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Announcement:

Moody's affirms ratings of PSEG, PSEG Power & PSE&G; PSE&G's outlook revised to positive

04 May 2011

Toronto, May 04, 2011 -- Today Moody's Investors Service affirmed the ratings of Public Service Enterprise Group Incorporated (PSEG, (P)Baa2 senior unsecured shelf), PSEG Power LLC (Power, Baa1 senior unsecured) and Public Service Electric and Gas Company (PSE&G, Baa1 Issuer Rating). PSE&G's rating outlook was revised to positive from stable. The rating outlooks of PSEG and Power remain stable.

RATING RATIONALE

The change in PSE&G's outlook to positive reflects the steady improvement in PSE&G's financial profile in recent years in the context of PSE&G's relatively low business risk profile as an electric and gas transmission and distribution (T&D) utility operating in a generally supportive regulatory environment. It also reflects our belief that, ignoring the temporary near-term cash flow benefit provided by federal bonus depreciation legislation, there could be further modest improvement in key financial ratios such as (CFO pre-WC -- Dividends) / Debt and Debt / Capitalization.

Power's Baa1 senior unsecured debt rating reflects the competitiveness of its generating assets; its hedging strategy that provides a degree of cash flow stability; and its good liquidity profile. These positive rating considerations are balanced by Power's moderately-high risk merchant operations, market concentration risk, and the expectation that Power's cash flow will weaken as existing hedges roll off and are replaced at lower price levels. We anticipate Power will utilize expected asset sale proceeds to reduce debt and prevent any material deterioration in key financial ratios.

PSE&G'S Baa1 Issuer Rating (senior unsecured) reflects the following key rating factors: its low risk T&D business model, a relatively supportive and constructive relationship with its principal regulator, and the expectation that credit metrics will strengthen in the near-term due to the continuation of bonus depreciation, the increasing proportion of higher returning transmission investments and an anticipated reduction in pension underfunding. These positive rating considerations are balanced by PSE&G's elevated capital spending plans.

PSEG's Baa2 senior unsecured rating is one notch weaker than the Baa1 senior unsecured ratings assigned to Power and PSE&G, reflecting the structural subordination of PSEG's creditors to creditors of the 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 consolidated debt. PSEG's (P)Baa2 assigned rating is consistent with the Baa2 rating implied by the Unregulated Utilities and Power Companies rating methodology. We also consider the Regulated Electric and Gas Utilities rating methodology as utility operations accounted for approximately 40% of PSEG's CFO Pre-WC.

An upgrade of Power's rating appears unlikely in the foreseeable future in light of the inherently risky nature the wholesale merchant generation business and the expectation that power prices will remain weak. However, should Power achieve an increase in the average life of its contracts and improve its financial metrics on a sustainable basis (CFO pre-WC Flow + Interest) / Interest (Cash Flow Interest Coverage) in approaching 9x, CFO pre-WC / Debt above 45% and Free Cash Flow/Debt above 16%), its rating could be upgraded.

Power's rating could be downgraded if its financial metrics were to exhibit a material deterioration from current levels. In our opinion, Cash Flow Interest Coverage below 7x, CFO pre-WC / Debt below 36%, and Retained Cash Flow / Debt below 25% would likely result in a downgrade. Power's rating could be negatively impacted by a number of other factors including:

• any significant regulatory or legislative intervention in the RPM pricing mechanism or other aspects of the PJM market structure or the BPU's BGS auction structure

• a decision to build a new nuclear facility unless the increased execution and financing risk associated with such an undertaking were to be balanced by a significant strengthening of Power's financial profile

• future changes in environmental legislation or regulation that could impose significant costs on Power and if such costs are not quickly reflected in the market price of electricity, Power's financial profile could deteriorate

• any material shift in Power's hedging strategy that results in lower or more volatile cash flows

• the development of significant new transmission or generation capacity that significantly reduces the constraints and market pricing in Power's key markets

PSE&G's ratings could be upgraded if there is a sustainable improvement in credit metrics such as cash flow interest coverage in excess of 4.5x, CFO pre-WC to debt in excess of 22%, (CFO pre-WC --Dividends) / Debt greater than 17% and Debt / Capitalization below 45%.

PSE&G's ratings could be downgraded if there was a sustained weakening of its financial profile, for instance Cash Flow Interest Coverage below 3.3x and CFO pre-WC to debt below 16%, combined with a deterioration in the supportiveness of its regulatory environment, for instance negative legislative or regulatory actions that increase the company's business or financial risk profile.

All else being equal, a sustainable improvement in PSEG's financial profile with Cash Flow Interest Coverage above 6x and CFO pre-WC / Debt above 31%.

PSEG's ratings could be downgraded if there was a sustained deterioration PSEG's financial metrics (Cash Flow Interest Coverage below 4.7x, CFO pre-WC / Debt below 26% and RCF / Debt below 22%) combined with a deterioration of Power's key markets, its competitive position or hedging strategy; or the deterioration of PSE&G's regulatory environment. The incurrence of material holding company debt, particularly in conjunction with a shareholder oriented financial strategy, would also place downward pressure on the rating.

The last rating actions with respect to PSEG and PSE&G occurred on July 17, 2008 when the ratings of both companies were affirmed (PSEG, Baa2 senior unsecured; PSE&G, Baa1 issuer rating) and the rating outlooks for both companies were changed to stable from negative. The last rating action with respect to Power occurred on December 20, 2004 when its Baa1 senior unsecured rating was affirmed and its rating outlook was revised to stable from negative.

The principal methodologies used in this rating were the Unregulated Utilities and Power Companies rating methodology, and Regulated Electric and Gas Utilities rating methodology which were published in August 2009.

Toronto
Allan McLean
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Canada Inc.
(416) 214-1635

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's affirms ratings of PSEG, PSEG Power & PSE&G; PSE&G's outlook revised to positive
No Related Data.
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