Sue Carson - IR Tom O'Flynn - CFO Jim Ferland - CEO

Paul Fremont - Jeffries & Co. Ed Kressler - Angelo Gordon & Company Louis Sarkes - Chesapeake Partners Ashar Khan - SAC Capital Clark Orsky - KDP Investments

Ladies and gentlemen, thank you for standing by. Welcome to the Public Service Enterprise Group second quarter 2006 earnings call. (Operator Instructions). I would now like to turn the conference over to Sue Carson, Director of Investor Relations. Please go ahead, ma'am.

Thank you and good morning. We appreciate your listening in today either by telephone or over our website. I will be turning the call over to Tom O'Flynn, PSEG's Chief Financial Officer, for a review of our second quarter 2006 results. Jim Ferland will then join us to discuss the status of our pending merger with Exelon. But first, I need to make a few quick points. We issued our earnings release this morning. In case you have not seen it, a copy is posted on our website, www.pseg.com. We expect to file our 10-Q with the Securities and Exchange Commission shortly, which will contain additional information. In today's webcast, Tom will discuss our future outlook in his remarks and so I must refer you to our forward-looking disclaimer. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance they will be achieved. The results or events forecast in our statements may differ materially from actual results or events. The last word on any of our businesses is contained in the various reports that we file with the SEC. As a reminder, our guidance speaks as of the data it is issued. Any confirmation or update in guidance will only be done in a public manner, generally in the form of a press release, a webcast such as this or an 8-K or other SEC filing. PSEG may or may not confirm or update guidance with every press release. As a matter of corporate policy, we do not comment on questions regarding guidance during one-on-one meetings or individual phone calls. In the body of our earnings release, we've provided a table that reconciles net income to operating earnings. We have adopted this format to improve the readability of the release and provide the required reconciliation between the GAAP term “net income” and the non-GAAP term “operating earnings”. The attachments to the press release provide the required reconciliation for each of our major businesses. Operating earnings exclude merger-related costs and the net impact of our various asset sales during the period presented. Operating earnings is our standard for comparing 2006 results to 2005 for all of our businesses. We exclude such costs so that we can better compare our current period results with future and prior periods. By excluding the merger-related costs, our results in the guidance are consistent with the way Exelon is treating their merger-related costs. Finally, Tom and Jim will take your questions at the conclusion of the prepared remarks. In order to accomplish this call effectively, we would appreciate it if you'd limit yourself to one question and one follow up. Thank you, and I will now turn it over to Tom. Tom O’Flynn: Thanks, Sue. Good morning everyone, thanks for joining us today. I hope you have had a chance to review our release of this morning. On this call, I will briefly go over our results for the second quarter, review our expectations for the remainder of the year and then I'll turn it over to Jim Ferland to discuss the current status of our pending merger with Exelon. Briefly, operating earnings for PSEG were $166 million for the quarter, an increase of $62 million or $0.23 from the second quarter of last year. Results for the second quarter exclude $3 million of after-tax merger-related costs, a net gain of $51 million from the sales of Global’s assets in Poland and Brazil, and $5 million of losses from operations in Poland. Second quarter results were mixed for our three operating companies: Our overall results continue to support our 2006 operating earnings guidance of $3.45 to $3.75 a share. As always, our guidance does not contemplate the impact of mark-to-market accounting, asset sales and related costs or merger costs. We've updated our expectations for PSE&G and Energy Holdings, which offset each other. I will walk through the details as I go through each company's results. Just a reminder that the full year 2006 guidance for PSEG is unchanged. While on the expected closing of our merger with Exelon, all results would obviously be integrated into Exelon Electric & Gas. Jim will