Ladies and gentlemen thank you for standing by. Welcome to the Public Service Enterprise Group, second quarter 2008 earnings conference call and webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session for members of the financial community. [Operator Instructions]. As a remainder, this conference is being recorded Friday, August 1, 2008 and will be available for telephone replay for 48 hours, beginning at 1 pm Eastern today until 1 pm Eastern on August 8, 2008. It will also be available as an audio webcast on PSEG's corporate website at www.pseg.com. It's now my pleasure to turn the conference over to Ms. Kathleen Lally. Please go ahead Ma'am. [Technical Difficulty] Strong results. We are maintaining our full-year operating earnings guidance of $2.80. Our reported loss for the quarter $0.32 per share includes a charge of $490 million or $0.96 per share, which reflects our decision to recognize most of the potential risk associated with our leveraged lease tax position at this time. Although we've taken the charges associated with this issue, we preserved our option to litigate with the IRS. As I'll review in greater detail later in the call, our discretionary cash position, adjusted for potential tax payments remains robust at $2.5 billion for the 2008 to 2011 period. We received approximately $600 million from the sale of SAESA in July after taking into account tax payments. And with the improved credit outlooks for PSEG, PSE&G, and Holdings, our credit ratings are in line with our objectives. Given the strength of this outlook, the Board has approved a share repurchase program of up to $750 million to be executed during a period of 18 months. The financial recognition of a substantial percentage of our potential tax risk and the sale of…

Operator, Elizabeth, we're available for questions at this time. Question and Answer

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session for members of the financial community. [Operator Instructions]. One moment please for our first question. Our first question comes from the line of Paul Fremont from Jeffries. Please go ahead.

Thank you. Go ahead Paul, good morning.

Good morning, thank you very much.

Good morning, Paul.

Just to sort of understand the charge that you took relates only to a portion of the leases that are in dispute, that would be for the cycle '97 through 2000. So should we assume that as you go through the audits, that you're going to have to make this decision again with respect to any possible disputes relating to other audit years?

No, Paul. There are a lot of moving parts in it. I think from an overall cash position, if you think about, we took a charge that represents the vast majority of the risk associated. If you think about the $900 million or so, that I say that we expect to pay… we've also got to deposit that we made last December, a voluntarily deposit of $100 million. So we… this charge represents a number that would be a very high ratio, the number would look a lot like $1 billion over the 1.16. In other words, 1.16 is our current exposure.

Okay.

Our cash expectation is in line with our accounting charge. And that total cash cost is about $1 billion. See, if you want to divide $1 billion by the 1.16, you get up with a pretty high percentage number. In terms of then… so the 490 is the accounting impact, the 900 and 950 plus the 100 is the cash impact, that's how we're giving them both to you. Then the question is, well how might the 900 to 950 be paid out? We believe that in a litigated scenario, it would be paid out over a two to three-year period, it may also look like that over a sale scenario. The first payment might be 300 to 350 that would represent the '97 to 2000 audit. There would be a subsequent payment potential for the '01 to '03 audit, that could be in '09 and another piece in '10 or '11. So that may be more detailed but that's… we just broke out the audit because that would be… the 300 to 350 is the first of the 900 to 950. But all of that money has been recognized in the accounting statements, that's the 490. And in our cash forecast, our cash forecast between now and '11 assume a very conservative 900 to 950 cash cost will go out.

And then just sort of as a follow-up. Should we assume at this point that a settlement with the IRS is unlikely? And that the more likely path is that you proceed to litigation or is there still a possibility here of a settlement?

I wouldn't want to rule it out but our expectations that litigation is more likely.

Thank you.

Thank you. Our next question comes from the line of Paul Patterson from Glennrock Associates. Please go ahead.

Hi, guys.

Hi.

Good morning, Paul.

Just to make sure, I understand, the 490's, the earnings impact, the 900 to 950 is the cash flow impact going forward?

That's exactly right Paul.

Okay. And the 490, other than the cash flow impact due to the lack of cash as a result of these payments. The expected earnings impact has pretty much been taken care of by this write-off, right?

Well, there is a onetime event, the 490.

Right.

We did say, there is about $0.10 to $0.12 a year of earnings drained for the next… for '08, '09 and '10. So it's going to be about half of that this year. That's about $0.06, I know you said $30 million which is about $0.06. And then it will be about $0.10 to $0.12 in '09 or '10, that number will get cut in about half in '11 and '12. That's a combination of… you re-run the leases and the earnings change around, it's also cost of money.

