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Rating Action:

Moody's Upgrades PSE&G Senior Unsecured Rating to A3 from Baa1, Affirms Ratings of PSEG and PEG Power

04 May 2012

Approximately $8 billion of securities affected

New York, May 04, 2012 -- Moody's upgrades PSE&G senior unsecured Rating to A3 from Baa1; Affirms ratings of PSEG and PEG Power

Approximately $8 billion of securities affected

Moody's has upgraded the ratings of Public Service Electric & Gas Company (PSE&G), including its senior unsecured debt to A3 from Baa1, first mortgage bonds to A1 from A2 and preferred stock to Baa2 from Baa3. PSE&G's rating outlook is revised to stable. Concurrent with this rating action, Moody's has affirmed the ratings and maintained the stable rating outlook for Public Service Enterprise Group Inc. (PSEG: Baa2 Issuer Rating) and PSEG Power LLC (PEG Power: Baa1 senior unsecured).

"Financial metrics at PSE&G have strengthened over the past several years," said Bill Hunter, Vice President and Senior Analyst, "as the utility has been able to recover investments that have improved its transmission and distribution network."

The affirmation of PSEG's ratings is based on our view that, while cash flows from merchant operations will be lower going forward, the consolidated business risk profile is decreasing due to a larger percentage of rate-regulated cash flows expected in the future combined with a reduction in risk resulting from the tax settlement relating to international leases.

The affirmation of PEG Power's ratings is based on PEG Power's low cost generation fleet that is well located to serve demand in New Jersey, including the transmission-congested northern part of the state, a hedging strategy that has been quite effective, and low leverage. While PEG Power's standalone metrics are expected to weaken for the rating category on a prospective basis, with the company producing negative free cash flow on average over the next several years, the primary driver of the weakness is the expected dividend burden at PEG Power. We believe a substantial portion of the dividends will be re-invested into PSE&G's rate-regulated businesses, which we believe will lower the group's dependence on the unregulated platform for earnings and dividend growth over the longer term.

RATINGS RATIONALE:

The upgrade of PSE&G's ratings and stable outlook are supported by a low risk T&D business model, a relatively supportive and constructive relationship with its principal regulator, the steady improvement in the company's financial profile in recent years (including a reduction in pension under-funding), and a balanced financial policy. These positive rating considerations are balanced against the risks associated with PSE&G's elevated capital spending plans, which are heavily weighted toward large, complex transmission projects that are FERC-regulated, with certain incentive returns but continuing local licensing and approval hurdles despite their approval by PJM. Our expectation is that PSE&G will continue to generate financial metrics appropriate for its rating category after the expiration of bonus depreciation and that its major projects will be financed conservatively and constructed without significant un-recoverable cost over-runs.

PSEG's Baa2 senior unsecured rating and stable outlook reflect the increasing contribution of rate-regulated businesses to consolidated cash flows, a reasonably supportive regulatory environment in New Jersey for PSE&G, merchant power operations that have historically benefitted from their low cost, fuel diversity and proximity to major load centers of New Jersey, and a generally lower risk profile at Holdings, which has settled significant tax issues . These positive factors are balanced against the execution and financing risks associated with a major transmission investment program at PSE&G, the inherent merchant risks associated with an unregulated generation business, and the structural subordination of PSEG's creditors to the creditors of its principal operating companies. At December 31, 2010, there was no long term debt outstanding at the parent, and Power and PSE&G accounted for virtually all of PSEG's unadjusted consolidated debt.

PEG Power's Baa1 senior unsecured debt rating and stable outlook reflect the competitiveness and locational value of its generating assets, a hedging strategy that provides a degree of cash flow stability, low leverage, and an adequate liquidity profile. These positive rating considerations are balanced against Power's moderately high-risk merchant operations, market concentration risk (albeit in a historically strong and liquid power market), an expectation that Power's cash flow will weaken due to lower market prices, and the likely incurrence of negative free cash flow on average over the next several years, in part due to dividends that will help the parent make substantial investments in rate regulated businesses.

In light of today's upgrade at PSE&G and the substantial capital spend at the utility, near-term ratings upgrades are unlikely. Nonetheless, PSE&G's ratings could be upgraded if there were a sustainable improvement in credit metrics such that (CFO pre-WC + Interest) / Interest were in excess of 5.2x, CFO pre-WC / Debt were in excess of 26%, (CFO pre-WC -- Dividends) / Debt were greater than 21% and Debt / Capitalization were below 40%.

PSE&G's ratings could be downgraded if there were a sustained weakening of its financial profile, for instance if (CFO pre-WC + Interest) / Interest were below 4.5x or CFO pre-W/C to debt were below 22%, or if there were a deterioration in the supportiveness of its regulatory environment, for instance negative legislative or regulatory actions that increased the company's risk profile, or if financial policy were to change such that less cash flow were invested in the company and more paid as dividends.