have additional comments on the merger in a few minutes. PSE&G, our regulated utility, reported operating earnings of $34 million or $0.13 for the quarter over 30% lower than last year’s result of $48 million or $0.20 per share. Power reported operating earnings of $78 million, or $0.31 per share for the quarter, $15 million or $0.05 per share above 2005 results. Finally, Holdings reported operating earnings of $72 million, or $0.29 per share for the quarter, an increase of $61 million, or $0.24 over last year. As I go through the three major businesses, I will provide more insight into the changes from last year using earnings per share as the metric. As an aside, PSEG had an average of about 9 million more shares outstanding for the quarter as compared to last year, the result of our prior convertible security. Starting now with PSE&G, for the quarter, the utility was down $14 million, or $0.07 per share compared to second quarter of '05. The absence of rate relief to offset the expiration for the excess depreciation credit was responsible for $0.04 of this decline. Mild weather resulted in a $0.03 reduction year-over-year. Increased transmission revenues, result of higher peak usage in 2005, added another of another $0.02 to earnings. Transmission tariffs are set based on the highest peak load during the prior calendar year, so we will continue to see some benefit from the 2005 peak all year. Offsetting the benefit of the higher transmission revenues was higher O&M expenses of $0.02. The increase is related mostly to higher labor and benefit costs, something we expect to see over the remainder of the year. We continue to work with the BPU on our gas base rate filing we made last September supporting a 3.8% increase in the gas distribution rate. The earnings are scheduled to end in mid-August and we expect to file briefs and begin settlement discussions shortly thereafter. We're moving on a schedule that would allow for rate relief late in the year or early next year. This is clearly subject to change based on our merger settlement discussions. We continued to experience disappointing returns from our gas business and we clearly need this rate relief. Some of the reduced earnings have been due to mild weather earlier this year, but we've also seen reduced usage stemming from customers' price sensitivity. Our trailing 12-month return on equity for the gas business is less than 4%, far below the 10% allowed in our last rate case. Continuing on the regulatory front, as part of the settlement of our 2003 electric base rate case, $64 million excess depreciation credit was established. This credit expired on December 31, 2005. PSE&G has made all the filings required by the settlement and provided requested updates. Year-to-date, this has reduced PSE&G's after-tax earnings by almost $20 million compared to 2005. As Jim will outline, this case is now part of our merger settlement discussions. As a result of these delays, we are reducing our 2006 operating earnings range for PSE&G by another $20 million. As you may recall, we reduced the range by $45 million when we reported first quarter results. The revised range for the utility is $250 million to $270 million for 2006. By way of comparison, 2005 earnings for PSE&G were $347 million. A summary of the various impacts of PSE&G that resulted in a $0.07 decline in earnings for the quarter can be found in attachment 6 of the release. For PSEG Power, we continue to see operational improvements for both our fossil and nuclear fleets. Hope Creek entered a refueling outage on April 7 and returned to service 29 days later on May 6. This was a significant accomplishment in light of the considerable outage scope that was planned. In addition to the standard refueling process, the team at Hope Creek replaced a large number of control rod drive mechanisms, the B recirc pump shaft and motor and inspected the high-pressure turbine. All these activities, as well as many others, are focused on improving the material condition of the plant were done while setting site records in multiple areas, including safety. For the quarter, the three New Jersey units had a capacity factor of 90%, including the scheduled Hope Creek refueling outage. This compares to a capacity factor of 79% last year, which included the sale on two refueling and vessel head replacements. Without the Hope Creek outage, all units ran at 100% for the quarter. For the full five unit fleets, the quarterly capacity factor was 90% versus 