Okay. And then…

And then Paul, as I just say, it cuts down, it's by few cents as we look out four or five years, and then it's starts to reverse because as I try to explain those complicated issue, I may not have done a good job. The majority of the 490 write-off is from a timely cash flow. There was an interest fees but the other majority, the 355 is an after-tax charge. And ultimately those come back over the next 10 to 20 years.

Okay. And that's on slide 28, I guess, is that the way to think of it?

Yes.

Okay. And then I guess when you were talking about the discretionary cash flow, what's sort of offsetting this tax payout is greater than expected asset sales. Is that correct?

That's the biggest piece. I would say when we talked, when we provided our $3 billion number back in March, we did have a number in there for some tax risk and it was consistent with our FIN-48 position at that time. So there was a number in there. It was obviously not nearly as large as the number that we've now got in there. So it was a number… it obviously got bigger up to the 9 to 950, it was offset by some proceed on asset sales. So net-net, we're moving the cash with 3 to 2.5.

Okay. And the asset sales, is that because you're selling more assets or the proceeds are higher because you're getting a better price for the assets than you previously expected?

The latter. We had used to be honest, a very conservative value for SAESA. And there is also one other investment in Resources, that we've been looking at selling that we were using a conservative number for.

Okay. Then just finally on the quarter, there is about $0.08 cents mark-to-market gain as I calculate it sort of year-to-date, about $0.03 cents for the quarter. Are you guys expecting that to reverse?

Yes, we do expect that Power… and it's unusual, Power does most of their… stuff is either hedge accounting and normal purchase and sales. So we don't get mark-to-market, that is virtually all into a year. So it was things that were positive in '08, if positive first half will roll off and be negative. So net-net to be neutral. And it was simply that, obviously as we buy fuel for our plants, we burn a lot of gas rather than buying forward gas we bought some options.

Okay great. And then just finally, you said whether adjusted sales I think were down, retail sales, I don't know if I got that correctly, I'm sorry.

You got it correct.

How much were they down?

Whether adjusted residential sales which are really the things we watch more closely were down 0.5% in electricity year-to-date.

Okay. Thank you, sir.

Okay.

Thank you. Our next question comes from the line of Ronald Kahn from Barclays Global Investors. Please go ahead. Mr. Kahn, your line is open. Mr. Kahn?

Perhaps we should move on, Mr. Kahn can call back if he still has questions.

Our next question comes from the line of Greg Gordon from City Investment Research. Please go ahead.

Thanks, good morning.

Good morning.

You pointed out that one of the things that drove better quarterly performance was performance of your gas plants?

Yes.

You manage those plants, if I'm correct. You purchased the gas and sold the power in the short-term markets, right? So they are not part of the long-term hedging program, right?

They are Greg to the extent that we sell our load into them. I mean, the reason we talk, for the most probably, we talk about longer term hedging, we talk about coal and nuclear because that's the majority of our margin. To the extent in the BGS, it's at BGS we did sell and hedge our way through so that we had sold Power forward such that we would… we basically sell into our natural gas stack. So when we do that, then at a reasonablable point in time within doing that, we then procure the gas.

Okay. So the extent you have…

We would, I'd say Greg to the extent that we looked out long-term sparks out two, three, four years and thought that they were at a good value, we could certainly sell sparks forward. But to-date, we've not seen sufficient value in the forward spark market to do that.

So you do utilize them to serve loads to the extent they are bundled, because you have a hedge that's a low serving hedge?

Yes, exactly.

You hedge out some of the gas?

Yes.

But the remaining piece you would just sell at prevailing sparks in the short-term market, right?

Yeah, but even then I mean, if we don't buy the gas and we are respectively in the day market and the short-term markets, then they are still being dispatched at short-term gas prices. Obviously, to the extent we have the gas at contracted different than market, we can make different decisions on the gas versus the plants. But the bottom line is, I think the plants are running more, which is they are more in the middle of the fairway of what PJM is needing for keeping the system going on a daily bread and butter basis. So…

What type of sparks present are you seeing on the… what did you see on the assets in the quarter?

So just on capacity, we've seen capacity factor go up. And this is really Bergen and Linden and the big drivers in the PS area, they've gone up 5% to 10%. Sparks, we've seen them be in the… depends on the weather. But generally in the $20 to $30 range… I've got mid-to-high 20s in April. May, it was mid-teens. June, it was up about $45 to $50. So it obviously it's…

And I assume the cycling, so you're giving the on peak, those are on peak rates, right?

