got to sell -- it's different in different aspects. I don't want to get into all the specifics and it may stress my short-term memory anyway. In general, our tax basis is less than our book basis, so if we sell from book, we could pay taxes. Or put another way, we need to sell above book to get out after-tax neutral. Part of what we booked in Electro was in recognition of that. We generally booked on the assumption we would sell around book. That's a planning assumption, not a prediction. That's a planning assumption. Because tax basis is lower than book basis, part of that $0.08 that's below the line -- or part of the $0.05 that's below the line, which is a combination of $0.03 from Ops and $0.08 from moving it down below the line -- is a recognition of expecting to pay taxes on a gain on sale because the tax basis is below book basis.

Okay. So you guys look like you've got strong prices there, but we do the tax impact, it will probably reduce -- it has the potential of reducing this value by -- you may get things -- the after-tax proceeds might be less than book?

That's fair. I wouldn't want to make predictive, but I would say at least as we've booked Electroandes, we booked it as if we sold for accounting book, which would cause a tax gain, and that is what's in the financials for this quarter.

Back to Andy's question, just to clarify, sorry if I forgot it -- when do you think the rest of the assets, you guys might make up your decisions on the strategic -- other than Electroandes, the other assets in Peru and Chile, when might those be --

I don't want to. I think I'm going to stay with where we were. I wouldn't want to set specific time horizons. Kind of stepping back, the assets are doing quite well. They continue to generate strong earnings in cash flow. They're operating, frankly, modestly above our expectations for this year. They have strong growth of 7, 8, 9%. So if we monetize them, it's on an opportunistic basis on the view that we can get more value from them. So we're going to be careful as we do that. I think my statement that a couple times we said here that we are more actively exploring options would be things that we're looking at here during 2007. We'll have to see whether that warrants anything new coming forward.

Any currency impact that's been affecting the --

No, currency's been good, currencies continue to be good, and they got modestly better in the last few weeks.

Has that impacted earnings at all?

No. Only a modest impact to earnings.

Okay.

But it does obviously enhance your view of monetization.

Absolutely. Okay, thank you.

Paul, I should correct myself. On the Texas market in general, we see the spark as being generally flat for a couple years. We do think there is going to be some need for new capacities. The market signals are at least not showing that to us for a few years. We would expect -- it is a particularly soft last couple of months there. It's been raining pretty heavily. When I said next year will be like this year, it will be like a normalized '07, which would be better than what we're currently experiencing.

Great.

And our next question comes from the line of Ashar Khan of SAC Capital Management. Please proceed.

Good morning.

Good morning.

Tom, you mentioned realized gross margin was $48 for the second quarter of 2007 if I'm right?

Yes.

Could we expect, because the BGS auction starts in like on every June, right? That gross realized margins should be higher in the third and fourth quarters than the $48?

That's fair.

Okay.

This only includes one month of increase.

Okay.

One month of implementation in the most recent BGS.

And do you have what the gross realized margin was for the first quarter? I don't remember -- I apologize, you might have provided it earlier last quarter. I don't remember it specifically.

Ashar, I don't remember the numbers exactly, but it was like between $46 and $47 per megawatt hours, something in that range. It was slightly less than the amount realized in the second quarter.

Okay. And if I can just stand up, not to think -- as you look at this monetization or not monetization in Latin America, how should we look at the use of proceeds to make up for the lost earnings if you do decide to monetize?

Yes. If we would, I would say we generally will use it as we have in the past. What we've done in the past is used some of the proceeds to repay debt at Holdings and the remainder has been dividend up from Holdings to PSEG. Over the last three years, that's about 60% of the money I believe has gone up from Holdings to PSEG, and the 40% has been used for debt reduction at Holdings. I'm not giving that as a predictive ratio, but that's just generally indicative of our history. So we try to pay down some of the Holdings debt -- as you shrink assets, we shrink the debt at Holdings and then the rest comes up to PSEG. PSEG would then look to use it as part of their overall capital planning and growth requirements. To the extent I said that we're going to use excess cash through about the first half of '08 to pay down debt, and thereafter we'll have new cash -- or we'll have cash to grow the business and/or buy back stock, that does not contemplate any incremental cash for Latin American divestitures beyond Electro.