86% for the second quarter of last year. The ongoing improvements at our nuclear operations continue to benefit the financial results for Power. This second quarter, the increased nuclear output added about $0.04 in margin compared to last year. In addition to the strong performance of the nuclear fleet, we continue to see improved performance in the operations of our fossil fleet. Both quarterly and year-to-date output is higher for the fleet, while the forced outage rate for the core fleet was 20% below the three-year average. The increased output from our fossil and nuclear fleet yielded incremental margins for Power. In addition, we realized higher prices from forward sales contracts and spot market sales compared to our older, lower-priced positions. Overall, better plant performance and market activities increased margins by $0.18 over comparable results for the second quarter of last year. The majority of this benefit, about two-thirds, resulted from general portfolio management activities in the forward markets and the remainder came from the improved pricing of the new BGS tranches. For the balance of the year, we expect to continue to see benefits from these improved margins. O&M expenses at Power for the quarter were $0.06 higher than last year; $0.04 from nuclear, $0.02 from fossil, both of which were expected. Last year when Salem 2 had the refueling outage and replaced the reactor vessel head, Power bore only 57% of the total cost because of our co-ownership of the unit with Exelon. This year, the Hope Creek outage was top both in terms of duration and cost. However, our costs were borne Power, accounting for the majority of the quarter-over-quarter increase in nuclear O&M. For the fossil fleet, incremental O&M was primarily the result of scheduled maintenance at Bergen and our peaking fleet. The incremental fixed costs related to our new assets, the Bethlehem Energy Center in Albany, which went commercial last summer, and the Linden plant in early May, reduced quarter-over-quarter results by $0.08. Most of this impact was the result of higher interest costs and the depreciation associated with the new plants. Around the other discussion of the variances for the quarter, mark-to-market impacts were flat at Power compared with a $0.02 loss reported last year for the second quarter. In addition, we also reported a $0.02 loss on the BGSS, the early spring impact of the gas prices that we talked about last quarter. A summary of the $0.05 improvement quarter-over-quarter for Power can be found in attachment 6 of the release. Now onto Holdings. As part of our ongoing program of opportunistically monetizing our international assets, in May, Global completed the sale of its ownership interest in two generating facilities in Poland and in June, completed the sale of Global's 32% interest in Rio Grande Energia, RGE, an electric distribution company in Brazil. Combined, the two asset sales provided gross proceeds of $654 million, approximately $612 million after-tax. Holdings is evaluating use of proceeds, including potential debt redemption in loans and/or dividends to PSEG. As part of this evaluation, PSEG and Energy Holdings will review liquidity needs of their respective businesses and the targeted financial profile for Energy Holdings. Operating earnings for the second quarter of 2006 were up sharply from the comparable period last year. Operationally, the second quarter was very strong for Holdings. Our Texas plants continued to achieve significant benefits in an attractive market and reflected a $0.07 improvement compared to the second quarter of last year. Part of the relative improvement was due to a major maintenance outage last year. The larger improvement came as a result of increased spark spreads in Texas. For the quarter, spark spreads were about $20, or 40% higher than last year. We had 75% of our peak output sold forward, leaving the remaining 25% to sell into a very attractive day-ahead market during the quarter. For the fall, we've locked in the majority of our expected margins. The continued strength in the Texas market is expected to increase Holdings' '06 operating earnings by an additional $20 million for the year. This is in addition to the $10 million increase we announced on our first quarter call. The current estimate of Holdings' operating earnings for 2006 is $185 million to $205 million, of which $50 million to $60 million is expected to come from Texas. With that, I will now turn it over to Jim Ferland.