Yes.

Okay.

That's right. I said they're running most of the time on peaks half the time and their capacity factor is around half. So they're most of the time on peak, they're running.

Great. Thank you.

Thank you. Our next question comes from the line of Daniel Eggers from Credit Suisse Securities. Please go ahead.

Hi, good morning.

Good morning.

Just thinking about the share repurchase program, and then the Board's comments that buying back shares might be the best return obviously you guys have from an investment profile perspective. How are you going to look at the CapEx for going to be laid out so far to make decisions on when to buy shares and when maybe to put-off or cancel CapEx projects?

Yeah, I think in general Dan, as we look at our business horizon over the… between now and 2011, we've got a large CapEx program that's consistent with what we told people in March, and not too different than what the Q was. At the same time we do have some discretionary CapEx is probably $500 million to $600 million. Or it's a little more than that, but I haircut the PSE&G numbers because those are really… that's the thing about the impact on dividends that changes in CapEx could have. And the reason to do that is that there is certain business that we look at possibly growing, but as before we make any investment, commit to any investment, we're obviously going to look at the value of the returns, the risk profile, the shareholder value accretion that such an investment would yield. And we'll look at that relative to our stock at the time. Or just in… kind of more broadly, our assessment on how to deploy our share repurchase capability is going to be based on our yield, sort of yield cash or obviously, conditions in the market that could be both financial such as stock market reaction, commodity market certainly, change in the commodity markets relative to changes in our stock value will have an impact. And then lastly, our ability to deploy or not deploy capital into discretionary CapEx, or other investments that could be attractive.

So what I need to assume that the $500 million plus of discretionary CapEx needs to be put-off to support the buyback or if you could lay the CapEx so that it means you could spend, you can buyback even more stock?

It's the latter. If we have about say five to six, if we did not pursue those investments, we would have five to six more share repurchase pattern.

Okay, got it. And then, it seems like there is a decent amount of planned maintenance and kind of planned work going on. It feels like it's more than what we normally see. Is that one, a correct assessment? And two, if so, should we be assuming that continues on over the next couple of years?

I think it's really Hudson and Mercer related. And keep in mind that these are two plants that have been older coal plants. We are putting back ends on for the back end for… and that scrubbers and making them fully environmentally compliant with everything, favorably with the exception of carbon. Mercer was spending about $500 million, Hudson $725 million, so as a part of that there are some outages to prep for those. And there are some maintenance associated with those plants as we do those back ends. So Mercer is done with that late '09 and early '10, and Hudson is late '10. But those are baked into our numbers. These are… it is important to say that the work we're doing is not different than what was anticipated and what was baked into our guidance in forecasting everything else.

With the lease decision all else, do we need to think about carving out the dime or so of earnings over the next couple of years out of previous expectations, given the settlement you announced today?

Yeah, that's fair, that's something that will be a head wind for us. The $0.05, $0.06 this year, and then $0.10 to $0.12 for each of the next couple of years and as I think I told Paul, we catch down at about $0.05 and $0.03 I'm thinking them to look out in those levels out thereafter. So all other things being equal, that's a head wind. Obviously there is different moving parts, and we'll do our best to define ways to offset that.

Okay. Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Vic Khaitan from Dutch Investment Management. Please go ahead Sir.

Hi, I've got two questions. One on the IRS related settlement talk. Looks like this amount you have taken charge, could we assume that that is the amount you are willing to settle for? Or is that the amount which you think is the most likely… liability you might have?

Yeah, Dick, I guess technically it's within 48. You do a very complicated probability weighted series of events and based on that probability distribution, once you get to a scenario that's more than 50% likely then that's the result that happens. So that's a technical answer. I'd say that we think our case still has some strong merits to it. There have obviously been some three cases gone the other way with financial counterparties, we think our position as an operating company puts us in better stead. That being said, I think we want to be mindful of the FIN 48 guidelines, and also be conservative and try to put it behind us at least from a financial discipline standpoint. So from where it is on the books, it's actually largely provided for from where we are on our cash position as we've talked to you about discretionary cash. We're baking in a pretty… obviously, a very large number, that is the vast majority of the exposure, baking that in as a cost. So we talk to you about our cash availability, it is after assuming we make very substantial payments.

So, could I understand then that, is IRS willing to set with you or they are not interested in settling, just going through litigation?