So, Tom, in essence, if you go through this path and you do get cash, you could start buybacks earlier; is that a fair point?

That's a fair point. That's where I was going to end up and say. To the extent we get extra cash, it could accelerate that point. That's very fair.

Okay. Thank you, sir.

Okay.

And our next question comes from the line of Shalini Mahajan of UBS Securities. Please proceed.

Thank you. I had a question on the legislation that was passed in New Jersey around climate change. Some of the targets -- actually, all the targets, whether it's on carbons, renewables, or efficiencies -- they seem pretty aggressive. So my question is how do you propose to meet these and how does this impact your capital deployment strategy beyond '08?

I think it's fair that they are fairly aggressive, but they're certainly -- I would say the state and the Governor in particular have a lot of conviction that they need and should be met and we're doing everything we can to contribute to that process. In terms of -- and I should say that it all is centered around the Energy Master Plan. There's a large study going on with the Governor's team, the Department of Public Utilities, we're involved, other stakeholders, customers, et cetera are all involved to think through the implementation of a number of these policies and where do we go. One thing that we did announce a couple months ago now is a solar initiative, and that was to spend $100 million of PSE&G money to invest along with other people from the solar community to put in 30 megawatts of solar. That's clearly just a start of what we think is a much larger requirement that's indicative of a program that we've got to try to feed into the Energy Master Plan and these broader initiatives. The EMP, the Energy Master Plan has a number of other things going on in terms of demand side management, whether it's energy conservation, clean vehicles, and we've announced a large program for hybrid vehicles. We announced that we're studying a number of our facilities to see whether we can get some demand side management out of our own facilities. So there's a number of things going on and I would expect towards the end of this year the Energy Master Plan group led by the state will have a number of initiatives that will be implemented. We would expect to be a meaningful part of that.

So for you to specify how exactly you can meet these goals, those would be after the master plan is tabled? Or would that be part of the plan that you actually lay out -- every utility lays out how they propose to meet the target?

Yes. What I would say is we have a number of thoughts, some of which are public, such as the vehicles, such as our facilities, and such as our solar program, but the ultimate orchestration of this will be at the hands of the Energy Master Plan officials. And as our proposals go in, we expect that the -- that some of those get approved and implemented over time.

Okay. Just a related question on new nuclear as well. You mentioned that's something you would continue to explore over the next few years. It could be one way to at least meet your carbon mandate in the state. Kind of just wanting to know more of your thoughts about your slow approach on the new nuclear front. We've seen more companies being more aggressive, even on the merchant side.

Yes. We think it's -- you're exactly right. It's a big part of a carbon free approach. We have a great site down at what we call Artificial Island and is really designed for four units. We've got three there now and it's a very attractive site. And sure you're going to appreciate in the northeast there aren't many sites for new build nuclear. So we're very upbeat from that standpoint. We want to be deliberate. One thing that is of particular concern obviously is the capital costs, managing the capital, managing delays, things that the industry went through in the last cycle of new build. As a merchant, we're going to be careful about that. It's fair that a couple other folks are more proactive than us and that's fine. I think as we see it, though, we'll move forward in a deliberate way. There is the added benefit to the extent you can get a COL accepted by the end of '08. There's the added benefit of having some tax benefits available. As I said, we do not expect to be able to move forward quickly enough to get those. As we see the benefit of those versus the uncertainties in the industry, we think that taking a few years to get our arms around it is the best thing to do.

Would you be willing to take a partner so you could share some of the risk involved?

Certainly, we'd be willing to consider those kind of things, and we'll consider all options as we go forward. We've obviously had discussions with all the vendors and thought about different partnership structures at least on a highly preliminary basis. I think as we go forward, we may consider a partner. We also think we've got a pretty valuable site, so like any kind of economic investment, you just have to weigh those things.