Thanks, Tom. Good morning, everyone. I'm going to make the assumption that most of you probably listened to the Exelon conference call yesterday, and to the extent some of you didn't and you would like additional details, I will try and deal with that in the Q&A section. I would like to give our view of this thing and maybe with some special emphasis on how we think the proposal we have put forth would benefit the state since it's really the BPU and the BPU staff that is one of the most important players moving head. Just quickly, some of the components that John described in some detail yesterday. The enhanced offer that we've put forth provides $600 million of cash for any number of customer benefits. That could be for conservation, the economic development, lowering bills. So the $600 million cash is pretty easy to understand from the standpoint of the benefits to the state. Additionally, the proposal would have us deferring our electric rate case, which we have had under consideration for sometime, for an additional four years. It will have us also completing a settlement of our gas case at a substantial reduction from its filed level. Just delaying those rate cases for some period of time into the future we think clearly has a value to the state. Somebody could easily get to $200 million or $250 million over the next three or four-year time period. So that's another significant benefit to the state. I think in addition to those more obvious factors are a couple of others that really provide significant benefits to the state which we really haven't elaborated on a lot. One is that, after the merger and as a result of the merger, the state is going to benefit, we estimate between $150 million and $200 million in additional tax revenues over the next three to four years, and that comes about for a couple of reasons. One is, it has to do with certain loss carryforwards that we have currently. They're going to disappear when you put the companies together. The second contributor, you've heard John Young talk about this in a different context. John was talking about some of the painful aspects of selling many of these fossil generation assets and the fact that we're going to realize capital gains on those and that's a cost obviously to the combined companies. Well, it turns out the state is a beneficiary of many of those additional tax revenues. So there's another $150 million or $200 million here over the next several years. I think the one that's probably most overlooked but is of incredible value, it's the performance of our nuclear plants. I think it's readily apparent to everyone that trying to run three plants, which is what we have been doing for some period of time, as opposed to having those three plants being part of a 20 nuclear unit fleet which we hope to achieve after the merger, we're not going to get the same results as a large fleet operator can create. As a result of that, the benefits, one of the additional benefits of the merger is that there will be increased nuclear output. Now it's easy to convert that and to understand how that provides a benefit to the Company and to our new generation company because we have more nuclear megawatt hours to sell. But there's a secondary effect that provides very substantial benefit to the customers really at no additional cost to the Company. That is that, everyday these nuclear plants run where they wouldn't have otherwise or they run at a higher capacity factor than they would have otherwise, that puts downward pressure on the wholesale power markets, which customers will benefit from. There has been a lot of analysis done in the rate case proceedings about the quantification of that. We believe it's a number between $100 million and $120 million per year effects in the form of benefits to the customers of New Jersey as a result of lower wholesale prices that go along with higher nuclear performance. So in the aggregate, you roll up those numbers, there's $600 million of cash, there's $200 million to $250 million associated with deferred rate cases, there's $150 million to $200 million associated with taxes which the state otherwise would not get, and there's something on the order of $450 million in nuclear benefits over a four-year time period. So I personally view this as a benefit of something approaching $1.5 billion in benefits to the state over the next four years. So if we look at our situation today and the decision-making process, the standard of the BPU is to apply a positive benefits test: is this thing, in the aggregate, good for the state, its customers and so forth. I think just on its face, it would seem to me it would be hard to argue that the state is not a clear beneficiary of this merger, and that it clearly would demonstrate satisfactorily meeting any positive benefits test. The issue gets to be, when does someone reach a conclusion like that? I would say at this time and you got some of this from John I know yesterday, time is our biggest enemy here. It's really a schedule issue at this point, because we have been waiting now 18-20 months and one can argue, there may be a lot of good reasons for that. But it's easy to understand from Exelon's side how they could be somewhat frustrated and feeling like, hey guys, we have to get this done or not, and I think John clearly stated that the other day and I know that the view of his Board as well. Schedule is not unimportant to our company, particularly on the recruitment and retention of employees. Our employees have, since we announced this transaction on December 20, 2004, there has been uncertainty associated with how this is going to work out and what the impact will be on their jobs. That has affected our ability to hold onto and attract additional people. We still have adequate people here to run the company and run a stand-alone business, if that's necessary. But this cannot go on much longer. So our Board is, while they have not given me a near-term deadline, they really, they share the vision of the Exelon Board generally, that we need to get this transaction done, or in the absence of the ability to do that, get about our businesses in general. So that's where we are and it's a schedule issue and how fast we can get some agreements on these broad parameters that we've described. Now with regard to when do you close a transaction like this, even if we had an agreement with the various parties -- and I should say that, even in the short time period we have put out this new offer, we have made considerable progress with many important parties in this proceeding. The parties that are most important that we still haven't gotten there yet and that's the BPU staff in working out some sort of an agreement with them within this broad framework. We are aware that, even if we had such an agreement today, which we don't, it's going to take some period of time to get this thing closed. This deal is a closing issue. We know that even after you have an agreement, you have to develop a very detailed stipulation, and currently, that document has been circulating back and forth, but it's 50 or 60 pages of material and we've made good progress on a lot of it, but there's still some things to nail down. Even after we have that, it's got to go to the administrative law judge. The judge has to rule on it, and then it goes to the BPU for final approval. So the point I'm making on closing schedule is that, even if all of this stuff falls out and we can reach an agreement here relatively quickly, it could still pass the September 30 date that we've been talking about, could find its way into the fourth quarter. A final thing I would say is, obviously, our Board like the Exelon Board is reserving the right to look at this transaction when it's all done and all the various aspects have been identified. As I see transaction now, the transaction continues to make very good sense for our Company and it provides many of the strategic benefits that led us into the transaction in the first place. With that, I will stop talking and I think Tom and I would be pleased to address questions you may have.