I think we have had… as obviously some settlement discussions, it wouldn't be fair for me to characterize the bid [ph] on that but I think as I said that earlier, we expect… I wouldn't want to rule out settlement, we expect litigation as the more likely path which would say that there is a bid in the asking, there is a meaningful difference in the… at the settlement table.

I see. One more question, Tom. On this open EBITDA you mentioned $2.6 billion or $2.8 billion. Is that based on current prices or is that more like a anticipation on your part or how do you come up with that open EBITDA calculation?

We've been in the conference room for a couple of hours so the market may have moved a lot as you know. But it's generally based on what I call mid-July numbers. It's certainly not... we're not expecting numbers to move up to their peak of where they were in last few days of June. But it's based on what I think it was kind of mid-July numbers.

But is it realistic to assume you can achieve those open EBITDA? That's what I was really getting at.

No, we think it's very reasonable. There is obviously a lot of volatile in the market, but the numbers there are very consistent. Since we gave the number out in March, obviously there was certainly, from our time in the market when open EBITDA would have been higher. And so, we were asked a few times whether we wanted to update things and we would rather stick to a number that stays away from some of the upswings and downswings in the market. But in terms of mid-July numbers, I think we're still comfortable.

Okay. Thank you very much.

In general, I'd say Vick, as we look at the market, obviously gas prices have come up. As we look add sparks and darks, there are some lower numbers than we think makes sense, the care ruling caused quite a fall-off in the market. And we think some of that may naturally correct itself.

Okay. Thank you.

Thank you. Our next question comes from the line Shalini Mahajan from UBS Securities. Please go ahead.

Thanks and good morning. Vick did ask my question, open EBITDA but, I was just wondering Tom, and I apologize because I guess I did step off the call, so I'm not sure if you addressed that. But if you can just maybe talk a little bit about the Texas market and your outlook on spark spreads, both on the western and southern zone that you operate your plans in?

Actually Shalini, I was not asked about the Texas market. We're generally doing very well at Guadalupe, and not as well as Odessa. Sparks are strong at Guadalupe and capacity factors above 50%. Sparks are in the high 20s, sort of 26 to 29 sort of zone would be our expectation which would be quite a pickup from where they were last year that was probably more like mid-teens. And that plans to run at capacity factor is about 50%. So it does cycle quite a bit generally, it's running on the peaks and that one on the off peaks. Odessa, sparks have declined modestly from about $20 to $16, $17, but we are losing hours. That plant used to run similarly to Odessa, sort of 50% to 55%, it's now running more like 35%, getting backed down by wind. So that's been the biggest disappointment for us in Texas, it's just losing capacity factor at Odessa which is in the west. So just now I clarify, Guadalupe is by San Antonio in south, Odessa is in the west, right in middle of a lot of wind. We were encouraged by the credit decision to put multi-billion dollars of transition going from west over to the bigger load centers. And we're hopeful that it improves Odessa's capacity factor or be it not for few years until that stuff gets built.

Okay. And then, we saw a huge spikes in Texas in May to mid-June. Is there… I mean have you guys isolated, were you able to take advantage of that and could you isolate the positive impact on your earnings from that?

We were able to take advantage of it, hat was at Guadalupe. Within the month,, there were certainly couple of months where we were up… I think at Guadalupe, $15 million or something in that range.

Okay.

But if you think about the… we moved just for the year. We moved our EBITDA up, considerably by $40 million. And that Odessa was down, is down somewhat. So Guadalupe has gone up by more than that amount. Probably Guad is up 50, and Odessa is down 10. We did do some '09 hedging during some attractive periods in the market, too.

Okay. So when you say that Guadalupe is going to be up $50 million, $15 million was just positive impact coming from the second quarter, and rest is the strength in stock spread that you see for the rest of the year, is that a fair way to think about it?

Yeah, that is probably fair.

Okay.

And then of course, when we say that, we use the time to realize some and then we also did some incremental forward sales within '08.

Okay. Great, thanks so much Tom.

Okay.

Thank you. Ms. Lally, there are no more questions at this time. You may continue with your presentation or closing remarks.

I think that's it, operator. If there are no further questions, we appreciate the interest shown by everyone on our call. And if you do have any other questions, please feel free to call into Investor Relations, and the material should all be available to on our website. And the IR number is 973-430-6565. Thank you.

Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We do thank you for your participation. And we ask that you please disconnect your lines.