At PSEG, ratings upgrades are unlikely in the near term, due to its continuing dependence on merchant cash flows combined with expectations of negative consolidated free cash flow due to the large capex investment program at PSE&G over the next several years. Nonetheless, if there were a sustainable improvement in PSEG's financial profile, such that CFO pre-WC/Interest were above 6x, CFO pre-WC/Debt above 29% and Free Cash Flow/Debt above 19%, ratings could be upgraded. Moreover, upon completion of the transmission capex program, PSEG's ratings could be upgraded if we conclude that the regulated business will represent the majority of the company's consolidated operations on a sustained on an sustained basis.

PSEG's ratings could be downgraded if in the near-term there were deterioration in PSEG's financial metrics, for instance CFO pre-WC/Interest below 4.7x, CFO pre-WC/Debt below 25% or CFO Pre-WC- Dividends/Debt below 19%. In addition, the incurrence of material holding company debt, particularly in conjunction with a shareholder oriented financial strategy, would also place downward pressure on the rating.

An upgrade of PEG Power's rating is unlikely in the medium term in light of our negative sector outlook, our expectation that power prices will remain weak, and management's intention to use cash flow from PEG Power to help finance investments at PSE&G. However, should Power achieve an increase in the average life or price of its contracts (including BGS and capacity auctions) and/or reverse the BGS migration trend while simultaneously improving its financial metrics on a sustainable basis (including CFO Pre-WC + Interest/Interest of approaching 9x, CFO Pre-WC/Debt above 45% and Free Cash Flow/Debt of about 22%) its rating could be upgraded.

PEG Power's rating could be downgraded if there were a reduction in the percentage of gross margin hedged or average tenor of the hedging program, if hedging operations were to cause unexpected results (including surprises in earnings or collateral calls), if BGS migration accelerated unexpectedly, if PEG Power's market position were materially altered as a result of additional competition or new regulatory mandates, or if financial metrics were to exhibit a material deterioration. This deterioration could include CFO Pre-WC + Interest/Interest below 6x, CFO Pre-WC/Debt below about 29% or Free Cash Flow/Debt below about 19%. The rating could also be downgraded if there were a increase in the aggressiveness of financial policy or if we perceived that the current policy, which is more onerous to PEG Power in the short-run on an standalone basis, were to continue beyond the near-to-medium term.

The following ratings of Public Service Electric and Gas Company are upgraded:

First Mortgage Bonds domestic currency ratings to A1 from A2

Senior Secured domestic currency ratings to A1 from A2

Senior Secured MTN domestic currency ratings to (P)A1 from (P)A2

Senior Unsecured Bank Credit Facility domestic currency ratings to A3 from Baa1

LT Issuer Rating ratings to A3 from Baa1

Pref. Stock domestic currency ratings to Baa2 from Baa3

Senior Secured Shelf domestic currency ratings (P)A1 from (P)A2

Senior Unsec. Shelf domestic currency ratings to (P)A3 from (P)Baa1

Pref. Shelf domestic currency ratings to (P)Baa2 from (P)Baa3

Backed First Mortgage Bonds domestic currency ratings to A1 from A2

Underlying First Mortgage Bonds domestic currency ratings to A1 from A2

The following ratings of Public Service Electric and Gas Company are affirmed:

Commercial Paper domestic currency ratings of P-2

The outlook of Public Service Electric and Gas Company is revised to stable from positive.

The following ratings of Public Service Enterprise Group Incorporated are affirmed:

Senior Unsecured Bank Credit Facility domestic currency ratings of Baa2

Senior Unsec. Shelf domestic currency ratings of (P)Baa2

Subordinate Shelf domestic currency ratings of (P)Baa3

Pref. Shelf domestic currency ratings of (P)Ba1

Commercial Paper domestic currency ratings of P-2

The following ratings of PSEG Power LLC are affirmed:

Senior Unsecured domestic currency ratings of Baa1

BACKED Senior Unsecured MTN domestic currency ratings of (P)Baa1

BACKED Senior Unsec. Shelf domestic currency ratings of (P)Baa1

The principal rating methodology used for PSEG and PEG Power is Moody's August 2009 Unregulated Utilities and Power Companies Rating Methodology. The principal rating methodology used for PSE&G is Moody's August 2009 Regulated Electric and Gas Utility Rating Methodology. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

William Hunter
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Upgrades PSE&G Senior Unsecured Rating to A3 from Baa1, Affirms Ratings of PSEG and PEG Power
No Related Data.
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