Operator, can you please provide the instructions for the Q&A?

(Operator Instructions) Our first question comes from Paul Fremont - Jeffries & Co. Paul Fremont - Jeffries & Co.: Thank you. Yesterday, we heard John Rowe indicate that he was hoping to get a response from the other intervener parties in the negotiations over a period that sounded to be one or two weeks. Can you indicate whether the other parties seem willing to negotiate on an expedited time schedule, or have you been able to gauge any type of reaction to the deadline that was put forward by John Rowe? Tom O’Flynn: Well, clearly, some of these parties are willing to negotiate on these type of terms because we've made significant progress with certain of them. The group that we just don't know currently where they are and probably the most important single group we have to deal with Paul, is the BPU staff. And at this time, we're continuing to have discussions with them. We just don't know at this time, we can't be certain what their willingness to accommodate that kind of a deadline is. Paul Fremont - Jeffries & Co.: Thank you.

Our next question comes from Ed Kressler - Angelo Gordon & Co. Ed Kressler - Angelo Gordon & Co.: Thank you. Just a quick question on the up offering. What period of time expired between when you actually made the up offer to the BPU staff and the decision to go public? The only thing that was disturbing yesterday about Mr. Rowe's comments and about yours today are that, why are we even hearing this? Why isn't this just going on kind of behind the scenes? Are things that bad at the BPU staff? Tom O’Flynn: I think that in part, first of all, I don't know how long, I guess ten days or something, a week, something like a week, that has been available. It appeared that -- there are many parties to this proceeding and a lot of people got copies of this material. It appeared to us that this stuff was leaking out from somewhere and the information was finding its way selectively into the financial community. We felt that we had to say something about that. We don't like the situation, but if some of this stuff is getting out, we felt that from a fair disclosure consideration, we had to get the information out. So that's why it came out and the timing was driven largely by when it appeared, elements of this were showing up in the financial community. Ed Kressler - Angelo Gordon & Company: Thank you.

Our next question comes from Louis Sarkes - Chesapeake Partners. Louis Sarkes - Chesapeake Partners: Thank you. Are there ongoing discussions this week with the staff? Is it a question of really no response from them, or is it an issue of they have rejected? Because this offer as you describe it, at least from what we had seen and heard, what New Jersey wanted, it seems to either meet or exceed the outlines of what they wanted. So is it a question of them just getting that and then refusing it, or is it just a question of just no response? Tom O’Flynn: It's not either. Nobody has refused anything yet, and we do have ongoing discussions with them. Louis Sarkes - Chesapeake Partners: Okay. But just to characterize it, is my characterization a correct one? I heard a rumor that the ask, I guess, from the state was something on the order of $1.2 billion or so, and you had a much smaller reported offer out there. Is this something that you believe responds to what they described as they wanted? Tom O’Flynn: First on the $1.2 billion number, I have heard all kinds of numbers, but nobody has come to us with a proposal that says we need $1.2 billion. That's just not there. I have described this proposal to you. It's beyond me how someone could look at this and say -- keep in mind, there's standards that they're judging this thing against, are there positive benefits for the state for customers? How somebody can look at that collection of data and information and reach a conclusion that there is not is beyond me. Louis Sarkes - Chesapeake Partners: Thank you.

(Operator Instructions). Our next question comes from Ashar Khan - SAC Capital. Ashar Khan - SAC Capital: Jim, can I just ask you, I am assuming is the market power issue totally resolved, so it's all about the number right now? What is a satisfactory number, which is it coming down to?