Great. Thanks, Tom, thanks for the color.

And our next question comes from the line of Rudy Tolentino of Morgan Stanley. Please proceed.

Hi. There's been talk under RGGI to implement a carbon cap and trade system. I was kind of curious how that would impact you guys and if you have any way to recover the costs of potential carbon credits that you would use at your coal plants or if that's something that you have to eat?

Rudy, it's fair that as part of RGGI, the assessment of carbon costs is still being reviewed. In general, we have a low carbon portfolio with about 55 to 58% of our megawatt hours being generated by nuclear. So as carbon comes into the market, the short answer is no, we do not have any, let's say regulatory means to recover those costs. We do think it would impact the market. So to the extent it would increase the cost for our coal facilities by some amount, we would -- it would obviously impact the market and that would help our nuclear facilities, as well as our gas facilities directly most largely our nuclear facilities. There are still the open issue of -- will any of the credits be allocated or will they all be auctioned? That's something that is an ongoing part of the dialogue. One thing that we do think is very constructive is that the cost of carbon will be paid by all generators who supply New Jersey customers. So whether you're a New Jersey plant supplying New Jersey customers or whether you are a non-New Jersey plant supplying New Jersey customers, the objective is to have the carbon cost be paid by all plants, which is the -- maybe I only briefly alluded to, but that's the comment about putting our coal plants in New Jersey on a level playing field with other coal plants.

Also, just as a follow-up question, I know this question has kind of been asked before in different forms, but I know everyone asked about recovering transmission CapEx, but what about the CapEx for IPower and some of the stuff you're doing at the distribution level at PSE&G? Would that require another rate case in New Jersey, or is that already included in your current rate agreement?

No, that's fair. Our largest band is on the new transmission, and that can go through FERC through the formula rate process that I'm sure you're familiar with. Other larger segments in the distribution segment of PSE&G would need to go through more normal rate recovery. Under our deal from last fall, we'd have a stay-out where new rates cannot be implemented until the fall of 2009. The large service customer platform that we're putting in that's incremental to our CapEx -- we're capitalizing that, we expect that to go live early '09 and would expect those costs to get rolled into a rate case that would then be effective in the fall of '09. We don't expect that to be a material magnitude in terms of rate requirements, et cetera, but that's how we would recover. We recover through a more traditional rate-making process. To the extent we can get -- to the extent that we end a rate-making process and we have clear visibility on CapEx that are on the horizon, then potentially we can get prospective -- prospective capital put in rate base. We did have some success with that on the gas side of the business on our last go around from last fall.

Thank you very much.

Okay.

Sir, our final question comes from the line of Greg Orrill of Lehman Brothers. Please proceed.

Thanks very much.

Good morning, Greg.

Good morning, Tom. I was just wondering, just following up on some of the questions on RGGI, is it clear yet when New Jersey would go forward with their auction and also what have you heard in terms of allowances being granted versus auction? Thanks.

Greg, it's meant to go live in '09, so the specific schedule is not yet come forth, but one might expect it to be late '08, but that has not yet come forth, but it's meant to be implemented in '09. In terms of the issue on allocation versus auction, that's still up in the air. I believe it's a minimum requirement of at least 25% being auctioned, but there's talk about that number being higher. So that's still subject to discussion. When we might hear final thoughts on that, I'm not aware of a clear date, but obviously the time is getting closer.

Okay, great.

I think the --

Thanks.

There are active discussions going on as we can speak. So whether they'll be some announcements to come out of that -- we've obviously been a part of that. We think there's some constructive dialogue. And as I said, the issue about putting Jersey plants on a level plane with non-Jersey plants we think was very constructive and fair.

Any other --?

Sir and ma'am that does conclude the question-and-answer session. Pardon the interruption.

Well, thanks very much. Again, we appreciate you all participating in the call and we're available for any questions that we might have. Thank you.

Thanks, all.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation, and ask that you please disconnect your lines. Thank you once again for attending, and have a great day.