I would like to think it's there, but I'm not sure that the Commission would fully agree. As you know, FERC is done with this thing, they have signed off on it. DOJ is done with it, they've signed off on it after looking at it for over a year. The BPU staff has surfaced a couple additional questions to the market monitor, Joe Bowring at PJM, and they've indicated they would like to have us address a few of these things. It looks like any remaining concerns, I don't think they are legitimate, but it doesn't matter. If somebody thinks they are, we need to deal with them. It looks like any additional concerns could be dealt with the behavioral changes of changing bidding practices and so forth in a way which would not affect the economics of the transaction. Ashar Khan - SAC Capital: Can I ask you, with your offer which is pretty generous, what is the response? We will take our time and come back to you? Is that what the response was you got? I'm just trying to understand what the other side's response was when you presented your new revised offer?

With regard to the timing issue, I don't think they've gotten back to us. They haven't said anything yet about it being acceptable or not. That is the issue here. That's what we're dealing with. We've put a proposal out there and we know that some of the fine details in a 60 to 70 page stipulation is going to take some time to work out. But frankly, the framework of this offer that we've put on the table, they can move parts around inside of it and the rest, but the economic effects on the Company cannot be any greater than that. Frankly, unless we can get some kind of assurances that we're working within that envelope, it doesn't make any sense to continue pursuing this because if a month from now or two months from now, they're going to conclude, well, we cannot settle this within these boundaries, all we've done is waste another couple of months. Ashar Khan - SAC Capital: I agree. Are there any further meetings scheduled in the next week or two weeks where we move forward towards?

The meetings never stop. The meetings have been going on hour by hour, day after day. This is nothing that somebody is dealing with from time to time, there are people dealing with this every minute of the day. Ashar Khan - SAC Capital: Okay, I appreciate it.

Our next question comes from Clark Orsky - KDP Investments. Clark Orsky - KDP Investments: Can I just ask a question about holdings? I think you said the decision about dividends or debt repayment would be based on some sort of financial parameters for holdings. Can you tell us what those goals are?

Sure. We've generally talked about FFO to interest coverage at the holdings being three times or greater. It's a target that we've had in place for some period of time. As you look at our performance over the last number of years, we have generally been there or exceeded that. That's generally a guideline, but we look at other credit ratios. As we monetize assets and get cash and obviously reduce the asset size of the business, we generally look to maintain the credit quality of holdings as we determine use of proceeds. On a short term, we may use that within PSEG as we're doing now. Actually, Holdings is loaning some money out to PSEG. But on a longer-term basis, we obviously look to Holdings' longer-term debt and potential dividends from Holdings up. Clark Orsky - KDP Investments: Can you tell me what the debt is at the end of the quarter at Holdings?

I think it's $1.4 billion. Clark Orsky - KDP Investments: $1.4 billion?

Yes. I will remind you that we bought back 310, something like that, the first month of this year. The end the year was 175 or something. I think 1450, something in that ballpark. Clark Orsky - KDP Investments: Thanks.

That's on a gross. On a net debt basis, it would be cash that Holdings got, that number would be under $1 billion. Clark Orsky - KDP Investments: Okay, thank you.

(Operator Instructions). Mr. O'Flynn, there are no further questions at this time. Tom O’Flynn: Okay, well thanks all for joining us. Just in summary, I think we've had a good quarter. Jim has is obviously told you what we know about the merger and we'll provide updates as they go forward. But our base businesses continue to do well, Power is a very good operation, super on the nuclear side. The rolling nature of our escalating prices that we realize in Power, we're realizing that with good margin improvements. Holdings is generating cash, enjoying benefits of Texas and stability in our other businesses. PSE&G continues to operate very well, safely, reliably and has a couple of rate cases stuck with the broader merger proceedings. But other than that, the broad business is doing well. So thanks all for joining us today.

Ladies and gentlemen, that does conclude your conference call for today. You may disconnect and thank you for your participation.